Airline insolvency and repossession – Turkey

What are the principal types of insolvency proceedings?

Turkish law recognizes both bankruptcy procedures and rescue/reorganization procedures. In practice, bankruptcy procedures are more common for Turkish companies and there have been few reorganizations other than Standard Arrangements of Debts (concordatum).  Recent local insolvencies include AtlasJet (2020) which filed for bankruptcy on 12 February 2020. Although the AtlasJet bankruptcy has not raised any novel issues affecting aircraft owner-lessors or mortgagees, and the majority of the aircraft were voluntarily returned to lessors prior to the bankruptcy, some lessors have also submitted claims in the ensuing court proceedings that remain ongoing at the time of writing.

Bankruptcy

The primary legislation governing the insolvency regime under Turkish law is the Turkish Execution and Bankruptcy Code numbered 2004 (the EBL). Under the EBL, there exist two different groups of bankruptcy proceedings:

1. Bankruptcy Proceedings
   1. Ordinary Bankruptcy Proceedings (the most common method in liquidating an entity’s assets in Turkish insolvency legislation)
   2. Special Bankruptcy Proceedings for Negotiable Instruments
2. Direct Bankruptcy
   1. Direct Bankruptcy
   2. Voluntary Bankruptcy

The Direct Bankruptcy processes do not require any court proceedings in order to initiate the liquidation process. In contrast, the Bankruptcy Proceedings require a written request for bankruptcy proceedings to be filed at the bailiff's office.

The main objective of both Bankruptcy Proceedings and Direct Bankruptcy under the EBL is to liquidate an entity’s assets for the satisfaction of its creditors. In Ordinary Bankruptcy Proceedings and Special Bankruptcy Proceedings for Negotiable Instruments, the debtor can avoid this by (i) paying its debts within the time frame stated in the payment order, (ii) offering an arrangement of debts, or (iii) challenging the validity of the insolvency process pursuant to the general provisions of the EBL.

These remedies are unavailable in Direct Bankruptcy since, if the conditions of Direct Bankruptcy are present, the debtor is past recovery and the main objective is the direct liquidation of the debtor’s assets as quickly as possible.

Leased aircraft are not included in the airline's insolvency estate for the purposes of Bankruptcy Proceedings or Direct Bankruptcy.

Company reorganisation

There exist three main rescue/reorganization procedures under Turkish law:

1. Standard Arrangement of Debts (concordatum)
2. Arrangement of Debts by Transfer of Assets
3. Restructuring

None of these rescue/reorganization procedures is common in Turkey. In 2018, the Standard Arrangement of Debts (concordatum) procedure was extended, allowing distressed businesses to stop payments for up to two years.

During concordatum proceedings, the Turkish courts have discretion to grant orders for relief, allowing the debtor/lessee to retain possession of leased property that is essential for it to continue its business. Further, the court may order that the leased property does not need to be returned to the lessor for an additional period of one year following the court’s decision to approve the concordatum, subject to the statutory requirements set forth under EBL.

During this period, enforcement proceedings commenced by the lessor for the collection of lease payments are suspended and new proceedings cannot be commenced. In addition, during the creditors' meetings held by the court-appointed administrators, a range of debt relief arrangements (such as reducing rentals and/or recalculation of the accrued interests, payment plan etc.) may be discussed as part of the concordatum.

Is there a moratorium or similar stay on enforcement in Turkey? Have any changes to the application of the moratorium been introduced as a result of COVID-19?

Yes. Although Turkish law does not establish a moratorium per se, a similar stay on enforcement exists.

The duration of such a stay on enforcement depends on the type of proceeding. For example, the most common reorganization procedure, the Standard Arrangement of Debts (concordatum), allows distressed businesses to stop payments for up to two years. 

Within the scope of the measures taken as a result of COVID-19, all enforcement and bankruptcy proceedings carried out throughout Turkey were suspended between 22 March and 15 June 2020.

Have any recent measures or legislative changes (temporary or permanent) been introduced to prevent or mitigate airline insolvencies?

