Payment Difficulty, Over-Indebtedness, Restructuring and Composition Are Not the Same Concept
Liquidity or payment difficulty is a weakening of the company’s capacity to pay its short-term debts when they fall due. A profitable company, or one whose assets exceed its debts, can also face payment difficulty because its cash flow has been disrupted.
Loss of capital and over-indebtedness bring into play the special duties of the board of directors under Turkish Commercial Code (TTK) Art. 376 concerning the balance sheet, the value of the assets and the company’s financial structure. This assessment cannot be made by looking only at the bank balance or the losses of previous years.
Out-of-court restructuring is an agreement by contract between the debtor and one or more creditors on the maturity, interest, payment schedule, security, capital, asset sales or new financing. Creditors that are not parties to the agreement are, as a rule, not bound by it.
Financial restructuring is the restructuring of the claims of certain financial institutions through a common process, within the Banking Law, the relevant regulation and the framework agreements of the Banks Association of Türkiye. It does not, on its own, cover all market, employee, public or other commercial debts.
Composition with creditors (konkordato) is a court-supervised route that lets a debtor who cannot pay its debts when due, or who is at risk of not being able to, reorganize its debts under the plan and majority conditions set out in the law. The provisional and final moratorium, supervision by the composition commissioner, the notification and voting of creditors and the court’s confirmation review are parts of this process.
Restructuring by settlement is a separate mechanism, regulated for capital companies and cooperatives under Enforcement and Bankruptcy Law (İİK) Art. 309/m et seq., built on negotiation with the creditors affected by the project and on court confirmation. Whether it is workable must be examined separately in light of the debtor and the structure of the claims.
Before asking “which application should be filed”, Güneş & Güneş Law Firm assesses together the company’s viability, cash generation, creditor structure, pledges, public debts, contracts, group relationships and management responsibility. The aim is not only to delay enforcement; it is to build a workable payment and operating model or, where that is not possible, to manage liability and loss of value.
Choosing the Right Legal Route
Bilateral restructuring
- Basic nature
- Contract between the debtor and a single creditor
- Main question of suitability
- Is the debt concentration limited and is the creditor open to an agreement?
- Binding effect and limits
- Binds only the parties; does not stop other enforcement proceedings
Multilateral out-of-court protocol
- Basic nature
- Joint negotiation with several creditors
- Main question of suitability
- Do the creditors accept a standstill and a common information arrangement?
- Binding effect and limits
- Provides no general protection against creditors that do not join
Financial restructuring
- Basic nature
- Restructuring within the framework among financial institutions
- Main question of suitability
- Do the debtor and the creditors fall within the current financial restructuring framework?
- Binding effect and limits
- Scope and effect depend on the framework agreement and the contract
Composition with creditors
- Basic nature
- Court-supervised collective restructuring
- Main question of suitability
- Can a realistic plan, a comparative offer and a majority be put together?
- Binding effect and limits
- The scope, exceptions, moratorium and confirmation rules of the law apply
Restructuring by settlement
- Basic nature
- Affected creditors and court confirmation
- Main question of suitability
- Do the company and the plan meet İİK Art. 309/m et seq.?
- Binding effect and limits
- Takes effect only within the legal scope and the confirmed plan
Bankruptcy or orderly liquidation
- Basic nature
- End of the business and liquidation of the assets
- Main question of suitability
- Can the value of the business not be preserved through debt restructuring?
- Binding effect and limits
- Collective liquidation, ranking and liability rules apply
The route to be chosen is not determined by the total amount of debt alone. The maturity and type of the debt, the number of creditors, pledges, pending enforcement proceedings, the company’s order and contract structure, working capital, shareholder support, new financing, tax and employee debts, group companies and the obligations of the managers must be assessed together.
Early Warning Indicators
Continuous cash shortfall
- Legal and financial risk
- Difficulty in paying on time and pressure from enforcement
- First review
- 13-week cash flow, payment priority and financing need
Delay in tax, social security or wage payments
- Legal and financial risk
- Public enforcement, personal liability of managers and employment disputes
- First review
- Type and maturity of the debt, personal liability and restructuring options
Breach of a loan agreement
- Legal and financial risk
- Acceleration, default, cross-default and security risk
- First review
- Contract, notices, waiver and standstill request
Inability to pay checks
- Legal and financial risk
- Commercial reputation, enforcement and criminal risk
- First review
- Drawer, authorized signatory, funds, payment plan and supply chain
Attachment or account blockage
- Legal and financial risk
- Operations come to a halt and value is lost
- First review
- Enforcement map, objection, security and the need for a collective solution
Suspected loss of capital / over-indebtedness
- Legal and financial risk
- TTK Art. 376 duties and the risk of a bankruptcy notification
- First review
- Interim balance sheet, fair market value, board actions and remedial measures
Loss of a key customer or supplier
- Legal and financial risk
- The assumptions of the plan break down
- First review
- Continuity of contracts, alternative revenue and critical supply
Concentration of intra-group debt and security
- Legal and financial risk
- Transfer of resources and liability risk
- First review
- Analysis of the parties, purpose, payment, security and the interest of the company
Inconsistency in records or reports
- Legal and financial risk
- Credibility of the application and management responsibility
- First review
- Accounting reconciliation, source of documents and correction plan
Early intervention does not mean that a composition filing will be made. On the contrary, a creditor map and a cash model prepared at the right time can show whether an out-of-court agreement, capital support or an operational improvement is enough.
