Turkey: Technical Bankruptcy Under The Turkish Commercial Code

The Turkish Commercial Code (the "TCC") gives particular importance to the protection of capital in joint stock corporations ("JSCs") and limited liability partnerships ("LLPs"). The TCC determines mandatory measures to be adopted by these companies' relevant bodies in the event of capital loss. Article 376 of the TCC governs over-indebtedness and technical bankruptcy ("Technical Bankruptcy"). Article 376 distinguishes between three different levels of capital inadequacy and sets forth specific corporate remedies for each. It is crucial to take right the steps on time, because Technical Bankruptcy is one of the legal grounds for dissolution of companies. Companies' board members and managers may be subject to legal and criminal liability, if they fail to fulfill their obligations under Article 376 as well as the Execution and Bankruptcy Law (the "EBL").

A. "Financial Insolvency" Concept

Article 376 of the TCC governs over-indebtedness, Technical Bankruptcy and their consequences:

(i) Under Article 376/1 of the TCC, if the company's board of directors (the "BoD") sees from the previous year's annual balance sheet that 1/2 of the company's share capital and statutory reserves have eroded, then the BoD must call the general assembly of shareholders ("GAS") immediately for an extraordinary meeting and to prepare a proposal for strengthening the company's financial status, to be submitted to the GAS's approval. There is no legal requirement for the GAS to comply with the BoD's suggestions or to take any other specific actions.

(ii) Under Article 376/2, if the BoD sees that 2/3 of the company's share capital and statutory reserves have eroded, the BoD must immediately call for an extraordinary meeting of the GAS and present a proposal for remedial measures, in order to improve the company's share capital status. At this extraordinary meeting, the GAS must resolve on either:

  • completing the eroded portion of the share capital through a cash injection, in order to replenish the share capital to its original level; or
  • proceeding with the amount equal to 1/3 of the share capital.

If the GAS fails to adopt any of the above mentioned resolutions at the GAS meeting or if a meeting is not convened at all, the company would be deemed dissolved pursuant to the TCC and the EBL.

(iii) In addition to the above, if there are significant signs that the company is over- indebted (e.g. according to the results of the year-end balance sheet or any other financial tables), the BoD must prepare an "interim" balance sheet, where the value of the company's current assets is recalculated at fair (current) market value (i.e., not on the book value). If the interim balance sheet indicates that the company's assets are not sufficient to cover its debts, the BoD must notify the competent commercial court and file for bankruptcy ("Financial Insolvency").

It is important to distinguish between separate Technical Bankruptcy and Financial Insolvency, since their consequences are different. Insolvency can be defined as a debtor's inability to cover its debts, while bankruptcy is a status to be determined by commercial courts, which announces the company's inability to cover its debts by its assets. A company may be bankrupt under several circumstances. Insolvency is one of the grounds for bankruptcy. A company is deemed insolvent if its assets are not sufficient to cover its liabilities, or if the company is in significant financial difficulty in making timely payments of its debts.

On the other hand, in practice, many Turkish companies lose their share capital or become financially insolvent due to different reasons and it is quite uncommon in practice to be declared bankrupt just because of Financial Insolvency under the balance sheet. A dissolution/bankruptcy is a significant risk when the company runs into cash flow problems and creditors are not satisfied. It is worth emphasizing that without remedying Financial Insolvency, a company would not be able to increase its share capital, to make solid financial decisions and to make long term financial plans.

B. Recovery Methods

As explained above, JSCs and LLPs can face Technical Bankruptcy or Financial Insolvency upon erosion of their share capital or if their statutory reserves reach the said thresholds. In these circumstances, the BoD/managers must act immediately, in order to strengthen the company's financial status.

There are several recovery methods such as (i) injection of cash to the company as "loss remedy fund" or (ii) capital increase in order to resolve the insolvency problem. However, these methods also bring together certain financial and tax implications.

i. Loss Remedy Fund

The shareholders/partners may inject cash to the company to replenish the company's capital funds, through creating a special fund, called the "loss remedy fund" (zarar telafi fonu). The shareholder/partner can inject, via loss the remedy fund, in an amount that covers Technical Bankruptcy threshold. Moreover, if the amount injected by the shareholder/partner exceeds the sum of the accumulated losses plus 1/3 of the paid-in capital, tax authorities will deem the exceeding portion as an income of the company.

ii. Capital Increase

The TCC does not explicitly govern capital increase methods in the event of Financial Insolvency. That said, a capital increase may be conducted either through a cash contribution or conversion of the shareholder/partner loans into share capital.

C. Conclusion

In light of the above, while incorporating a capital company, the initial share capital must be carefully determined, based on the profit and loss projections of the company. This will help avoid Technical Bankruptcy or a similar situation at the early stages of the company's operations. Regardless of the amount of the initial share capital, the company's financial position should also be closely followed and any injection of loans or equity should be arranged, preferably before the company falls in any insolvency situation.

© Kolcuoğlu Demirkan Koçaklı Attorneys at Law 2015

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Gökçe İldiri
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.