Debt Collection Agency Turkey

Debt Collection in Turkey

• Domestic courts lack transparency, the understanding of the rule of law is modest and the possibility of securing reward by legal action is smaller than through good pre-legal negotiation activities.

• Debt renegotiation lawsuits before the courts are not common and, where insolvency cases are involved, liquidation is the default procedure even though liquidation sales seldom produce effective outcomes and may not be in the best interest of the creditors.

1. Summary

1.1. General financial information

1.1.1. It may be difficult to obtain financial information on domestic companies inasmuch as the domestic market is largely deficient in accountability and exposure given strict regulations.

1.2. Key legal structures

1.2.1. Corporate debt liability is determined by legal structures, which are described as follows:

• Sole proprietorship is available for individually managed small businesses for which no corporate structure is required. In this scenario, the claimant shall be held responsible for all contractual debts. Two or more people may also decide to share ownership and responsibility by Partnerships, in which case the partners may collectively and separately be responsible for the other couples ' acts. Conversely, limited liability companies (Komandit Sirket) sell the parties limited liability.

• Limited Liability Companies (Limited Sirket, Sti) represent the vast majority of Turkish companies as they need minimum capital assets (TRY 10,000) while the responsibility of the shareholders is limited to their allocation. Joint Stock Companies (Anonim Sirket, Aÿ) are used to split their money (at least TRY 50,000) into stakes in larger structures. The creditors ' interest in those companies is limited to their financial contributions.

• Foreign companies that preferably settle in Turkey by branch offices providing foreign parent company with no liability limits. Joint ventures may take the form of commercial collaborations (Komandit Sirket and Kollektif Sirket), but such partnerships may also be formed by incorporated entities as indicated.

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1.3. Regulatory framework

1.3.1. Turkey has a system of civil law influenced by Swiss, German and French law and in which the judiciary is comprised of two separate legal bodies. On the one side, the ordinary jurisdiction splits into courts of ordinary (Civil and Criminal) jurisdiction making judgments in first instance, District Court of Appeal and Court of Cassation, serving as the court with ultimate jurisdiction of civil law matters.

1.3.2. Specialized corporate (Ticaret Mahkemeleri), intellectual and technological property (Fikri ve Sinai Haklar Mahkemeleri), labour (including Mahkemeleri) or regulation (including Mahkemeleri) courts deal with conflicts related to company.

1.3.3. On the other hand, the administrative jurisdiction focuses exclusively on disputes involving public bodies through first instance Tax and Administrative Courts, District Administrative Courts acting as Appellate Courts and a Council of State acting as the final jurisdiction.

1.3.4. Overall, while the Turkish authorities stress that the country has made significant efforts to harmonize domestic rules with EU standards, the judiciary is not fully independent, business lawsuits remain slow and expensive, and there is scope for improving the perception of the country's rule of law.

2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. Domestic firms' compensation conduct has substantial margin for change. Although parties are free to determine their own payment conditions laws, it is reasonable to anticipate average delays of up to 30 days. The stock of outstanding receivables has grown considerably in recent years as a result of this long trend in the payment period. Among listed companies the current total DSO was 80 days.

2.2. Late interests

2.2.1. A customer will normally be considered in default if an invoice was left unpaid after 30 days from the date of receipt, or after distribution (if the date of receipt of the invoice is not determinable). Credit on late payment may then be paid to the debtor as specified by a contract by taking the interest rate of 9.75 percent (per annum) usually imposed by the courts (under Legal Interest and Standard Interest Law No. 3095).

2.2.2. During the amicable settlement process, late payment risk is often a derogatory device, although it may be applied to the argument as legal action starts. In most instances, the courts would then immediately determine the value.

2.3. Costs of debt collection

2.3.1. Settlement expenses must be agreed as specified in the contract, although in reality they will never be paid to the claimant and would rather function as a mechanism for bargaining. Even if the contract contains no related clause, the court would normally order the defeated party to pay the cost of collection when legal action is initiated (Law No. 6100 on Civil Procedures, Law No. 492 on Charges).

