When a company in Turkey enters financial distress, the legal risk landscape changes fast. Decisions that would be normal in good times—paying one supplier first, selling assets quickly, taking new orders, borrowing short-term—can become high-risk if insolvency is looming. For foreign-owned companies, this “danger zone” is even more sensitive because documentation gaps, related-party payments, or informal governance can quickly become dispute fuel.
This guide explains director and manager duties in financial distress in Turkey: what the risk triggers are, what behaviors create exposure, and what practical steps management should take to protect the company and themselves before insolvency procedures (bankruptcy or concordat) become inevitable.
1) The “Financial Distress Zone”: When Normal Decisions Become Risky
Financial distress is not only “no cash.” It’s when the company’s obligations and liquidity no longer match in a sustainable way. Typical signs include:
- persistent inability to pay debts on time,
- repeated restructuring of short-term debt just to survive,
- uncontrolled creditor enforcement threats,
- tax/SGK arrears increasing month by month,
- suppliers refusing delivery without upfront payment.
At this stage, the key management duty is structured, documented crisis governance.
2) The Highest-Risk Behaviors (What Management Must Avoid)
A) Preferential Payments and Insider Favoritism
Paying certain creditors first can trigger serious disputes, especially if the paid parties are:
- related entities,
- shareholder-linked suppliers,
- insiders.
Best practice: adopt a transparent payment strategy and document the commercial reason for each major payment.
B) Asset Transfers That Look Like “Value Leakage”
Selling assets quickly can be necessary—but if the sale looks like:
- undervalue pricing,
- related-party sale,
- rushed transfer without documentation,
it can later be attacked.
Best practice: keep valuation evidence, competitive offers if possible, and written approvals.
C) Taking New Obligations When Insolvency Is Obvious
Continuing to sign major contracts, borrow, or guarantee obligations can create allegations of reckless continuation.
Best practice: freeze major new obligations until a restructuring plan is in place.
D) Weak Recordkeeping and Hidden Reality
In distress, every missing record becomes a liability problem:
- missing board/shareholder approvals,
- undocumented loans,
- informal cash movements,
- unclear related-party arrangements.
Best practice: stop informal payments, formalize arrangements, and create a clean evidence file.
3) What Management Should Do Immediately (Practical Crisis Plan)
Step 1: Build a 13-Week Cashflow Forecast
Short-term cash forecasting is the core tool in distress. It helps management decide:
- which payments are critical for survival,
- what creditor negotiations are needed,
- whether concordat is realistic.
Step 2: Implement Emergency Payment Controls
- dual approvals above a threshold,
- no payments without invoice/contract basis,
- centralized control of bank access,
- daily cash reporting.
Step 3: Map Creditors and Prioritize “Business-Critical” Relationships
Create a creditor list:
- amount owed,
- enforcement risk,
- operational impact (supplies, utilities, key tech vendors).
Then negotiate with the critical ones early.
Step 4: Stop Related-Party Value Transfers
Even legitimate intercompany payments become suspicious if not documented. During distress:
- avoid new related-party payments unless essential and documented,
- ensure arm’s length logic,
- obtain approvals and keep evidence.
Step 5: Create a Distress Governance File
Keep a structured archive:
- management/board minutes,
- payment logs and approvals,
- creditor communications,
- asset sale valuations,
- compliance filings.
If a dispute arises later, this file becomes your defense.
4) Choosing the Right Legal Path Early: Restructuring vs Insolvency
Management should evaluate:
- Can the business survive with a payment plan? → concordat may be an option
- Is the business no longer viable? → bankruptcy/liquidation risk becomes central
The earlier management chooses a structured path, the more credibility it has with creditors and the court.
5) Tax and SGK: Don’t Let Compliance Collapse in Distress
A common mistake is treating compliance as “secondary” during a cash crisis. But tax/SGK arrears:
- increase penalties and interest,
- attract enforcement pressure,
- create reputational and operational friction,
- make concordat/banking harder.
Best practice: keep compliance alive—even if payments must be negotiated and structured.
6) Communication Strategy: Creditor Trust Is an Asset
In distress, trust is a currency. Management should:
- communicate early with key creditors,
- provide realistic proposals (not promises),
- document agreements and keep consistent payment behavior.
Chaotic communication makes creditors more aggressive and reduces restructuring options.
FAQ
What is the biggest legal risk for directors/managers in distress in Turkey?
Preferential payments, undervalue asset transfers, and weak documentation are among the most common triggers for disputes and allegations.
Should the company immediately file for concordat?
Not always. Concordat is powerful, but it requires credible financial data and a realistic plan. If preparation is weak, filing too early can fail.
Can strong governance actually help in insolvency disputes?
Yes. Clean records and documented decision-making often determine whether management is seen as responsible or reckless.
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