Turkey: Lending & Secured Finance

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This country-specific Q&A provides an overview to lending and secured finance laws and regulations that may occur in Turkey.

This Q&A is part of the global guide to Lending & Secured Finance. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/lending-and-secured-finance/

  1. Do foreign lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?

    Lending and offering of credit products within Turkey can only be conducted by banks duly licensed by the Banking Regulation and Supervision Agency (the "BRSA") under Article 4 of the Banking Law (Law No. 5411). However, pursuant to the Decree No. 32 on the Protection of the Value of the Turkish Currency ("Decree No. 32"), Turkish residents may freely and without any permission, approval, licence from, or registration or filing with any Turkish regulatory authority, including the BRSA, Ministry of Treasury and Finance (the "Ministry") and the Central Bank of Turkey ("CBT"), obtain cash or non-cash loans (other than consumer loans or mortgage loans) in foreign currency or Turkish Lira from banks and financial institutions abroad provided that the proceeds of such commercial loans are paid to an account of the borrower held with a bank operating in Turkey.

  2. Are there any laws or regulations limiting the amount of interest that can be charged by lenders?

    As per Article 8(1) of the Turkish Commercial Code (Law No. 6102) (the "TCC"), contractual interest rates in commercial transactions may be freely determined by the relevant parties. There is no clarity under TCC and the Turkish Code of Obligations (Law No. 6098) (the "TCO") as to whether the default interest rate applicable to a commercial transaction can be freely determined by the relevant parties, but in standard market practice, default interest rates are determined by the parties freely. It should also be noted that Turkish law provides restrictions on application of interest on the accrued interest (i.e. compound interest) save for certain exceptional cases. That said, accrual of interest over default interest is prohibited without any exceptions.

  3. Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?

    With the amendments to the Decree No. 32 and the Capital Movements Circular issued by the Central Bank (the "Capital Movements Circular") effective as of 2 May 2018, Turkish entities which do not generate foreign currency revenues are not allowed to utilise foreign currency denominated loans ("FX Loans"), unless they benefit from the exemptions listed exhaustively under the Decree No. 32 and the Capital Movements Circular.

    Further, the Capital Movements Circular sets out that FX Loans may be utilised either in foreign currency or in Turkish Lira. Turkish Lira loans obtained by Turkish residents from abroad cannot be utilised as foreign currency indexed loans and must be repaid in Turkish Lira only.

  4. Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction. If so, what is the procedure – and can such security be created under a foreign law governed document?

    The security documents creating security interests over the assets located in Turkey must be subject to Turkish law in accordance with the Turkish conflict of laws rules. Accordingly, to the extent that the assets subject to the following types of security are located in Turkey, such security interest must be created under a Turkish law governed document. Further, the perfection requirements set out for each type of security below must also be complied with to establish a valid security interest.

    As a general principle that applies to pledges and mortgages, any provision entitling the security holder to become the owner of the secured asset upon the occurrence of an event of default is null and void under Turkish law (the lex commissaria prohibition). This means that the security holder cannot automatically become the owner of the secured assets upon the occurrence of an event of default but it can sell (depending on whether private sale is permitted for that particular form of security) or have them sold in order to receive sale proceeds for the satisfaction of its receivables and/or it may join such sale and bid against its claims (i.e. the security holder does not have to make an actual payment for the amount of its claims). Limited exceptions apply to this general rule, for instance, in respect of the collateral arrangements where the subject matter of the form of security is dematerialised capital market instruments registered in the electronic records of the Turkish Central Registry Agency, Article 47 of the Capital Markets Law (the "CML").

    Please find below a summary of the validity and perfection requirements pertaining to each type of security forming a customary Turkish law security package:

    (a) Pledge over shares

    Without prejudice to any further requirements in the articles of association of the relevant company, a pledge over the shares of a Turkish joint stock company (anonim şirket) can be established by entering into a written pledge agreement and delivering the share certificates (issued or temporary form) representing the pledged shares to the pledgee (bearing pledge or blank endorsements if they are registered shares). Although not a perfection requirement, registering the pledge in the share ledger of the company is advisable so that no one can claim good faith while conducting any transactions regarding the pledged shares.

