GUIDELINE WITH RESPECT TO REGULATIONS GOVERNING CAPITAL LOSS AND NEGATIVE EQUITY
Besides, the Communiqué on the Amendments on the Procedures and Principles of the Implementation of Article 376 of the Turkish Commercial Code No. 6102 (in Turkish, “6102 Sayılı Türk Ticaret Kanununun 376’ıncı Maddesinin Uygulanmasına İlişkin Usul ve Esaslar Hakkında Tebliğ’de Değişiklik Yapılmasına Dair Tebliğ”) entered into force on 26 December 2020, strengthened and clarified the situations where the technical insolvency shall be applied and the measures that shall be taken in the given circumstances.
In accordance with the unpredictable fluctuations in foreign exchange rates starting in 2018 and the Covid-19 pandemic on the balance sheets of the companies, the above regulations has become very popular in Turkey in recent years.
Pursuant to Article 376 of the TCC and Articles 6, 7 and 12 of the Communique, there are three thresolds based on the last balance sheet from capital loss to technical insolvency.
- First threshold is loss of half (1/2) of the share capital
If it is understood from the last annual balance sheet that half of the total amount of the share capital and the legal reserves are unrequited due to losses, in other words the loss is equal to or more than half of the sum of the capital and legal reserves and less than two thirds, the Board of Directors/Managers («BoD ») shall immediately call the general assembly for a meeting and presents the remedial measures it deems appropriate to this general assembly. The first threshold is an entrance for the financial deterioration for the companies and there are not any mandatory measures to be taken. Hovewer, remadial measures that will be suggested by the BoD and that may be taken by the shareholders are indicated as examples in the article 6 of the Communique. In this content, BoD may suggest the remedial measures in order to eliminate the deterioration in the company’s financial situation or at least to mitigate its effects, such as completing the capital, capital increase, closing or downsizing some production units or sections, sale of subsidiaries, changing the marketing system, etc.
- Second threshold is loss of two-third (2/3) of the share capital
If, according to the last annual balance sheet, it is understood that two-thirds of the total amount of the share capital and the legal reserves are unrequited due to loss, in other words, in case the loss is equal to or more than the two-thirds of the sum of the share capital and legal reserves, the company is automatically dissolved unless the general assembly immediately called for the meeting decides to suffice with one-third of the share capital or to complete the capital.
The second threshold is the financial deterioration and a risk for dissolution for the companies, and the TCC forces the company to take an action in order to stop dissolution risk.
In accordance with article 7 of the Communique, the general assembly shall be able to resolve on (i) capital decrease, (ii) completion of capital and/or (iii) increase of capital with the recommendation of the BoD.
- Third threshold is loss of total of the share capital, technical insolvency
If, during the financial year, there are signs that raise the suspicion that the company is in insolvency, the BoD prepares an interim balance sheet on the basis of both the continuity of the business and the probable sale prices of the assets. If it is understood from this balance sheet that the assets are not sufficient to meet the receivables of the creditors of the company, the BoD notifies this situation to the commercial court of first instance where the company headquarter is located and requests the bankruptcy of the company unless, before the decision of bankruptcy is given, the creditors of the company’s debts in an amount that will cover the company’s deficit and eliminate the debt-ridden situation have accepted in writing that the order of their receivables will be placed after the order of all other creditors, and the relevance, reality and validity of this statement or contract is determined by the BoD for the bankruptcy request and confirmed by the experts appointed by the court. Otherwise, the application made to the court for expert examination is accepted as a declaration of bankruptcy.
Third thresold is called as «technical insolvency » in practice.
- Capital decrease
As per the regulation foreseen within the Article 8 of the Communique, if at least two-thirds (2/3) of the total of the share capital and legal reserves are uncovered due to loss, the general assembly of the company may resolve to decrease the capital so as to offset the balance sheet losses until the remaining share capital amount.
It is also possible that the share capital shall be decreased until the minimum share capital amount if at least half of the sum of the share capital and the legal reserves are preserved in the equity. It should be noted that the minimum capital amount is TRY 50,000.- for joint stock companies, and TRY 10,000 for limited liability companies.
- Completion of the capital
As per the regulation foreseen within the Article 9 of the Communique, the completion of the capital is the closing of the balance sheet deficits by all or some of the shareholders. There is no need to complete the lost parts of the legal reserves. In the event that the capital is resolved to be completed, each shareholder is obliged to give the amount of money to cover the unrequited amount due to the loss. Each shareholder can participate in the completion according to his share and cannot get back what he/she has given. This obligation is not in the nature of capital investment or lending, and is unrequited. In addition, the payments made are not considered as an advance against the future capital increase. Failure to complete the capital does not prevent other shareholders from completing voluntarily.
Payments made in accordance with the obligations imposed to cover the balance sheet losses are collected and followed up in the capital completion fund account within the equity. The capital completion fund can only be used by offsetting losses.
- Capital Increase
As per the regulation foreseen within the Article 10 of the Communique, there are three kind of capital increase to be made, save for capital market regulations (capital market regulations shall be followed in publicly held companies):
(i) It may be resolved to increase the capital by the desired amount simultaneously with the decreasing the capital as much as the amount resulting from the loss.
As per the current legislation in effect, it is stiputaled that in case of simultaneous capital increase with the capital decrease process, the cash capital subscription shall be paid in accordance with the provisions of Articles 344 and 585 of the Turkish Commercial Code. Therefore in joint stock companies, at least twenty five percent (25%) of the nominal value of the shares subscribed in cash shall be paid before the registration, whereas the balance shall be paid within twenty-four (24) months following the registration of the capital increase. However, the condition of payment of twenty five percent of the nominal value of the shares subscribed in cash prior registration is not applicable for limited liability companies;
(ii) It may be resolved to increase the capital without decreasing the capital. In the capital increase to be made in this way, it is obligatory to pay the amount that will ensure that at least half of the sum of the capital to be registered and the legal reserves are protected within the equity, before the capital increase is registered. Thereby, the amount to be paid prior to such capital increase transaction has been increased.
(iii) At the same general assembly meeting, it may be resolved to increase the capital at the desired level and to decrease it later, without seeking the condition in (ii), by paying the full capital subscription amount. As a result of the transactions to be carried out in this way, at least half of the sum of the share capital to be registered in consequence of the transactions to be carried out within the scope of the current legislation in effect and the legal reserves shall be preserved in equity, and the share subscription amount shall be paid in full.
fulfilled; and
(ii) half of the sum of expenses resulting from leases, amortizations and personnel expenses accrued in 2020
and 2021.
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