The Communique on the Procedures and Principles regarding the Application of Article 376 of the Commercial Code (6102) was published in the Official Gazette on 15 September 2018 and entered into force on the same date. It determines the procedures and principles that will apply to certain companies (ie, joint stock companies, limited liability companies and limited partnerships whose capital is divided into shares) in cases of capital loss and insolvency.
Losses due to foreign currency obligations
Turkish lira has recently dropped in value against a number of foreign currencies. As a result, Turkish companies that are indebted in said foreign currencies have experienced severe financial difficulties, including capital losses and insolvency. According to the communique, up until 1 January 2023, losses that arise from foreign currency obligations which have yet to be performed may not be considered when calculating or assessing capital losses and insolvency as per Article 376 of the Commercial Code.
The communique further clarifies:
- the procedures and principles regulated under Article 376, such as convening a general assembly;
- the remedial measures to be taken during capital loss or insolvency situations; and
- the longstanding practice to meet a legal ground.
According to Article 376 of the Commercial Code, if it is clear on review of a company's most recent annual balance sheet at least half or two-thirds of its share capital and legal reserves are exposed due to losses, company management must immediately convene a general assembly meeting to discuss said issues and attempt to relieve their liabilities.
If a company's most recent annual balance sheet shows that at least half of its share capital and legal reserves have been lost, the company's management body will offer the general assembly the following remedial measures:
- a top-up of the company's capital;
- an increase of the company's capital;
- the closure or downsizing of the company's production units or departments;
- the sale of the company's subsidiaries; and
- changes to the company's marketing systems.
A general assembly meeting is free to accept or adapt the remedial measures offered or adopt alternative measures.
If at least two-thirds of a company's capital and legal reserves are uncovered, a general assembly meeting must decide to apply one of the following remedial measures:
- a reduction of the company's capital to one-third of its current value;
- a reduction of the company's capital;
- a top-up of the company's capital; or
- an increase of the company's capital.
Failure to meet this obligation will lead to a company's automatic termination.
If the general assembly agrees to a reduction of one-third of the company's capital or to reduce said capital, this reduction will be performed in accordance with the Articles 473 to 475 of the Commercial Code. However, the management body is not obliged to notify creditors or pay and guarantee their rights.
If a general assembly decides to top-up a company's capital, all or some of the shareholders will pay the uncovered balance. According to the communique, any lost legal reserves need not be covered. In addition, shareholders can top-up a company's capital according to the ratio of their shares. However, such contributions cannot be considered as advance payments, capital injections or loans and must be accounted for as part of the share capital top-up fund. Therefore, contributing shareholders cannot reclaim the amounts which they have contributed as part of the top-up process.
A general assembly meeting may decide to increase capital simultaneously with a capital reduction. According to the communique, in such cases, at least one-quarter of the increased amount must be paid. Further, if a general assembly meeting decides to increase capital only, at least half of the increased amount must be paid before it is registered with the Trade Registry.
Insolvency arises when a company's assets cannot meet its liabilities and its capital and legal reserves are fully uncovered. Insolvency can be detected by:
- annual and interim financial reports;
- audit reports;
- early diagnosis committee reports; and
- management bodies.
If a company is insolvent, its management body must issue an interim balance sheet in accordance with the company's value and presumptive sale price. If on review of an interim balance sheet a management body determines that its company's assets cannot meet its liabilities, it must apply to the relevant court for bankruptcy or take one of the following remedial measures:
- a reduction of the company's capital to one-third of its current value;
- a top-up the company's capital; or
- an increase of the company's capital.
For further information on this topic please contact Asli Tezcan, Duygu Acar Yucesoy or Sevgi Akyol Çevirir at Acar & Ergonen Law Firm by telephone (+90 212 358 07 00) or email ([email protected], [email protected] or sevgic@acarergonen.av.tr). The Acar & Ergonen Law Firm website can be accessed at www.acarergonen.av.tr.
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