Avoidance Of Transactions Made With The Intent To Cause Harm Under Article 280/3 Of The Enforcement And Bankruptcy Law

1. INTRODUCTION

The legal order protects both the right of ownership and the creditor's rights arising from obligations. The right of ownership grants the holder the broadest powers over their property, whereas the right of claim enables the creditor to demand performance from the debtor. However, certain transactions carried out by the debtor concerning their assets may render it practically impossible for the creditor to exercise this right. At this point, the institutions of reclamation and cancellation of disposition come into play.

A reclamation action arises when third parties assert ownership rights against a creditor who has argued execution on the debtor's property. In contrast, an action for avoidance of transactions allows the creditor to request that certain acts performed by the debtor with the intent to defraud creditors be deemed ineffective with respect to their own claim. Thus, the avoidance of transactions constitutes an important limitation on the principle of the absoluteness of ownership, serving to protect the creditor's right.

The action for cancellation of disposition regulated under Article 280 of the Enforcement and Bankruptcy Law may be brought by a creditor holding a definitive or provisional certificate of insolvency. By invoking the statutory grounds specified in the article, the creditor may request that a disposition alleged to be voidable be declared ineffective solely in relation to themselves and to the extent of the claim evidenced by the insolvency certificate and its accessories. This action is of a personal nature, subject to a five-year limitation period, and proceeds under the simplified trial procedure. Moreover, paragraph 4 of the same article provides that if the debtor transfers their commercial enterprise or the entirety—or a substantial part—of the commercial goods present at their workplace, an action for cancellation of disposition may be instituted.

2. Cancellation of Dispositions Made with Intent to Harm (EBL Art. 280/3)

Transactions made by the debtor with the intent to harm their creditors may be subject to avoidance if the financial situation of the debtor and their intent to harm were known or if there were clear indications that they should have been known by the other party to the transaction.

For this condition to be met, it is sufficient that the third party benefiting from the transaction could have understood the debtor's situation and the nature of the transaction if they had exercised the necessary diligence. In other words, if the third party was in a position to know the debtor's circumstances through a slight inquiry, attention, or observation, this condition should be considered fulfilled.

The action for cancellation of dispositionto be filed by the creditor under this article consists of the elements specified below.

• Transfer of a Commercial Enterprise

A commercial enterprise is an enterprise where activities aimed at generating income exceeding the limit stipulated for a tradesman's enterprise are carried out continuously and independently (Turkish Commercial Code – Art. 11). Pursuant to the third paragraph of Turkish Commercial Code Art. 11, a commercial enterprise may be transferred as a whole and may be subject to other legal transactions, without the need for separate disposition transactions for the transfer of the assets it contains. Unless otherwise stipulated, the contract of transfer is deemed to include the fixed assets, the enterprise value, the right of tenancy, the trade name, other intellectual property rights, and the assets permanently allocated to the enterprise. Furthermore, according to this provision, the transfer contract and other contracts concerning the commercial enterprise as a whole must be made in writing, registered with the trade registry, and announced (published).

In order to determine whether a transfer of a commercial enterprise is at issue within the meaning of Enforcement and Bankruptcy Law Article 280/3, the following must be ascertained: the debtor's assets and liabilities as of the date of sale, the proportion of the commercial enterprise's assets that the real estate subject to the action for cancellation of disposition constituted on the date of sale, and the amount of its paid-in capital.

• Debtor's Intent to Harm Creditors and the Presumption of Bad Faith

The presumption of bad faith applies, whereby it is deemed that the third party who transfers or purchases all or a significant part of a commercial enterprise or the existing commercial goods in a workplace, or who acquires a part of it and subsequently occupies the workplace, knew of the debtor's intent to harm their creditors, and that the debtor themselves also acted with the intent to harm their creditors in these circumstances.