    (b) Mortgage

    The perfection of a mortgage requires a mortgage agreement to be entered into by and between the mortgagor and the mortgagee at the relevant Title Deed Registry in ex officio form and thereafter registration of the mortgage with the records of the same.
    In principle, the amount of the mortgage is required to be registered in Turkish Lira, however, according to Article 851/II of the Turkish Civil Code (Law No. 4721) (the "Civil Code"), a foreign currency mortgage can be created in connection with and to secure a foreign currency denominated loan made available by a (local or foreign) credit institution to a Turkish resident borrower.

    (c) Pledge over movables

    Under Turkish law, perfection of a pledge over movable property requires a written pledge agreement to be entered into by and between the pledgor and the pledgee and transfer of the physical possession of such movable property to the pledgee.

    In respect of a pledge over movable property which is legally required to be registered with a special registry (such as vehicle registry, ship registry or aircraft registry), the pledge may be granted through registration of the pledge with the relevant special registry as a perfection requirement and, in such a case, physical possession of such movable property is not required to be transferred to the pledgee.

    (d) Movables pledge in commercial transactions

    The Movable Pledge Law in Commercial Transactions (Law No. 6750) (the "Movable Pledge Law") provides for the establishment of pledge over movables without any requirement to transfer the physical possession of the pledged asset to the pledgee. A movable pledge agreement subject to the Movable Pledge Law must be entered into in written form and signed before the Pledged Movables Registry or the signatures of the parties thereof must be approved by a notary public in Turkey. Also note that the Movables Pledge Law also provides for the pledge agreements to be signed electronically with secure electronic signatures (in the sense as defined under the Electronic Signature Law (Law No. 5070)). As a perfection requirement, the pledge must be registered with the Pledged Movables Registry.

    A pledge can be established on the existing or future assets of a pledgor (or revenues thereof). The assets which can be pledged as per the Movable Pledge Law include (i) receivables; (ii) intellectual property and industrial rights; (iii) raw materials; (iv) all types of revenue and income; (v) licenses and permits (save for administrative authorisations) that are not required to be registered with other registries; (vi) movable equipment of the enterprise such as machinery, vehicles, equipment, tools, construction equipment, all kinds of electronic devices including electronic communication devices; (vii) inventories; (viii) agricultural products; (ix) trade names and/or business names; (x) commercial enterprises and/or craftsmen enterprises; (xi) commercial plates, commercial lines and commercial projects; (xii) carriages and (xiii) all similar assets. In addition, it is also possible under the Movable Pledge Law to create a pledge over a commercial enterprise as a whole which would cover any and all kinds of assets that are allocated to the operations of such enterprise .

    (e) Assignment (transfer)

    An assignment (transfer) of receivables over receivables is perfected by entering into a written assignment (transfer agreement). Present or future receivables (including insurance proceeds) can be assigned for security to the extent that they are ascertainable. Although notifying the underlying debtor(s) is not a perfection condition, in the absence of such a notification, the underlying debtor(s) will be released from its/their obligation once the relevant payment under the underlying agreement to the assignor has been made. Acknowledgement from the underlying debtor(s) would also be advisable to ensure that there are no prior claims or encumbrances over such receivables and ideally a waiver from the debtor from exercising its right of set-off can also be potentially obtained. An assignment (transfer) of receivables is the preferred form of security because it transfers the title of such receivables to the assignee unlike a pledge.

    (f) Bank account pledge

    The perfection of a bank account pledge (which is a type of pledge over the receivables of the deposit holder vis-a-vis the account bank) requires execution of a written pledge agreement between the pledgor and the pledgee and a notification to the account bank (unless the pledgee is also the account bank). It is also advisable to obtain an acknowledgement from the account bank to ensure that the pledge is duly registered with its records, it waives any set-off rights it may have in respect of the pledged accounts and it does not have any counterclaims as at the date of the acknowledgement.

    Although not a perfection requirement, the pledged accounts may be blocked by the bank holding the pledged accounts or the pledgor may be allowed to operate the pledged accounts until the occurrence of the enforcement conditions.

  5. Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?

    In addition to our explanations under Question 4 above, Turkish law allows for future movable assets and receivables of a Turkish entity to be pledged subject to the Movable Pledge Law. Also note that a mortgage and a movable asset pledge subject to the Movable Pledge Law can secure the future obligations provided that such future obligations are definite and ascertainable at the date of the relevant mortgage/pledge agreement.

