ABSTRACT
The Communiqué on Procedures and Principles on Enforcement of Article 376 of the Turkish Commercial Code numbered 6102 , published on September 15, 2018 , regulates the procedures and principles applicable to capital loss or over-indebtedness under the subject law article, and the Communiqué Amending the Communiqué on Procedures and Principles on Enforcement of Article 376 of the Turkish Commercial Code numbered 6102 makes some amendments in the aforesaid procedures and principles particularly as to which conditions may be applied in the case of technical bankruptcy of companies in law practice and to which extent. This paper aims to explain and scrutinize said amendments.
I. INTRODUCTION
The Communiqué on Procedures and Principles on Enforcement of Article 376 of the Turkish Commercial Code numbered 61021 (“Governing Communiqué” or “GC”), published in the Official Gazette on September 15, 2018,2 effective immediately, aims to regulate procedures and principles applicable on capital loss and over-indebtedness of stock corporations. Later, the Communiqué Amending the Communiqué on Procedures and Principles on Enforcement of Article 376 of the Turkish Commercial Code numbered 61023 (“Amending Communiqué” or “AC”), published in the Official Gazette on December 26, 2020, effective immediately, has brought some amendments in GC. Mandatory measures required to be taken by companies in case of over-indebtedness are set down in third paragraph of Article 376 of the Turkish Commercial Code (“TCC”), also known and termed as technical bankruptcy in practice. First two paragraphs of Article 376 of TCC regulate the measures required to be taken in the cases of capital loss not so dire as over-indebtedness. Relevant provision has received affirmative reactions from legal doctrine as it increases the protected value of a company and this in turn forces companies to seek more early solutions in case of financial troubles4 . First, it is required to explain the concept of “protected value”. Protected value covers all of such assets the loss of which has some certain repercussions as specified in TCC Article 376. In fact, both the general assembly (“GA”) and the board of directors (“BoD”) are forced to take some legal actions upon loss of these assets. TCC Article 519 holds the companies liable to set aside legal reserve fund. Moreover, it is dictated by paragraph 3 of Article 519 of TCC that unless and until it exceeds half of capital or issued capital, the legal reserve fund can be used only to cover and offset losses, or in cases of bottleneck, to take measures fit for survival of company or prevention of unemployment or alleviation of its consequences. This means to say that legal reserve funds, in principle, cannot be employed for distribution of profit or for any motives other than the purposes clearly inscribed in law, and are legally blocked. That is why due to the ban on their distribution, legal reserve funds have the same value for a company with its share capital. As a natural result of this reasoning, aside from its capital, its legally protected, retained and non-distributable assets must also be taken into consideration in deciding and determining the extent of capital loss or over-indebtedness of a company. While the Commercial Code numbered 6762 (“oCC”) was in force, only capital loss was considered and had some consequences. The inexactness of said provision of oCC may be seen obviously when it is taken into consideration that the ratio legis underlying the protected value concept is basically that all of the pecuniary assets required to be kept by the company must also be protected legally, and not only the capital, but also the legal reserve funds are legally mandatory. At this point, it is also argued that capital loss ratios may be calculated more than actual ratios by also including therein the legal reserve funds which are already set aside for covering and offsetting the losses of companies5. And as a result of this argument, it is stated that companies are put in a disadvantageous position in terms of calculation of financial situation. However, in our opinion, to force the companies for early measures bears significant importance especially in regards to fragile economies. In this context, TCC’s addition of legal reserve funds to the calculation is apt. But discussions continue on. While some think that if a company acquires its own treasury stock under Article 520 of TCC, the reserve funds required to be set aside in the amount of cost of acquisition must also be included in the calculations under Article 376 of TCC, others believe that the reserve funds of Article 520 of TCC are excluded6 . We believe that the spirit of law here is to increase protected value and to force companies to take early measures. Moreover, given that title lines of articles are also included in the text of law as per Article 1534 of TCC, it should be taken into consideration that the main heading of Article 520 of TCC is “legal reserve funds”. Considering that the text of Article 376 of TCC mentions about “legal reserve funds”, it will be inappropriate to confine this to “general legal reserve funds” regulated by Article 519 of TCC. The limitation of the definition of legal reserve fund given in GC may be eliminated by the hierarchy of norms argument. For these reasons, our opinion is that Article 520 of TCC must also be included in the calculations under TCC 376. AC, on the other hand, brings significant changes regarding the economic hardships that a stock corporation might encounter, and some of these changes aim just to explain and clarify GC, but some are expected to create material novelty in practice.