Yes. The Turkish government has recently introduced various measures targeted at supporting the aviation industry. These include:

• Payment extensions: Payments for airports, terminals and ground handling companies (in an amount of approximately TRY 38 million) have been deferred to be paid after three months from the recommencement of flights.
• Eurocontrol: Turkish airlines' Eurocontrol debts (approximately €30 million) were deferred for a temporary period. However, such deferral has expired at the time of writing.
• Fee reductions: The fees regulated under the service tariff of the Turkish Civil Aviation Authority have been reduced by 50% for the year 2020, constituting a reduction of approximately TRY 7 million across the aviation sector.
• Flight cancellation/rebooking: Under the amendment on the Regulation on the Rights of Passengers Traveling by Airway of 25 March 2020, passengers on canceled flights were granted the right to change their ticket, rebook, or exchange it for an open ticket, rather than claiming a refund. However, airlines must refund passengers in full if such open tickets are not used within two months after the recommencement of flights. This measure helped to reduce airline cash outflow by approximately US$750 million across the aviation sector.

Has the Republic of Turkey adopted the 2001 Cape Town Convention and its Aircraft Equipment Protocol (together, Cape Town)?

Yes. The Republic of Turkey ratified Cape Town and implemented it into Turkish domestic law via Article 68/A of the Law on Civil Aviation in 2012 and the Additional Clause 2 of EBL in 2014.

Can creditors use "self-help" to repossess leased or mortgaged aircraft?

Yes. Turkish law recognizes the right of a lessor to repossess an aircraft on a lease termination and has made the appropriate declaration under Cape Town. However, it should be noted that the Turkish courts do not have widespread experience in the application of Cape Town. Furthermore, when a lessor or mortgagee anticipates that repossession will be contested by the lessee, such lessor or mortgagee may instead voluntarily commence court proceedings for repossession.

How long does the aviation authority typically take to deregister an aircraft when an IDERA is invoked?

If an export certificate of airworthiness for the aircraft is not required, or after one has been issued, the Turkish Civil Aviation Authority typically deregisters an aircraft within five days of a request. If an export certificate of airworthiness is required, timing of deregistration will also depend on the location of the aircraft. If the aircraft is located in Turkey, the issuance of the relevant export certificate of airworthiness takes approximately five days from submission of the application, whereas if the aircraft is located outside Turkey, the process takes approximately 30 days. However, lessors and mortgagees should note that timing of deregistration can be subject to (i) the workload of the relevant authority, and (ii) complete submission of the necessary documents.

Are there any non-consensual liens which would take priority to an ownership interest / mortgagee's rights as a secured creditor?

Yes. The following liens take priority over ownership and security interests:

• Tax: The Turkish government may detain and sell an aircraft in respect of motor vehicle tax that is payable for the aircraft. However, the amount does not typically exceed a few thousand US dollars so, in practice, this risk can usually be avoided by payment of the relevant taxes.
• Rights of manufacturers and MROs: Under the Law on Civil Aviation, aircraft manufacturers and MROs have a right to request the registration of a statutory mortgage on an aircraft in respect of amounts due to them. However, such a request must be made within three months of the completion of construction or repair of the aircraft – otherwise the right lapses.

Are there any "fleet liens" (i.e. a lien for debts relating to one aircraft that may be asserted against any aircraft in the airline's fleet, regardless of ownership)?

No.

Key practical considerations for lessors and financiers:

• Experience: Although Turkey recognizes the right of the lessor to use self-help for repossession on lease termination, Turkish courts do not have wide experience of Cape Town and so there exists no common practice in respect of the self-help process for repossession.
• Speed: Lessors or financiers should intervene and submit claims in any insolvency proceedings at an early stage as there exist statutory deadlines for the submission of claims and intervention requests. The creditors will be informed of such proceedings and deadlines through the official announcement website of the Press Announcement Institution.
• Filing: For mortgagees, a legally valid aircraft mortgage must be filed with the Civil Aviation Authority, together with a notarized and apostilled (if applicable) copy of the mortgage and a notarized Turkish translation of the same. For lessors, a similar process also applies for aircraft leases which must be registered with the Association of Financial Institutions.