The Draft Law on Improvement of the Investment Environment (the “Law”), which was submitted to the Parliament on 23 June 2016, was adopted by the Parliament on 15 July 2016 with minor changes (the “Law”). As an omnibus bill, the Law includes amendments to various laws with an objective to create a more favorable investment climate. The main novelties relate to (i) the deferral of bankruptcy (iflasın ertelenmesi) and the composition of debts (konkordato), (ii) simplified company formation, and (iii) amendments to tax legislation.
Amendments to the Enforcement and Bankruptcy Law
One of the most important novelties that the Law envisages introducing is the prevention of easy recourse to the “deferral of bankruptcy” proceedings by the companies. Pursuant to the current provision of the Enforcement and Bankruptcy Law , if a company is under financial distress and its representative or one of the creditors (in case the company is in liquidation) submits a recovery project to the court, which establishes a specific approach for the company to overcome its adverse financial position, the company could benefit from the deferral of bankruptcy. The Law envisages amending deferral of bankruptcy provisions in order to prevent the abuse of this process by the companies, taking into consideration the rights of the creditors. Some of the major amendments are as follows:
• In order to apply for deferral of bankruptcy, a company must submit, along with a recovery project, additional documents proving that the recovery project is feasible and credible and must provide lists that indicate the identities and the rights of their creditors, as well as providing practical solutions on how to meet their working capital throughout this phase. Failure to submit these documents will result in rejection of the deferral of bankruptcy request.
• A company which has already benefited from the deferral of bankruptcy cannot reapply for one year starting from the expiry of the deferral period.
• Following the deferral of bankruptcy request, creditors are granted the right to oppose to the request after it has been published in the Trade Registry Gazette. However, such rejection needs to be raised within a period of two weeks and only in cases where the creditors allege that the conditions of deferral of bankruptcy are not met.
• In order to protect the assets of the company, the court is entitled to stop all ongoing enforcement proceedings which were initiated prior to the deferral request by an interim relief and prevent new enforcement proceedings, including proceedings which were initiated for the collection of public receivables. This interim decision can first be objected and then challenged before the intermediate court of appeal (istinaf mahkemesi).
• Deferral of bankruptcy may be extended only for another year, as opposed to the current provision, which stipulates that the period could be extended to a total of four years after taking the legal administrator’s reports into consideration.
• Deferral of the bankruptcy decision given by the commercial court can be first contested before the intermediate court of appeal within 10 days following the notification of the decision, or following the announcement for third parties. The decisions of the intermediate court of appeal can also be challenged before the High Court of Appeals in line with the same principles and time limitations.
However, following the coup attempt and the declaration of the state of emergency in Turkey, the Council of Minister adopted the Statutory Decree No. 2016/226, which has been published in the Official Gazette No. 29788 dated 31 July 2016. The Statutory Decree restricts commercial companies and cooperatives from applying for a deferral of bankruptcy and stipulates that such applications shall be rejected by the court. This regulation shall continue until the end of the state of emergency, which has been set as 90 days following 21 July 2016.
The Law further envisages reforming the “composition” proceedings with creditors by amending the relevant provision in the Enforcement and Bankruptcy Law. One of the main reasons why requesting a composition with creditors has been unpopular among debtors was the short period of protection granted by courts, i.e. three months plus a maximum of two months of extension. This leaves debtors vulnerable to enforcement proceedings in cases where the validation proceedings (tasdik yargılaması) exceed this deadline. The Law attempts to solve this issue and grants courts with the authority to stop ongoing enforcement proceedings and block new proceedings, so that the debtor is protected during the composition validation process.
Amendments to the Turkish Commercial Code
• Under the Law, it becomes possible to sign a signature declaration or articles of association before the trade registry rather than a notary public. The Law further annuls the provision which introduced the document of “founders’ declaration”, a declaration given by the company’s founders during the formation process. Also, during the enactment debates in the Parliament, an additional amendment was introduced, pursuant to which the articles of association will not be subject to valuable paper fee (değerli kağıt bedeli) during the formation of the company. The amendments aim to reduce the company formation costs.
• The Law moreover expedites the liquidation process of companies. Following the payment of its outstanding debt and the return of its share prices, a company in liquidation may distribute its remaining assets among the shareholders. The current form of Article 543(2) of the Turkish Commercial Code stipulates that the remaining assets may only be distributed provided that one year has passed as of the third call to the creditors. The intended amendment foresees an alteration to such period of one year and shortens the prescribed waiting period to six months.
• In relation to checks, the Law introduces a barcode system, which provides check holders with various information regarding the check issuers and requires that banks will not provide to the check account owners check pages without a barcode after 31 December 2016. The Law also makes certain amendments in the Check Law regarding the obligation of the beneficiary to register the check and the bank’s liability for payment.
• With regards to checks, the most important change that the Law foresees is the return of the criminal liability in case the check is worthless. The Law prescribes that upon complaint, a person who issues a bad check will be punished by a judicial fine up to 1.500 days . Such fine will not be less than the combination of the uncovered amount itself, its commercial default interest starting from the submitting date of the check and the litigation and enforcement expenses.
• Throughout the lawsuit process, the court is entitled to prohibit the defendant to open a check account or to issue checks. If the bad check is issued on behalf of a company, the mentioned prohibition equally applies to the managing body and company executives who are registered in the company’s trade registry. Once rendered, the prohibition decision is notified to the Risk Center of the Turkish Central Bank and the Central Registration System. These persons cannot assume roles in the managing body of a company until the end of their respective penalty period. In the event of failure to pay the judicial fine, such fine will be directly transformed into a jail sentence.
• Should the claimant withdraw his claim during the prosecution process, or if the person who is prosecuted pays the entire amount of the check (including interest), the lawsuit will be dismissed. A person may request the court to remove the prohibition to issue checks or to open a check account after three years and in any case ten years after the rendering of the prohibition have passed as of the date of the execution of the sentence.
Amendments to Tax Legislation
The Law also includes various amendments to the tax legislation on a wide range of issues, including exemptions from stamp taxes and fees and tax amnesty regarding transfer of off-shore assets. Main novelties include:
• certain stamp tax exceptions and favorable applications to reduce the stamp tax costs on some transactions and investments;
• exemption from real estate tax for the lands assigned to the investors or acquired by the investors during the investment incentive certificate period;
• VAT exemption of interest payments over the bonds; and
• tax amnesty provisions for the overseas assets under certain conditions.
Please see in the Annex hereto a Client Alert prepared by Hakan Eraslan, tax counsel, for details of such amendments to the tax legislation.