In this paper, capital loss and over-indebtedness concepts will be briefly explained, and then, the novelties brought by AC in regard to the actions required to be taken by stock corporations in such situations will be discussed.
II. CONCEPTS OF CAPITAL LOSS AND OVER-INDEBTEDNESS
A. Concept of Capital Loss
Concept of capital means share capital in share capital system, while it means issued capital in authorised (registered) capital system7.
TCC 376 makes a dichotomy based on the extent of the company’s capital being unrequited or unreciprocated. Accordingly, 1st paragraph of TCC 376 is enforceable if and when at least half of capital plus reserve funds is unrequited due to losses incurred by the company, while 2nd paragraph of TCC 376 becomes functional only if and when the portion of capital unrequited due to losses is equal to or more than two-thirds of the sum of capital and reserve funds8.
B. Concept of Over-indebtedness
Over-indebtedness occurs only if and when total assets of a company are less than its total liabilities. In the preamble of TCC 376, the concept of over-indebtedness is described as the inability of a debtor to pay back its loans owed to its creditors, or in other words, as the company’s asset deficiency wherein its liabilities exceeds its assets9.
III. AMENDMENTS MADE IN REGARDS TO CAPITAL LOSS AND OVER-INDEBTEDNESS
A. On Capital Loss
The capital’s being unrequited or unreciprocated, means that all of the accumulated losses of past years have already finished the protected value10. Capital loss, on the other hand, is to be calculated in line with accounting principles. In the light of the equation of “assets = liabilities + capital”, the real capital of a company will be calculated by subtracting liabilities from assets. If this sum is less than the amount of capital plus legal reserve funds of the company, then, there is unrequited capital and capital loss. The various discussions on calculation, albeit there were already plenty, were further boosted by the definition in given in AC: “Loss being equal or more than two thirds of the sum of capital and legal reserve funds.” The first capital loss scenario regulated by GC, i.e. “at least half of the sum of capital and legal reserve funds being unrequited”, was changed by AC by addition of the term “due to loss” under the heading of GC. Accordingly, the second capital loss scenario, being originally as “at least two thirds of the sum of capital and legal reserve funds being unrequited due to loss”, was changed by AC to “the portion of capital unrequited due to losses is equal to or more than two-thirds of the sum of capital and reserve funds”. Considering that what is important is whether the loss is remedied and recovered or not, rather than its amount, the basis here should have been whether the accumulated loss had already spent the capital or not, rather than taking the sheer amount of loss into consideration11. Anyhow, based on the definition given in the law, it will be plausible to overcome the definition made in AC. TCC 376 sets down the consequences of the unrequited capital to the extent and level thereof. By AC, the scope of exceptions on calculations which were originally regulated only as foreign exchange losses has been expanded, and it is stipulated that half of the total sum of leasing expenses, depreciations and personnel expenses accrued in the years 2020 and 2021 may be disregarded in loss calculation. Through amendments made in Temporary Article 1 of GC pertaining to foreign exchange losses, until 01/01/2023, in calculations made in respect of capital loss or unrequited capital under Article 376 of the Turkish Commercial Code, in addition to the provision allowing the exclusion of the full amount of foreign exchange losses arising out of debts and liabilities in foreign currency not repaid yet from the aforesaid calculations, it is also stated that half of the total sum of leasing expenses, depreciations and personnel expenses accrued in the years 2020 and 2021 may be disregarded in loss calculation, and that these amounts are required to be calculated in such manner to avoid any duplication, and that no reference will be made to these calculations in the financial statements issued pursuant to Article 13, but the calculations will only be shown in footnotes of financial statements for information purposes.
