Loss of Share Capital in Joint Stock Companies

The notion known as the “technical bankruptcy” which was regulated by Article 324 of the former Turkish Commercial Code No. 6762 (“Former Code“) is regulated within Article 376 of the new Turkish Commercial Code No.6102 (“New Code“).

Pursuant to Article 324 of the Former Code, the board of directors had the duty to notify the general assembly of the company in the event that the half of the share capital was lost according to the last annual balance sheet. In the presence of a doubt that the company is insolvent the board must prepare an interim balance sheet based on the sale prices of the actives. If 2/3 of the share capital is lost, the company was deemed terminated unless the general assembly decides to make up the share capital or continue with the 1/3 of the share capital. The board was obligated to notify the court if the actives of the company were not sufficient to cover the receivables of the creditors of the company. In such case, the court would rule on the bankruptcy of the company. However if it was possible to save the company, the court could postpone the bankruptcy decision on the request of the board of directors or a creditor of the company.

As you may see from the above explanations, the measures applied by the Former Code were either the complete the lost capital or to decrease the capital in the amount of the loss. The New Code partially conserved the provisions of Article 324 but also provided more details regarding the measures.  According to the new Article 376, in case that the half of the total of the share capital and the legal reserves are lost based on the last annual balance sheet, the board of directors must convene the general assembly and present to the assembly corrective measures. If the loss appears in the interim balance sheet, the board shall not wait for the annual financials in order to convene the general assembly. According to the preamble of the New Code, among the corrective measures which may be taken by the board there are (i) to increase the share capital, (ii) to shut-down certain production units and (iii) to sell the subsidiaries.

If 2/3 of the share capital and the legal reserves are lost, the general assembly must decide either to decrease the share capital or complete the lost capital; otherwise, the company is automatically terminated.

As explained in the preamble of the law, the general assembly may take two kinds of decisions: (i) the decision to continue with the 1/3 of the capital, which means to decrease the capital and delete the loss, or (ii) the decision to complete the lost capital which means either a share capital increase or the payment of the deficiencies of the balance sheet by the shareholders or deletion of the receivables of certain creditors.

In the event that there are indications that show that the company is insolvent, the board shall immediately prepare an interim balance sheet based on the continuity of the enterprise and the probable sale prices of the actives. If according to this interim balance sheet, actives are not sufficient to pay the receivables of the creditors, the board shall notify the court and ask the bankruptcy of the company.

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