Balance Sheet Insolvency expresses the situation where the
liabilities of a company exceed its assets. According to Article
324/2 of TCC Numbered 6732 and Article 179 of Execution and
Bankruptcy Code ("EBC") Numbered 2004, it is the board of
directors duty to determine whether the company is balance sheet
insolvent or not. If it is determined that the company is balance
sheet insolvent, the board of directors are obliged to notify it to
the competent commercial court.
With the New TCC, there will be some changes on determination of
insolvency. The liability to notify insolvency is still on the
board of directors. However, according to Article 376/3 of New TCC
if there are any signs suspects that the company is insolvent, the
board of directors is obliged to have an unconsolidated interim
balance sheet prepared according to value of either the contingent
selling prices of the company's assets or a going concern basis
and to give it to an auditor.
Asset and liability evaluation in accordance with going concern
basis means performing evaluation based on a management which is in
continuation with its activities. Such evaluation sets forth
whether a company is in a promising situation or not due to some
facts, expectations and disenabled reasons despite the fact that it
is balance sheet insolvent. For example, a company may be evaluated
differently by a competent manager because of the fact that it is
balance sheet insolvent due to investments made in its first years
of establishment but it has a good chance of making a profit in the
following years. An evaluation like this includes the results of
investments as well. It is stipulated that the mandatory auditor
that will evaluate the interim balance in accordance with Article
376/3 of New TCC will interpret both of the balances objectively
and determine the one to be preferred considering the concrete
The auditor shall analyze the given interim balance sheet and
present a prepared report including its assessments and
recommendations to the Board of Directors in seven working days.
The report prepared by the auditor shall also include the
recommendations of the Early Risk Identification Committee
,mandatory in publicly traded companies and in the other companies
by a written request of the auditor, which is established, ran and
developed as a responsibility of the Board of Directors according
to Article 378 of New TCC in order to identify the causes that
jeopardize the companies existence, development and continuation
and for this purpose to apply the necessary measures and remedies
and to manage risks.
If it is determined from the report that the companies'
assets do not meet its liabilities, then the Board of Directors
will notify the competent commercial court in the district where
the company is registered. The Court shall rely on the report in
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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