I. Introduction

Article 376 of the Turkish Commercial Code No. 6102 ("TCC") pertains to the loss of capital and insolvency circumstances in joint-stock and limited liability companies, as well as the measures that must be taken to improve their financial distress.

In order to further illustrate the practical implementation of the Article 376 provisions, on September 15, 2018 the Ministry of Trade had introduced the Communiqué on the Procedures and Principles as to the Implementation of Article 376 of the Turkish Commercial Code ("Communiqué on Article 376") and eliminated the legal uncertainties to a great extent. On December 26, 2020, the Ministry of Trade introduced a number of amendments and new provisions to the Communiqué on Article 376 ("Amendments to the Communiqué on Article 376") and clarified the remaining points of contention.

In this article, we will touch upon relevant rules, procedures and principles stipulated by Article 376 of the TCC and the Communiqué on Article 376, as amended, for ascertaining and improving the financial circumstances of joint-stock and limited liability companies.

II. Loss of At Least Half (1/2) of the Total of Company Share Capital and Legal Reserves (Article 376/1):

The Amendments to the Communiqué on Article 376 now defines and clarifies the calculation of this loss as: the amount of loss which is (i) equal to or more than one-half (1/2), and (ii) less than two-thirds (2/3) of the total sum of the share capital and legal reserve amounts. Previously, the Communiqué on Article 376 had not provided any specific definition on this matter and the calculation method was therefore subject to interpretation by the practitioners and the legal doctrine.

As for the obligations that arise in the event of such a case, the board of directors of the company must immediately invite the shareholders to a general assembly meeting to be convened, inform the shareholders on the company`s financial position and provide them with a list of possible recommended remedies to eliminate the financial distress, or at least alleviate it. If there is an upcoming general assembly meeting, this matter must be included in the agenda and discussed by the shareholders during that meeting.

The possible remedies that could be raised by the board are not numerus clausus; and thus, may include capital increases in cash or from company`s own resources (e.g., undistributed profits), business solutions such as closing or downsizing certain divisions or branches, selling subsidiaries, adopting new and different marketing strategies, among many others. The general assembly may adopt the board`s recommendations as they are or with changes; or decide to implement wholly different remedies.

III. Loss of At Least Two-Thirds (2/3) of the Total of Company Share Capital and Legal Reserves (Article 376/2):

Article 376/2 has also been clarified by way of the Amendments to the Communiqué on Article 376, with respect to the amount of loss which is (i) equal to or (ii) more than two-thirds (2/3) of the total sum of share capital and legal reserves.

As with the previous loss threshold criteria, in such a case, the board of directors should immediately convene the shareholders for a general assembly meeting and inform them about the financial status of the company. If there is an upcoming general assembly meeting, this matter must be included in the agenda and discussed by the shareholders during the meeting.

Nonetheless, the remedies available to improve the extensive financial distress addressed by Article 376/2 are limited, unlike the wide range of options made available under Article 376/1 where the losses are lower. The general assembly must adopt one of the following resolutions: (i) to decrease the share capital, (ii) to provide additional funds by shareholders to offset the capital loss of the company (i.e., share capital completion), (iii) to increase the share capital, (iv) to decrease and increase the share capital simultaneously or (v) to increase and decrease the share capital simultaneously.

The following rules and principles have also been introduced with regard to the foregoing remedies of Article 376/2:

  • Share capital decrease: Provided that at least half (1/2) of the sum of share capital and legal reserves is preserved in the equity, the share capital of the company may be reduced down to the minimum statutory amount of TRY 50,000 in joint-stock companies, and TRY 10,000 limited liability companies. Before the recent amendment, the Communiqué on Article 376 had allowed reduction of the share capital to an amount equal to one-third (1/3) of the original share capital.
  • Share capital completion: Pursuant to the Communiqué on Article 376, the additional funds received from the shareholders to offset the capital deficit are maintained under a separate share capital completion fund account. The Amendments to the Communiqué has further stipulated that these funds are not capital contributions or shareholder loans, but are deemed as forfeited by the shareholders and can only be used to eliminate the loss.
  • Share capital increase: At least half (1/2) of the total sum of the new share capital and legal reserves must be paid into the company, before the registration of the share capital increase with the trade registry, in order to ensure that such amount is preserved in the equity. Previously, the payment requirement had been limited to one-half (1/2) of the share capital only.
  • Simultaneous share capital decrease and increase: For the increased part of the share capital, the relevant provisions of the TCC will apply. This means that the Communiqué on Article 376 no longer stipulates a particular payment ratio. Before the amendment, the Communiqué on Article 376 had required that one-fourth (1/4) of the increased part be paid before the share increase was registered with the trade registry.
  • Simultaneous share capital increase and decrease: Provided that the increased part of the share capital is paid in its entirety, the share capital may be increased at the desired amount and decreased simultaneously; however, at the end of such transaction the equity amount must reach at least half (1/2) of the sum of new share capital and legal reserves. This remedy did not exist under the previous version of the Communiqué on Article 376 and it is a significant novelty for Turkish corporate law practice.

III. Financial Distress (Technical Bankruptcy) (Article 376/3):

If there are any indications that the liabilities of a company exceed its assets, the board of directors is obliged to initially prepare an interim balance sheet in order to ascertain whether that is the case. In the event that a company does fall under the circumstances described in Article 376/3, it could choose to implement one of the remedies explained in detail under the Section (II) above to remedy the situation. If the remedies are not implemented and the interim balance sheet does show the company is insolvent (i.e., the assets are not sufficient to meet the creditors' receivables), then the board of directors must file for bankruptcy to the relevant court. Unless the court appointed experts can confirm that the creditors of the company, with total receivables that exceed the amount of the company`s asset deficit, have agreed to defer the recovery of their receivables until after all other creditors have been satisfied, this application will be deemed as notification of bankruptcy.

IV. Other Noteworthy Points

The amendments have also expanded the scope of Provisional Article 1 of the Communiqué on Article 376 pertaining to the temporary exceptions for calculating the financial position of a company. Consequently, until January 1, 2023, the following will not be required to be included in the company financial statements, except as footnotes: (i) all losses arising from currency fluctuations of non-performed debts in foreign currencies, (ii) lease expenses to accrue in 2020 and 2021, (iii) depreciation and amortization, (iv) half of the total personnel expenses.

V. Conclusion

In terms of the hierarchy of norms, although provisions of the Communiqué on Article 376 are widely criticized for going beyond what the law itself stipulates under TCC Article 376, a detailed secondary legislation on such a significant matter was an urgent need for the practitioners and commentators. In this regard, it could be inferred that the Communiqué on Article 376 meets its purpose. In addition, the Amendments to the Communiqué on Article 376 have greatly clarified the remaining question marks in practice, and also taken into consideration the adverse economic effects of COVID-19.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in March 2021. A link to the full Legal Insight Quarterly may be found here

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