The common conclusion derived from here is that BoD should immediately convoke GA. If the unrequited capital is less than two thirds but more than half, BoD is required to present to GA the solutions and remedies deemed fit therein for. Examples of these solutions and remedies listed in Article 6 of GC optionally include, but are not limited to, making up the capital, increasing the capital, entirely shutting down some production units or downsizing the company in terms of business units, selling out the subsidiaries, or changing the marketing system. However, GA has full and ultimate discretion at this point, and may accept or reject the proposed solutions or remedies, or may totally adopt different solutions or remedies for the problem. It may therefore be easily said that the lawmaker has granted such a wide discretion to GA and has not stipulated any consequences for probable inaction of GA because this capital loss situation is seen by the lawmaker as a less serious problem in comparison to the capital’s being unrequited by more than two-thirds.
On the other hand, under TCC 376/2, the Rubicon will have been crossed if unrequited protected values reach or exceed the two thirds’ threshold. Again, BoD will immediately alarm and convoke GA. However, in this GA meeting some resolutions and actions are required to be taken or else the company will dissolve by operation of law. These actions are either to content itself with the remaining capital or to make up the capital. If neither of these decisions is taken, then the company will be automatically dissolved by operation of law. That is why TCC 376/2 is also termed and nicknamed as “technical bankruptcy” in practice. However, according to one mindset, this is erroneous12. Under said mindset, it is argued that a company is adjudged bankrupt only if and when it becomes insolvent, i.e. enters into an asset deficiency, but under TCC 376/2, given that the company still protects and keeps in its possession at least one-third of its shareholders’ equity, this means that it is still solvent, and therefore, it cannot be adjudged bankrupt. However, in fact, bankruptcy is a legal proceeding which is targeted at all assets of the debtor in full. Neither the assets and liabilities balance nor the solvency of debtor is examined or taken into consideration in order to start bankruptcy proceedings or to adjudge the debtor bankrupt. Therefore, we believe that it is wrong to base the incorrectness of nicknaming of TCC 376/2 as “technical bankruptcy” upon the debtor’s solvency. But nevertheless, it is still faulty to term the provision of TCC 376/2 as “technical bankruptcy”, because bankruptcy is a legal concept describing a remedy and a way of liquidation. On the other hand, the bankruptcy proceedings do not come into play if and when the company is dissolved under TCC 376/2, whereupon some other specific liquidation proceedings detailed in TCC become enforceable. As it is unjustified to use a legally defined term irrelevantly, we find the definition of TCC 376/2 as technical bankruptcy wrong.
With AC, in terms of capital decrease that may be done if and when at least two thirds of the sum of legal reserve funds and capital is unrequited due to loss of the company, the fact that the remaining capital may even be less than one-third of capital before the loss has been clarified by replacement of the words “to content itself with one-third of capital” contained in the wording of said law article by the words “to content itself with the remaining capital”, as already understood and interpreted so by scholars in theory. In the same sense and likewise, it is clarified by AC that it is possible to content itself with the remaining capital and that its lower limit is the proviso of TCC 332.
B. On Over-indebtedness
According to Article 376/3 of the Turkish Commercial Code numbered 6102, if a company faces over-indebtedness, an interim balance sheet is required to be prepared and issued by its managerial body. This balance sheet will be issued on the continuity of company operations basis and on the basis of probable sale prices. If assets of the company are not adequate to pay back the outstanding claims of its creditors, then, the board of directors is required to file a petition for bankruptcy of the company to the Commercial Court of First Instance having jurisdiction in venue in the city of headquarters of the company. However, this process which is explained so in the relevant article of the law has been amended by the AC published and put into force as cited above.
AC has created a new opportunity that may be used by the board of directors in the case of over-indebtedness of the company before filing a petition for bankruptcy. Accord ingly, it is possible to file an application to competent court for bankruptcy of the company only if and when it is duly determined that the company is really in over-indebtedness, and any one of the remedial measures, namely capital decrease, making up the capital or capital increase, is not taken. This means to say that only if the board of directors does not opt for any of the remedial measures envisaged in Article 7 of the AC, an application may be filed to the court. For this reason, a direct application to the court for bankruptcy of the company is not permitted.
