Understanding Article 226/2 of Turkey’s Execution and Bankruptcy Law: Limits and Authorities of Bankruptcy Administration

Turkey’s legal framework for bankruptcy and execution has undergone several revisions over the years, with the aim of balancing the interests of creditors and debtors, and the effective administration of bankruptcy estate. One crucial aspect of this framework is Article 226/2 of the Execution and Bankruptcy Law (EBL), which addresses the authority of the bankruptcy administration in matters of settlement and arbitration.

Empowering the Bankruptcy Administration: Article 226/2

Article 226/2 of the EBL, a provision that carries significant implications for the bankruptcy administration’s authority, reads: “The administration may make settlement and arbitration for receivables up to two billion Turkish Liras directly, and for more receivables with the authorization of a meeting of creditors.” This clause outlines the scope within which the bankruptcy administration can engage in settlement and arbitration proceedings without the need for explicit authorization from creditors.

Bankruptcy Administration: A Distinct Legal Entity

In the realm of bankruptcy, legal proceedings take on a unique character due to the involvement of the bankruptcy administration. It’s important to note that the bankruptcy administration, rather than the bankrupt party, assumes the role of a party in proceedings related to the bankruptcy estate. Lawsuits connected to the estate are filed by or against the bankruptcy administration. Moreover, any lawsuits initiated by or against the bankrupt entity prior to bankruptcy are carried forward by the bankruptcy administration. This distinctive arrangement positions the bankruptcy administration as the legal representative of the estate in all related legal matters within the scope of EBL.

Special Powers of the Bankruptcy Administration

As the legal representative of the estate, the bankruptcy administration wields considerable authority in legal proceedings. Unlike typical legal representation scenarios that require a power of attorney, the bankruptcy administration operates without the need for such authorization when pursuing cases related to the estate. This unique attribute grants the administration broad decision-making powers within the scope of these cases. Nonetheless, this overarching power doesn’t extend unrestrictedly to settlement and arbitration proceedings.

Limitations on Settlement and Arbitration Authority

While the bankruptcy administration is endowed with extensive powers as the legal representative of the estate in legal proceedings, its authority concerning settlement, mediation and arbitration has limitations. The law prescribes a specific monetary threshold that limits the administration’s settlement, mediation and arbitration authority. The bankruptcy administration is allowed to directly conclude settlements and arbitration agreements for receivables, or property rights, up to a certain monetary threshold, which is annually revised.

For the year 2023, this threshold stands at 37,580 Turkish Liras. The bankruptcy administration is prohibited from executing settlement, arbitration, or waiver transactions for receivables surpassing this established threshold. This threshold alteration is conducted annually according to the revaluation rate, and the process is guided by Article 298 of the Tax Procedure Law No. 213.

Authority to Waive and Accept

Within the legal context, the authority of the bankruptcy administration to waive and accept actions is an other topic of consideration. While Article 226/2 of the EBL doesn’t explicitly address this aspect, legal scholars opine that the administration holds the right to waive and accept within the defined legal limits. This interpretation stems from the inherent nature of settlement and arbitration, which inherently involve waiver and acceptance.

Judicial Interpretation: The Court of Cassation’s Stance

In a notable case addressed by the Court of Cassation, the court affirmed that the monetary threshold specified in Article 226/2 constitutes the maximum legal boundary within which the bankruptcy administration can engage in settlement and arbitration proceedings without requiring authorization from creditors. This ruling emphasized that the administration is not mandated to seek creditor authorization within this defined limit.

Scope of Authority and the Nature of Receivables

The term “receivables” within Article 226/2 of the EBL has generated some degree of ambiguity. A ruling from the Court of Cassation clarified that this term pertains to cases wherein the estate functions as a creditor rather than a debtor. The provision within Article 226/2 that outlines the bankruptcy administration’s settlement and arbitration authority is specifically designed to address scenarios where the estate assumes the role of a creditor. Consequently, it’s inappropriate to attribute settlement, mediation and arbitration powers to the bankruptcy administration in cases where the estate acts as a debtor.

Conclusion

Article 226/2 of Turkey’s Execution and Bankruptcy Law plays a pivotal role in the nation’s bankruptcy legal landscape. By defining the bankruptcy administration’s authority in settlement and arbitration matters, it contributes to a balanced approach that safeguards the interests of both creditors and debtors. While the current provisions establish a careful calibration of powers, striking a delicate equilibrium, threshold amounts should be considered to be raised, especially in light of changing economic conditions and the existing limitations may require periodic adjustments to align with evolving financial realities. Understanding the nuances of this provision remains crucial for legal practitioners, creditors, and debtors navigating the complex terrain of bankruptcy proceedings in Turkey.

Our Managing Partner, Çağlar Kaçar, has provided brief information on the scope and interpretation of bankruptcy administration’s authority in settlement and arbitration matters. You may also find more informative document which includes both Turkish and English versions below in pdf.

Authority of the Bankruptcy Administration for Settlement, Arbitration and Mediation