Ercüment Erdem Att. Melisa Sevinc Atilganer

Amendments on Capital Loss and Insolvency

September 2018

Introduction

Various amendments have been introduced into Article 376 of Turkish Commercial Code No. 6102 (“TCC”) through the Communiqué on Procedures and Principles on the Implementation of Article 376 of Turkish Commercial Code No. 6102 published in the Official Gazette dated 15.09.2018 and numbered 30536 (“Communiqué”). Although the new implementation on exclusion of foreign exchange losses arising from unfulfilled debts from the calculations to be made within the scope of Article 376 of the TCC is the most discussed amendment, various other amendments, including certain principles adopted in practice are introduced through the Communiqué.

Within this study, amendments and explanations introduced through this Communiqué will be evaluated separately in accordance with the structure of Article 376 of the TCC.

When Half of the Total of the Capital and Legal Reserves are Uncovered

Pursuant to Article 376/1 of the TCC, in the event that half of total capital and statutory reserves appear to be uncovered from the final annual balance sheet, the board of directors shall immediately invite the general assembly to the meeting and present the remedial measures it deems appropriate.

Details of “remedial measures” to be submitted by the board of directors were not included in Article 376 of the TCC. In addition to the regulation stipulated concerning submission of remedial measures, under Article 6 of the Communiqué, the remedial measures that may be submitted by the board of directors are exemplified, as follows:

  • Completion of the capital amount deemed appropriate by the board of directors;
  • Capital increase;
  • Closure or reduction of certain production units or departments;
  • Sale of subsidiaries; and
  • Alteration on marketing system.

When Two-Thirds of the Total of the Capital and Legal Reserves are Uncovered

Pursuant to Article 376/2 of the TCC, in the event that it appears from the last year's balance sheet that two-thirds of the total of the capital and legal reserves are uncovered due to loss, and the general assembly which is invited to the meeting, resolves neither to continue with one-third of the capital, nor to complete the capital, the company is automatically terminated.

Pursuant to Article 7 of the Communiqué, in the event that two-thirds of the total of the capital and legal reserves are uncovered, the General Assembly may resolve, as follows:

  • Continuation with one-third of the capital, and to oversee a capital decrease, in accordance with Articles 473-475 of the TCC;
  • Completion of the uncovered capital amount, or
  • Capital increase.

The TCC does not a grant capital increase option to the companies in the event that two-thirds of the total of the capital and legal reserves are uncovered. However, companies falling under this clause had been conducting capital decreases and capital increases, simultaneously, in accordance with the method presented in the preambles of the TCC. Such method has been frequently conducted in practice and is included in Article 7/1(c) of the Communiqué.

Additionally, the companies within the scope of this paragraph have been granted with the option to directly increase their capital without engaging in a capital decrease. However, as distinct from the procedure of simultaneous capital increase and decrease, such opportunity is conditioned to payment of one-half of the capital amount prior to registration.

Insolvency

In the event that the current and fixed assets of a company are insufficient to cover the debts of the same, provisions on insolvency are applied. The provision stipulated under Article 376/3 of the TCC stipulating issuance of an interim balance sheets on the basis of both continuance of the business and potential sale prices, is also included in the Communiqué.

In the event that company assets are insufficient to cover its liabilities, the TCC requires fulfillment of the following conditions prior to a bankruptcy decision:

  • Debtors of the company having receivables from the company that are sufficient to eliminate insolvency of the company waives, in writing, the priority of their receivables; and
  • Verification of the relevance, reality and validity of such waiver by the experts appointed by the court to which the board of directors submitted the bankruptcy.

The options granted to the companies whose two-thirds of the capital and legal reserves are uncovered under Article 7 of the Communiqué, are also granted for insolvent companies, and they are required to apply to the court for bankruptcy, unless such options are not exercised.

Participation in a Merger in the Event of Capital Loss or Insolvency

Pursuant to Article 14 of the Communiqué, a company that has lost its capital or is insolvent, may merge with a company having disposable assets sufficient to cover the lost capital amount.

Accordingly, in the event that a company, subject to a merger, has lost its capital or is insolvent, one of following should be presented in a financial report:

  • Such information that the other company subject to the merger has disposable assets sufficient to cover the lost capital amount, and calculation methods as to the same; or
  • Verification of the absence of capital loss or insolvency.

Exemption on Foreign Exchange Losses

Pursuant to Provisional Article 1 of the Communiqué, prior to and until 1/1/2023, foreign exchange losses, arising from unfulfilled foreign currency liabilities, may be excluded from the calculations related to the loss of capital or insolvency under Article 376 of the TCC. Through the aforementioned regulation, it is aimed to prevent the companies from being faced with bankruptcy or capital loss provisions due to the changes in exchange rates.

Conclusion

Through the Communiqué, companies falling under the scope of Article 376 of the TCC due to the changes of exchange rates, and other certain economic conditions, and which are required to conduct certain procedures, are granted with certain new methods, and are not to be subject to the requirements foreseen under Article 376.