2.4. Protecting ownership

2.4.1. The use of title retention (RoT) agreements aimed at preserving ownership of goods until full payment of the related invoice are admissible in Turkey provided that the provisions have been registered with a notary at the place of registration of the debtor. It should be noted that RoT agreements do not provide a complete safeguard, especially when the debtor sells goods to a third party acting in good faith when legal action becomes impossible.

2.4.2. RoT deals are usually used to obtain leverage during insolvency proceedings, however, the borrower may also depend on a RoT to order the return of the products if the debtor fails to fulfill his payment obligations. Nonetheless, unless the parties find a peaceful compromise, it would be appropriate to take legal action.

2.5. Payments

2.5.1. The most common methods of payment are as follows: bank transfers are among the most prominent means of payment for international transactions, as they are quick, safe and sponsored internationally and domestically by an increasingly integrated banking network. Transfers are usually guaranteed for export transactions by Export Credit Insurance which helps minimize the risk of sudden or unforeseen insolvency of customers.

2.5.2. Furthermore, Standby Letters of Credit (a bank guarantees the creditworthiness and repayment ability of the debtor) are often used for export shipping transactions because they provide secure assurances that can be enabled as a' payment of last resort' if the buyer fails to fulfill a contractual obligation. In fact, irrevocable and verified Documentary Letters of Credit (a debtor assurances that a certain amount of money will be made available to a borrower via a bank after such conditions, expressly decided by the parties, have been met) are gradually being dependent upon.

2.5.3 Although bank guarantees are equally secure, promissory notes and checks are often used as transferable debt identification titles in Turkey, enabling the lender to receive a Transaction Order from the Compliance Bureau ( İcra Dairesi ) to seek forfeiture of the debtor's properties without going through the courts. Importantly, skipped checks can also create heavy financial fines and as of 2012, an administrative judge's decision will prohibit the issuer from using checks for ten years.

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3. Collecting payments

3.1. Amicable action

3.1.1. Negotiating amicable settlement opportunities should always be considered as the best alternative to formal legal proceedings given the difficulty in obtaining timely decisions from domestic courts. Until beginning legal proceedings against a claimant, asset appraisal is crucial as it requires assurance as to whether the company is still involved and whether the chances of recovery are the highest. Therefore, it is important to be mindful of the solvency condition of the debtor: once insolvency proceedings have been launched, the execution of a loan (see below) is indeed unlikely.

3.1.2. Legal dunning should then begin with a registered Demand Letter, recalling the debtor's obligation to pay the principal along with late payment interests, but in practice it is very important to rely on a collection agency with local correspondents, as they will be able to enter into dialog with the debtor.

3.1.3. Obtaining settlements in the shape of a loan instalment is rather acceptable, but getting a payment expert attempting to launch execution proceedings at a bailiff's office usually helps impose more leverage if the claimant refuses negotiations.

3.2. Legal action

3.2.1. Ordinary proceedings.  Where the debt is certain and unchallenged, Law No. 2004 on Execution and Bankruptcy allows for fast-track settlement request prosecutions before the court of the bailiff for debt recovery. The debtor is then summoned to pay or file their objections within seven days (five days if the debt originates from a bill of exchange) from the payment order's service date.

3.2.2. If the debtor remains silent, the creditor can obtain from third party attachment of movable and immovable assets of the debtor (including bank accounts) and also debtors' receivables. If the debtor presents a defense, an ordinary action must settle the claim. Typically, ordinary legal action should begin if nice selection failed. The creditor would lodge a claim with the court and notify the debtor to file a defense for up to two weeks. The parties are then given an opportunity to share arguments and evidence, but the court will usually allow the parties to seek an agreement (though seldom found in practice) before making a judgment.

3.2.3. The courts normally grant remedies in the form of damages, specific performance, declaratory judgments or injunctions (to do or abstain from doing anything), but there are no punitive damages.