  6. Can a single security agreement be used to take security over all of a company’s assets or are separate agreements required in relation to each type of asset?

    A commercial enterprise pledge within the scope of the Movable Pledge Law allows for any and all kinds of movable assets allocated to the operations of a commercial enterprise, as well as the commercial title and the intellectual property rights of the enterprise be pledged as a whole under a single pledge agreement. Please refer to Question 4(d) for details. We note that such commercial enterprise pledge would not cover the shares of the relevant company. Establishing mortgage over real estate and pledge over shares would require separate security agreements.

  7. Are there any notarisation or legalisation requirements in your jurisdiction? If so, what is the process for execution?

    Various certification requirements apply under Turkish law with regards to different types of legal documents and legal procedures (e.g. legal proceedings before courts). With respect to security documents, notarisation or execution in ex officio form before relevant authorities as certification may be required depending on the type of security. Please refer to our explanations under Question 4 above.

  8. Are there any security registration requirements in your jurisdiction?

    There are registration requirements in respect of certain types of security under Turkish law; such as mortgages and movable asset pledges subject to Movable Asset Pledge law. Please refer to our response under Question 4 above.

  9. Are there any material costs that lenders should be aware of when structuring deals (for example, stamp duty on security, notarial fees, registration costs or any other charges or duties), either at the outset or upon enforcement? If so, what are the costs and what are the approaches lenders typically take in respect of such costs (e.g. upstamping)?

    In general, for any security that requires registration or notarisation, such as the movable assets pledge under Movable Pledge Law or mortgage over real estates registration and notarisation fees would arise.

    Any document indicating a monetary value is, in principle, subject to stamp tax imposed by Stamp Tax Law of Turkey (Law No. 488) in the amount of the TL equivalent of zero point nine four eight (0.948) per cent. of the highest monetary figure indicated in the relevant document. However, as per Article IV.23 of Table No. 2 of the Stamp Tax Law of Turkey (Law No. 488), loansloan agreements in respect of the loans that are granted to Turkish residents as well as any security documents in connection therewith are exempt from stamp tax.

    In addition to the above the following charges and fees may be applicable:

    (i) court charges imposed pursuant to the Law on Charges of Turkey (Law No. 492), in the amount of six point eight three one (6.831) per cent. of the TL equivalent of the amount in dispute;

    (ii) court charges payable in connection with the making of an appeal from an adverse judgment;

    (iii) the deposit at the court's discretion of security for such costs (cautio judicatum solvi); however, the court may, in its discretion, waive such requirement for security in the event that the plaintiff is considered to be a national of one of the contracting states of the Convention Relating to Civil Procedure at The Hague on 1 March 1954 (ratified by Turkey pursuant to the Law No. 1574) or a national of a state that has signed a bilateral treaty with Turkey, which has been duly ratified and containing, inter alia, a waiver of cautio judicatum solvi requirement on a reciprocal basis;

    (iv) lawyers' fees payable in accordance with the most recent tariff in force at the time of judgment as published in the Official Gazette, together with the other court expenses;

    (v) fees and charges payable in connection with execution and attachment proceedings, if initiated, imposed pursuant to the Law on Charges of Turkey (Law No. 492); and

    (vi) advances on expenses imposed pursuant to the Civil Procedure Code of Turkey (Law No.6100) based on the tariff published annually by the Ministry of Justice (payable at the commencement of any suit or action).

  10. Can a company guarantee or secure the obligations of another group company; are there limitations in this regard?

    In general, companies can provide a guarantee or security in respect of the obligations of another group company, provided that there are no restrictions under their articles of association in this respect.

    However, pursuant to TCC, a controlling company is prohibited from exercising its control over a controlled company (i.e. the subsidiary) in a way which would cause losses to the controlled company, including forcing it to provide upstream guarantees or securities result in the controlled company engaging in transactions to provide an upstream guarantee. However, if there is a corporate benefit in engaging in these types of transactions and if it can be proven that the director of the controlled company has acted in good faith and that a prudent director of an independent company would (acting in good faith) have taken the same action under similar conditions, upstream guarantees or security may be provided by the controlled company in favour of the controlling company. If no such corporate benefit exists, upstream guarantees or security can still be provided, however, the controlling company should undertake and offer to the subsidiary an equivalent consideration against such guarantee.

