New Amendments To The Financial Restructuring Regulation

New Amendments has been introduced in regards to Financial Restructuring (“FR”) through the omnibus bill (“The Bill”) which entered into force upon its publication on the Official Gazette (Repeating) No. 30836 dated 19/07/2019. The Bill introduced the Provisional Article 32 to the Banking Law about Financial Restructuring process.

Within the scope of the Amendment, the creditor and the borrower companies were provided with new opportunities to enable the continuation of their activities. which were not possible in the previous FR regulations. It has also provided creditor companies with a more flexible environment to maintain their ability to collect their debts. The amendments were aimed at making sure more companies benefited from the FR practices which would help establish a financial consensus ground in commerce.

Previously there was no regulation concerning Financial Restructuring practices in the Banking Law. There was only the “Regulation on the Restructuring of Debts Owed to the Financial Sector”, prepared as per Article 93. of the Banking Law, which regulates the general procedures and principals of Financial Restructuring. This Regulation was amended on 21/11/2018.

While the Provisional Article 32 has corresponding regulations with the aforementioned Regulation, it also sets forth new regulations such as:

• According to the previous provisions It was not possible for banks or financial institutions to waive their claims, partially or whole, or allowed any remissions to be made in regards to their claim. Any acts contradictory to this practice were classified as embezzlement. With the new provision such a crime will not be in question in regards to restructuring of loans by means of collateral reduction, principal and other receivables or in a similar form of transaction.
• Receivables from the collection of the creditor companies will be considered as worthless debt for the creditor and forfeited debt for the debtor. This shall not apply to restructions which has been implemented by the creditors who are in the same risk group with the debtors. In addition to this, the credits deducted from the registry will be deemed as worthless receivables for the creditor since there is no possibility of collection after the special provision is reserved.

Thus, it may be said that more favorable conditions will be created in the agreements between creditor companies and debtor companies.

Banks operating in Turkey, financial leasing companies, factoring companies and financing companies, non-resident banks and financial organisations that have lent directly to Turkish resident debtors, multinational banks and institutions that have directly invested in Turkey, and Special Purpose Companies (“SPC”) established by such creditors established for the purpose of collecting their debts, as per the Capital Markets Law, borrowers in a credit relationship and determined by the Financial Restructuring Framework Agreements shall benefit from the facilities brought forth by the aforementioned Provisional Article.

As per the Law, in order for debtors to be considered eligible to make use of such benefits for FR and to benefit from the opportunities, measures, exemptions and restructuring conditions provided thereby, it is a condition precedent for them to form and shape an opinion that they will regain their solvency and ability to repay their debts as a result of the restructuring. In other words the debtors believed to be unable to regain their solvency and ability to repay their debts will not have the right of access to such opportunities. However, it is by no means clearly known under which conditions and circumstances this opinion will be derived from. On the other hand, while the Regulation mentions the regaining of solvency and ability to repay debts “within a reasonable time”, the new legislative instrument does not refer to “a reasonable time”, and thus does not impose any time limitation on the regaining of solvency and ability to repay debts.

The institutions to be assigned for financial due diligence of the debtors wishing to make benefit from said opportunities were also mentioned. Both financial due diligence of the debtors and assessment as to feasibility of FR shall be made by:

• Independent audit firms, or
• Entities having adequate know-how and expertise and to be designated as per the Framework Agreements, or
• If accepted by the debtor, the creditor itself.

While, as per the previous version of the Regulation, entities having adequate know-how and expertise were required to be approved and considered eligible by the Banking Regulation and Supervision Agency (“BRSA”), this conditions has been removed with the amendments made on November 21, 2018. Under the current terms it has been deemed adequate for said entities to be referred to under the Framework Agreements. As also referred to in the statutory instrument enacted in the same direction with said amendments, as per the provisions of paragraph (c) of Article V of the Framework Agreement of January 29, 2019 prepared and drafted by the Banks Association of Turkey, the financial due diligence and feasibility study of the relevant debtor may, by a decision of the Consortium of Creditors, be assigned and entrusted to a bank or banks, independent audit firms or other entities deemed fit by the Consortium of Creditors, providing that the coverage and duration of completion thereof are determined again by the Consortium of Creditors.

Principals regarding FR shall continue to be further determined by the Financial Restructuring Framework Agreements.