It is understood that if it is opted to increase capital without decreasing capital first in proportion to losses sustained by the company, it is mandatory to pay, prior to registration of capital increase, an amount enough to ensure the maintenance in the shareholders’ equity of the company of at least half of total sum of legal reserve funds and to-be-registered capital. Moreover, AC allows the companies covered by TCC 376 to decide in the same general assembly meeting to freely and unconditionally increase the capital through full payment of capital subscriptions and later, to decrease the same as they wish. Additionally, together with the condition of the maintenance in the shareholders’ equity of the company of at least half of total sum of legal reserve funds and to-be-registered capital, it is stated that it may first be decided to increase capital by the required amount through full payment of capital subscriptions and to decrease the capital later on. Prior to AC and GC, it was generally accepted in legal theory13 that in the light of Article 376/2 of TCC, a company which has lost its capital cannot directly increase its capital without decreasing it first, and capital increase should be considered and treated as a prerequisite, because in Article 376/2 of TCC, the remedial measures which can be decided by the general assembly of shareholders in such a case were limitedly enumerated only as “making up capital” or “capital decrease”. However, this is changed to the detriment of the doctrine by GC. Accordingly, now it is possible to directly increase capital without first decreasing it in such manner to reduce the capital loss below the two-thirds’ threshold. As these new regulations set forth the opposite of the non-equitable prevalent mindset, which may create non-equitable outcomes, considering the capital decrease as a precondition before capital increase, more equitable outcomes are to be observed in practice due to GC and AC.
IV. CONCLUSION
Pandemic, which started to rage in 2019 and still is raging, has so far negatively affected many enterprises’ financial structures throughout the world. With the pandemic, even if foreign exchange losses are disregarded, companies fail to get out of over-indebtedness. It is observed that companies are directly at the brink of bankruptcy, let alone insolvency and technical bankruptcy. In this sense, it is thought that new legislative instruments addressing these situations are required as well14.
Considering capital loss, over-indebtedness, and volatile exchange rates, and given that in our country, companies are rather frequently facing capital loss and over-indebtedness problems in the course of economic developments, significant revisions have been made by AC, and the phrase “half of the total sum of leasing expenses, depreciations and personnel expenses accrued in the years 2020 and 2021” has been added to the provision saying that exchange rate differences were not taken into consideration beforehand.
These amendments and additions made by AC are important in the context of volatile exchange rates, and pandemic which has gravely deteriorated our national economy and has also made very negative effects on the financially distressing companies.
In conclusion, published AC brought new and developed suggestions and solutions to the table for companies experiencing capital loss or over-indebtedness problems, and various measures are envisaged for them to survive the economic hardships they experience and overcome the crisis with less damage.
BIBLIOGRAPHY
AHMET TÜRK, “Yeni Türk Ticaret Kanunu’nun Getirdiği Değişiklikler ve Yeniliklerle Anonim Ortaklıkta Sermaye Kaybı ve Hukuki Sonuçları”, D.E.Ü. Hukuk Fakültesi Dergisi 2015, C. 17, S. 2, p. 63-112.
EMEK TORAMAN ÇOLGAR, TTK m. 376/2 Hükmü Kapsamında Sermaye Kaybı Olan Anonim Şirketlerde Sermaye Artırımı Yapılması, İstanbul.
EZGİ ÖZTÜRK, Sermaye Şirketlerinde Sermaye Kaybı, Borca Batıklık Ve Teknik İflasın Sonuçları İle Alınabilecek İyileştirici Önlemler Kapsamında Mali Tablo Analizi, İstanbul 2019.
