New Procedures and Principles Regarding Loss of Capital and Insolvency

The Ministry of Trade has published the Communiqué (the “Communiqué”) on the Procedures and Principles Relating to Implementation of Article 376 of Turkish Commericial Code numbered 6102 (“TCC”) in the Official Gazette dated 15 September 2018. The Communiqué sets forth the detailed procedures and principles relating to loss of capital and insolvency and brings new protective measures for the joint stock, limited and commandite companies suffering from capital loss or insolvency and sets the obligations of the company’s board of directors and general assembly at such times.

Loss of Capital

Pursuant to paragraphs 1 and 2 of Article 376 of the TCC, board of directors should immediately call the general assembly for a meeting, if it is understood from the previous year’s annual balance sheet that at least half or two thirds of the sum of the capital and legal reserves has eroded due to loss. Communiqué sets forth that, loss of capital may be taken into consideration in the general assembly even it was not included in the agenda.

  • Erosion of at least half of the sum of the capital and legal reserves due to loss

If at least half of the sum of the capital and legal reserves erodes due to loss, board of directors should submit and explain to shareholders the last balance sheet, the appropriate remedial measures and the financial condition of the company. Adjustment of the capital, increase of capital, shutting down or decrease of some units of production, sale of subsidiaries and changing marketing strategy are given as examples of remedial measures in the Communiqué. It is under the discretion of the general assembly to accept the submitted remedial measures without any change, with changes or deciding on the implementation of another measure that is not submitted.

  • Erosion of at least two-thirds of the sum of the capital and legal reserves due to loss

Pursuant to Article 376 paragraph 2of the TCC,in caseat least two-thirds of the sum of the capital and legal reserves erodes due to loss, general assembly would decide to proceed with the remaining one-third of the capital or to adjust the capital in order to recover losses; however, if it does not decide on one of the remedies mentioned herein, the company would terminate automatically. The Communiqué clarifies to proceed with the remaining one-third of the capital as to decreasethe capital in accordance with the Articles 473-475 of TCC. In such case,the board of directors has been authorized to notinvite the creditors, not paying their receivables and not providing security to the creditors during the capital decrease.

The Communiqué defines adjusting the capital as, the settlement of the company’s balance sheet deficits by some or all of the shareholders, however, adjustment of the legal reserves are kept out of this scope. In case it is decided for the adjustment of the capital, each shareholder will be obliged to give enough money to eliminate the eroded amount of capital that occurred due to loss. Each shareholder can participate in the capital adjustment on a pro rata basis, however, these contributions of the shareholders will not be regarded as investing capital or loans and will be refunded. Furthermore, these payments will not be regarded as advance payments for further capital increases and will be collected in the capital adjustment fund in equities and be monitored therein.

The decision of capital adjustment is taken unanimously in joint stock companies and limited partnership (komanditşirket) divided into shares. The capital adjustment decision in limited liability companies is taken in accordance with the provisions of Article 603 regulating additional payment obligations and the following provisions. Some shareholders may adjust the capital bythemselves, in case the adjustment of the capital decision is not taken by the general assembly.

The Communiqué, in addition to adjusting the capital and proceeding with the remaining one-third of the capital, also enables the general assembly to increase the capital in order to cure the loss. In this context, general assembly will be able to decide to decrease the capital in the amount of loss while at the same time being able to decide on capital increase with the desired amount. In this case, one-fourth of the increased capital needs to be paid during the increase. The Communiqué provides a new opportunity that, the general assembly may also choose to increase the capital without going through a capital decrease. However, in such case, an amount corresponding to at least half of the capital needs to be paid prior to the registration of capital increase.

If the general assembly fails to implement one of the above-mentioned remedies, the company will automatically terminate and enter into liquidation.

Insolvency

The Communiqué defines insolvency as, on event wherethe company’s assets are not sufficient to cover its debts. Indicators of insolvency may be evidenced in annual and interim financial reports, inaudit reports, in reports of early determination committee and by observations of the board of directors. The Communique provides to the management and the shareholders the possibilities; to proceed with the remaining capital, adjustment of the capital and increasing the capital in case of insolvency before making a bankruptcy application.

Remedial Merger

The Comminiqué also gives the opportunity to make a remedial merger with another company in case of loss of capital or insolvency in addition to above-mentioned remedies. In this case, the company that will be merged with should have sufficient equity to cover the loss and this should be ratified by the reports of independent accountants and financial advisor or certified public accountants.

Exchange Rate Differences

The Provisional Article of the Communiqué provides that, until 1 January 2023, losses arising from the differences in liabilities denominated in a foreign currency;  which have not been fulfilled yet, may be disregarded in the calculations to be made regarding loss of capital or insolvency.