For many years, most joint stock companies in Turkey were family owned businesses. This made it easy for families to become indebted to their companies, by claiming advance payments from the company's cash capital in lieu of proper dividend distribution. The new Turkish Commercial Code (the "TCC")1, enacted significant prohibitions on shareholders and board members to become indebted to their companies (i.e. limited liability partnerships and all joint stock companies regardless of whether it is a publicly held or private corporation). The real intention behind this restriction was to prevent shareholders from withdrawing company cash for their personal expenses in order to (i) preserve financial situation and continuity of the company and (ii) protect the company's creditors and minority shareholders. Group companies and banks are exempted from this restriction due to the fact that group companies may provide funds, surety and guarantee to each other according to the TCC and banks are subject to special regulations (i.e. Banking Law).
However, the limitations imposed under the TCC were very strict and heavily criticized by the business community. Thus, in 2012, these restrictions were amended by the Law Amending the TCC and the Law on Enforcement and Implementation of the TCC (the "Amending Law")2.
Initial Text of the TCC
Prior to the enactment of the Amending Law, the original language of the TCC had restricted shareholders from becoming indebted to the company apart from the following two exceptions:
- debts arising from shareholders' capital subscriptions; and
- debts arising from a transaction that is within the company's scope of business and shareholder's day to day business requirements and these debts must not be less than the going rate for similar transactions.
Further, regardless of their shareholder status, all board members, their non-shareholder relatives as set out under the TCC, partnerships (şahıs şirketleri) in which these individuals are shareholders and capital companies in which these individuals own at least 20% of the shares, were restricted from becoming indebted to the company whether in cash or in kind.
The Amending Law's Novelties
A significant amendment was made with the Amending Law on the scope of the prohibition on shareholders in becoming indebted to the company, which has reduced the deterrent effect of the restriction. Under the Amending Law, a shareholder may become indebted to the company under the following circumstances:
- the shareholder must have paid his "due debts" arising from his capital undertaking; and
- the sum of the company's free capital reserves and company's profits must cover the previous year's losses.
The Amending Law has limited the scope of the prohibition on board members and their relatives. Thus, non-shareholder board members and their non-shareholder relatives (set out under the TCC) cannot become indebted to the company in cash. In addition, the Amending Law revoked the initial text's prohibition on capital companies and partnerships (şahıs şirketleri) in which board members and their relatives are shareholders.
Payment of Due Debts Arising From the Capital Subscriptions
A shareholder must pay his capital undertaking before becoming indebted to the company that is due at the time of indebtedness. The important point is that they are obligated to pay the "due debts" arising from their capital undertaking. As a general rule, the shareholders must pay 25% of the capital subscription (pro-rated to their shares) before the registration of the incorporation or the capital increase of the company with the trade registry. The remaining capital subscription must be paid within a maximum of 24 months as from the registration of the establishment or capital increase of the company.
Company's Profit Including Free Capital Reserves Must Cover the Losses of Previous Year
In order for shareholders to become indebted to the company, the sum of the company's profits and free capital reserves must cover the company's previous year's losses. As becoming indebted to the company is related to the financial status of the company, financially weak companies are prevented from loaning money to shareholders. In calculating the company's previous year's losses and sum of the company's profit and capital reserves, the losses and profits on the company's balance sheet will be taken into account based on the date of the indebtedness.
In addition to limiting the scope of the limitation, the Amending Law has further reduced the criminal sanctions to be imposed for a violation of the debt restriction. Before the Amending Law, a judicial fine that was not less than 300 days, were imposed on shareholders who became indebted to the company contrary to the restriction. According to the Amending Law, a judicial fine, that is not less than 300 days, may be imposed on those who realize the lending transaction on behalf of the company that is subject to breach (e.g. general manager or financial director). The main intention of the Amending Law is to penalize the authority of the company carrying out the relevant transaction instead of the shareholder. However, this amendment to the TCC will create confusion in the future, if the signatory authority of the company realizing the relevant transaction will also be the shareholder of the company (i.e. sole shareholder companies).
1 Law No. 6102 published in the Official Gazette dated 14 February 2011 and numbered 27846.
2 Law No. 6335 published in the Official Gazette dated 30 June 2012 and numbered 28339.
© Kolcuoğlu Demirkan Attorneys at Law, 2014
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.