Funds To Be Added To The Share Capital Of Companies And Re-Assessment Of Fixed Assets
Provisions of the New Turkish Commercial Code on Capital Increase from Internal Sources
Article 462 of the new Turkish Commercial Code numbered 6102, which entered into force on 01.07.2012 (“NTCC”) sets forth the provisions regarding the authorised capital increases through addition of internal sources to the capital. As per this article;
- capital reserve funds, which are set aside for contingencies but not allocated for a special purpose,
- the parts of the statutory reserves which can be freely disposed and
- the funds, which are permitted by the law to be indicated in the balance sheet and to be added to the capital;
may be converted into share capital and the share capital can be increased by utilizing those internal sources.
In the event that the company has funds which are permitted by the law to be added to the share capital; the share capital cannot be increased by means of subscription.
According to the procedure, the amount, which will cover the increased part of the share capital, should be attested with the approved annual balance sheet and a clear written statement given by the board of directors. If more than six months passed from the date of the balance sheet, a new balance sheet shall be issued and approved by the board of directors. The capital increase becomes final upon the registration of the general assembly and board of directors resolutions and the amended articles of the articles of association to the related trade registry. As per the last paragraph of article 462 of the NTCC, the current shareholders of the company should automatically acquire the newly issued gratis shares pro-rata to their shareholding in the share capital of the company. The right to acquire gratis shares cannot be overruled, restricted or waived.
The secondary legislation with respect to the funds which are permitted to be added to the share capital has not yet been set forth as per the NTCC. Considering the secondary legislation under the Turkish Commercial Code numbered 6762, there is an Internal Trade Communique on Incorporation and Amendment of Articles of Associations of Joint Stock and Limited Liability Companies numbered 2003/3 which was announced in the Official Gazette dated 25 July 2003 by the Ministry of Industry and Trade (“Communique nr. 2003/3”). When this Communique nr. 2003/3 is reviewed, it is seen that Annex 2 of this Communique nr. 2003/3 sets forth the documents requested for the registration of the capital increase and within these documents, the ways of capital increase by utilizing internal sources is listed as “inclusion of share certificates, addition of value increase funds, value increase funds of affiliates, cost increase funds, profits from sales of affiliate shares or immovable properties”.
The legal doctrine suggests that with respect to the funds permitted to be added to the share capital, article 462 of the NTCC provides merits to the tax rules set forth by the Tax Procedure Law numbered 213 (“TPL”) under articles 298, reiterated article 298 and provisional article 25 on inflation accounting.[i] Therefore, those articles of TPL shall be evaluated in that regard.
Tax Procedure Law Provisions on Re-Assessments and Secondary Legislation
The provisions of the TPL regarding the recordation of value increases to the balance sheet or addition to the share capital as a result of a re-assessment have been eliminated with reiterated article 298 which is entered into force with the “Law regarding the Amendments on Tax Procedure Law, Income Tax Law and Corporate Tax Law” numbered 5064 which was announced in the Official Gazette dated 30.12.2003 and numbered 25332 (“Law nr. 5064”). With this Law nr. 5064, inflation adjustment system is accepted under amended articles of TPL and the re-assessment system is overruled, thus the accounts regarding the “Increases upon Re-assessment of Fixed Assets” and “Increases upon Re-assessment of Affiliates” set forth in the balance sheets are no longer applicable. Similarly, since article 38/4 of the Income Tax Law numbered 193 (“ITL”) has also been eliminated; the “Cost Increase Funds” which previously were permitted to be added to the share capital have also lost its applicability.
On the other hand, before those amendments made with Law nr. 5064, the ways of capital increase by utilizing the internal sources has been listed in the Annex 2 of the above mentioned Communique nr. 2003/3 and no correction has been made in this Communique after the law amendment. Therefore, it has been seen that the trade registries organized under the Ministry of Customs and Trade and the tax offices organized under the Ministry of Finance have conducted different implementation which are contrary to each other. Some trade registries have continued to register this kind of capital increases which are made upon re-assessment of fixed assets based on the certified accountant reports as per Communique nr. 2003/3.
Given the circumstances, this kind of capital increases should not be registered since the law is a higher legislative act than the communique and the discrepancies in the communique should be corrected.
