Fears of a spree of suspended bankruptcies
These days, there is a fear among creditor banks and companies that the companies they are doing business with could appeal for a suspension of any declaration of bankruptcy. If this situation turns into an epidemic, then it may well be a nightmare for commerce and economy in general.
As you know, after the 2009 crisis, due to the abundance of global capital inflow, the debts of the private sector in Turkey increased significantly. Now, there has been a withdrawal of foreign capital, and the economy has slowed down somewhat. The highly indebted private sector is now face to face with the prospect of paying for the debt and its interest with their falling turnovers.
For two reasons, a rush to suspend bankruptcy has been noted since the New Year; one is because of companies that actually have poor solvency and are deep in debt, and the other is because of companies that opt to suspend bankruptcy to abuse the opportunity.
Companies deep in debt may ask for the suspension of bankruptcy by submitting a recovery project to the court covering the possibility of recovering their financial situations. If the court deems the project serious and convincing, it can suspend bankruptcy for up to four years with extensions. The basic criterion is that the assets of the company do not meet the liabilities – in other words, the debts of the company, meaning they are deep in debt. This is determined and reported by local experts.
The suspension of bankruptcy is a legal opportunity provided as a “last exit” before bankruptcy. Basically, it is an opportunity for the company that is deep in debt but following a business plan to allow it to pay its debts.
Investment companies brokering bond issues for banks and companies in the capital market have recently entered a nightmare in terms of suspending bankruptcies. The reason for this is that this mechanism has been used as a tool very easily and is open to abuse. Companies that take this decision do not face legal proceedings for their debts. This situation not only affects creditors but also other companies that have commercial relations with these creditor companies. Even a company in good financial standing that has first or secondary commerce relations with a company in a suspended bankruptcy may experience cash flow difficulties.
The 1994 and 2001 crises hit more deeply because of congestion or a stoppage in the banking system’s payment chain. The trend toward suspending bankruptcy we are currently witnessing will create a disruption in the micro-size payment chain while also making banks extremely cautious in their loaning mechanisms.
In the first stage of the appeal to suspend bankruptcy, there are concerns that boards of trustees that are appointed are not experts in the sector and that the courts decide on the suspension of bankruptcy too easily.
Bank executives point out that there are examples of moving the headquarters of companies to other cities such as Kayseri, Denizli and Bursa because such decisions are easier to find in these cities.
The question is that while companies are able to pay for their debts by selling their existing assets, they opt to suspend bankruptcy, meaning their debts ultimately cannot be paid. Worse than that, banks that have gained experience in this field take early action against companies they suspect are seeking to suspend bankruptcy and launch legal proceedings. In an environment of many creditors, this also opens another door to a dilemma.
The Union of Banks, chambers of commerce and politicians in Ankara are all aware of this situation. A new legal regulation against this opportunism has been suggested. Especially in an environment where the political shadow over judicial institutions has grown darker, a situation resulting in damage to the economy could soon emerge if moves to suspend bankruptcy becomes an epidemic.