Legal Assessment of the Legislative Provision Prohibiting Requests for Bankruptcy Moratorium During a State of Emergency

Attorney-at-Law Dr. Tolga Ersoy | Commercial Law | August 05, 2016

It is observed that one of the measures taken during the State of Emergency (OHAL) period is the regulation concerning the bankruptcy moratorium. The legal foundation for this regulation is Decree-Law No. 669, titled "Decree-Law on Taking Certain Measures within the Scope of the State of Emergency, Establishing the National Defense University, and Amending Certain Laws," which was published in the Official Gazette, issue no. 29787, dated July 31, 2016.

Article 4 of the Decree-Law, bearing the marginal heading "Bankruptcy Moratorium," stipulates the following:

"Throughout the duration of the state of emergency, capital companies and cooperatives shall be precluded from filing requests for a moratorium on bankruptcy pursuant to Article 179 of the Enforcement and Bankruptcy Law No. 2004, dated June 9, 1932; any such requests shall be dismissed by the courts."

It is understood that the purpose of this provision is to prevent capital companies and cooperatives potentially affiliated with a terrorist organization from availing themselves of the bankruptcy moratorium provisions and the associated legal protection during the State of Emergency period.

Consequently, applications for a bankruptcy moratorium filed with the courts subsequent to the declaration of the State of Emergency must be dismissed in accordance with this Decree-Law.

Upon evaluating the duration, it is understood that the provision of the Decree-Law is to be applied throughout the continuance of the state of emergency, specifically for ninety days commencing from July 21, 2016.

In this context, it can be concluded that the aforementioned measure shall also be applicable during the period from July 21, 2016, the date the state of emergency was declared, to July 31, 2016, the date Decree-Law No. 669 entered into force.

Consequently, in practice, requests for a bankruptcy moratorium filed with the courts subsequent to the State of Emergency will be summarily dismissed. As judicial avenues against State of Emergency Decree-Laws will be closed, it appears unlikely for applicant firms to obtain a favorable outcome in the short term. Nevertheless, applicant firms retain the right to petition the European Court of Human Rights subsequent to exhausting domestic legal remedies, and any compensation for damages incurred through this process will be determined by decisions rendered following an assessment of the factual circumstances.

How will the provision of the Decree-Law impact pending cases?

Concerning requests for a bankruptcy moratorium filed prior to the declaration of the state of emergency, it is understood that no final decision can be rendered during the state of emergency, irrespective of whether an interim injunction has been issued. Similarly, if a request for a bankruptcy moratorium was filed before the declaration of the State of Emergency and no interim injunction has yet been granted, no such injunction may be issued during the State of Emergency. It is, therefore, abundantly clear that cases will remain protracted as the State of Emergency period is extended.

What will be the ramifications of this implementation?

While instances of abuse of the bankruptcy moratorium provisions are frequently observed in practice, it is also known that numerous large capital companies have averted bankruptcy through these regulations. Our economy is indirectly impacted by the insolvency of large capital companies, both in the short and long term.

Does the current regulation, metaphorically speaking, risk causing the innocent to suffer alongside the guilty? It must be emphasized that the most stringent measures are warranted against firms conclusively identified as being linked to terrorism and against their executives. However, the declaration of bankruptcy for firms that have no involvement whatsoever in terrorist activities and have consistently paid their taxes for many years, particularly during a period of economic upheaval, coupled with the failure to pursue a recovery path through bankruptcy moratorium provisions, is likely to engender numerous issues. It is self-evident that such corporate insolvencies have cascading effects on the economy.

Therefore, a more specific regulation concerning the bankruptcy moratorium, which unequivocally denies this right to firms affiliated with terrorism, while allowing firms entirely unconnected to terrorism to continue benefiting from the bankruptcy moratorium provisions of the Enforcement and Bankruptcy Law, provided they meet the requisite conditions, could resolve the current implementation challenges.