The intersection of bankruptcy proceedings and arbitration clauses under Turkish law poses intricate challenges, particularly concerning the rights of creditors to initiate bankruptcy proceedings against a debtor when an arbitration clause exists. To unravel this issue, we will examine the extent to which an arbitration clause may prevent creditors from successfully initiating bankruptcy proceedings in Turkey.
Arbitrability of Bankruptcy Proceedings
Under Turkish law, parties may refer their disputes to arbitration only if the dispute's subject matter is arbitrable. This principle is captured in both Article 1 of the International Arbitration Law (IAL) and Article 408 of the Civil Procedure Law (CPL). Both articles mandate that any dispute (i) relating to in rem rights of immovables located in Turkey and (ii) not within the parties' disposal, cannot be arbitrated. Therefore, bankruptcy proceedings, being of a public policy nature and affecting all creditors of the debtor, typically fall within the realm of point (ii) and are not arbitrable in principle.
Bankruptcy proceedings can be initiated via a payment order or by pursuing direct bankruptcy. In these cases, the commercial court conducts a two-step examination, colloquially termed the 'bankruptcy lawsuit', to (i) verify the existence of the receivable, and if so, (ii) declare the debtor's bankruptcy. Notwithstanding, jurisprudence from the Court of Cassation reveals conflicting views whether these two steps can be separated, and the existence of the receivable can be referred to arbitration.
Conflicting Views of the Turkish Courts on Jurisdiction
Several rulings from the Court of Cassation uphold that, when faced with a debtor's objection, the commercial court should refer disputes arising from contracts with arbitration clauses to arbitration.1 The court argues that this approach safeguards the arbitration clause from becoming inoperative, respecting the principle of pacta sund servanda. Consequently, the court separates the assessment of the receivable's existence from the decision on the debtor's bankruptcy, the latter remaining under the exclusive jurisdiction of commercial courts as per Article 154(3) of the Enforcement and Bankruptcy Law (EBL).
Under this perspective, creditors must initiate arbitration proceedings in line with the arbitration clause, before starting bankruptcy proceedings against the debtor in Turkey. However, the arbitration awards are subject to set aside or enforcement proceedings in Turkey, effectively suspending their execution. Therefore, the execution of a favorable arbitral award may not accelerate the collection of receivables and a case-by-case evaluation should be undertaken.
On the other side of the coin, several decisions from the Court of Cassation, including a notable ruling from the General Assembly of the Court of Cassation (General Assembly) in late 2021, favor the jurisdiction of commercial courts to assess the existence of receivables.2 The General Assembly reasoned that referring the assessment to arbitration would violate the principles of good faith and judicial economy, as it would extend the resolution of the case beyond the stipulated simplified procedure under Article 158(2) of the EBL.
However, this decision, too, has sparked critique, with dissenting opinion in the aforementioned General Assembly decision, highlighting the risk of bypassing arbitration clauses and rendering them virtually unfeasible, a course of action that opposes the principle of pacta sund servanda.
Conclusion
The intersection of bankruptcy proceedings and arbitration clauses in Turkish law reveals a legal landscape marked by divergence and complexity. As the Court of Cassation and the General Assembly articulate differing views, creditors and debtors face significant uncertainty in navigating the intersection of bankruptcy and arbitration.
This contradiction underscores the imperative for Turkish judiciary to reconcile these competing views and provide clear guidance, striking a balance between upholding the pacta sunt servanda principle and preserving the integrity of bankruptcy proceedings. Therefore, parties are advised to consult to Turkish legal advisor to assess the current practice in Turkey before initiating bankruptcy proceedings against a debtor if their underlying contract contains an arbitration clause.
Footnotes
1. Decision of the General Assembly of the Court of Cassation dated 04 May 2011, E. 2011/19-151, K. 2011/275; Decision of the 23th Civil Chamber of the Court of Cassation dated 24 September 2019, E. 2019/689, K. 2019/3829; Decision of the 23th Civil Chamber of the Court of Cassation dated 12 May 2015, E. 2015/2119, K. 2015/3613; Decision of the 23th Civil Chamber of the Court of Cassation dated 25 January 2016, E. 2015/1608, K. 2016/344; Decision of the 23th Civil Chamber of the Court of Cassation dated 14 November 2013, E. 2013/4914, K. 2013/7094.
2. Decision of the 23rd Civil Chamber of the Court of Cassation dated 27 February 2012, E. 2012/192 K. 2012/1405; Decision of the 19th Civil Chamber of the Court of Cassation dated 5 March 2019, E. 2005/5976 K. 2005/10004 T. 13.10.2005; Decision of the General Assembly of the Court of Cassation dated 21 December 2021, E. 2019/574 K. 2021/1710.
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