Capital Loss And Technical Bankruptcy

The capital companies’ activities resulting in losses and the deterioration of their financial situation cause the company’s capital to remain partially or completely unrequited, and thus the company’s assets cannot meet the company’s debts and liabilities. The formula (Capital + Legal Reserves) – Equity / (Capital + Legal Reserves) is applied in the calculation of capital loss and insolvency. As a result of this calculation, in case of a partial or complete loss of the company’s capital, Company management and decision-making bodies have some legal obligations.

Article 376 of the Turkish Commercial Code No. 6102 regulates the procedures and principles to be followed in cases of capital loss or insolvency in capital companies. In addition, In addition, with the entry into force of the “Communiqué on the Procedures and Principles Regarding the Implementation of Article 376 of the Turkish Commercial Code No. 6102” on 15.09.2018 and the “Communiqué Amending the Communiqué on the Procedures and Principles Regarding the Implementation of Article 376 of the Turkish Commercial Code No. 6102” on 26.12.2020, it has been introduced detailed explanations regarding the practices on capital loss and insolvency. 

In this article, it is aimed to provide a general scheme on the measures to be taken according to the type of capital loss within the scope of the regulations brought by the TCC article 376 and the Communiqués.

1. In case one-third of the total of the capital and legal reserves is unrequited

If it is determined from the last annual balance sheet that one-third of the total of the capital and legal reserves are unrequited, the company may continue to operate without taking any remedial action, since the company’s capital is considered to protect its equity.

2. In case half of the total of capital and legal reserves is unrequited

If it is determined from the last annual balance sheet that at least half of the total capital and legal reserves are unrequited, the Board of Directors must convene and call the General Assembly immediately and present the company’s financial situation, the reasons for the loss and the remedial measures to the General Assembly. If the Board of Directors neglects its duty to convene the General Assembly, minority shareholders may also call the General Assembly for a meeting.

The remedial actions to be proposed by the Board are expressed in the Communiqué by way of example as capital completion, capital increase, closing of some production units or sections, sale of subsidiaries, changing the marketing system and similar measures. However, the specified measures are not limited and will be implemented by evaluating the financial situation and activities of the company.

The remedial actions offered by the Board may be accepted by the General Assembly in the same way or with amendments, or it may be decided to implement another measure, if it is considered that it would be more appropriate to improve the financial situation of the company in line with the information and financial statements presented by the Board.

3. In case two-thirds of the total of capital and legal reserves are unrequited

As per the last annual balance sheet, if it is determined that two-thirds of the total of the capital and legal reserves are unrequited, the Board must immediately call the General Assembly to convene and present remedial actions to the General Assembly. The General Assembly must also decide to take one of the regulatory measures which are to settle for one-third of the capital or to complete the capital. Otherwise, the company will automatically terminate (TTK m.376.2). 

In the event that at least two-thirds of the total of the capital and legal reserves are unrequited, by the General Assembly, which is called for a meeting by the Board of Directors, may resolve:

• Proceed with one-third of the share capital; It may be decided to reduce the capital in a way that does not violate the minimum capital and nominal value amounts, so that the loss is thrown out of the company and thus, the company proceeds with the amount equal to one-third of the share capital. Pursuant to articles 473 to 475 of the TCC, while it is aimed to protect the rights and interests of shareholders and company creditors by means of requiring an amendment of the articles of association in this regard, if the capital reduction the Board of Directors may waive the call to the creditors and the payment or guarantee of their rights in accordance with articles 474/2 of the TCC, in order to close the balance sheet deficit resulting from losses and only in the capital reduction to be made at this rate, the Board of Directors may waive the call to the creditors and the payment or guarantee of their rights in accordance with articles 474/2 of the TCC if the capital reduction is made in order to close the balance sheet deficit resulting from the losses
• Completion; It may be decided to complete the capital by distributing the loss to the partners in proportion to the shares of the partners and by making a payment to be collected in the capital completion fund account by the shareholders without increasing the capital. If the unanimous vote of the shareholders regarding the completion is achieved, each shareholder will be obliged to proportionally provide the funds to close the balance sheet deficit. As explained in the justification of the article, this additional obligation is neither a capital investment nor a loan to the company and is unrequited. If there is no unanimity, some shareholders will be able to make completions of their own accord.
• Capital increase; It may be decided to increase the capital as much or more as the reduced amount simultaneously with the reduction of the capital at the rate of balance deficit, or to increase the capital directly without any reduction.

As one of the remedial actions in the financial situation of the companies, the practice of removing the loss from the company by increasing it simultaneously with the decrease at the rate of balance deficit, is included in the scope with the Communiqué, and it is also possible to make a direct capital increase without reducing the capital.

4. Over Indebtedness (Technical Bankruptcy)

In case it is understood that the assets of the company are not sufficient to meet the company’s debts, the company is deemed in over indebtedness. If it is determined that the company is in debt based on the interim balance sheets drawn up by the Board, the Board will be obliged to apply to the Commercial Court of First Instance where the company headquarters is located and to request the bankruptcy of the company. However, with the Communiqué, an important innovation has been introduced in this regard. According to Article 12 of the Communiqué, if it is determined that the company is in over indebtedness, it is possible to resort to one of the above-mentioned actions first. If one such remedial action is not taken or results ineffective, the Board will apply to the court for the bankruptcy of the company. 

Exception for Foreign Exchange Losses

Another important innovation brought by the Communiqué is that in the calculations made until 01.01.2023 regarding capital loss or insolvency under Article 376, foreign exchange losses arising from unfulfilled foreign currency liabilities will not be taken into account. Thus, it is aimed to prevent the risks of facing technical bankruptcy due to the fluctuations in the exchange rate and the current economic situation.