İSMAİL CEM SOYKAN, Türk Ticaret Kanunu’na Göre Anonim Ortaklıklarda Sermaye Taahhüdü Yoluyla Sermaye Artırımı, On İki Levha Yayınları, İstanbul 2019, p. 257-271. İSMAİL KAYAR “Yeni TTK’ya Göre Anonim Şirkette Sermaye Kaybı ve Borca Batıklığın Tespiti ve Sonuçları”, 6102 Sayılı Türk Ticaret Kanunu’nu Beklerken, 10-11-12 Mayıs 2012 Sempozyum, Marmara Üniversitesi Hukuk Fakültesi Hukuk Araştırmaları Dergisi Özel Sayı, p. 643-658,
TOLGA AYOĞLU “TTK M. 376 F. 1 ve 2 Hükümlerine İlişkin Düşünceler”, Legal Hukuk Dergisi, C. 15, S. 172, 2017, p. 1581-1604.
ÜNAL TEKİNALP, Sermaye Ortaklıklarının Yeni Hukuku, 5. Bası, İstanbul 2020.
YAVUZ AKBULAK, Anonim Şirketler Yönünden Sermaye Kaybı ve Borca Batık Olma Hadiseleri, (Accessed on: 07.02.2022) https://blog.lexpera.com.tr/anonim-sirketleryonunden-sermaye-kaybi-ve-borca-batik-olma-hadiseleri/.
FOOTNOTE
1 14.02.2011 dated, 27846 numbered Resmi Gazete (RG).
2 15.09.2018 dated, 30536 numbered Resmi Gazete (RG).
3 26.12.2020 dated, 31346 numbered Resmi Gazete (RG).
4 Ahmet Türk, “Yeni Türk Ticaret Kanunu’nun Getirdiği Değişiklikler ve Yeniliklerle Anonim Ortaklıkta Sermaye Kaybı ve Hukuki Sonuçları”, D.E.Ü. Faculty of Law Journal 2015, V. 17, E. 2, p. 63-112, p. 65; İsmail Kayar “Yeni TTK’ya Göre Anonim Şirkette Sermaye Kaybı ve Borca Batıklığın Tespiti ve Sonuçları”, 6102 Sayılı Türk Ticaret Kanunu’nu Beklerken, 10-11-12 May 2012 Symposium, Marmara University Faculty of Law Legal Studies Journal Special Edition, p. 643-658, p. 643, 646. For a general critique of this mindset: Tolga Ayoğlu “TTK M. 376 F. 1 ve 2 Hükümlerine İlişkin Düşünceler”, Legal Law Journal, V. 15, E. 172, 2017, p. 1581-1604, p. 1583 ff., especially p. 1595-1601; qtd. in Emek Toraman Çolgar, TTK m. 376/2 Hükmü Kapsamında Sermaye Kaybı Olan Anonim Şirketlerde Sermaye Artırımı Yapılması, İstanbul 2021 p.7
5 Ayoğlu, p. 1597.
6 Toraman Çolgar, p. 6,7.
7 Toraman Çolgar, p. 5.
8 Ezgi Öztürk, Sermaye Şirketlerinde Sermaye Kaybı, Borca Batıklık ve Teknik İflasın Sonuçları İle Alınabilecek İyileştirici Önlemler Kapsamında Mali Tablo Analizi, İstanbul 2019.
9 Toraman Çolgar p. 3.
10 Toraman Çolgar p. 11.
11 Toraman Çolgar, p. 14.
12 Ayoğlu, p. 1585.
13 Ünal Tekinalp, Sermaye Ortaklıklarının Yeni Hukuku, 5. Edition, İstanbul 2020 N. 12-143. For a comprehensive analysis; İsmail Cem Soykan, Türk Ticaret Kanunu’na Gore Anonim Ortaklıklarda Sermaye Taahhüdü Yoluyla Sermaye Artırımı, İstanbul 2019 p. 257-271; qtd. in Toraman Çolgar p. 3.
14 Yavuz Akbulak, Anonim Şirketler Yönünden Sermaye Kaybı ve Borca Batık Olma Hadiseleri https://blog.lexpera.com.tr/anonim-sirketler-yonunden-sermaye-kaybi-ve-borca-batik-olma-hadiseleri (Access: 07.02.2022)