    On the other hand, if a company directly or indirectly holds 100% of the shares in the controlled company, the company may give instructions to the controlled company if the policies of the group so require, even if the controlled company may suffer from the results of those instructions. Such instructions may cover the granting of upstream guarantees. Any resulting loss arising from these instructions would also give rise the liability of the instructing company. Typically, lenders deal with these conditions through requiring relevant representations and undertakings in the documentation (and usually attempt under a disclaimer not to concern themselves to analyse separately if any such conditions exist).

  11. Are there any issues that lenders should be aware of when requesting guarantees (for example, financial assistance or lack of corporate benefit)?

    Please refer to our responses to Question 10 and Question 12.

  12. Are there any restrictions against providing guarantees and/or security to support borrowings incurred for the purposes of acquiring directly or indirectly: (i) shares of the company; (ii) shares of any company which directly or indirectly owns shares in the company; or (iii) shares in a related company?

    A target cannot provide financing or security for the acquisition of its shares by a third party. Any such transaction will be null and void. This restriction stems from the prohibition regarding acquisition of a company of its own shares. Providing financing or security for acquisition of its own shares is considered as a way to circumvent the referred prohibition and this restriction is introduced mainly to avoid such circumvention. It is sufficient that the intention of the restricted transactions is to acquire the shares and no written agreements are necessary for this restriction to apply. The timing of the acquisition is (whether completed before or after such restricted transactions) is also irrelevant as long as the intention of transactions is to acquire the shares. The rule also applies to a company which directly or indirectly owns shares in the company or to an affiliate company.

  13. Can lenders in a syndicate appoint a trustee or agent to (i) hold security on the syndicate’s behalf, (ii) enforce the syndicate’s rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate?

    In general, apart from the fact that the lenders can hold the security package in their own capacity, it is possible to have a security agent or a security trustee holding the security package on behalf of a pool of lenders. However, if a security trustee will be used, then such role cannot be undertaken by a Turkish entity for such concept is not recognised under Turkish law. Therefore, a non-Turkish entity can be appointed as a security trustee if it has the capacity to act as a trustee under the laws of the jurisdiction of incorporation and its capacity to act as a trustee which is recognised under its own jurisdiction would also be recognised under Turkish law. This rule also applies to enforcement of the syndicate's rights under the loan documentation and application of enforcement proceeds to the claims of all lenders in the syndicate since no such role is regulated under Turkish law.

  14. If your jurisdiction does not recognise the role of an agent or trustee, are there any other ways to achieve the same effect and avoid individual lenders having to enforce their security separately?

    As stated above, a syndicate may choose to appoint (i) a Turkish or non-Turkish entity as security agent, or (ii) a non-Turkish entity as security trustee. Please refer to Question 13 for further details.

  15. Does withholding tax arise on (i) payments of interest to domestic or foreign lenders, or (ii) the proceeds of enforcing security or claiming under a guarantee?

    The Corporate Tax Law (Law No. 5520), requires the borrower to deduct withholding tax from all payments of interest and fees under the finance documents to the lender whose principal office or facility office is outside Turkey, except that: (a) the rate of such Turkish Tax applicable to such payments which are in respect of interest has been reduced to zero by virtue of Article 30 of the Corporation Tax Law of Turkey (Law No. 5520) (published in the Official Gazette dated 21 June 2006 and numbered 26205) in conjunction with the Decree of the Council of Ministers of Turkey (Decree No. 2009/14593) (published in the Official Gazette dated 3 February 2009 and numbered 27130); and (b) fees payable under or pursuant to the Finance Documents are, in the opinion of the General Directorate of Revenues of the Ministry, to be assimilated to payments of interest for the purposes of the Articles and Decree referred to in (a) above with the result that the rate of such Turkish tax applicable thereto is reduced to zero.

  16. If payments of interest to foreign lenders are generally subject to withholding tax, what is the standard rate and what is the minimum rate possible under double taxation treaties?

    Please refer to our response to Question 15.

  17. Are there any other tax issues that foreign lenders should be aware of when lending into your jurisdiction (for example, will any income become taxable in your jurisdiction solely because of a loan to or guarantee and/or grant of security from a company in your jurisdiction)?

