Proposed EU Directive on Harmonisation of Insolvency Law could safeguard Turkish creditors, if adopted

Insolvency proceedings and avoidance actions play a significant role in safeguarding creditors' interests and maximising the insolvency estate in Türkiye. The European Commission's Proposal for a Directive (COM (2022)702) aims to harmonise contestation rights in insolvency across EU member states. Although Türkiye is not an EU member states, Türkiye has similar avoidance actions regulated under its own insolvency legislation, the Turkish Enforcement and Bankruptcy Law (EBL).

Overview

Similar to the EU’s proposed Directive, the EBL contains provisions for the annulment of transaction lawsuits (tasarrufun iptali davası), which is intended to protect creditors' rights and ensure fair treatment in insolvency proceedings. There are differences, however, between the EU proposal and Turkish law in terms of certain mechanisms and time limits.

Comparison with Turkish Law

Voidability of Legal Acts

According to the proposed EU Directive, the following legal acts can be rendered void:

• Preferences: legal acts benefiting a creditor or group of creditors by satisfaction, collateralisation, or in any other way, if perfected within three months prior to the submission of the request for the opening of insolvency proceedings or after the submission of such request.
• Legal acts against no or an inadequate consideration: transactions at an undervalue if made within a period of one year prior to the submission of the request for the opening of insolvency proceedings.
• Legal acts intentionally detrimental to creditors: acts through which the debtor intentionally caused detriment to the general body of creditors, if perfected within a period of four years prior to the submission of the request for the opening of insolvency proceedings or after the submission of such request.

Turkish Law:

The following transactions made within a specified period prior to the submission of the request for the opening of insolvency proceedings may be contested if deemed invalid:

• Preferences: if perfected within one year prior to the submission of the request for the opening of insolvency proceedings, include but are not limited to:

Pledges for securing existing debts: transactions where the debtor perfects a pledge over an asset to secure an outstanding debt except in cases where they had previously committed to provide the same;

Non-conventional payments: payments made through means other than customary payment methods;

Payments made for debts not yet due: payments made for debts not yet due where the debtor seeks to settle obligations ahead of their maturity date;

Annotations for strengthening personal rights: annotations made in official records, typically at land registries, aimed at strengthening personal rights;

• Transactions concluded significantly under the market value;
• Transactions detrimental to creditor interests and made with the intent to harm creditors;

Time limits for avoidance actions

EU Proposal: The proposal sets specific time limits for avoidance actions. For instance, preferences may be contested if perfected within three months prior to the submission of the request for the opening of insolvency proceedings or after the submission of such request.

Turkish Law: Turkish law also allows for avoidance actions within certain time frames: where the EBL stipulates that transactions made within two years before the submission of the request for the opening of insolvency proceedings may be contested.

Prescription periods

EU Proposal: Under the EU proposal, there is a three-year prescription period for initiating avoidance claims in insolvency proceedings.

Turkish Law: Türkiye's five-year limitation period for avoidance actions allows for a longer time frame compared to the EU proposal. This extended period may afford creditors greater flexibility in initiating avoidance actions.

Conclusion

Differences between EU proposal and Turkish legislation may lead to difficulties in handling avoidance actions and creditor rights when it comes to international commerce and disputes. The comparison highlights the differences between the EU proposal and EBL. Thus, harmonising Turkish legislation with EU proposal's provisions would enhance coherence in insolvency law and facilitate cooperation among EU member states and Türkiye in cross-border insolvency cases.

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