Under Article 376 Of The Turkish Commercial Code Technical Bankruptcy

• Introduction

Commonly referred to as “Technical Insolvency,” this concept is regulated under Article 376 of the Turkish Commercial Code (“the Code”) under the heading “Loss of Capital, State of Insolvency.” The provisions of the article define the circumstances of capital loss and insolvency for companies and set forth the procedures to be followed and the measures that may be applied in such cases.

The existence of technical insolvency indicates that a company’s financial structure has been seriously impaired and that a certain portion of its capital has been eroded due to losses incurred. The purpose of this provision is to ensure that necessary measures are taken in a timely manner when a company’s financial condition deteriorates and that the company’s operations are maintained to the extent possible.

• Loss of Capital

1. Loss of Half the Total of Capital and Statutory Reserves

The first paragraph of Article 376 of the Law addresses the situation where half of the total of capital and statutory reserves is lost. Pursuant to this provision, if it is determined based on the company’s latest annual balance sheet that half of the total of capital and statutory reserves has been lost due to a loss, the board of directors is required to convene the general meeting of shareholders and present to the general meeting the measures it intends to take to remedy this loss.

Article 6 of the Communiqué on the Procedures and Principles Regarding the Application of Article 376 of the Turkish Commercial Code No. 6102 (“Communiqué”) defines the situation where at least half of the total of capital and statutory reserves becomes worthless. Accordingly, for the loss of half of the total of capital and statutory reserves to be established, the loss must be equal to or greater than half of the total of these two items and less than two-thirds of that amount.

The third paragraph of Article 6 of the Circular lists the measures that the board of directors may propose to the general meeting to eliminate the deterioration in the company’s financial condition or mitigate its effects. In this regard, the measures the board may propose include, among other alternatives, capital replenishment if deemed appropriate, a capital increase, the closure or downsizing of certain production units or divisions, the sale of company subsidiaries, and changes to the marketing system. The general meeting may approve these measures proposed by the board of directors either directly or with modifications. Additionally, the General Assembly may decide to implement a measure other than those listed in the provisions of the Communiqué.

      Consequently, the loss of half of the total amount of capital and statutory reserves does not result in the automatic dissolution of the company; rather, it requires the board of directors to take action to rectify the company’s financial situation.

2. Loss of Two-Thirds of the Total of Capital and Statutory Reserves

The second paragraph of Article 376 of the Law addresses the situation where two-thirds of the total of capital and statutory reserves is lost. If, based on the company’s latest annual balance sheet, it is determined that two-thirds of the total of capital and statutory reserves has been lost due to a loss, the general meeting must be convened immediately.

In accordance with the provisions of this article, unlike the first paragraph, definitive outcomes rather than remedial measures are envisaged. The decisions that the general meeting may take are limited to either accepting the remaining capital (1/3) or replenishing the capital; the provision states that if neither of these two decisions is adopted, the company will automatically cease to exist. In addition to the provisions of the Law, another option set forth in subparagraph (a) of the first paragraph of Article 7 of the Communiqué is to reduce capital in accordance with Articles 473 and 475 of the Law, titled “Reduction of Authorized Capital” and “Implementation of Resolutions,” respectively.

Pursuant to Article 8 of the Circular, in the reduction of capital, the capital may be reduced to the minimum capital amount, provided that at least half of the total of capital and statutory reserves is maintained within the net assets.

Capitalization is the process by which a deficit on the balance sheet is covered by all or some of the partners. It should be noted that there is no requirement to replenish the portion of statutory reserves that has been depleted. If a decision is made to capitalize the company, each partner is obligated to make a payment in an amount sufficient to cover the portion of the capital that has become worthless due to losses. Shareholders may participate in the capital replenishment process in proportion to their shares and may not request a refund of the payments they make in this context. This obligation does not constitute a capital contribution or a loan to the company but is a payment made without consideration . Furthermore, these payments made by shareholders cannot be considered advances to be offset against a future capital increase. Failure to fully subscribe the capital will not prevent certain shareholders from voluntarily making additional contributions. Payments made pursuant to obligations imposed to cover balance sheet losses are pooled in the capital subscription reserve account within equity and may be used solely to offset such losses.

In increasing capital, the general meeting may resort to various capital adjustment methods to address capital losses (subject to the provisions of capital markets legislation for publicly traded corporations). In this context, a capital increase in the desired amount may be carried out simultaneously with a capital reduction equal to the amount of the loss incurred due to losses; alternatively, a capital increase may be carried out directly without first reducing capital. Furthermore, it is possible to decide at the same general meeting to first increase capital and then reduce it. A fundamental condition for implementing capital increases and reductions is that at least half of the total of the registered capital and statutory reserves must be maintained within the company’s net assets. In the event of a simultaneous capital reduction and increase, cash capital contributions must be fulfilled in accordance with Articles 344 (Payment of Share Premiums) and 585 (Incorporation) of the Law.

• Insolvency

The third and final paragraph of Article 376 of the Law addresses the situation where a company is insolvent. Insolvency occurs when a company’s assets are insufficient to cover its liabilities.

According to the provision, if indications arise that cast doubt on the company’s solvency, the board of directors is required to prepare an interim balance sheet based on both the going concern value and the probable liquidation value of the company’s assets. If the prepared balance sheet reveals that the company’s assets are insufficient to cover creditors’ claims, the board of directors must file a petition with the local commercial court where the company’s headquarters is located to declare the company bankrupt. However, before a bankruptcy ruling is issued, a bankruptcy petition may be waived if the creditors holding company debts in an amount sufficient to cover the company’s deficit and eliminate its state of insolvency have agreed in writing to have their claims paid after all other creditors . However, the authenticity, validity, and appropriateness of this consent must be verified by experts appointed by the court. Otherwise, the application filed with the court for an expert examination is deemed to be a notice of bankruptcy.

Article 12 of the Regulation outlines the indicators of insolvency. These may be evident from annual and interim financial statements, audit reports in companies subject to audit, reports from the early detection committee, or determinations made by the management body.

• Conclusion

Article 376 of the Law is an important protective mechanism to be applied in the event of a deterioration in the financial condition of joint-stock companies. Under this article, various obligations are imposed on the board of directors and the general meeting when capital loss reaches certain thresholds. Commonly referred to as “technical insolvency,” this term does not imply that the company is legally insolvent; rather, it is used to describe a situation where the company’s financial structure has reached the critical levels specified by law. The primary purpose of this provision is to ensure that the deterioration in the company’s financial condition is detected in a timely manner, that necessary measures are taken, and that the company’s operations are maintained to the extent possible.

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.