    Income or franchise taxes of general application may be imposed on a lender if that lender makes a loan available from, or carries its portion of the loan on the books of, or receives any amount payable there under at, any facility office located in Turkey or which is incorporated or organised or has its principal office in Turkey (a "Resident Finance Party"). Interest, commission and fees to be paid by a borrower to a Resident Finance Party and any income realised by such Resident Finance Party is subject to Banking and Insurance Transactions Tax ("BITT").

    In addition, loans extended by Turkish banks and financial institutions are exempt from Resource Utilisation Support Fund ("RUSF") (applicable rate of RUSF has been set as 0%). Any foreign currency loan made available to a Turkish resident (other than banks and financial institutions) from abroad having an average maturity falling (i) short of 1 year would result in the accrual of RUSF at a rate of three (3) per cent.; (ii) between 1 year to 2 years would result in the accrual of RUSF at a rate of one (1) per cent.; and (iii) between 2 years to 3 years would result in the accrual of RUSF at a rate of zero point five (0.5) per cent. over the principal amount of that loan, unless such loan has been extended by a lender lending through a facility office in Turkey. Turkish Lira loans made available to Turkish residents by foreign financial institutions are subject to 1% RUSF if the average maturity is less than a year and 0% if the maturity is longer than a year.

  18. Are there any tax incentives available for foreign lenders lending into your jurisdiction?

    Foreign investors in particular are encouraged to enter into the market by various incentives provided mainly under the Foreign Direct Investment Law (Law No. 4875) which gives a very broad definition of foreign investment, enabling many investors to benefit from such incentives. Furthermore, foreign investors also benefit from noteworthy tax incentives (i.e. VAT exemption, customs tax exemption, VAT return, income tax discount, depending on the place and volume of investment) alongside the tax exemptions in place for health public private partnership projects.

  19. Is there a history in your jurisdiction of financing structures being challenged by tax authorities, and if so, can you give examples.

    There is not a landmark tax investigation or penalty imposed on financing structures. However, tax authorities impose penalties on the banking sector from time to time. In 2017, the Ministry, imposed total of TRY 30 million on two major Turkish banks for breaching RUSF obligations. However, those tax penalties were cancelled by tax courts.

  20. Do the courts in your jurisdiction generally give effect to the choice of other laws (in particular, English law) to govern the terms of any agreement entered into by a company incorporated in your jurisdiction?

    As per the Private International Law (Law No. 5718), which would apply to the private law transactions and relations that contain a foreign element, the parties may freely choose foreign laws including English law as governing law of the contract. Turkish courts shall abide by the parties' choice of law. However, rights in rem, the contracts concerning an immovable property and/or use of immovable property shall be subject to the law of the country where such immovable property is located. Also, although the parties to a consumer or employment contract may choose the governing law of such contracts, the mandatory provisions of the consumer's or employer's (as applicable) country of residence would still be applicable.

  21. Do the courts in your jurisdiction generally enforce the judgments of courts in other jurisdictions (in particular, English and US courts) and is your country a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (i.e. the New York Arbitration Convention)?

    Under the Private International Law (Law No. 5718), a judgment of a court established in a country other than Turkey may not be enforced in Turkish courts unless (i) there is a treaty in effect between such country and Turkey providing for the reciprocal enforcement of judgments, or (ii) there is de facto reciprocity in the field of enforcement of judgments between such country and Turkey, or (iii) there is a provision in the law of such country which provides for the enforcement of judgments of the Turkish courts. There is no treaty between the United Kingdom or the United States of America and Turkey providing for reciprocal enforcement of judgments, however, to the best of our knowledge, there is de facto reciprocity between the United Kingdom and Turkey.

    In addition, Turkish courts will only enforce a foreign court judgement if (i) the judgment is not clearly against public policy rules of Turkey, and (ii) where the person against whom enforcement is sought does not raise objections in the Turkish courts to the effect that he was not duly summoned to or represented at the foreign court or that the judgment was rendered in his absence in violation of the laws of the foreign country, (iii) the judgment does not fall within the exclusive jurisdiction of the Turkish courts or (provided that the defendant objects) the judgment is not issued by a self-authorised court without any relation to the subject matter or the parties of such dispute and (iv) such judgment is final and non-appealable.

