The Banking Regulation and Supervision Agency (“BRSA“) on 21th of November 2018 published recent amendments in relation to the Regulation on Restructuring of Debts Owed to Financial Sectors (the “Regulation“) in the Official Gazette1. The Regulation was previously published on the 15th of August 20182 with a view to rescheduling and restructuring debts owed to the banks, financial leasing, factoring and financing companies (collectively “Creditor Institutions“). This note aims to summarize the debt restructuring procedure as well as the recent amendments introduced thereunder.
The purpose of the Regulation is to provide a chance to the debtors to honor their repayment obligations and continue to provide employment in Turkey upon the precautionary measures to be adopted under the financial restructuring framework agreements and contracts to be executed among such debtors and the Creditor Institutions.
Article 4 of the Regulation requires an assessment of the debtor’s financial condition and its ability to repay its debts “in a reasonable time” after implementation of a restructuring plan or new repayment schedule. Principles and procedures as to how these assessments will be made should be indicated in the framework agreement. In principle, upon the assessment if it is determined that the debtor will not regain its ability to discharge its debts, they would not be allowed to benefit from restructuring. The financial condition assessment is conducted by institutions determined by the framework agreements.
As part of the framework agreements and restructuring contracts, the following precautionary measures may be taken:
- extending the maturity of loans;
- refinancing of existing loans;
- granting additional indebtedness;
- reducing or writing off the principal, interest, default interest, profit shares and/or other claims (“loan receivables“) arising from existing loans;
- converting loan receivables to in part or in full joint ownership;
- assigning or transferring loan receivables in return of cash or value in kind or tying it to the condition of collectability;
- liquidating, selling or derecognizing loan receivables in part or in full in return of value in kind belonging to the debtor or third parties; and
- signing protocols in cooperation with other banks and creditors.
As per Article 5 of the Regulation, the unpaid debts or receivables can be restructured within two years from the BRSA’s date of approval of the framework agreements and on condition that they are tied to the framework agreements prepared by the Banks Association of Turkey (“Association“), in consultation with Participation Banks Association of Turkey and Association of Financial Leasing, Factoring and Financing Companies. BRSA is entitled to extend the two years time period. The scope of restructuring claims, characteristics of debtors, minimum payment due and conditions, essential terms of the financial restructuring contracts to be executed separately with each debtor are specified in framework agreements.
Pursuant to the same Article, all Creditor Institutions who are a party to the framework agreement are required to restructure their claims in the event that the restructuring agreement is executed by the Creditor Institutions holding at least 2/3 of the total claims. The amendment introduced a new provision as Article 5(4) stating that procedures and principles of foreign credit institutions and international foundations participating in financial restructuring are determined in the framework agreements. The said institutions, upon request, may join in with the financial restructuring plan notwithstanding the Creditor Institutions approval or assent quorum.
According to Article 6 of the Regulation, framework agreements drawn up by the Association are signed by the representatives of the Creditor Institutions. The same article allows the Association to categorize the debtors based on their economies of scale and field of activities and draw up separate framework agreements for the relevant categories.
Article 7 of the Regulation designates common grounds of framework agreements which are:
- main principles and conditions relating to the operation of the financial restructuring process;
- minimum requirements in relation to debtors;
- the parties’ obligations imposed by the agreements;
- conditions of breach of the agreements;
- essential terms of the agreements to be executed between the Creditor Institutions and debtors and general framework of the contractual rights and obligations.
Moreover, Article 7 requires that the establishment of a Dispute Resolution Committee to be in charge of the resolution of disputes arising from the failure of parties to comply with contractual obligations. The Committee consists of three people assigned by the board of directors of the Association and resolves upon an affirmative vote of at least two members. Framework agreements regulate the Committee’s operation procedures and principles along with the effect and consequences of its decisions.
As part of the amendments, in order to clarify who are the debtors which can benefit from the Regulation, a definition of “debtor” is included in the Regulation. In definition, a broad category of financial institutions is left outside of the scope of the debtors. Accordingly, the debtors, which can benefit from the debt restructuring under the Regulation are companies which are not subject to (i) Banking Law3, (ii) Article 35 of Capital Market Law4, (iii) Insurance Law5, (iv) Financial Leasing, Factoring and Financial Companies Law6; and (v) Law on Payment and Securities Settlement System, Payment Services, Electronic Money Institutions7.
Lastly, it is important to note that the recent amendments annulled the following provisions:
- Statute of limitation for the debts freezes as of the restructuring contract date;
- For the debtors in the same risk group, (i) interest rate which is lower than the market rate cannot be charged, and (ii) additional indebtedness cannot be extended.
- Creditor Institutions are prohibited to disclose client secret information of the debtors among themselves and with others rather than authorized explicitly by law. It is also required to include such a provision to the restructuring contracts or execute a separate confidentiality agreement.
1. Official Gazette dated 21.11.2018 and numbered 30602
2. Official Gazette dated 15.08.2018 and numbered 30510
3. Law No. 5411 dated 19.10.2005
4. Law No. 6362 dated 06.12.2012
5. Law No. 5684 dated 03.06.2007
6. Law No. 6361 dated 21.11.2012
7. Law No. 6493 dated 20.06.2013
Written by Faruk AKTAY & Tutku SEN