Article 376 of the Turkish Commercial Code ("TCC") regulates specific cases of capital inadequacy in joint stock (A.S.) and limited liability companies (Ltd. Sti.) and requires certain corporate actions to be taken in each case.
In case it is clear according to the last annual balance sheet that 2/3 of the sum of the capital and statutory reserves is unsecured due to loss, the company is deemed to be in technical bankruptcy under Article 376/2 of the TCC. In order to determine whether the company in technical bankruptcy, the Board of Directors (or manager(s) in Ltd. Sti.) must compare i) the shareholders' equity (which equals to assets - liabilities) in the company with ii) the total of capital and legal reserves of the company.
If a company is in a technical bankruptcy as indicated above; unless the General Assembly of the company either i) decides to fully supplement the capital or ii) decides that the company will continue to operate with 1/3 capital (by decreasing the capital, provided that the minimum capital requirements under the TCC and any other applicable legislation are satisfied), the company will be deemed automatically terminated.
The most common way to remove a company from technical bankruptcy is either to decrease the capital (i.e. to continue operations with 1/3 capital) or by way of decreasing the registered capital in the lost amount and increasing it back to its current registered amount simultaneously.
That said, some companies also prefer to increase the capital by way of regular capital injection as a remedy for technical bankruptcy. However, this caused some problems in the past as some scholars argue that mere capital injection is not permitted if the company is in technical bankruptcy (and also the law uses the wording "supplement" instead of "increase"). Moreover, the Trade Registry did reject some applications based on this reasoning in the past.
However, it is widely accepted among the scholars today that any type of remedial action such as cash injection should be allowed if it puts the company out of technical bankruptcy. The latest practice of the Trade Registry is also in line with this opinion. Therefore, it is legal and practically possible to remove a company from technical bankruptcy by way of cash injection.
Another issue that is often raised when cash injection method is preferred is determining the minimum amount of the cash to be transferred in order to be able to remove the company from technical bankruptcy. Some scholars and legal practitioners claim that the minimum amount to be injected must be the amount that is sufficient to put the company in a situation where at least 1/2 of the capital is preserved.
However, although the above-mentioned Article 376 of TCC regulates the situation where 1/2 of the sum of the capital and statutory reserves is unsecured due to loss, it only requires the Board of Directors to convoke the General Assembly to discuss remedies; the General Assembly is not required to take any action in this respect. In other words, the company is not deemed in technical bankruptcy in such case. Technical bankruptcy only occurs when 2/3 of the sum of the capital and statutory reserves of a company is unsecured due to loss, according to Article 376/2 of the TCC.
Therefore, in order to remove a company from technical bankruptcy, the minimum amount to be injected to the company must be the amount that is sufficient to preserve at least 1/3 of the capital (not 1/2), even certain portion of the capital is still unsecured (as long as it does not reach 2/3). The Trade Registry accepts such capital increases if it is confirmed in the accountant report that the company will not be in technical bankruptcy after the capital injection (as regulated under Article 376/2 of the TCC).
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.