Ceasing Commercial Activities versus Liquidation of Legal Entities

Att. Leyla Orak Celikboya, Temmuz 2015

Introduction

Bankruptcy and Enforcement Code No. 2004 (“BEC”) [1] regulates certain obligations for merchants who are ceasing to continue their commercial activities. Pursuant to Art. 44 BEC, a merchant ceasing commercial activities must notify the commercial registry to which such merchant is registered, declare all of its properties, debts, and the names and addresses of its creditors, as a declaration of property. This provision aims to minimize damages that may be suffered by the creditors due to the malicious actions of the debtor merchants[2]. In fact, merchants may be subject to bankruptcy proceedings, both pursuant to the BEC and Turkish Commercial Code No. 6102[3] (“TCC”); however merchants may intend to avoid any such proceedings of creditors through ceasing their commercial activities.

The BEC regulates the obligations of merchants ceasing commerce and sanctions in the event of their violation. However, this framework as established under the BEC must be assessed carefully for legal entity merchants, especially the commercial companies regulated under the TCC that have detailed and specific liquidation procedures foreseen thereunder. In fact, commercial companies’ trade names shall be deleted from the register following the liquidation, and the legal entity will cease to exist. The coherence of the obligations and sanctions related to the cease of commercial activities with the framework as foreseen for the liquidation of legal entities must be evaluated.

Obligations of a Merchant Ceasing Commercial Activities

Who is a Merchant?

The TCC defines the scope of merchants in Art. 12 et seq. Persons operating a commercial enterprise, commercial companies, foundations, associations operating a commercial enterprise to realize their purposes and entities established by the State, the provincial administrations or other public entities that are governed by private law, or which shall be operated commercially shall be deemed a merchant (Art. 12, 16 TCC). Based on the issues addressed in this article, among these merchants, commercial companies, specifically joint stock and limited liability companies will have a special emphasis.

Obligations Governing Ceasing Commercial Activities and Sanctions

Art. 44 of the BEC regulates that a merchant ceasing commercial activities shall notify its commercial registry of the same. The merchant is also obliged to provide a declaration of property together with this notification. This shall be published and announced on the gazette where trade registry announcements are made, and in local newspapers where the creditors are located.

There are certain consequences of, and sanctions governing the ceasing of, commercial activities, some of which are set forth below:

  • Pursuant to Art. 18/1 of the TCC, the merchant may be subject to bankruptcy proceedings for all kinds of indebtedness. Art. 43 of the BEC also regulates that persons declared a merchant under the TCC may be subject to bankruptcy proceedings. Pursuant to Art. 44 of the BEC, merchants having declared that they cease their commercial activities will continue to be subject to bankruptcy proceedings for an additional period of one year. Therefore, in the event merchants fail to make their declaration to cease commercial activities, they will continue to be at risk of bankruptcy proceedings, as the one year period will not have yet commenced.
  • For a period of two months following its declaration of property, a merchant may not dispose of assets that may be confiscated (Art. 44/3 of the BEC).
  • A debtor who fails to make its declaration of property under Art. 44 of the BEC, whose declaration is incomplete, who hides assets or other values from execution of bankruptcy, and who disposes of assets following their declaration, shall be subject to imprisonment from between three months to one year upon complaint of a creditor who incurs damages (Art. 337/a of the BEC).

Hence, Art. 337/a of the BEC provides for a material sanction. Certain conditions need to be met in order for this sanction to apply. Firstly, a merchant must have failed to make the declaration of property under Art. 44 of the BEC, must have provided an incomplete declaration, hidden assets or other values from the execution of bankruptcy, and/or disposed of assets following their declaration. In short, the debtor must have violated the provisions of the BEC governing the ceasing of commercial activities. Additionally, there must be a complaint from a damaged creditor. In other words, a creditor needs to have incurred damages and have filed a complaint. In fact, Art. 337/a/2 of the BEC states that if the debtor proves the non-existence of damages of the creditor, imprisonment will not be imposed.

In short, if the above conditions are met, the debtor will be imprisoned.

Ceasing of Commercial Activities versus Liquidation

Different Mechanisms Foreseen

The TCC provides for a regulatory framework governing the termination and liquidation of commercial companies. Art. 243 et seq., and especially Art. 267 et seq., for collective companies; Art. 329 for commandite companies that make a reference to the provisions related to collective companies; Art. 529 et seq. for joint stock companies. Art. 636 et seq. and, especially, Art. 643 for limited liability companies (the latter referring to the provisions governing the liquidation of joint stock companies), provide for such framework[4].

The aforesaid provisions regulate the duties and obligations of liquidators, the protection of property, assets, and especially, the creditors, protection measures, preparation of balance sheets, and liquidation of assets, in detail. Special emphasis should be placed on certain provisions governing the liquidation of joint stock companies, which shall apply by analogy to limited liability companies by reference under Art. 643:

  • A general assembly resolution is necessary for the liquidator(s) to sell a material lump sum asset (Art. 538/2).
  • Liquidators shall prepare an initial balance sheet following their appointment, and submit it for the approval of the general assembly (Art. 540).
  • Invitations shall be issued to creditors three times in three consecutive weeks in order that they may declare their receivables from the company (Art. 541).
  • The assets may not be liquidated until the lapse of a one-year period from the date of the final invitation issued to the creditors. Only if it is clear that no harm or risk exists on the receivables of the creditors may the courts authorize liquidation prior to the lapse of this one-year period (Art. 543/2).
  • Upon the completion of the liquidation procedure, the trade name of the company shall be deleted from the commercial registry (Art. 545).