Upon the amendments made by Law nr. 5024, the determination of the Company’s equity can be requested from the court for only following circumstances;
- for the contribution of an enterprise to a company as share capital (in other words, change of type, merger, de-merger transactions set forth under ITL 81, CPL 18, 19 and 20) and
- in a situation where a company lost its entire share capital, for the determination whether the assets of the company is sufficient to cover the liabilities and whether the company becomes bankrupt or not.
Even though the circulars legalized under the NTCC indicate that the Communique nr. 2003/3 will be in force until the secondary legislation based on NTCC is approved, since the expression under the Communique nr. 2003/3 is contradictory to TPL, the capital increases based on this expression should not be accepted.
Istanbul Tax Authority declared a similar opinion in its private ruling dated 19.08.2011. According to this private ruling, the re-assessment system was eliminated with the inflation correction provision which was set forth under the reiterated article 298 of TPL by the Law nr. 5024 and it is no longer possible to make a re-assessment other than the inflation correction. Therefore, even the companies procure the re-assessment of their immovable properties; these re-assessed values cannot be accepted as values according to the tax procedure legislation. In addition, the excessive values determined as per the re-assessment can be recorded to the accounts solely for information purposes. On the basis of the foregoing, the re-assessment funds or cost increase funds are no longer accepted with the law as the funds that can be added to the share capital; therefore it is no longer possible to add these funds to the capital.
Accounting Principles and Provisions regarding the Re-assessment under New Turkish Commercial Code
The 5th Chapter of the NTCC under articles 64 et seq. regulate the provisions on accounting principles, balance sheets and assessment.
As per article 72 of the NTCC, in an enterprise; all assets, debts, all costs paid and income received in cash; in technical words all term defining accounts and all income and costs, are mandatory to be shown as truly assessed.
The assessment provisions regarding the company assets are set forth under articles 78-80. In general, the principles set forth under Turkish Accounting Standards are applicable for the assets and debts indicated in the financial statements. The values indicated in the closing balance sheet of the previous term should be equal to the values to be indicated in the opening balance sheet of the term of activity. On the closing date of the balance sheet, the assets and debts should separately be assessed and the method applied for the previous year should be preserved.
As per articles 79 and 80, the assessment of the fixed assets shall also be made according to the Turkish Accounting Standards.
The “principle of true and fair view” is accepted by article 515 of NTCC. According to this principle, the financial statements of a joint stock company should set forth all assets, debts and obligations, equity and the results of its activity in an understandable, comparable, transparent, trustworthy manner as convenient as to its needs and scope of activity in accordance with the Turkish Accounting Standards and should reflect the truth exactly, adequately and same as original.
In light of the above provisions, it seems possible to choose “true view method” for the assessment of the asset values in accordance with the accounting principles. On the other hand, since the secondary legislation with respect to the accounting principles is still pending and the link between the Turkish Accounting Standards and tax accounting system as per the Turkish tax procedure law has not yet been clearly defined, the reassessment of the fixed assets as per the “true view method” should be re-examined after those steps are taken.
The Consequences of the Non-Compliance
In the event of a capital increase by way of re-assessment of fixed assets contrary to reiterated article 298 of TPL and article 462 of NTCC; the following consequences may occur:
1- Non-approval of the Capital Increase Resolution by the Ministry Commissar or Non-registration of the Capital Increase Resolution by the Trade Registry:
Even though a re-assessment of the fixed assets was made before the court, the excessive value was recorded to the balance sheet as value increase funds and a capital increase was made by addition these funds to the share capital, since such a resolution will be contrary to the law, it is possible for the Ministry of Customs and Trade commissar not to approve the resolution or for the second step, it is also possible for the trade registry not to register the resolution.
2- Statements regarding the Capital Increase and the Audit
As per article 457 of the NTCC, for the capital increase procedures in a joint stock company, the board of directors shall sign a statement and in this statement, one of the issues that should be verified is legality, validity, existence and disposability of the funds, if such capital increase is made by addition the internal funds. Accordingly, for a capital increase from internal sources, the company board of directors shall declare and guarantee that the funds are the type of funds that are permitted to be added to the share capital as per the law. Otherwise, if there is a capital increase from funds that are not permitted, the statement of the board will be false and thus, the liability of board may arise and civil and penal sanctions will become applicable against the board of directors.