Legal Work That Can Be Carried Out on This Subject
Early Legal Diagnosis of Financial Distress
The payment schedule, enforcement proceedings, defaults, public debts, wages, critical suppliers, security and contractual breaches are brought into the same risk picture. Together with the finance teams, we examine whether the problem is a temporary liquidity gap, a lasting operating loss, a loss of capital or a risk of over-indebtedness.
What information the board of directors obtained and when, and which decision it needs to take, are determined. The consequences that delay may have for the company, the managers, the sureties and the shareholders are assessed separately.
Crisis Management and the First Thirty Days Plan
Daily and weekly responsibilities are set up for cash protection, critical payments, continuity of supply, communication with employees, talks with banks, legal follow-up, contract notices and management decisions.
The members of the crisis team from legal, finance, accounting, sales, purchasing and human resources, and the reporting line, are determined. Statements to the public or to employees are kept accurate, measured and consistent.
Legal Review of the Cash Flow, Debt and Asset Map
Short- and medium-term cash flow is examined against the collectability of receivables, inventory, asset sales, credit limits, shareholder support and working capital assumptions. Debts are classified by creditor, maturity, currency, interest, security, suretyship, acceleration and enforcement status.
The differences between the accounting records and the contracts, bank reconciliations, and court and enforcement files are identified. A restructuring offer is not based on a revenue or value assumption that cannot be verified.
Loss of Capital and Over-Indebtedness under TTK Art. 376
The loss of capital, statutory reserves, the fair market value of the assets, and the going-concern and liquidation assumptions are assessed together with the relevant financial experts. The duties of the board of directors to call the general assembly, to propose remedial measures and, in the case of over-indebtedness, to notify the court are examined on the basis of the concrete data.
Preparation for a composition is not carried out on the assumption that it replaces the duties under TTK Art. 376. The decisions of the board of directors, their financial basis and the follow-up of the measures taken are recorded together.
Comparing the Restructuring Options
A bilateral protocol, a multilateral standstill agreement, financial restructuring, composition with creditors, restructuring by settlement, a company merger, asset sales, a capital increase and orderly liquidation are compared in terms of legal effect, time, cost and feasibility.
The decision memo contains the recommended main route, a fallback route, the failure triggers and the transition timetable. No single solution is forced on all creditors and all types of debt.
Coordination of the Feasibility Study, Business Plan and Financial Model
We examine whether the revenue, cost, capacity, investment, asset sale, exchange rate, interest, seasonality, customer and supply assumptions are consistent with the contracts and the actual data. The effect of the base, optimistic and adverse scenarios on the payment plan is shown.
The financial model is prepared by the qualified expert; the legal team checks that the model is consistent with the rights of creditors, the contract terms, the management decisions and the composition offer.
Group Companies and Related-Party Debts
Intra-group loans, current accounts, security, cash pooling, services, licenses and purchases of goods are separated company by company. The assets, debts, creditors and management body of each company are assessed independently.
The rationale of group interest does not by itself make a gratuitous transfer of the assets of an affiliated company lawful. In a restructuring plan, the nature of the related-party claims and their effect on voting are examined openly.
Tax, Social Security and Other Public Debts
The type, maturity and enforcement stage of public claims, personal liability, and the possibility of deferral or special restructuring are determined under the relevant legislation. The effect of a composition on public claims under Law No. 6183 is not treated in the same way as its effect on commercial claims.
The tax and accounting consequences are examined together with the financial adviser (mali müşavir). The effects of a waived claim, a doubtful receivable, exchange differences, interest, VAT and corporate income tax are assessed for the specific transaction.
Employee Claims and the Human Resources Plan
The risks of wages, severance pay, notice pay, leave, overtime, work accidents and transfer of the workplace are included in the company’s cash and operating plan. The privileged status of employee claims and the limits of their being affected by a composition plan are examined separately.
Unpaid leave, a wage reduction, dismissal or a change of duties is not applied on the mere claim of financial necessity. The obligations under employment law, collective bargaining agreements, equal treatment and personal data are preserved.
Foreign Currency Debts and Cross-Border Restructuring
Foreign currency loans, exchange rate risk, foreign banks, bonds, guarantees, contracts governed by foreign law and assets in different countries are gathered in a single debt map.
It is not assumed that a moratorium or confirmation decision of a Turkish court has an effect on enforcement and security in a foreign country. Jurisdiction, applicable law, recognition, enforcement, cross-border insolvency and data transfer are coordinated with qualified legal counsel in the countries concerned.
Position of Managers, Shareholders, Sureties and Pledgors
The liability of the managers, shareholders, sureties, guarantors on a bill (aval), joint debtors and third-party pledgors is examined separately from the company’s debt, under the separate contracts and statutory provisions.
A moratorium or restructuring agreement of the company does not end the liability of third parties in every case. Recourse, the continuation of security, creditor consent, release and the special provisions in the composition plan are assessed together.
What Information Do We Bring Together for the First Decision?
The current cash flow, overdue debts, pledges and the risks the management has learned of are assessed together. A 13-week cash study is a planning tool; it is not a single form that the law requires for every application. The financial statements are prepared by the qualified financial expert; our firm assesses their legal consequences and the order of the steps.
If the interests of the manager and the company diverge
Whether the same attorney can represent the company, the shareholder, the surety and the manager is examined from the standpoint of conflict of interest. Where necessary, independent representation is required. Joint representation of a debtor and its creditor in the same dispute is not offered.