On 26 December 2020, the Communique on the Amendment of the Communique on Procedures and Principles Regarding the Application of Article 376 of the Turkish Commercial Code No. 6102 (Amendment Communique) was published in Turkey's Official Gazette No. 31346, which amends provisions in the Turkish Commercial Code No. 6102 (TCC) regarding capital loss and negative equity situations.
The liability to summon and notify in cases of capital loss and negative equity
The three consequences related to capital loss and negative equity in Article 376 of the TCC include:
- If it appears on the last annual financial statement that half of the sum of the share capital and statutory reserves are uncovered due to loss, the executive board must summon the general assembly as soon as possible and present the measures deemed suitable (Article 376(1), TCC);
- If it appears on the last annual financial statement that two-thirds of the sum of the share capital and the statutory reserves are uncovered due to loss, the executive board must summon the general assembly as soon as possible. If the general assembly will not accept one-third of the capital or to top up the capital, it can decide to close the company (Article 376(2), TCC);
- If there are indicators that raise doubts about the company being in a negative equity situation, the executive board must conduct an interim financial statement on the going-concern concept and possible sale prices of the 'actives'. If it appears on this financial statement that the actives are not sufficient to encounter the receivables of creditors, the executive board must notify the commercial court of first instance where the company headquarters is located and demand the company's insolvency (Article 376(3), TCC).
Legal and penal responsibilities may arise if the executive board does not conduct liabilities specified in Article 376 of the TCC. According to Article 345/a of the Enforcement and Insolvency Law No. 2004, if a notification is not made and the insolvency is not demanded upon the appearance of negative equity on the interim financial statement with the possible sale prices of the actives, a complaint by one of the creditors could result in incarceration from ten days to three months for persons authorised to act as management and representation.
Amendment of procedure and principles regarding Article 376 of the TCC
As indicated in detail in our article dated 20 September 2019, due to the importance of Article 376 of the TCC, the procedures and principles for the application of this provision were regulated by the Communique on Procedures and Principles Regarding the Application of Article 376 of the Turkish Commercial Code No. 6102 (Communique) published in the Official Gazette on 14 September 2018, numbered 20359. On 26 December 2020, the Amendment Communique was published and included the following amendments:
- With the Article 1 and Article 2 of the Amendment Communique, Article 6 and Article 7(1) of the Communique was amended by emphasising that loss must be taken into account during the specification of capital loss with details added on the proportional criteria specified under Article 376 of the TTC;
- Within the scope of Article 376(2) of the TCC, which states that one-third of the capital can be deemed sufficient, a capital decrease below this one-third can now be conducted if necessary. This matter was clarified through amendments to the Article 7(1)(a) and Article 8(1) of the Communique (Article 2 and Article 3 of the Amendment Communique);
- According to the Article 9 of the Communique on the topping up of capital, payments made regarding the obligations related to the covering of financial statement losses are assembled and pursued under the capital top-up fund located in the net equities. In order to prevent the misuse of this capital top-up fund, it can only be used by offsetting losses (Article 4 of the Amendment Communique);
- The Article 10 of the Communique on the capital increase was subjected to a comprehensive amendment:
- The capital market provisions were reserved regarding capital changes made by the general assemblies of the public joint stock companies;
- The options of decreasing the capital as much as the loss and subsequently increasing it at will and increasing the capital without decreasing it has been reserved. Another option was presented and the payment terms of the increased capital was amended:
- In case of decreasing the capital as much as the loss and subsequently increasing it, the monetary capital commitment should be paid in accordance with Article 344 and Article 585 of the TCC. Thus, by means of joint stock companies, at least twenty five percent (25%) of the nominal price of the committed shares must be paid before the registration and the rest must be paid within 24 months after registration of the capital;
- In case of increasing capital without decreasing, it will be necessary to preserve at least half of the sum of the capital and the statutory reserves within the net equity at the end of the transaction. But if the company's statutory reserve amount is high, the transaction can be conducted by paying a lower rate of capital without having to pay the half; and
- It is now possible to increase capital at will, provided that prices have been paid, or to decrease capital within the same general assembly meeting. At least half of the sum of the capital and the statutory reserves must be preserved by the end of the transaction. If this option is chosen, the company will get back to the stage specified in the Article 376(1) of the TCC;
- With the amendment to Provisional Article 1, while calculating capital loss and negative equity, half of the sum of expenses regarding leases, amortisations and employee expenses accrued in 2020 and 2021 will not be considered in the same way that exchange difference losses were not considered before the Communique. The purpose of this provision is to prevent repetitions of calculations and recognise that these losses can simply be indicated in the footnotes of financial statements.
Officials of companies, which indicate capital loss and negative equity, must examine the Communique on the procedure and principles of the Article 376 of the TCC, especially when taking the steps specified in Article 376 of the TCC.
For further information on the new amendments to the Communique on Principles and Procedures of Capital Loss and Negative Equity Situations, contact your CMS partner or local CMS experts: Hülya Kemahlı or Arcan Kemahlı.