TEXTILES AND APPAREL

When a Turkish Supplier Gets into Financial Difficulty: Advances, Patterns, Materials and Concordat

Many Turkish textile manufacturers operate with tight cash flow because of high financing costs and fluctuating order volumes. A supplier falling behind on payments or applying for concordat (court-supervised composition proceedings under Turkish law) means for the European brand not only a receivables problem but also a production stoppage in the middle of the season. In this situation, the brand's priority is often less to collect its claim than to recover its patterns, materials and semi-finished goods and move production to another supplier.

Experience shows that the options available to the brand at this stage vary considerably depending on the contract concluded at the start of the relationship and on how the materials were recorded. The following sections address the main legal questions the brand faces when its supplier gets into financial difficulty.

Early warning signs

Frequently postponed delivery dates, increasing requests for advances, delayed payments to sub-workshops and material suppliers and staff turnover are among the first signs of financial difficulty. At this stage, the brand listing its materials and patterns held by the supplier, establishing where they actually are and making new advance payments subject to security may be more effective than any later step.

Advances paid

Advances paid by the brand before production are, to the extent they have become part of the supplier's assets, generally unsecured claims. If the supplier enters concordat proceedings, this claim is paid together with other unsecured claims under the concordat plan and often spread over a long schedule. For large advances, it is therefore advisable to secure the advance with a bank guarantee or to tie it directly to the purchase of materials so that the materials remain the brand's property.

Patterns, materials and semi-finished goods

Patterns belonging to the brand and materials supplied by it can, to the extent the brand's ownership can be proven, be protected against the supplier's creditors and their return demanded. The success of such a claim depends on ownership being clearly attributed to the brand in the contract, on the materials being identifiably marked and on delivery records being available. For semi-finished goods, the risk of dispute is higher, since ownership is determined by the rules on processing and the contractual provisions.

It is also common for the supplier to try to retain patterns and materials on the grounds of unpaid invoices. In that case, it must be assessed whether the conditions for a right of retention are actually met and, where necessary, delivery of the goods obtained by way of an interim injunction. In practice, settling mutual claims by agreement and taking over the goods against a handover protocol is often the quicker solution given the seasonal calendar.

Concordat proceedings

Once the supplier applies for concordat and the court grants a temporary moratorium, enforcement proceedings may as a rule no longer be initiated against the supplier and pending proceedings are stayed. During the concordat proceedings, the supplier generally continues to run its business and requires the approval of the commissioner or the court for certain transactions. At this stage, it is important for the brand to communicate directly with the commissioner regarding the completion of pending orders, the return of materials and the future of the contract.

For contracts that are important for the continuation of the supplier's business, the application of clauses treating the concordat application in itself as grounds for termination is restricted by law. The brand's right to terminate the contract must therefore be assessed in light of specific contractual breaches and the relevant legal conditions, in addition to the concordat application. The brand's claims must be filed with the commissioner in due time in the claims registration process.

Moving production to another supplier

The seasonal calendar may require the brand to move production quickly to another supplier. For this, the patterns and technical files must also be available to the brand, the materials must be recoverable and no exclusivity clause may prevent starting work with a new supplier. Expressly providing in the contract with the existing supplier that the brand may transfer orders to another manufacturer in the event of financial difficulty makes this transition easier.

Conclusion

The brand's position when a Turkish supplier gets into financial difficulty is determined by the steps taken before the difficulty arises. Securing advances, attributing ownership of patterns and materials to the brand both contractually and in fact, identifying materials at the first warning signs and filing claims in due time in concordat proceedings help both to limit losses and to keep production running. General questions on the creditor's position in concordat proceedings and on debt collection are addressed on the pages of the relevant practice areas.