3.2.4. Required documents: Import invoices, financial reports, contract sales, purchase orders, delivery records and customs record.

3.2.5. Time limits. The time limit for filing claims ranges from two and ten years, based on the nature of the case. As a general rule in bankruptcy law, the borrower will begin debt collection action either through the courts or execution offices within ten years of the due date, if any other legislation allows for no stricter time limit.

3.2.6. Precautionary measures. The Civil Procedures Act offers precautionary measures to aid in protecting the rights of the claimant awaiting a final decision. Upon appeal, the courts may impose interim remedies aimed at preserving the status quo and preventing irreparable damage (attachment of the debtor's properties, statutory injunctions to do something, prohibitory injunctions to deter doing something, declaratory judgments aimed at protecting a privilege, orders to pay interest, etc.).

3.2.7. Nevertheless, it would be necessary to demonstrate that the lawsuit has a good chance of success and that, in the absence of precautionary measures, negligence alone would not satisfy. The court may consider its judgment ex parte in emergency situations (i.e. without the defendant being present), but the court will generally require that the applicant have insurance on costs to shield the respondent against reckless behavior. Precautionary measures must be taken within one week of notice to the parties, while counterclaims from the claimant would not hinder compliance. Turkish arbitration law gives arbitrators the right to order precautionary measures.

3.2.8. Appeal lodging. The filing of appeal judgments made by courts of first instance may be referred to the District Court of Appeal, and the decisions reached by that court may be appealed to the Court. The submission times for lawsuits range from eight days to one month, as per the form of trial from which the ruling is made. There are also monetary constraints which prevent cases of lower value from being subject to appeals. First-instance judgements are absolute for such cases.

3.2.9. Enforcing court decisions. First instance court rulings requiring the settlement of a penalty are enforceable as long as the claimants are represented, even if the losing party has protested against the court decision. A debtor seeking to suspend the actions of the execution office until the Court of Cassation's judgment must provide an appropriate defense, priced as (in common practice) the entire debt amount plus 90 days of interest, and secure a stop order from the Court of Cassation. Should the debtor fail to pay or act, the borrower can order the bailiff to garnish the debtor's assets and receivables from third parties.

3.2.10. Duration of a legal action. It may take six months for undisputed trials, but more complex cases can need seven years before a definitive and enforceable decision is made.

3.2.11. Costs of a legal action. Litigation costs consist mainly of word payments, fees for the expert/survey, plaintiff fees and fees for the Court of Cassation. Term costs compensate for 6.8 percent of the petition, of which 25 percent must be charged by the applicant at the outset of the court proceedings together with a sum of around TRY 750 for expertise / survey services and witness charges. As a general rule, the losing side is to be paid the court costs. Contingent payments which allow legal professionals to earn a percentage of the final award are not permitted by law.

3.3. Alternatives to legal action

3.3.1. Alternative dispute resolution mechanisms (ADR). Although the quality of Turkish courts has a significant margin for development, domestic companies rarely rely on alternative dispute resolution approaches such as mediation or arbitration (Law No. 4686 on international arbitration relates to conflicts concerning a foreign dimension and where Turkey has been preferred However, in practice the effects of ADR are limited, and interference by the courts is inevitable during the process.

3.3.2. Foreign forums. Likewise, creditors could seek a judgment abroad and have it enforced by domestic courts against the debtor (provided that the agreement is characterized by an international connection and that a jurisdiction clause is specifically drafted for that purpose), although the process is dangerous and would have very little effect in practice. Secondly, the procedure of acknowledgment and compliance would most definitely take more time than obtaining a verdict by domestic courts. Furthermore, a certain degree of ambiguity should be stressed insofar as the courts have consistently defined zones of exclusive authority, which in some cases prohibit the parties from escaping domestic courts.

3.3.3. Enforcing international awards. It would be pointless to impose foreign rulings aimed at bypassing domestic court jurisdiction, but valid foreign judgments against Turkish debtors can be imposed in Turkey nevertheless. Under Turkish Foreign Private and Procedural Law No. 5,718 of 2007, implementation of international rulings will normally require approval of the ruling by domestic courts before compliance.

