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New rules on Technical Bankruptcy in Turkey

COMMUNIQUÉ ON PROCEDURES AND PRINCIPLES ON IMPLEMENTATION OF ARTICLE 376 OF THE TURKISH COMMERCIAL CODE NO. 6102 ("COMMUNIQUÉ") ENTERED INTO FORCE

Article 376 of Turkish Commercial Code (“TCC”) regulates the obligations of companies in the events of loss of capital and insolvency which are also commonly known as “technical bankruptcy”. The Communiqué regulating the procedures and principles on the implementation of Article 376 of TCC has been promulgated in Official Gazette dated 15 September 2018 and numbered 30536 and entered into force. Communiqué explains the ways of determining the event of and remedies for the financial difficulty of companies. Article 376 provides that in the event the capital and two-thirds of the sum of a company's share capital and legal reserves are lost due to previous years’ loss as per the balance sheet, the board of directors is obliged to call a general assembly for meeting immediately. It seems that the main purpose of the Communiqué is to prevent companies from ignoring the event of capital loss and that companies in the status of capital loss do not continue with their operations, but instead call shareholders to convene meeting and discuss the event of capital loss in the meeting even if the meeting does not have this discussion item in the meeting agenda.

Article 6 of the Communiqué provides examples of remedial actions that the board of directors should take in the event of loss of the company's share capital and legal reserves. The same article also substantiates the methods of what kind of resolutions the general assembly can take on proposed remedial actions.

The Communiqué also sets out the thresholds for a minimum amount to be paid in the event two-thirds of the sum of a company's share capital and legal reserves are lost and general assembly resolves on capital increase. With this regard, in the event the general assembly resolves on a capital decrease by the amount corresponding to incurred loss and a simultaneous capital increase, then at least one-fourth of the increased capital must be deposited prior to registration of general assembly resolution. In the event the general assembly directly resolves on a capital increase rather than first realizing a capital decrease, then at least half of the share capital must be deposited prior to registration of general assembly resolution.

Sub-paragraph 3 of Article 376 provides that in the event it is understood that the company’s assets are not sufficient to cover its liabilities as per the interim balance sheet, i.e. in the event of insolvency, board of directors is obliged to make a notification to commercial court seated where the headquarters of the company is located and file for bankruptcy. The Communiqué, on the other hand, provides that the board of directors may file for bankruptcy in the event of insolvency only if one of the remedial actions out of capital decrease, adjustment of capital to recover the losses or capital increase had not been taken. In other words, the new regulation provides a new step to resort rather than directly filing for bankruptcy and provides that the board of directors should file for bankruptcy in the event said remedial actions had not been taken. 

Another significant provision of the Communiqué is provisional article 1 which provides that until 1 January 2023, foreign exchange losses arising from outstanding liabilities denominated in foreign exchange, will not be taken into consideration in the calculation of capital loss and insolvency in the context of Article 376.  We believe the purpose here is to protect companies from facing capital loss and insolvency and bankruptcy situations dues to high volumes of FX debts.

The Communiqué’s aim in general looks like to prevent the companies from doing business without strengthening their weak capital structures especially in current negative economic conditions of the domestic market and to prevent them from being further financially damaged due to the fluctuations in exchange rates.

To sum up the main novelties in the new Communique:

  • Board of Directors’ role will be more active, in particular, in bringing remedial measures,
  • Certain minimum amounts of capital must be deposited before the official registration of capital increase,
  • Foreign exchange losses will not be taken into account in article 376 calculations until 1 January 2023.

So, on the upcoming days, it will be more important for companies that they take into consideration the provisions of this Communiqué before planning a capital increase, giving special emphasis on determining the presence of events of capital loss and insolvency, and that companies double-check the financial advisory reports with the respective trade registries prior to any kind of capital increase registration.