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Introduction
A concordat is a legal mechanism under enforcement law that allows a debtor who is unable, or likely to be unable, to pay its due debts to settle those debts or restructure its business under the supervision of the court, by reaching an agreement with its creditors in accordance with the conditions prescribed by law.1
During the concordat suspension period (both the temporary and the definitive stay periods), enforcement proceedings against the debtor are prohibited in order to enable the debtor's restructuring, and a decision is also issued to suspend existing proceedings.
Pursuant to Article 294(1) of the Enforcement and Bankruptcy Law, "no enforcement proceedings may be instituted during the stay - including proceedings brought under Law No. 6183 dated 21/7/1953 on the Procedure for the Collection of Public Receivables - and proceedings already initiated are stayed; interim measures and interim seizures are not applied; and statutes of limitation and peremptory time-limits that can be interrupted by an enforcement proceeding do not run."
However, there are exceptions to the general prohibition on enforcement provided in that article. In this article we will deal with one of those exceptions, namely enforcement by conversion of a pledge into cash.
Prohibition of the Sale of Pledged Property and Its Exceptions
A pledge right is a limited real right that gives the creditor the authority to collect their receivable with priority by selling the pledged asset or right in the event of non-payment. Although various restrictions are imposed on the debtor's assets during the concordat process, certain exceptions apply with respect to receivables secured by a pledge throughout the stay period. Within this scope, secured creditors may initiate or continue proceedings for the conversion of a pledge into cash even during the stay period. However, within such proceedings, the sale of the pledged asset is not permitted, and no conservatory measures (such as seizure or custody) may be taken over the asset.
Article 295(1) of the Enforcement and Bankruptcy Law provides:
"During the stay period, proceedings for the conversion of a pledge into cash may be initiated or continued due to receivables secured by pledge; however, no protective measures may be taken in connection with such proceedings, and the pledged property may not be sold."
As seen, while secured creditors may continue with enforcement proceedings, the execution phase is effectively suspended, meaning that actions such as seizure, storage, preservation, or sale of the pledged asset by public auction cannot be carried out.
This restriction serves as a protective mechanism designed to ensure that the debtor's business operations can continue uninterrupted during the restructuring process, allowing the debtor to reestablish financial stability and maintain economic viability by adapting to market conditions. This protection also supports the objectives of the concordat plan, such as achieving financial recovery, protecting creditor interests to a reasonable extent, and enabling the debtor to fulfill obligations under a sustainable payment schedule.
The exception to the prohibition on the sale of pledged property is regulated in the second paragraph of the same article:
"However, if the pledged property is not envisaged to be used by the enterprise according to the concordat plan, or if its value will decrease or its safekeeping will be costly, its sale may be permitted in accordance with the procedure set forth in Article 297(2). The proceeds from the sale shall be paid to the secured creditor up to the amount of the pledge."
According to this legal provision, if the pledged property is not used by the enterprise as stated in the concordat plan, if the pledged asset is at risk of depreciation over time, or if the costs of preserving the asset are high, the court may authorize its sale. Examples that may qualify for this exception include a pledged warehouse no longer useful to the business, or a pledged machine stored outdoors without protection, posing a significant risk of depreciation due to rust or disrepair.
Post-Confirmation Postponement of the Sale of Pledged Property in Concordat
The main objective of the concordat process is to ensure the debtor can continue their business operations while allowing creditors to recover their receivables in a fair and structured manner. Upon confirmation of the concordat plan, although the priority rights of secured creditors over pledged assets are preserved, in certain exceptional cases, the sale of pledged property may be postponed in order to protect the debtor's economic viability.
Pursuant to Article 307 of the Enforcement and Bankruptcy Law, upon the debtor's request, the concordat confirmation decision may order that the secured asset be taken under custody and that its sale be postponed for a period not exceeding one year. However, such postponement is subject to stringent conditions:
1- The claim secured by the pledge must have arisen prior to the filing of the concordat application.
2- The pledged claim must not have any unpaid interest accrued up to the date of the concordat application.
3- The debtor must reasonably demonstrate that the pledged asset is essential for the operation of the business and that its liquidation would jeopardize the debtor's economic viability.
This provision concretizes one of the core functions of the concordat mechanism, namely enabling the debtor to continue its operations. However, since the protection is limited in duration and subject to stringent conditions, the secured creditor's rights are not extinguished but merely deferred.
Legal Status in Case of Pledge Provided by a Third Party
Articles 295 and 307 of the Enforcement and Bankruptcy Law prohibit the sale or regulate the postponement of the sale of pledged assets, regardless of the identity of the pledgor. An examination of the statutory provisions reveals that it is irrelevant whether the pledgor is the concordat debtor or a third party, or whether the pledge was granted for the pledgor's own debt or for that of another; what matters is whether the pledged asset is used in the operations of the business under the concordat plan. Consequently, both the prohibition on protective measures and sale under Article 294, and the postponement of sale under Article 307, must apply even if the pledged asset belongs to a third party.
Indeed, this view is also supported in legal doctrine, as the sale of a pledged asset could prevent the debtor from deriving effective benefit from it. Therefore, if the other conditions set out in Article 307 are met, the postponement of the sale of a pledged asset belonging to a third party should be permitted. By the same reasoning, the prohibition on the sale of pledged assets during the stay period should also apply; assets pledged by a third party for the benefit of the concordat debtor should not be converted into cash during the stay period.2
Conclusion
The prohibition on the conversion of The prohibition on the conversion of pledged assets into cash during the concordat stay period (Article 295 of the Enforcement and Bankruptcy Law) constitutes a carefully balanced legal mechanism. It provides a proportionate solution between the security function of the pledge and the objective of restructuring. As a general rule, the sale and custody of pledged assets are not permitted, with the aim of ensuring the continuity of the debtor's business. However, this restriction does not eliminate the secured creditor's rights entirely; rather, it establishes a temporary and controlled postponement mechanism to protect the debtor's economic position.
Within this framework, the sale prohibition applies when the pledged asset is essential for the operation of the business under the concordat plan, whereas in exceptional cases - such as when the asset will not be used, is at risk of depreciation, or entails high preservation costs - sale may be permitted. Accordingly, Article 295 functions as a mechanism balancing both the debtor's restructuring and the interests of the creditors.
Similarly, the possibility under Article 307 to defer the sale of pledged assets for up to one year following confirmation of the concordat represents an extension of this same delicate balancing approach. This provision supports the debtor's continued economic activity and the successful implementation of the concordat plan, while limiting the secured creditor's rights in a controlled, rather than absolute, manner. In cases where the pledged asset is vital for the business, postponing its sale despite the confirmation decision enhances the functionality of the restructuring and serves to protect the long-term interests of the creditors.
Footnotes
1. Atalı, Murat, İbrahim Ermenek, Ersin Erdoğan. Enforcement and Bankruptcy Law. Ankara: Yetkin Printing, Publishing and Distribution, 2022.
2. Köroğlu, Anıl. "Prohibition of Converting Pledged Property into Money During the Concordat Period (Article 295 of the Enforcement and Bankruptcy Law)". Istanbul Law Journal 78, no. 1 (March 2020): 139-60.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
