19 September 2018
The Ministry of Trade has recently published the Communiqué on the Procedures and Principles Relating to Implementation of Article 376 of Turkish Commercial Code No. 6102 (“TCC”) in the Official Gazette dated September 15, 2018 and numbered 30536 (“the Communiqué”).
The Communiqué sets forth the procedures and principles relating to implementation of Article 376 of the TCC which regulates the corporate remedies available in the event of over-indebtedness and loss of capital and sets the obligations of the company’s board of directors in such times. The Communiqué provides the procedure to be followed in a systematic and detailed manner with the purpose of protecting the companies under the threat of insolvency due to sharp decline in the value of Turkish lira against certain foreign currencies.
The Article 5 of the Communiqué regulates the duty of the board of directors to immediately call the general assembly of shareholders for a meeting, if it sees from the previous year’s annual balance sheet that “at least” half or two thirds of the sum of the share capital and statutory reserves has eroded due to loss. While the same duty has also been regulated under Article 376 of the TCC, the scope of the duty has been unclear since Article 376 refers to erosion of half of the share capital and statutory reserves as well as erosion of two thirds due to loss in two separate paragraphs. By adding the phrase “at least”, the Communiqué clarifies the scope of the board of director’s duty. In addition, Article 6 of the Communiqué provides further details for the reporting procedure and the corporate remedial actions that the board of directors may take in the event of erosion of at least half of the sum of the share capital and statutory reserves of the company.
Article 376(2) of the TCC provides corporate remedies for a company’s general assembly to decide on in the event of erosion of two thirds of the sum of the company’s share capital and statutory reserves due to loss: (i) proceeding with the remaining one-third of the capital (i.e. decreasing the capital) or (ii) adjusting the capital to recover the losses. In the event that none of the options is decided on, the company automatically terminates. Article 7 of the Communiqué, on the other hand, offers an additional third option: capital increase.
Article 8 of the Communiqué provides that in the event that at least two thirds of the sum of the share capital and statutory reserves of the company has eroded due to loss, and the general assembly has decided to proceed with the remaining one-third of the capital, the capital should be decreased in accordance with the Articles 473-475 of the TCC (Decrease of the Share Capital).
Although Article 376(2) provides the option of adjusting the capital to recover the losses as a corporate remedy, Article 9 of the Communiqué sets the procedure in further detail. Article 9 defines adjustment of capital as the elimination of the company’s balance sheet deficits by some or all of the shareholders.
The Communiqué further states that each shareholder can participate in the capital adjustment on a pro rata basis. It is important to highlight here that these contributions of the shareholders are unreciprocated and hence the shareholders participating in the adjustment of the capital will not be compensated for their contributions.
Under Article 10 of the Communiqué, the general assembly may decide to decrease the capital in the amount of loss while at the same time deciding on capital increase with the desired amount. Article 10 sets that for the decrease and increase of the capital to take place simultaneously; one-fourth of the increased capital needs to be paid beforehand.
Alternatively, the Communiqué provides that the general assembly may also choose to increase the capital without going through with capital decrease. In such a case, an amount corresponding to at least half of the capital needs to be paid prior to the registration.
Parallel to Article 376(2) of the TCC, Article 11 of the Communiqué sets forth that if the general assembly fails to choose one of the above-mentioned options, the company automatically terminates.
As a noteworthy novelty, Article 12 of the Communiqué makes the remedial actions explained above (i.e. decreasing, adjusting or increasing the capital) available also for cases of insolvency. In the event of sings indicating the risk of insolvency, Article 12 requires the board of directors to prepare an interim balance sheet based on the principle of business continuity and the fair market value of the assets. Based on the interim balance sheet, if the board of directors decide that the company’s assets are not sufficient to cover its debts and if none of the remedial actions provided under Article 7 of the Communiqué has been taken, the board of directors is obligated to file for the bankruptcy of the company before the courts.
Article 14 of the Communiqué also introduces another remedy for the companies suffering from loss of capital or insolvency: merging with companies having sufficient equity to cover their losses.
Finally, with an aim to protect the companies under the risk of substantial capital erosion and insolvency as a result of the sharp depreciation of Turkish Lira, Provisional Article 1 of the Communiqué provides that, until January 1, 2023, losses arising from the instability of liabilities denominated in a foreign currency and which have not been fulfilled yet, may be disregarded from the calculations to be made in the context of loss of capital or insolvency as per Article 376 of TCC.
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