Sponsored briefing: The increasing number of enforcement and bankruptcy cases in Türkiye in recent years

Using statistical data, Egemenoğlu Hukuk Bürosu reflects upon bankruptcy in Türkiye, and looks to the effective measures available for present businesses

In recent years, the liquidity shortage in the markets, the unexpectedly high increase in raw material costs, the sudden fluctuations in exchange rates and the problems arising from the deterioration of the supply and demand balance have caused serious economic difficulties for citizens and companies in our country. As a result of this situation, many companies are struggling under the financial burden of debt. As a result of deteriorating cash flows and financial structures, companies are experiencing difficulty in paying their debts, and are subsequently encountering enforcement proceedings, and even the risk of bankruptcy. Recent negative progress in the economy has also led to an increase in the number of execution and bankruptcy files.

Number of enforcement and bankruptcy files exceeds 33 million

The Ministry of Justice’s data on execution and bankruptcy offices has once again revealed the effects of the deepening economic crisis in Türkiye. According to the compilations made from the data of the Ministry of Justice, in 2022 the number of files in execution and bankruptcy offices reached a total of 33,275,632, including the files carried over from previous years. The increase in the number of execution and bankruptcy files in the 2015-22 period was 27%.

With the Presidential Decree published in March 2020, within the scope of the measures taken to prevent the spread of the Covid-19 virus, all enforcement and bankruptcy proceedings, except for those for alimony receivables, were suspended. The prohibitions, which were extended for a while afterwards, were removed with the normalisation process. Except for the periods of pandemic restrictions and restrictions on execution transactions, there was a significant increase in the number of execution and bankruptcy files at the execution offices. With the removal of the prohibition of execution, the number of files started to escalate again.

In 2022, 9,046,245 new execution and bankruptcy files were filed. With the new files filed in 2022, the total number of execution and bankruptcy files in the offices exceeded 33 million.

The data on the number of files of execution and bankruptcy offices in Türkiye between 2015 and 2022 can be seen in Table 1.

The Ministry of Justice also shared the distribution of files in execution and bankruptcy offices according to geographical regions. The Marmara region ranked first with 14.66 million execution and bankruptcy files, while the number of files in the Aegean, Mediterranean and Central Anatolia regions were 3.69 million, 3.65 million and 4.98 million respectively.

Number of files by type

As of 2022, the total number of files carried over from the previous year was 24,229,387. In 2022, the number of new files filed was 9,046,245 and the number of files closed during the year was 8,281,024. As can be seen from this data, more new enforcement and bankruptcy files are filed every year than files closed, and the total number of pending files continues to increase rapidly. This is also the situation with regard to bankruptcy cases.

As can be seen from Table 2, the most important issue that distinguishes bankruptcy files from other types of proceedings is the average duration of bankruptcy proceedings. As of 2022, the average timespan of bankruptcy proceedings was 3,498 days, which is 4.70 times the duration of proceedings with judgment and 3.31 times the duration of proceedings without judgment. Therefore, there is a necessity for preventive legal arrangements by taking into account the differences in the quality of bankruptcy files.

In order to reduce the workload at the enforcement offices as well as to reduce the rapidly increasing number of files, legal arrangements have been made for the cancellation of debts arising from subscription agreements below a certain figure, as well as for the liquidation of public debts below a certain figure, etc, however, these arrangements will not make a sufficient difference to reduce the number of enforcement files. In addition to such regulations aiming to reduce the rapid increase in the number of execution and bankruptcy files periodically with temporary solutions, solutions that can permanently solve the problem should be considered.

Number of bankruptcy files by provinces as of the end of 2022

When the number of bankruptcy files by provinces in our country as of 2022 is observed, the direct proportion with population and trade capacity stands out. With a total of 1,599 bankruptcy files, Istanbul solely contains more than one third of all bankruptcy files in Türkiye. Istanbul is followed by Ankara with 569 files, Izmir with 233 files, Antalya with 164 files, Kocaeli with 139 files, Bursa with 129 files and Denizli with 113 files. Table 3 provides detailed information on the number of bankruptcy files for all provinces.

As can be seen in Table 4, although there are small changes in the number of bankruptcy files filed during the years between 2015 and 2022, the number of files carried over to the next year is constantly increasing. Considering the long liquidation period in bankruptcy cases and the low collection rate of receivables, creditors are largely unable to obtain their receivables in the case of bankruptcy. This situation may cause other economic problems like a domino effect.

Number of companies closed in the first half of 2023

According to the statistics of closed companies released by the Union of Chambers and Commodity Exchanges of Türkiye (TOBB) for June 2023, 1,938 more companies were closed in June and thus a total of 9,852 companies were closed in the first six months of the year.

Compared to the previous month, the number of closed companies decreased by 7%, the number of closed cooperatives by 1.4% and the number of closed real-person commercial enterprises by 12.8%. In June 2023, the number of closed companies and cooperatives decreased by 29.3% and 38.3%, respectively, while the number of closed real-person commercial enterprises increased by 29.5% compared to the same month of 2022.

In the first six months of 2023, compared to the first six months of 2022, the number of closed companies decreased by 4.7%, the number of closed cooperatives decreased by 7.9%, while the number of closed real-person commercial enterprises increased by 16.2%.

According to TOBB data, 634 of the companies and cooperatives closed in June were in the wholesale and retail trade and repair of motor vehicles and motorcycles sectors. 250 were in the manufacturing sector and 223 were in the construction sector. Among the real-person commercial enterprises closed this month, 1,107 were in the wholesale and retail trade and the repair of motor vehicles and motorcycles, 392 in construction and 278 in the manufacturing sector.

