• It is the spirit and not the form of law that keeps justice alive.
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THE NEW TCC BRINGS NEW TOOLS FOR RESCUING A COMPANY FROM BANKRUPTCY

Summary

The Turkish Commercial Code no. 6102 dated 13.01.2011 entered in force on July 1, 2012. The exception to the requirement of filing a request for bankruptcy with the court in case of loss of equity within the context of Article 376 is an important change for many companies. The exception aims to increase the chances of saving the company from bankruptcy.

Changes

Under Article 376 of the TCC, a loss of equity occurs when 1/2 of the company’s total capital plus legal reserves, is depleted or lost, or 2/3 of the company’s total capital plus legal reserves is depleted, or the company is unable to pay its debts (insolvent).

If the latest balance sheet shows that the outstanding debts or liabilities of the company cannot be satisfied by the company’s capital and legal reserve funds, and the amount of such uncovered debts or liabilities exceeds half of the company’s capital and legal reserve funds, the Board of the company is required to convene the general assembly of shareholders for a meeting. The Board should also prepare a report on this subject, specifying the reasons and suggest remedies and proposals such as an increase of capital, the closure or downsizing of some production units or departments, the divestment of affiliates, a change of marketing systems, and so forth.

Pursuant to paragraph (2) of Article 376 of the TCC, if it is determined from the company’s balance sheet that the company’s total equity decreased below 1/3 of its capital, then the General Assembly must decide either (i) to replenish the capital or (ii) to continue operations with the remaining 1/3 of capital. Otherwise, if no General Assembly resolution is taken on this issue, the company will be considered to be technically insolvent.

Pursuant to paragraph (3) of Article 376 of the TCC, if there are signs demonstrating that the company is “insolvent”, the Board shall prepare a “special purpose interim balance sheet”. “Insolvent” means that the creditors may not redeem their receivables - that is, the company may not be able to cover its debts and liabilities even if the company’s assets are assessed at their real (probable sale) values and not on their book (acquisition) values indicated in the annual balance sheet. If it is determined from the interim balance sheet that the company’s assets are insufficient for covering its debts, the Board shall immediately notify the commercial court and file a request for the company’s bankruptcy.

The last sentence of Article 376 of the TCC provides that if some of the company’s creditors agree in writing to adjust the priority of their respective receivables within the ranking of receivables (whereby their receivables are pushed down below the rank of all other creditors’ receivables) and if the validity, existence and appropriateness of such a written undertaking is approved by a court-appointed expert, the court will not declare the company as bankrupt. Such an undertaking would be effective in the event of a bankruptcy and these receivables (which are pushed to the lowest ranking) would not be included in the distribution until the payment of all other debts. If the amount of such written undertakings (i.e., receivables) is equal to the equity deficit in the interim balance sheet, the company is no longer required to file a request for bankruptcy with the court.

Postponement of the filing with the court within this context means a creditor acquiescing to rescuing the company from bankruptcy by agreeing that its receivables will be pushed down to the lowest rank. It does not constitute a barter or set-off, nor does it constitute a waiver of receivables on the part of the creditor. Therefore, if the creditors of the company are also the shareholders of the company, they will be in a position to assess the option of postponing bankruptcy in accordance with this provision of the new Turkish Commercial Code.

Conclusion

Article 376 of the TCC brings an exception to the requirement of filing a request with the court for bankruptcy in case of loss of equity. The last sentence of Article 376 of the TCC (adopted in accordance with Article 725(2) of the Swiss Code of Obligations in the 1991 reform) aims to increase the chances of rescuing the company from bankruptcy.

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