Return of Assets Subject to Financial Leasing During Composition with Creditors
As a rule, the return of assets subject to financial leasing and any conditions thereof can be requested after the approval of the composition agreement. However, a regulation in favor of the debtor has been made in Article 307 of the Enforcement and Bankruptcy Law No. 2004. With the fulfillment of the conditions specified in the mentioned provision, upon the debtor's request, the return of assets subject to financial leasing in the approval decision can be postponed for a period not exceeding one year.
In this study, after briefly explaining the financial leasing agreement and the institution of composition agreement, the conditions for the return of assets subject to financial leasing in the case of composition with creditors will be examined.
1. Financial Leasing Agreement
Financial leasing agreement is a contract that has emerged for the purpose of providing credit and has its own unique structure that includes elements beyond this purpose.
Financial leasing is defined as follows: "It is a contract between the owner user, who is the lessee, and the leasing institution, which is the credit institution, according to which the leasing institution acquires, by purchasing from third parties or by other means, a specific asset that the lessee needs and determines for its operations, and provides it to the user for use in production activities, in exchange for a certain fee and under the condition of not terminating the contract for a certain period."[1]
The ownership of the asset subject to financial leasing belongs to the leasing company. However, the parties may decide in the contract that the lessee will have the right to purchase the ownership of the asset at the end of the contract period.
2. Composition Proceedings
According to Article 285 of the Enforcement and Bankruptcy Law No. 2004, any debtor who is unable to pay their debts when due or is at risk of not being able to pay them when due may request a composition in order to repay their debts by extending the maturity or making adjustments, or to avoid a possible bankruptcy. They must also attach the documents specified in Article 286 of the Enforcement and Bankruptcy Law to their request. Any creditor who can file for bankruptcy may also request the initiation of composition proceedings against the debtor by submitting a reasoned petition. (Enforcement and Bankruptcy Law, Art. 285)
Accordingly, composition is a legal institution that enables the debtor, based on their request to the competent court and the approval of the creditors by the qualified majority prescribed by law, to repay their debts and avoid a potential bankruptcy.
Upon a request for composition, the court issues a temporary stay decision when it determines that the documents are complete and takes all necessary measures to protect the debtor's assets. (Enforcement and Bankruptcy Law, Art. 287)
During the temporary period, taking into account the objections raised by objecting creditors in their petitions, the court grants the debtor a definitive period of one year if it believes that the composition will succeed. (Enforcement and Bankruptcy Law, Art. 289)
When examining the consequences of the definitive period for the creditors, the following situation is important in our context: During the period, no enforcement proceedings can be initiated against the debtor, ongoing proceedings are suspended, precautionary measures and precautionary attachment decisions are not implemented, and statutory periods of limitation and forfeiture that can be interrupted by enforcement proceedings do not run. (Enforcement and Bankruptcy Law, Art. 294)
3. Return of Assets Subject to Financial Leasing During Composition Proceedings
In the event of the termination of a financial leasing agreement, the lessee who did not exercise the purchase right arising from the agreement or who does not have such a right is obliged to return the asset subject to financial leasing.
The debtor being in a composition proceeding generally does not change this outcome, and the return of assets subject to financial leasing can be requested. However, with the amendment made in Article 307 of the Enforcement and Bankruptcy Law No. 2004 through the Law on Amendments to the Enforcement and Bankruptcy Law and Some Other Laws, the postponement of the return of assets has been made possible. [2]
According to this provision: Upon the debtor's request, the return of assets subject to financial leasing in the approval decision can be postponed for a period not exceeding one year from the date of the decision. (Enforcement and Bankruptcy Law, Art. 307) For this to apply:
1. The debtor must have explicitly assumed the performance of the financial leasing agreement as it is in accordance with the seventh paragraph of Article 294.
2. The rent receivable arising from financial leasing must have been due before the composition request.
3. The unpaid rental debt must not exceed the amount of three months' rent.
4. The damage that may arise from the depreciation of the asset subject to financial leasing due to this postponement must be secured.
5. The debtor must approximately prove that the asset subject to financial leasing is necessary for the operation of the business and that the economic existence will be endangered if it is returned.
If all five conditions are met, upon the debtor's request, the return of assets subject to financial leasing can be postponed for a period not exceeding one year from the date of the decision. If any of the conditions is not met, the return of assets subject to financial leasing cannot be postponed.
According to the same provision mentioned above, the court approving the composition may revoke the postponement if the debtor obtained it by providing false information, or if the debtor's assets and income have increased and the debtor has become able to repay the debt without jeopardizing their economic existence, or if the return of the asset subject to financial leasing will no longer endanger the debtor's economic existence. In such cases, based on the approximate proof of these circumstances and upon the request of the relevant creditor, the court invites the debtor and revokes the postponement.
In the event of the termination of a financial leasing agreement, as explained above, the return of assets subject to financial leasing is required. In the case of an application made to the court for the return to be ensured after the termination, what will happen if the precautionary measure obtained as a result of the application is implemented in a timely manner and there is a composition period decision?
In this case, Enforcement Offices mostly reject the return requests by citing the existence of the definitive period decision according to Article 284 of the Enforcement and Bankruptcy Law, stating that precautionary attachment and precautionary measure requests should not be implemented. The practices of the courts in this regard are not yet clear. Especially when it is proven by debtors that the use of the assets subject to financial leasing is necessary for the continuation of their activities, the stay decision is cited as a reason, and it is stated that the return of the assets subject to financial leasing is denied as it would render the composition meaningless. However, in some court decisions, it is stated that if no specific measure decision has been given for the assets subject to financial leasing in the stay decision and if the conditions for the postponement of the return have not been met, there is no obstacle to the return of these assets. [3]
In the event that no precautionary measure is taken for the return of the leased assets in the composition interim decision, such as the sale or leasing of other assets, there should be no obstacle to the return of the leased assets. This is because the conditions for the deferral of the return of the leased assets are clearly specified in Article 307 of the Execution and Bankruptcy Law No. 2004. Therefore, if the deferral conditions are not met and no precautionary measure regarding the leased assets is ordered in the composition interim decision by the court, the return of the leased assets should not be prevented by referring to this decision and Article 284 of the Execution and Bankruptcy Law. Otherwise, the deferral conditions specified in Article 307 of the Execution and Bankruptcy Law will lose their meaning.
4. Conclusion
In the event of the termination of a financial lease agreement, if the lessee has not exercised the purchase option or if no such right has been granted, the leased assets must be returned to the lessor. The debtor being in a composition situation does not generally constitute an obstacle to the return of the leased assets. However, as explained above, if the conditions specified in Article 307 of the Execution and Bankruptcy Law No. 2004 are met, the court may postpone the return of the leased assets for a period not exceeding one year. In this case, as long as the deferral is in effect, the return of the leased assets cannot be requested. As for the existence of a composition interim decision, although the situation has not been clearly established in practice, in our opinion, unless a precautionary measure is explicitly ordered for the leased assets in the composition interim decision and the conditions for deferral are not met, there is no obstacle to the return of the leased assets.
Zeynep Sude Sağlık
Bibliography:
- Ruhi Ahmet Cemal, Contract Law, Volume 1, Seçkin Yayıncılık Ankara 2011, pp. 557-559.
- Execution and Bankruptcy Law No. 2004, Article 307.
- Istanbul 34th Directorate of Enforcement, Case No. E.2019/15735. Istanbul 19th Commercial Court, Case No. E.2019/610. Istanbul 12th Commercial Court, Case No. E.2019/228.