The measures and opportunities that may be used, if necessary, for companies satisfying the financial conditions in order to be deemed eligible for FR are as follows:

• The Extension of Maturities in regards to loan payments
• The Renewal of Loans.
• New and additional loans being made available
• The Reduction or waiver of Interests, Default Interests, Delay Penalties, Profit Shares and and any other receivables arising out of crediting relations in full or in part,
• The Reduction of Collaterals
• The convertion og claims for principal, interests or profit shares into capital shares in full or in part, or to transfer or assign the same to special purpose businesses or vehicles or to investment funds against a cash or non-cash consideration or against a price subject to the condition of collection, or to fully or partially settle, sell or otherwise remove them from balance sheet in consideration of properties and assets belonging to debtor or third parties,
• The joint execution of protocols with other institutions and/or creditors.

The provisions pertaining to these opportunities provided by the new statutory instrument have been harmonized with the corresponding clauses of the existing regulation, and as per the amendments in the regulation, the same provisions have been implemented to the Banking Law as well.

Exemptions from certain public duties and taxes have also been provided to companies in the scope of FR. Pursuant to the principles set down in the Framework Agreements and in the contracts executed under said Framework Agreements:

• Transactions to be executed have been exempt from the prison charges and other public fees (also including juridical charges) levied in reliance upon the Public Fees Law, and documents to be issued (also including Framework Agreements and other secondary contracts) have been exempt from stamp duty or tax, and
• Money to be collected by the creditors under any name whatsoever have been exempt from the bank and insurance transactions tax, and
• Loans made or to be made available thereunder have been exempt from the resource utilization support fund.

The exemptions listed above will, however, not be applied if and when the creditors sell or otherwise dispose of the assets and collaterals acquired directly or indirectly through their transactions and acts covered by the Framework Agreements and other secondary contracts, except for transfer of the same among the creditors or to the debtor itself.

Scope of the Corporate Income Tax exemption granted as per Article 5/1-f^[1] of the Corporate Income Tax Law shall be extended to cover the proceeds of sale of the relevant assets or properties by the entities transferring their assets to creditors under the framework agreements or FR agreements and by the aforementioned creditors acquiring the relevant assets as such, irrespective of the condition of being subject to legal proceedings.

The VAT exemption granted by and set down in article 17/4-r^[2] of the Value Added Tax Law will also extend to and be applicable on transfer and delivery of the relevant assets to the creditors under and as per the framework agreements and financial restructuring agreements, and on transfer and delivery of these assets by the creditors which acquire the same as above.

The opportunities, measures, exemptions and restructuring conditions provided by the provisional article will be valid for a term of two years starting from 19/07/2019 when the subject statutory instruments are promulgated, and this term may be extended by the President for not more than two years.

If and when the outstanding debts of a debtor included in the scope of financial restructuring are again made subject to a financial restructuring within a period of two years starting from the beginning of the year following the date of signature of the Agreement, then and in this case, these tax exemptions and incentives will not be applied.

The tax, fund and public fee exemptions and exceptions and other incentives granted as above will be applied without any limitation of two years, and will not be claimed back or withdrawn even if the underlying transactions are not realized.

You may reach the original text of the omnibus bill here.

FOOTNOTES

[1] The full amount of earnings corresponding to the part used in settlement of these debts of the proceeds obtained by transfer and assignment to banks, financial leasing or financing companies or to this Fund against said debts of the real properties, capital shares, founder shares and jouissance shares (dividend right certificates) and rights of option thereon owned by the entities or businesses subject to legal proceedings due to their outstanding debts owed to banks or financial leasing or financing companies or indebted to the Saving Deposits Insurance Fund, and 50% of the proceeds of sale of the real properties out of the aforementioned assets acquired by banks or financial leasing or financing companies as such (also including the real properties covered by financial leasing, all kinds of rights of disposal of which are acquired by the lessor, upon mutual agreement of the sides, in consideration of the financial leasing claims under legal proceedings due to a default of lessee in financial leasing transactions executed as per the Law no. 6361), and 75% of the proceeds of sale of other assets are exempted from the Corporate Income Tax hereunder.

[2] Transfers and deliveries made by sales of capital shares and real properties kept in the assets of entities (…)(3) for at least two full years, and transfers and deliveries of real properties and capital shares (also including sales executed in auction halls) to banks or financial leasing or financing companies against outstanding debts of debtors of banks or financial leasing or financing companies or of their guarantors, and transfers and deliveries of these real properties and capital shares by financial leasing or financing companies are all exempted from VAT liability.