Technical bankruptcy, as it is known in practice, is described as 'loss of capital and/or excess of liabilities over assets' of companies (joint stock companies, limited companies and limited partnerships divided into shares). Its legal basis is found in Article 376 of Turkish Commercial Code numbered 6102 and its elements and provisions are regulated in the following provisions of the specified article. In addition, a Communique (Communique on Procedures and Principles regarding Practice of Article 376 of the Turkish Commercial Code No. 6102) was issued to regulate the procedures and principles to be followed in these cases by Ministry of Commerce.

In this article, we will be making an examination for our readers about in what circumstances a corporation will be accepted within the scope of Article 376 of the Turkish Commercial Code No. 6102 and the actions to be taken in that state.

WHAT IS 'EXCESS OF LIABILITIES OVER ASSETS'?

Excess of liabilities over assets means a state of a company when its assets can no longer meet its debts. Explicitly, 'excess of liabilities over assets' means even if a company's assets are subject to real valuation - not the historical cost as shown in the annual balance sheet – its creditors cannot receive their receivables, in other words the company cannot meet its debts and commitments.

Signs raising suspicions that the company's liabilities exceed its assets can be detected by the annual and interim financial reports, by audit reports for companies subject to audit and by reports of the early detection committee or the inferences of the managing body.

In the event of existence of signs raising suspicions that the company's liabilities exceed its assets, the managing body shall give an interim balance-sheet, drawn up upon the going concern value of the assets and over the potential sales prices, to the auditor. The auditor analyzes and reviews the interim balancesheet and shall give report with its recommendations and feedbacks within 7 days. According to this report, the managing body will report the situation to the court or will not find it necessary to report it to the court. This report will be the basis for the court's ruling.

Assessment of assets and liabilities according to the continuity of the business means making an evaluation based on a business that will continue its activities. Such an evaluation reveals whether the company has a hope to continue its activities or not due to some facts, expectations and reasons that have lost its effect despite the fact that the company is in debt. For example although a company's liabilities exceed its assets, the situation may be evaluated as favorable by an expert manager because of the high probability that the company will make a profit in the following years due to the investments it made in the first years of its establishment. Such an assessment also takes into account the results of the investments.

IIn case it is comprehended from the interim balancesheet that is drawn up upon the ongoing concern value of the assets and over the potential sales prices that the company assets are not sufficient to cover the receivables of the company creditors, the managing body shall file a claim for bankruptcy of the company to the court if it does not forthwith convene the general assembly and measures below.

a) Satisfaction with 1/3 of the capital or capital decrease

b) Supplementation of the capital

c) Capital increase

WHAT ARE SOME COMMON POINTS IN CAPITAL LOSS AND EXCESS OF LIABILITIES OVER ASSETS?

a) 'Capital' is the joint stock item in the balance sheet.

b) 'Statutory reserve' is regulated in Article 519 of the Turkish Commercial Code.

c) Until 01.01.2023, foreign exchange losses arising from liabilities in foreign currency that have not yet been carried out and half of the total of expenses arising from leases, amortizations and personnel expenses that accrued in 2020 and 2021 may not be taken into account in calculations regarding capital loss or excess of liabilities over assets.

d) Loss of capital of companies or whether companies' liabilities exceed its assets or not are determined by financial statements to be prepared in accordance with Article 88 of the Turkish Commercial Code.

e) In order to compensate the capital loss, a company that its liabilities exceed its assets or with a capital loss can merge with a company which has an equity that can be freely disposed. If a company that is a party to the merger has capital loss or its liabilities exceed its assets, a report that states whether the company which is the other party to the merger has an equity that can be freely disposed and enough to cover the capital loss or excess of liabilities over assets (verified by including the related accounts) shall be drawn up by a certified public accountant or an independent accountant and financial advisor. In case that the company is subject to audit, this report can also be drawn up by the auditor of that company.

WHAT ARE THE LEGAL REQUIREMENTS IF AT LEAST ONEHALF OF THE TOTAL SUM OF CAPITAL AND STATUTORY RESERVES ARE UNSECURED (LOST) DUE TO LOSSES ACCORDING TO THE LAST ANNUAL BALANCE-SHEET?

In order for that to be implementable, besides statutory reserves, the open reserves should fail to cover the total loss, and the remaining loss should exceed half of the total sum of the capital and statutory reserves. If loss is equal to or more than half but less than two-thirds of the sum of capital and statutory reserves, it is called that at least half of the total of the capital and statutory reserves is unsecured.