Article 398 of the NTCC sets forth that the audit of the company financial statements and annual board of directors’ report also covers the audit on whether those are kept in compliance with the Turkish Accounting Principles, the law and the articles of association of the company. As per article 403, the auditor should provide an opinion letter and indicate any matter with respect to the financial statements causing any liability in this opinion. Non-compliance to these audit provisions and not-indicating the reservations and problems in the audit report may lead the liability of the auditor and may cause civil and penal sanctions.
3- Claims Against the Registered and Announced Capital Increase
As per article 456 of the NTCC, the incorporation provisions under article 353 are also applicable for capital increases by analogy. If this article is interpreted solely with its wording, same as incorporation, the capital increase resolution cannot be declared as null and/or void. As per the analogical interpretation, it would be possible to claim the termination of the capital increase which endangers or breaches the interests of the creditors, shareholders of the public with a legal action initiated by the creditors, board members, shareholders or the Ministry of Customs and Trade before the competent court. This legal action shall be filed within three months upon the registration and announce of the capital increase as per article 353/4.
On the other hand, there is a counter-doctrine, which states that claiming the nullity or voidness of the capital increase is possible.[ii] In such case, these claims have no statute of limitation. The implementation of such article will be defined by the case law of High Court of Appeals in the future.
4- Liability and Sanctions
- Civil Liability Provisions
Articles 549 et seq. of the NTCC set forth the provisions of civil liability for joint stock companies. As per the general provision under article 549, in the event that there are false, misleading or missing information or breach of law in the documents, declaration, undertakings or guaranties regarding the incorporation, capital increase or decrease, merger, de-merger, change of type or issuance of securities; the people who prepare those documents or who provide those statements are liable for their fault.
In addition, according to article 550, the people, who lead false and misleading impression with respect to the share capital, are liable for their fault and the fictional shares which cause the false impression shall be undertaken and paid jointly by those who are liable.
Therefore, should there be a capital increase by utilizing the funds that are not permitted to be added to the share capital, the current board members who provide the statement and other people who cause the wrong impression (e.g. the certified accountant who gives a positive report) will be liable and will be responsible for the losses against the company, the shareholders and also the company creditors.
As per article 554, the auditors or special auditors are also liable for their faults during fulfilment of their duties, for the losses against the company, the shareholders and also the company creditors. Therefore, should there be a capital increase by utilizing the funds that are not permitted to be added to the share capital, the current auditors, who do not point out this discrepancy, will be liable for it.
According to article 559 of NTCC, the liability of the board members, auditors regarding the incorporation or capital increases shall not be waived or released within four years upon the relevant registration. The claim of indemnification is subject to a statute of limitation of two years as of the date on which the loss and the liable person is learned and at most five years as of the date on which the action lead to loss is occurred. Should there be a longer statute of limitation under Turkish Penal Code for the same action, this statute of limitation shall apply the civil legal actions as well. The legal action shall be filed before the court where the company headquarters is registered.
- Penal Liability Provisions
According to article 562 of the NTCC regarding the penal liability and sanctions, the above discrepancies set forth under article 549 regarding the incorporation, capital increase or decrease, merger, de-merger, change of type or issuance of securities, the people who prepared fictional documents and who make false and misleading records shall be subject to a penalty of 1-3 years imprisonment. In addition, as per article 550, the people, who cause wrong and misleading impression regarding the share capital, shall be subject to a penalty of 3 months – 2 years imprisonment or judicial fine.
In the light of the above, the increase of the share capital of a company by utilizing internal courses which are recorded as re-assessment funds upon a re-assessment of the fixed assets shall not be legally possible according to the reiterated article 298 of TPL which was amended with the law nr. 5024. Therefore, a capital increase conducted contrary to the relevant provisions of law may lead civil and penal liability of the board members, auditors or any related people.
[i] Pulaşlı, Hasan; Yeni Şirketler Hukuk Genel Esaslar, Adalet Yayınevi, Ankara 2012, 1. Edition, p. 859.
[ii] Kendigelen, Abuzer; Türk Ticaret Kanunu Değişiklikler, Yenilikler ve İlk Tespitler, XII Levha, İstanbul 2011, p.310, fn.133.
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