This presumption may be rebutted if the transaction (transfer, sale, or abandonment) was notified to the creditor in writing at least three months prior to the date of transfer, sale, or abandonment, and was publicly announced (published) with visible signs (placards) at the location of the commercial enterprise and through the Trade Registry Gazette or other appropriate means.

In Article 280, third paragraph of the Enforcement and Bankruptcy Law, the legislator introduced a rebuttable presumption in favor of the creditor from two perspectives; it relieved the creditor of the burden of proof by presuming, on the one hand, that the debtor acted with the intent to harm their creditors and, on the other hand, that the third party knew of this intent.

• Claimant Creditor's Burden of Proof

In the provision of the Enforcement and Bankruptcy Law Article 280, third paragraph, the legislator has relieved the claimant creditor of the burden of proving the existence of the debtor's intent to harm and the third party's knowledge of this intent, through the aforementioned presumption.

To succeed in an action for cancellation of disposition based on the Enforcement and Bankruptcy Law Article 280, third paragraph, the creditor only needs to prove that the debtor transferred or sold all or a significant part of their commercial enterprise or the commercial goods in the workplace to the third party, or that the third party occupied the debtor's workplace after acquiring a portion of the commercial goods there. In proving the transfer of a commercial enterprise, the registration and public announcement made under Turkish Commercial Code Article 11, third paragraph, may be utilized.

The Court of Cassation has jurisprudentially ruled that in cases regarding the removal of the third party's claim of ownership, if the transfer of the workplace between the defendants (debtor and third party) is collusive and subject to avoidance after the debt arose, the decision should be to remove the third party defendant's claim of ownership, citing that the third party defendant will be jointly and severally liable with the transferor debtor for the debts of the enterprise they acquired, pursuant to the Turkish Code of Obligations Article 202.

Rebuttal of the Presumption of Bad Faith under Article 280(3) of the Enforcement and Bankruptcy Law

In order to establish that the debtor did not act with the intent to cause harm to creditors when carrying out the aforementioned transactions, it must be proven that, at least, three months prior to the date of transfer, sale, or abandonment:

• the situation was notified in writing to the creditor who has filed the action for avoidance, or
• public notices were posted at visible locations in the place where the commercial enterprise operates and published in the Turkish Trade Registry Gazette, or
• if such publication was not possible, the situation was announced through appropriate means that would ensure all creditors could reasonably become aware of it.(Article 280/3, sentence 2)

As can be seen, the presumption of bad faith can be rebutted only by taking certain precautionary measures prior to the transfer of the commercial enterprise.

3. Conclusion

The avoidance of transactions carried out with the intent to cause harm, as regulated under Article 280(3) of the Enforcement and Bankruptcy Law, constitutes a type of avoidance action that creditors may bring within specific conditions and time limits when the debtor disposes of assets in a manner detrimental to their creditors.

In such actions, the key elements include the financial condition of the debtor, the intent to cause harm, the awareness of the other party to the transaction regarding such intent, the existence of a certificate of insolvency in the hands of the claimant creditor, and the observance of statutory time limits. Furthermore, the scope of transactions subject to avoidance is not strictly limited, leaving room for judicial discretion in determining whether a particular disposition should be cancelled.

It is also noteworthy that the draft amendment to the Enforcement and Bankruptcy Law proposes the abolition of the presumption currently set forth in this provision.

BIBLIOGRAPHY:

1. T.Muşul, Tasarrufun İptali Davaları, Ankara 2017, p.378.

2. M.BERKİN, N. İflas Hukuku, p:511
3. Relevant precedents of Court of Cassastion ((Yargıtay 17. HD. 15.3.2011, E.2010/10070, K.2011/2289, YHGK. 30.5.2007, E. 2007/295 K. 2007/319, Yargıtay 17. HD., 31.1.2011, E.2010/5030, K.2011/594, Yargıtay 15.HD. 4.10.2005 T. 4505/5179, 21.HD. 21.2.2005 T. 11573/1442,HGK, 2017/2773, 2021/987,17. HD., 2016/14657, 2019/5472)

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.