Buying Distressed Assets in Turkey

The term distressed asset is not legally defined under Turkish law. It is more financial investment term. However, in practice, the term refers to an asset that is on the market under legal and/or financial pressure, or ready for forcibly sold in exchange for, in most cases, below market price in order for owner to deal with financial crisis, reorganizing debts and/or refrain from bankruptcy procedures etc. For the sake of this information note, buying a distressed assets of a company will be taken into account.

Under Turkish Commercial Code (“TCC”) art. 376, a company is insolvent if the total liabilities exceed total assets calculated on both i) current and ii) possible liquidation basis. If both balance sheets show loss, the company is legally insolvent.

Also, under Turkish Enforcement and Bankruptcy Law (“EBL”) a company is insolvent if it cannot pay the debts which are due event if its assets exceed liabilities according to the records.

Likelihood of insolvency maybe visible if the company has bounced cheque, frequent change of its address, recent change in the board of directors and last but not least filing a concordat application before relevant courts. It is important to highlight that Turkey has unique payment instrument called “cheque” which is issued by the bank and used by many small and mid-sized entrepreneurs in daily commercial activities. One should note that, under Turkish law, cheque have specific due date in order to cash out. If, at due date, the cheque is unable to be cash out, it is very likely that the company may be insolvent.

Most common risk in Turkish practice when buying distressed assets is clawback actions according to EBL art. 277 – 284. A sale can be terminated retroactively if the creditors prove that the sale was made in the wake of insolvency or during the insolvency, sold below market price, nepotism to one or more creditor(s), or involved related parties.

In such cases, the potential buyer or buyer must be careful since “good faith” defence does not necessarily qualify for full protection. The buyer, if challenged, may be obliged to return the asset or pay the difference according to the market value.

Another aspect is that, under Turkish law, public debts such as tax receivables, social security debts, statutory attachments, employment receivables have priority over ordinary debts and can survive the sale & claimed anytime.

The buyer of distressed asset may also face criminal action before Turkish Criminal Court, if the buyer knowingly concludes a transaction in cooperation with the seller in order to jeopardise the interests of creditors.

Risks can be observed or identified via due diligence of a distressed asset. For this reason, I recommend following actions to be taken before buying a distressed asset in Turkey:

• Checking the courts and enforcement offices where the distressed asset is located,
• Checking the title deed office, if the distressed asset is a real estate,
• Checking the municipality where the distressed asset is located,
• Thorough legal, tax, environmental due diligence,
• An appraisal which proves that the purchase price of the distressed asset is more or less the market value, so that possible clawback actions can be reduced.

Once above mentioned actions are taken, the Buyer will have clear vision whether to buy the distressed asset or refrain due to potential risks.

In Turkey, very common use of concordat procedures which is carried out by the court and court appointed officers significantly reduces claw back and similar risks. Under EBL law, an asset sale made with court approval is free from any claw back action. Likewise, any asset sold through state execution office or authority through tender process, is transferred free from any liabilities.

In pre-insolvency procedure, buying a distressed asset via court approval indicating that the debts remain with the debtor can be implemented. By doing so, the buyer shall have a clear picture what kind of liabilities will associate with the assets.

In insolvency, however, bankruptcy administration automatically sells the asset free from prior debts and encumbrances. In other words, if there is any claim to the asset after the transfer, it should be directed to the bankruptcy administration rather than the buyer.

In pre-insolvency there is no general requirement to conduct a public tender for asset sale during a concordat. The asset is usually sold through court approval based on fair market price.

In insolvency procedure, bankruptcy administration conducts public tender except for court and/or creditors approve negotiated sale, direct sale justified by value preservation when there is a time sensitivity, endangerment of the asset, and/or asset is special.