    Turkey is a contracting state to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention") with reciprocity reservations; and thus, foreign arbitral awards rendered in a contracting state to the New York Convention shall be recognised and enforced in Turkey under the New York Convention, subject to the reservations and declarations made by the relevant country and Turkey.

  22. What (briefly) is the insolvency process in your jurisdiction?

    The main bankruptcy, concordat, rehabilitation or other similar insolvency proceedings to which a debtor may be subject to are:

    (a) bankruptcy: commenced with the filing of a petition by either the debtor (i.e. a company or a merchant) or its creditors; and followed by a judgment from the commercial court that the debtor is bankrupt if it fails to raise objections or satisfy its creditors within specified time limits. Once a bankruptcy judgment is given, a creditor's options for debt collection will become subject to the Enforcement and Bankruptcy Law (Law No. 2004) which provides that the bankrupt's management will be taken over by a bankruptcy administrator for liquidation of the bankruptcy estate.

    (b) concordat: either by way of abandonment of the debtor's assets or ordinary concordat. Concordat through abandonment of debtor's assets enables a debtor to make a general assignment of its assets for the benefit of its creditors. This type of concordat grants the creditors the right to dispose of debtor's assets and transfer its assets, in part or in whole, to third parties. In other words, the debtor would abandon its assets so that the creditors may liquidate the assets and use the proceeds for the collection of their debts. Ordinary concordat is an interim remedy available to the creditors of a debtor facing a financial difficulty or the debtor itself with which the debtor would be provided a relief (decrease on its debts and/or extension of maturity) with the approval of a certain majority of the creditors and the commercial court. In principle, ordinary concordat is meant to be granted to those which could potentially regain their solvent status or increase the value of assets as a result of concordat.

    (c) restructuring of stock companies by way of conciliation: stock companies in financial distress but deemed to have ability to recover may file for restructuring in a bid to pay their debts in an extended payment plan or at a discount and to eliminate the risk of bankruptcy. In order to file for restructuring, the debtor would first have to convince its certain creditors which are willing to discuss a restructuring project. The debtor then has to invite its creditors interested in the project for voting. A majority representing at least (i) ½ of the voters and (ii) two-thirds of such creditors' receivables is required to submit the project to the courts. The debtor also has to provide the court with the restructuring project, its commercial books for the last three financial years, a report from an independent auditor confirming that the debtor is capable of implementing the project, documents evidencing the negotiation process, written consents of creditors to benefit from the project and a list of all other creditors.

  23. What impact does the insolvency process have on the ability of a lender to enforce its rights as a secured party over the security?

    Once a debtor is declared bankrupt, all debts (save for receivables secured by mortgage) become payable and the creditors become entitled to use their right of set-off against such amounts. In addition, all pending enforcement or attachment proceedings in respect of the bankrupt entity are stayed. However, secured lenders (i.e. lenders with pledge or mortgage security) may initiate enforcement proceedings after the announcement of bankruptcy or concordat. In case of bankruptcy, lenders are entitled to sell the pledged assets during the bankruptcy process.

    In case of concordat, all ongoing enforcement proceedings against the debtors are suspended and the creditors cannot initiate new enforcement proceedings. However, the creditors may enforce their security, although they cannot request sale (foreclosure) of the secured assets.

    In respect of restructuring of stock companies by way of conciliation, the court may suspend all enforcement proceedings initiated by the relevant creditors and prevent initiation of new enforcement proceedings in the interim period during which the restructuring project is evaluated.

  24. Please comment on transactions voidable upon insolvency.

    Donations and gratuitous transactions (save for customary gifts) made at any time after the date on which the earliest receivable being enforced under the bankruptcy proceeding accrued (and in any case within two years preceding the declaration of bankruptcy or insolvency) will be deemed void. Unconscionable transactions entered into within the same period will also be deemed void.

    In addition, pursuant to Article 279 of the Enforcement and Bankruptcy Law (Law No. 2004), the following transactions will be deemed void provided that such transactions are made by the bankrupt debtor within one year preceding its bankruptcy or insolvency:

    (a) pledges or similar security interests established to secure existing debts (save for cases where the debtor has already undertaken to establish a pledge before the above period or at the time of assuming the debt);

    (b) payments that are not made in cash or commonly used payment methods (e.g. payment that is made in kind for a pecuniary debt);

    (c) payments made to discharge immature debts (i.e. prepayments); and

    (d) annotations registered with the title deed registry to strengthen personal rights.