If the loss at issue is detected from an interim balance-sheet, the board of directors shall not wait for the last annual balance-sheet. If the loss is detected from monthly accounts, an interim balance-sheet shall be drawn up in accordance with the principles of the annual balance-sheet. The board of directors shall convene the general assembly immediately and shall present the remedial measures it deems favorable for the situation to the general assembly.

Among the agenda of the general assembly, it shall be stated that the total sum of the capital and statutory reserves are unsecured. The managing body shall submit the final balance sheet to the general assembly and shall explain the financial situation of the company clearly and in a way that every shareholder can understand. A report can also be submitted to the general assembly on this matter.

The managing body shall present and explain remedial measures such as the supplementation of the capital, capital increase, shutting down or decreasing the amounts of some production units or sections, sale of subsidiaries, amendment of the marketing system to the general assembly in alternative and comparative ways, in order to eliminate the loss in the financial condition of the company or at least to soften these conditions. The general assembly may accept the proposed remedial measures as they are, or accept them with some amendments, or decide to take another measures other than the proposed ones.

WHAT ARE THE LEGAL REQUIREMENTS IF IT IS UNDERSTOOD FROM THE LAST ANNUAL BALANCESHEET OF THE COMPANY THAT 2/3 OF THE TOTAL SUM OF THE CAPITAL AND STATUTORY RESERVES ARE UNSECURED DUE TO LOSSESS?

If it is understood from the last annual balancesheet of the company that two-thirds of the total sum of the company capital and statutory reserves are unsecured due to losses (when loss is equal to or more than two-thirds of the sum of capital and statutory reserves), the managing body shall promptly convene the company general assembly. Among the agenda of the general assembly, it is stated that the total sum of the company capital and statutory reserves are unsecured. The general assembly can take one of the following measures:

a) Capital decrease according to Article 473 to 475 of Turkish Commercial Code

b) Supplementation of the capital

c) Capital increase

The company will be automatically terminated in case that the general assembly does not take one of these measures. Liquidation procedures of companies that are terminated as such will be carried out in accordance with Article 536 and the following articles of the Turkish Commercial Code.

a) Capital Decrease;

If the general assembly of the company, that twothirds of the total sum of its capital and statutory reserves are unsecured due to losses, decides to be satisfied with one third of the capital, capital decrease will be made according to Article 473 and Article 475 of the Turkish Commercial Code. Capital can be decreased up to the minimum amount of capital, provided that at least half of the total capital and statutory reserves are maintained within equity. The managing body may refrain from notifying the creditors and paying their receivables or securing these receivables in capital decrease.

b) Supplementation of the capital;

The supplementation of the capital is the payment of deficits in the balance sheet by all or some of the shareholders. A capital increase equal to or more than capital decrease means payment of deficits in the balance sheet by all or some of the shareholders or waive of some of the receivables by the creditors.

There is no need to complete the loss in statutory reserves.

In case that supplementation of the capital is decided unanimously, each shareholder is obliged to pay the money that will cover the amount unsecured due to losses. Each shareholder can participate in supplementation of the capital in accordance with his/her amount of shares, and withdrawal is not allowed. This obligation does not imply a capitalization or a loan, and it is complimentary. Moreover, the payments made by the shareholders cannot be considered as an advance on account of future capital increases. In case a unanimous decision cannot be achieved, shareholders can participate in supplementation of the capital as they wish.

In the supplementation of the capital, Article 421/2(a) of the Turkish Commercial Code shall be applied within the scope of joint stock companies and limited partnerships divided into shares.

Failure of supplementation of the capital does not prevent some of the shareholders from participating in the supplementation of the capital voluntarily.

Payments made in accordance with the obligations to cover the deficits in the balance sheet will be collected and inspected in the fund of supplementation of the capital. The fund of supplementation of the capital can only be used by setting off the losses.

c) Capital Increase

By the general assembly.

a) It may be decided to increase the capital by the same amount simultaneously with reducing it by the amount of loss. In the simultaneous capital increase with the capital decrease, it is compulsory that at least one fourth of the increased capital shall be paid.

b) It may be decided to increase the capital without reducing it by the amount of loss. In case of capital increase to be made in this way, it is obligatory to pay the amount to ensure that at least half of the total of the to be registered capital and statutory reserves are maintained within equity before the capital increase is registered.

c) At the same general assembly meeting, by being paid in full of amount, it may be decided to increase the capital to the desired amount or decrease to reduce it afterwards without seeking for condition in Article (b). As a result of the operations to be carried out in this way, at least half of the total of the to be registered capital and statutory reserves should be maintained within equity.

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.