Legal Framework And Consequences Of Bankruptcy In Joint-Stock Companies

Joint-stock companies are among the preferred types of capital companies today. Their ability to facilitate large-scale investments, limit shareholders' liability to their committed capital, and create trust in the market through corporate governance are among the reasons for their popularity. However, the natural risks of economic life may, in some cases, render it impossible for joint-stock companies to maintain financial sustainability.

At this point, the termination of the joint-stock company may come into question. Termination means the disappearance of the company's purpose of generating profit and distributing it among the shareholders. Upon termination, the company's assets are liquidated; this stage involves the dissolution of all financial and legal ties in both internal and external relations. Termination may occur automatically (dissolution by law) or by a decision (dissolution by resolution). Dissolution may occur automatically upon the realization of a cause stipulated by law or the articles of association, without the need for an additional decision. One of the grounds for dissolution of a joint stock company is bankruptcy. Upon the court's declaration of bankruptcy, the company is deemed to have been dissolved automatically; the moment of dissolution is considered to be the date of the court's decision. A bankruptcy decision may also be rendered during the liquidation process; in such cases, a separate dissolution does not occur. In this article, we will provide a general overview of the concept of bankruptcy.

For a debtor to be subject to bankruptcy, certain conditions must be met, such as being a merchant engaged in commercial activities or being deemed a merchant under the Turkish Commercial Code. Bankruptcy is a process that enables the liquidation of capital companies suffering from over-indebtedness through a court decision and ensures equal protection of creditors.

I. Legal Framework

In Turkish law, bankruptcy is primarily regulated under the Enforcement and Bankruptcy Law ("EBL"). According to the law, bankruptcy is a compulsory enforcement process aimed at converting all assets of the debtor into cash and distributing it proportionally among creditors (EBL Art. 154 et seq.).

The distinctive feature of bankruptcy for joint-stock companies is that these are capital companies. Therefore, shareholders are not personally liable for company debts. The bankruptcy of a joint-stock company only involves the assets of the legal entity. For this reason, in terms of joint-stock companies, bankruptcy is a mechanism that directly terminates the legal personality of the company.

In addition, Article 376 of the Turkish Commercial Code imposes significant obligations on the board of directors in cases of capital loss and over-indebtedness. If two-thirds of the company's capital is lost or the company becomes over-indebted, the board must convene the general assembly, take necessary measures, and, if required, notify the court of the company's bankruptcy. Otherwise, the board may be held liable. In the event of over-indebtedness, the board is obliged to notify the court of the company's bankruptcy; the court may declare the bankruptcy of the company, but it may also consider alternative remedies such as concordat. Failure of the board of directors to fulfill these obligations results in liability both towards the company and its creditors. Therefore, Article 376 of the Turkish Commercial Code is a critical provision that regulates not only the financial structure but also the liability of the company's directors.

Bankruptcy has two forms: bankruptcy with enforcement proceedings and direct bankruptcy. Bankruptcy with enforcement proceedings occurs when the creditor initiates enforcement proceedings at the enforcement office by requesting bankruptcy. Direct bankruptcy occurs when an application is filed directly before the commercial court. Direct bankruptcy is subject to specific conditions and may be requested by both creditor and debtor.

To request bankruptcy, two formal conditions are sufficient: the debtor must have a due debt to the creditor and must have failed to pay it.

In Turkish law, those subject to bankruptcy are essentially real and legal person merchants engaged in commercial activities. A real person merchant is one who operates a commercial enterprise in his/her own name or registers with the trade registry; merchant status arises even if the enterprise is not actively operated. All commercial companies, whether partnerships or capital companies, are considered merchants and are therefore subject to bankruptcy. In addition, associations engaged in commercial activities, as well as individuals who are not merchants but act as such or create the impression of operating a business, may also be subject to bankruptcy under the provisions of the Turkish Commercial Code.

II. Bankruptcy Case and Process

There are three ways to initiate a bankruptcy case:

1. Bankruptcy with Enforcement Proceedings: If a creditor believes that the debtor is insolvent or over-indebted, they may initiate enforcement proceedings via the enforcement office with a request for bankruptcy. This process is called bankruptcy with enforcement proceedings. A payment order is issued and served on the debtor. If the debtor objects, a bankruptcy case is filed before the commercial court. If the debtor does not object, the order becomes final, and a bankruptcy case is filed upon the creditor's demand.

2. Direct Bankruptcy: In the case of direct bankruptcy, the creditor applies directly to the competent commercial court requesting the debtor's bankruptcy. For this, the existence of debt alone is not sufficient; at least one of the conditions listed under EBL Art. 177, such as the debtor's escape or suspension of payments, must be present.

3. Debtor's Own Bankruptcy Request (Optional/ Compulsory): The debtor may also request its own bankruptcy, either voluntarily or compulsory. If the company's debts exceed the total value of its assets, the company must request bankruptcy. If the persons authorized with management and representation, or the liquidators, fail to file a petition, they may be subject to criminal sanctions upon complaint pursuant to Article 345/a of the Enforcement and Bankruptcy Law, as third parties who are unaware of the company's state of insolvency may enter into legal transactions that could harm them in the future.

It should be noted that the bankruptcy process begins with a lawsuit filed before the commercial court upon the request of the debtor or creditor and continues with the court's bankruptcy decision. Following the decision, a bankruptcy administration or trustee is appointed, the debtor's assets are collected, liquidated, and distributed to creditors. Creditors report their receivables and are allocated shares from the bankruptcy estate. Once all assets have been liquidated and the distribution completed, the court issues a decision to close the bankruptcy. Although this process varies depending on the nature of the assets, the number of creditors, and the course of the proceedings, it is generally lengthy. Irregular notifications or objections raised during the proceedings may cause delays or even lead to the process being restarted. Therefore, the proper and efficient conduct of bankruptcy proceedings requires professional support.

III. Consequences of Bankruptcy

Upon the declaration of bankruptcy, the debtor acquires the status of "bankrupt." The seized assets and rights of bankruptcy constitute a collective pool called the bankruptcy estate. The bankrupt's authority to dispose of these assets and rights is restricted. The bankruptcy can no longer freely dispose of these assets; the bankruptcy administration liquidates the assets and distributes them to creditors.

For the company, bankruptcy terminates the legal personality of the joint-stock company. The assets transferred to the bankruptcy estate are converted into cash and distributed to creditors. At this stage, it is no longer possible for the company to continue its commercial activities. With the declaration of bankruptcy, receivables that are not yet due also become collectible. Claims tied to the principal, such as interest, are added to the principal and registered in the bankruptcy estate.

Conclusion

The institution of bankruptcy in joint-stock companies plays a critical role in protecting economic order and creditors. Since bankruptcy only covers the assets of the company's legal personality, shareholders' personal assets are preserved. This is one of the fundamental reasons why joint-stock companies are attractive to investors.

However, bankruptcy is not merely about the termination of a company; it is also a process that affects all actors of economic life. Employees, suppliers, and producers are also directly affected by this process. Therefore, it is of great importance to implement effective early warning mechanisms before bankruptcy, to strengthen restructuring methods, and for managers to fulfill their obligations in a timely manner.

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.