    However, if the counterparty benefiting from the above transactions proves that it was not aware of the financial situation of the debtor, such transactions cannot be annulled.

    Finally, fraudulent transactions of the bankrupt debtor (i.e. the transactions carried out by the debtor to damage its creditors) within five years preceding the commencement of bankruptcy proceedings will be voidable. It should also be noted that under Turkish law, any transaction which is not made on an arm's length basis or which is not in accordance with the market or is made without any consideration may be construed as a preferential and fraudulent transaction.

    However, as determined by the Turkish Supreme Court, the grounds for annulment action stated in Articles 278, 279 and 280 of the Enforcement and Bankruptcy Law (Law No. 2004) as explained above are not exhaustive and the courts shall have discretion in determining whether a transaction is voidable.

  25. Is set off recognised on insolvency?

    Under Turkish law, the right of set-off can be exercised before, on or after the insolvency or bankruptcy of the counterparty. However, pursuant to the Enforcement and Bankruptcy Law (Law No. 2004), set-off shall not be enforced after a party's bankruptcy if:

    (a) a debtor of the bankrupt person becomes a creditor of the bankrupt person after its bankruptcy (but not the insolvency) if declared by a competent Turkish court; or

    (b) a creditor of the bankrupt person becomes the debtor of the bankrupt person or the bankruptcy estate after bankruptcy;

    (c) the debts of the creditors are evidenced by a negotiable instrument (i.e. promissory note or bill of exchange) after the debtor is declared bankrupt, regardless of such negotiable instrument being issued before, on or after the bankruptcy.

  26. Can you comment generally on the success of foreign creditors in enforcing their security and successfully recovering their outstandings on insolvency?

    In the insolvency of a debtor, receivables of secured creditors are fulfilled from the sale of the pledged/mortgaged property at first; and a secured creditor would have preferential rights on the proceeds of sale. After their receivables are fulfilled, the remaining part of the sale proceeds is transferred to the bankruptcy estate for fulfilment of other creditors' receivables.

    Pending enforcement proceedings would be stayed and new enforcement proceedings may not be initiated against a debtor in the event of declaration of bankruptcy or concordat. However, secured creditors may continue their pending enforcement proceedings or initiate enforcement proceedings against their debtor.

    Fulfilment of receivables or secured creditor in full is an approval condition of concordat; and hence, a debtor seeking for concordat may not have the concordat approved without fulfilment of secured creditors' receivables in full.

    Considering such privileges (i.e. preferential right on sale proceeds) provided to secured creditors, they would have a stronger position as compared with unsecured creditors. However, it is worth to note that, their receivables which are not fulfilled through sale of encumbered property will be subject to creditor's ranking category. Claims of each creditor within a particular category rank pari passu with claims of other creditors in the same category (save for secured debts which shall be paid in accordance with their respective rankings and degrees). Creditors of any category are not entitled to any payment until and unless all creditors of the superior category are satisfied in full.

  27. Are there any impending reforms in your jurisdiction which will make lending into your jurisdiction easier or harder for foreign lenders?

    Please see our response to Question 3.

  28. What proportion of the lending provided to companies consists of traditional bank debt versus alternative credit providers (including credit funds) and/or capital markets, and do you see any trends emerging in your jurisdiction?

    December 2018 statistics show that approximately 96.1 per cent of the total credits extended to borrowers were made available by banks whereas this percentage decreases to approximately 2.3 per cent, 0.9 percent and 0.7 per cent of the total credits extended, by financial leasing companies, factoring companies, and financing companies respectively. Within the past three years, major infrastructure, energy, transportation projects have been funded through syndicated loans of banks.

    Banks still heavily dominate the banking sector, even though factoring, financial leasing, financing companies and funds are beginning to strengthen their position and alternatives to banks emerge in the market and through legislation. Turkey has made significant reforms in its capital market securities, by rearranging existing securities and introducing new fund-raising models. The most noteworthy of these changes is the draft regulation on crowdfunding. With the proposed entry into force, investors may be entitled to raise funds by advertising their projects through crowdfunding platforms. We note that the Turkish financial regulators abstain from acknowledging and regulating blockchain, cryptocurrencies and initial coin offerings and remain sceptical on the usage of these capital markets instruments as a part of financing.