Loss of the capital and over indebtedness of joint stock companies in Turkey
February 2015 | EXPERT BRIEFING | BANKRUPTCY & RESTRUCTURING
The main legislation regarding the loss of the capital and over indebtedness of joint stock companies is the Turkish Commercial Code (TCC). Both of these are regulated under the section called ‘Duties and Powers’ of the board of directors.
Loss of half of the capital
According to the first paragraph of Article 376 of the TCC, if the assets of a company as per the last annual balance sheet do not cover half of the total of capital and statutory reserves, the board of directors shall immediately call the General Assembly for a meeting and notify the directors about the improvement measures reasonably offered for approval. These proposed improvement measures should be provided in detail and be effective. The proposed remedies may vary from capital increase, cost reduction policy, suspension of investments to the sale of assets, depending on the circumstances.
Loss of the two-thirds of the capital
If the assets of a company as per the last annual balance sheet do not cover two-thirds of the total capital and statutory reserves, the company shall be deemed terminated if the General Assembly, upon immediate call for a meeting, does not agree either on sufficiency of the remaining one-third of the capital or completion of the lost capital. According to this regulation, in such cases the General Assembly has two options: completing the capital or decreasing the capital and continuing with one-third of the capital (which cannot be less than the limit stated in the TCC which is TL 50,000).
If the General Assembly does not apply a solution, the company will be automatically deemed terminated. The reason for forcing the General Assembly to choose one of these options is to clarify the future of the company as soon as possible and to protect the creditors.
If there are implications from a company’s over-indebtedness, the board of directors shall prepare two interim balance sheets one of which shall be based on the fair market value of the assets and the second one shall be prepared by taking principle of continuity of the operations into consideration.
If it is evident from the balance sheet that the assets are not sufficient to cover the receivables of the company’s creditors, the board of directors shall notify this fact to the commercial court at the place where the company’s head office is domiciled by demanding bankruptcy of the company – unless the creditors whose claims from the company are sufficient to cover the deficit of the insolvent company accept in writing, prior to the bankruptcy decision, that their debts may be deferred after all other creditors are satisfied and the accuracy and validity of such is verified by the experts appointed by the court.
According to the preamble of this article, over-indebtedness means that the creditors cannot collect their receivables from the company even though the company’s assets are valued at fair market value instead of book value. As mentioned above, in such a case, the board of directors is required to ensure preparation of interim balance sheets as envisaged in the TCC to evaluate the financial situation of the company. The balance sheet will determine whether the board of directors is required to notify the relevant court about the bankruptcy of the company.
If, prior to the commercial court’s decision, the following events occur together, such notification shall not be considered as a bankruptcy notification by the commercial court: (i) if one or several company creditors accept in writing that their receivables may be deferred; (ii) if the sum of receivables of said creditors from the company is equal to an amount that will eliminate over indebtedness of the company under Article 376 of the TCC; and (iii) if this declaration of the creditors receives approval from experts appointed by the commercial court.
Postponement of the bankruptcy
According to Article 377 of the TCC, the board of directors or any creditor may request the postponement of bankruptcy by submitting to the court a recovery plan which indicates objective and actual sources and measures. Upon the request for the postponement of bankruptcy, the court shall immediately assign a trustee and take necessary measures for the determination and preservation of the company’s assets.
Enforcement and bankruptcy law requires that such a recovery plan be serious and credible in order to prevent usage of the option of requesting bankruptcy postponement as a way to delay making payments to the creditors of the company. Once the court resolves to take postponement measures, the expert appointed by the court should analyse whether: (i) the company is in financial distress; and (ii) the recovery plan submitted to the court is serious and credible. If these two conditions exist, the court will rule in favour of postponing the bankruptcy for one year. If it is determined that the company is in financial distress but the recovery plan is not serious and credible, the court will declare the bankruptcy of the company.
Ceylan Kuscu is an associate at Baspinar & Partners. She can be contacted on +90 212 465 66 99 or by email: email@example.com.
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