The Ministry of Commerce issued a Communiqué on 15 September 2018 ("Communiqué") setting out the principles and procedures pertaining to the application of Article 376 of the Turkish Commercial Code ("TCC"). In brief, Article 376 regulates the measures to be adopted by joint stock companies and limited liability companies (for the purposes of this article, each a "company") in cases of loss of capital or insolvency.

Recently, Turkey’s leading companies are experiencing financial difficulties due to the exchange rate volatility. This extraordinary situation has hit the companies unexpected; as such a serious disequilibrium between the assets and liabilities of the companies, which are indebted in foreign currencies, have been emerged. Due to this fact, the Turkish Government was in need of taking some measures in order to reduce this weakness in the economy. Therefore, several amendments have been made within the scope of Article 376 to rehabilitate the balance between the liabilities and assets of companies.

The Communiqué introduces provisions clarifying the application of Article 376 and certain new provisions that materially deviate from the TCC. The main provisions introduced by the Communiqué are as follows:

  1. The Communiqué introduces a provision covering the treatment of foreign exchange (FX) debts and any losses due to currency fluctuations. It stipulates that such losses may not be taken into consideration for any assessment of capital loss or insolvency.

    In principle, the liabilities of entities based on FX debts should be calculated based on the Turkish New Lira (TRY) equivalent of the FX debt on the relevant date. However, the Communiqué makes it possible for Turkish entities to disregard any debts that have arisen because of currency fluctuations, so that they not need to apply any measures dictated under Article 376 for capital maintenance.

    Furthermore, the Communiqué does not distinguish between matured and defaulted debts, enabling companies to ignore adverse currency fluctuation scenarios for unpaid FX debts in their entirety.

    Lastly, the Communiqué indicates that this principle will apply until 1 January 2023.

  2. The Communiqué requires that the agenda of general assembly meetings called by a board of directors include a statement on the loss of capital. It also indicates that, even when convened for purposes other than discussing the loss of capital, general assembly meetings must include a discussion of capital loss.
  3. The Communiqué sets out some ways in which the board of directors may mitigate the effects of the company's deteriorating financials: (a) topping up the share capital (i.e. some or all shareholders cover the balance sheet loss), (b) increasing the share capital, (c) terminating or downsizing certain production units or departments, (d) selling subsidiaries, and (d) modifying marketing systems.
  4. The Communiqué further clarifies that the shareholders have the right either to modify the measures proposed by the directors or implement completely different ones.
  5. Article 376 dictates that if a company loses two-thirds (2/3) of its share capital, the shareholders must either top up the share capital or resolve that the company continue its operations with the remaining one-third (1/3). The Communiqué also empowers the shareholders to undertake a share capital increase.
  6. Even though in practice share capital is topped up by decreasing the share capital and subsequently increasing it, the Communiqué refers to "topping up by one or more of the shareholders" without spelling out the relevant procedure.

    According to Article 421 of the TCC, the decision to top up share capital must be adopted unanimously. Any payments made by the shareholders to that effect will not be considered as advance payments and must be accounted as part of the share capital top-up fund (sermaye tamamlama fonu). Accordingly, it is not possible to apply interest to the payments made by the shareholders during the top-up exercise.

  7. In case of an insolvency scenario, the interim financial statements to be prepared by the directors as per Article 376 should both clearly evidence such insolvency in order for the company to be considered insolvent within the meaning of Article 376.
  8. The Communiqué further enables the shareholders to resolve (a) to continue the insolvent company’s operations with the remaining share capital, (b) to top up or increase the share capital, and (c) in case neither (a) nor (b) are adopted, to proceed with bankruptcy proceedings. Because it is virtually impossible for an insolvent company to proceed with only its remaining share capital, the option to top up the share capital temporarily has been provided in Article 376/3.

    Accordingly, the relevant provision of the Communiqué might be interpreted as enabling the shareholders to either top up the share capital or, alternatively, increase the share capital to the threshold where the company is no longer considered insolvent.

  9. The financial statements forming the basis of any capital loss or insolvency calculation must be prepared in accordance with Article 88 of the TCC. However, if the relevant entity's financial statements have instead been prepared in accordance with the Turkish Accounting Standards, the calculation can also be made based on such statements.

As to conclude, within the scope of the above mentioned amendments, the board members of the companies shall take action to discharge their respective liabilities arising from Article 376 of the TCC and convene the general assembly. The board members, in order to discharge their liabilities, shall add the “technical bankruptcy” item on the general assembly meeting agenda, which has to be resolved at the general assembly meeting.