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 case.
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 its decision.
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.