3.3.4. As in most nations, the courts will usually (among other things) guarantee that the international tribunal did not declare on issues falling entirely within the authority of Turkish courts, that the foreign decision is final and binding in the issuing region, and that the verdict is not in dispute with domestic public policy. The procedure is compounded by a reluctance on the part of domestic courts to undertake comprehensive exequatur trials concentrating on the nature of reciprocity provisions in the context of a contract of mutual recognition and compliance, or de facto reciprocal recognition. That may result in prolonged disciplinary proceedings.

3.3.5. Turkey is a signatory of the 1958 New York Convention on the Recognition and Compliance of International Arbitration Awards, and international arbitration awards should therefore be applied fairly quickly, given they are valid and binding in the awarding region.

4. Managing insolvent debtors

4.1. Insolvency in Turkey

4.1.1. In Turkey, a company's liquidation and bankruptcy process is regulated by the Turkish Legal Code (Law No. 6102) and the Act on Procedure and Bankruptcy (Law No. 2004). Nevertheless, changes to the execution and bankruptcy legislation in 2003 and 2004 contributed to the implementation of new processes, when banking institutions realized that helping debtors experiencing economic turmoil (through turnaround proceedings) could be more productive and effective than merely arranging their liquidation.

4.1.2. Since then, several Turkish institutions have concluded a consensual framework agreement and have also developed separate debt restructuring agreements with large debtors (Istanbul Approach) and small / medium debtors (Anadolu Approach).

4.2. Insolvency proceedings

4.2.1. Out-of-Court litigation. Turkish legislation gives the chance of holding debt restructuring talks outside the judiciary.

4.2.2. Debt restructuring. Safeguarding procedures are usually initiated for debtors experiencing problems that are likely to make them insolvent even if their company is viable. Such preventive measures may be undertaken on behalf of the debtor but, as long as there are no time limits provided by law, they may well be harmful to the creditors.

4.2.3. Upon conducting the proceedings under court supervision, the debtor and their creditors would normally aim to negotiate a plan for the continuation of business. An extension order shielding the company from enforcement claims for one year (extendable up to four years) could then be applied for.

4.2.4. Winding up proceedings. Creditors requesting liquidation from their creditors must first accept reimbursement of the loan through the qualified execution office to secure an order to pay the bankruptcy. In the case that the debtor fails to pay within seven days, the borrower may bring a bankruptcy claim before the Commercial Court and seek emergency remedies (preparation of an asset inventory, selection of a trustee, etc.). Once the bankruptcy order has been issued, it is sent to the bankruptcy office which then carries out emergency actions, manages the case, calls for the meeting of creditors and sells the properties. Nevertheless, it should be remembered that since the company is not allowed to sell assets below certain limits, liquidation sales may be costly and, thus, would not be in the benefit of creditors.

4.2.5. Priority rules. In the liquidation process, favoured cases have precedence over other forms of receivables, receivables covered by contract, severance pay and pay instead of labor warning, receivables from provident funds of the workers, payment for a spouse or children.

Under a Title Retention Agreement, ownership of the goods remains with the creditor, who can submit a claim arguing that the moving goods in question are not within the bankruptcy assets.

4.2.6. Cancelation of suspicious transactions. Any gifts awarded two years before a garnishee, insolvency or bankruptcy warrant is given may be revoked. Pledges, settlements for excessive loans, and contracts with unusual methods of payment may be canceled if such transactions were done within one year previous to the decree. Transactions adverse to creditors may also be canceled if, within five years of the settlement date, the creditors launched execution proceedings against the debtor (through garnishment or bankruptcy proceedings) and specified that the other party to the agreement was informed of the debtor's financial state.

4.2.7. Duration of insolvency process. Debt restructuring proceedings should last one year, but can in practice be extended to up to four years.