Can the Letter of Guarantee of the Company Declared Concordat Be Converted into Cash? 30 October 2018
Due to the recent economic conjuncture in our country, many firms have difficulty on paying their debts and resort to concordat institution as a consequence. The increasing number of firms, which resort to this solution, creates insecurity for the creditor firms and causes that creditor firms seeking for a way of guaranteeing their credits regardless of the economic competence of the debtor. One of the most important guarantee mechanisms used by the creditor firms is the bank letter of guarantee.
Letter of guarantee is a guarantee contract under which the banks undertake to unconditionally pay certain amount of debt. Banks are obliged to pay the demanded amount without exceeding the letter of guarantee limit after they are notified that the debt guaranteed by the letter of guarantee, is not paid by the debtor.
However, it is a matter of curiosity that whether a letter of guarantee submitted before the date of concordat by a firm that declared concordat, can be converted into cash after the decision of temporary delay or not.
What is the Concordat?
Concordat is an institution that provides to the debtor, who is in difficult position to pay his debts, a delay granted by creditors under the control of the court in order to pay his debts before the decision of bankruptcy. Since the validity of the concordat is subject to the approval of at least half of creditors whose receivables exceed two-thirds of the total debt of the debtor, the most important issue is that the concordat is an agreement which binds upon creditors who do not accept the concordat.
In accordance with the agreement, debtor shall pay half over the two-thirds of his debts to creditors and prepare a payment plan for rest of his debts. The debtor must undertake to pay at least half of his debts. Therefore, concordat could be defined as the waiver of creditors from a part of their receivables and an agreement upon payment plan with debtor.
How does Concordat Affects Creditors?
The debtor shall apply to the court with the required documents in order to demand concordat. The courts will give a three-month temporary period to the debtors within the scope of the concordat in order to evaluate the situation of debtor given that all the documents provided are complete. During the temporary delay, it is decided whether the decision of definitive delay would be delivered or not.
There is no difference between the temporary and definitive delay in terms of legal consequences for debtors and creditors. In the course of temporary and definitive delay, as a rule, execution proceedings cannot be initiated against the debtor and execution proceedings that were previously initiated shall be suspended. Preliminary injunction and preliminary attachment decisions rendered against the debtor shall not be executed. The lapse of time interrupted by execution proceeding do not resume in this period. Only exception of this rule is the receivables secured by pledge, in that case the execution proceeding shall resume in normal way.
How is the Situation in terms of the Letter of Guarantee?
Acceptance of the concordat matters at the point of that whether the creditors can collect their receivables from the debtor’s co-debtors or not. If the creditors did not give an affirmative vote for the concordat, they reserve all their rights against the co-debtors and guarantors. However the creditors, who accept the concordat, can only collect their receivables from co-debtors and guarantors in line with the terms of concordat.
However, the liability of the banks in the extent of letter of guarantee is not considered as a co-debtor. Because the Turkish Court of Appeal delivered a decision that the bank's guarantee liability was completely independent from the debtor's debts and the creditor's right to apply to the bank was not affected by the concordat process. Therefore, even if the concordat decision is given, the letter of guarantee can be still converted into cash.
On the other hand, duly conversion of the letter of guarantee has a vital importance in this process. Since the conversion of the letter of guarantee into cash before the right of conversion has not born or by not following the necessary proceedings will weaken the economic power of the company declared concordat and negatively affects success of concordat process, it is in evitable that a serious indemnity obligation shall be born in case of such unjustified conversion.
Similarly; in case of not following certain legal procedures, a firm, which continues to provide goods and service to the company declared concordat, by relying on the letter of guarantee and to create debt against the firm knowing that there will be no capacity to collect, may be subject to claims and demands of the bank and may be confronted with demand of compensation with the claim of consciously causing the increase of the amount to be paid by the bank.
Moreover; the declaration of concordat does not entitle the creditors to convert the letter of guarantee into cash and it shall not be accepted as a valid reason even if it is defined as a valid reason in the agreement with regard to terminate the agreement or to convert the letter of guarantee into cash. Therefore, with few exceptions, the letter of guarantee submitted by a company declared concordat cannot be converted into cash just because of such reason.
For all these reasons; when the letter of guarantee submitted by a company declared concordat is converted into cash, creditors should be extremely careful and take a support from a lawyer in order not to face any compensation liabilities.
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