Increase in bankruptcy filings expected in Türkiye

According to the Global Insolvency Report of Allianz Trade, a trade receivables insurance company which provides another set of comprehensive data in addition to TOBB statistics, bankruptcies in Türkiye were expected to increase by 50% this year. According to the report, it was predicted that there would be an increase of 21% in bankruptcies worldwide in 2023 and 4% in 2024.

Allianz Trade’s Global Insolvency Report draws attention to the domino effect in bankruptcies:

• the number of bankruptcies for companies with revenues of more than €50m is currently slightly above pre-pandemic levels;
• the most affected sectors are construction, retail and services;
• low growth, pressure on profitability and strict financing conditions are testing the resilience of the most vulnerable companies; and
• among these companies, the sectors with the least pricing power are textiles, services, retail, transport, construction and consumer durables, which are wage-driven and most exposed to interest rate hikes.

On the other hand, the recent turbulence in the banking sector in Europe and the US raises the question of the impact of a possible liquidity crisis on bankruptcies. According to the predictions in the report, in the event of a financial crisis similar to that of 2008, the number of bankruptcies in the US and Western Europe could increase by 21,600 and 99,900 in 2023 and 2024. Even a liquidity crisis of the magnitude seen during the bursting of the tech bubble in the early 2000s, rather than a major financial crisis, would lead to 12,900 and 95,300 additional insolvencies in the same regions in 2023 and 2024. In the event of a credit freeze and no new loans, the number of bankruptcies in the US and Europe would increase by 10,700 and 46,300 respectively.

Is concordat the remedy for companies with financial problems?

The necessity for legal mechanisms to prevent the bankruptcy of companies whose financial structure and cash flows have deteriorated as a result of the current economic crisis and poor financial management has been increasing recently.

In the bankruptcy postponement system, which was previously included in our legal system as the last exit before the bankruptcy of companies with deteriorating financial structure, many problems existed such as the duration of the trial and implementation period, the inability of the court to fully supervise the companies in the bankruptcy postponement process, and the inability of the creditors to intervene in the operation.

Therefore, the Bankruptcy Postponement Provisions of the Enforcement and Bankruptcy Law (EBL) were repealed by Law No. 7101 on the Amendment of the Enforcement and Bankruptcy Law and Certain Laws published in the Official Gazette dated 15 March 2018. With this amendment, ‘postponement of bankruptcy’ was abolished and the ‘concordat’ system was introduced by expanding the scope.

The concordat, which comes to the agenda in times of economic distress, aims to enable a debtor to pay all its ordinary (not pledged or privileged) debts in line with this offer, provided that the payment offer made by a debtor to its creditors through the court is accepted by at least half of the creditors and approved by the Commercial Court.

‘By protecting companies from enforcement proceedings and subsequently from bankruptcy, the concordat could be used
more actively and efficiently to help the economy and employment rates to
progress within the framework of stability.’
Egemenoğlu Hukuk Bürosu

It is an important advantage for the debtor that the debt is postponed for a long period of time and then spread over favourable maturities and paid equally to all creditors. On the other hand, it is also an important advantage for the creditor that the firm is saved from bankruptcy and the debt can be paid.

Although the concordat process, which came to the agenda as a result of the negative effects of the Covid-19 pandemic in the economy after the high interest rate and exchange rate crisis in the 2018-22 period, decreased in use towards the end of 2022, it started to come to the agenda again due to the economic and financial problems experienced in the first six months of 2023.

In the context of the unfavourable view created by the unpayable and increasing debt burden arising as a result of the execution and bankruptcy files that continue to increase rapidly in our country in recent years, it should be taken into consideration that the aforementioned legal regulations, which are mostly focused on reducing the number of individual and low-amount files and consequently reducing the total number of execution files, are not beneficial for companies.

Since the concordat procedure is quite new and companies in the market are not well-informed about it, they do not apply for this procedure to the extent necessary for their needs. As a result, companies that do not enter the concordat process despite needing it are facing serious financial difficulties and may even go into bankruptcy. As a result of bankruptcy, while the commercial activities of these companies are over, their contribution to the economy and the employment they create are also terminated. This situation prevents the creditors from reaching their receivables to a considerable extent.

By protecting companies from enforcement proceedings and subsequently from bankruptcy, the concordat could be used more actively and efficiently to help the economy and employment rates to progress within the framework of stability. Companies whose cash flow and financial structure has deteriorated should definitely consider this solution to improve their financial situations, in order to not go into bankruptcy and to obtain the capacity to pay their debts.

As it is known, with Article 17 of the Law No. 7186 on Amendments to the Income Tax Law and Certain Laws published in the Repeated Official Gazette No. 30836 dated 19 July 2019, the financial restructuring opportunity was introduced in the Provisional Article 32 and added to the Banking Law No. 5411. This regulation was aimed to enable debtors in credit relations with banks, financial leasing companies, factoring companies and financing companies operating in Türkiye to fulfil their repayment obligations and continue to contribute to employment through measures to be taken within the scope of the framework agreement and contract regarding their credit debts with these institutions. However, the implementation of financial restructuring framework agreements under the Provisional Article 32 of the Banking Law No. 5411 expired on 15 July 2023.

At this stage, the concordat process is the most effective and pluralistic form of debt liquidation in our legal system, in which creditors have a direct say in the process, in terms of ensuring that honest and well-intentioned companies, whose economic situation has deteriorated to a considerable extent, can recover their economic situation, avoid the bankruptcy process and ensure that creditors can safely receive their receivables.