In light of these provisions, the TCC enacts mechanisms to assist the creditors from incurring damages as a result of malicious actions of legal entities in the liquidation process that are ceasing their commercial activities. For example, three invitations are issued to creditors, which is not a procedure that is foreseen to cease commercial activities of real persons. Unless the court authorizes otherwise, the assets that constitute security for receivables of creditors may not be disposed of.

The underlying purpose of Art. 44 of the BEC that envisages the protection of creditors is achieved through other mechanisms for joint stock and limited liability companies under the TCC.

The declaration of property, and the inability to dispose of assets for a period of two months from such declaration, is not in accordance with the liquidation procedure of such companies. If this declaration is made together with the initial inventory, the liquidator’s authority, which it needs to use to protect the assets and rights of the company in liquidation, will be limited by this prohibition. On the other hand, such declaration cannot be made after the trade name is deleted from the registry. The legal entity will cease to exist together with such deletion, and unless a property item is overlooked, there will be no property to declare. In fact, there will no longer be a legal entity that may be subject to any bankruptcy proceeding.

When the provisions of the BEC to cease commercial activities, and the provisions of the TCC for liquidation are assessed, it could be argued that the BEC provisions govern real person merchants only.

Jurisprudence

Based on the above explanations, one could easily argue that the BEC framework to cease commercial activities, and the TCC framework for liquidation are not in line with the other. When the main purpose of these provisions are taken into consideration, it could be said that Art. 44 and 337/a of the BEC should be applicable to real person merchants only, and that legal entities fall outside of their scope. In fact, in practice, the commercial registries do not list the declaration to cease commercial activities and declaration of property among the procedures that need to be complied within the scope of liquidation. The registry representatives have also stated verbally that such declarations shall be made by real person merchants, and not by legal entities in liquidation.

Nonetheless, the Supreme Court jurisprudence is established contrary to the arguments and opinion voiced, above. Three different rulings of the Supreme Court General Assembly of Criminal Chambers, under file no. 2010/16-75, decision no. 2010/159 and dated 01.06.2010; under file no. 2011/16-505, decision no. 2012/28 and dated 14.02.2012; and under file no. 2013/11-821, decision no. 2014/478 and dated 4.11.2014 adopt this jurisprudence. In short, the Supreme Court follows the below-summarized logic:

  • 44 of the BEC refers to “merchant ceasing commercial activities.” The article makes no distinction between real person and legal entity merchants.
  • The partnership shall cease through liquidation. This is assessed within the scope of ceasing commercial activities.
  • If it were to be accepted that persons authorized to represent and manage a company cannot be charged with the crime regulated under Art. 337/a of the BEC, this would result in real persons being sanctioned; however, managers of companies engaging in the same act would be relieved from punishment. This discrimination has no basis in law.
  • Pursuant to Art. 354 of the BEC, in the event this crime is committed during the management and operation of a legal entity, the managers and representatives shall be subject to the sanction. In the given Supreme Court rulings, the managers of limited liability companies are addressed.
  • Accordingly, if legal entities violate Art. 44 and 337/a of the BEC, the sanction foreseen under Art. 337/a shall apply.

As a result, commercial companies in liquidation are treated as a merchant ceasing its commercial activities, and therefore, are obliged to make a declaration of property and refrain from disposing of its property for two months in accordance with Art. 44 of the BEC. Otherwise, despite the ceasing of the legal personality, the (former) managers of the legal entity shall be faced with the imprisonment sanction as foreseen under Art. 337/a if the relevant conditions are met.

Conclusion

It is clear that the legal framework governing the ceasing of commercial activities, and the liquidation of commercial companies are incompatible. Based on the current legislation and the Supreme Court jurisprudence, unless an amendment is made to the applicable codes, legal entities in liquidation must give notice of its ceasing of commercial activities and make a declaration of property prior to the ceasing of its legal personality.

In fact, if liquidation is pursued in accordance with the legal framework, it is unlikely that the creditors will incur damages or make a complaint that results in sanctions. Furthermore, as the TCC introduces certain restrictions on the liquidation of assets, the prohibition to dispose of assets for a period of two months will not result in any major inconvenience, in practice. However, the fact that discrepancies and inconveniences are overcome in practice through various mechanisms does not eliminate the issue that incompatibility exists. Therefore, an amendment is necessary for the BEC provisions to be harmonious with the liquidation procedure as foreseen under the TCC.

[1] Published in the Official Gazette dated 19 June 1932 and No. 2128.

[2] Government Justification of Law No. 538: see. Necip Bilge-Burha Gürdoğan, Son değişikliklere göre gerekçeli İcra ve İflas Kanunu, Ankara, 1965, page 41, cited from Baki Kuru, Ticareti Terk Eden Tacirlerin Tabi Bulunduğu Hükümler, AUHFD, 1970, http://auhf.ankara.edu.tr/dergiler/auhfd-arsiv/AUHF-1970-27-01-02/AUHF-1970-27-01-02-Kuru.pdf (accessed on 22.07.2015), footnote. 2.

[3] Published in the Official Gazette dated 14 February 2011 and No. 27846. Art. 18/1 of the TCC, Art. 43 of the BEC.

[4] Please see previous newsletter articles governing the liquidation of joint stock companies: Dissolution And Liquidation Of Joint Stock Companies, http://www.erdem-erdem.com/en/articles/dissolution-and-liquidation-of-joint-stock-companies/; Nilay Celebi, Duties, Obligations and Liabilities of Liquidators http://www.erdem-erdem.com/en/articles/duties-obligations-and-liabilities-of-liquidators/ (accessed on 22.07.2015).