I. General information
In order to recover the loss of a joint stock company shown in the balance sheet of that company or to return part of the capital of the joint stock company to its shareholders through new shares, companies can choose to reduce their share capital. Turkish Commercial Code No. 6102 (“CTC”) regulates the capital reduction and sets out the requirements that must be met in order to successfully complete the share capital reduction process. Under Turkish law, the capital reduction consists of several statutory stages. In this article, we will explain these steps in the capital reduction process and share practical information about the process.
In accordance with article 5 of the Communiqué on the procedures and principles relating to the implementation of article 376 of the TCC published in the Official Journal of September 15, 2018 and numbered 30536 (“Communiqué”), the Board of Directors is required to convene the general meeting to meet immediately in the event that (i) half of the sum of capital and legal reserves, according to the last annual balance sheet, is discovered due to losses, (ii) two-thirds of the sum of capital and legal reserves, according to the latest annual balance sheet, become overdraft due to losses. If it turns out that half of the sum of the capital and the legal reserves is discovered due to losses, the board of directors must convey its suggestions concerning the reform measures and the latest balance sheet to the general assembly. If it turns out that two-thirds of the total capital and legal reserves are no longer covered due to losses, according to the last annual balance sheet, the general meeting may decide (i) to decrease the capital, (ii) to supplement the capital or (iii) increase the capital as a remedy.
II. Legal proceedings for capital decrease
Articles between 473 and 475 of the CCT will be applied if the general meeting of the company, of which two-thirds of the sum of the share capital and legal reserves, in the last annual balance sheet, are discovered due to losses, decides to reduce the capital . The capital of the company can be reduced up to the legal minimum amount of 50,000 TRY in public limited companies, provided that at least half of the sum of the share capital and the legal reserves is kept in equity.
According to article 473 of the CCT, a report drawn up by the board of directors must be approved during the general assembly; registered with the trade register and announced in the Official Trade Journal. The report must mention the object and extent of the capital reduction and the terms and conditions that will be carried out. At the same time as the report of the board of directors, a report indicating that there are sufficient assets to cover the rights and claims of creditors despite the capital reduction must be drawn up by a sworn accountant or by the independent accountant and financial advisor or auditor must be approved at the general meeting; registered with the trade register and announced in the Official Trade Journal.
In view of the above, the shareholders of the company must convene a general meeting and adopt a resolution approving the capital reduction by examining and approving the aforementioned reports. In order to pass a resolution of approval, the affirmative votes of shareholders or their representative owning shares representing at least 75% of the company’s capital must be obtained, unless the articles of association require a higher quorum. Also, a representative of the Ministry of Commerce must attend the general meeting to be held for the capital reduction. The minutes of the general meeting must include the object of the type of capital reduction and the procedures that will be followed for the capital reduction process.
III. Invitation to creditors
According to article 474 of the TCC, a company must notify its creditors of a reduction in share capital so that the creditors notify their claims and request payment or security for their claims. After having taken the decision of the general meeting to reduce the capital, the board of directors will make a request to the trade register in which the company is registered, to make an announcement to the creditors. Creditors will be invited 3 (three) times at intervals of 7 (seven) days by the Journal du Commerce. In addition, the board of directors should send letters of invitation to creditors whose addresses are already known and the announcement should also be made on the company’s website if the company is required to launch a website in accordance with the CCI.
For the implementation of a resolution to reduce the capital, debts due and payable must either be paid or guaranteed. Consequently, the debts of creditors due and payable at the expiration of a period of 2 (two) months following the third announcement published in the Official Journal of the Trade Register will be reimbursed and those which are not due by then will be reimbursed. well-off. After 2 (two) months following the third announcement made to the creditors by the announcement published in the Official Trade Journal, a report must be drawn up by the board of directors showing the list of creditors who have requested payment from the company. of their claims. or secure. If a creditor has not made a request to the company within the 2 (two) month period, this report from the board of directors will indicate that no creditor has made a request to the company.
In addition to the above, in the event that the capital reduction is intended to recover the loss of the company indicated in the company’s balance sheet and the capital is reduced by the amount of this loss; the board of directors may decide not to follow the procedures for informing creditors and for the payment or guarantee of their claims, at its discretion.
IV. Execute decisions
The capital of the public limited company can only be reduced if all the claims declared by the creditors within the time limit are covered or guaranteed. In the event that the creditors’ claims are not paid or guaranteed, the creditors may apply to a court for the annulment of the decision of the general meeting concerning the capital reduction within 2 (two) years following the publication of the resolution in the Journal du Commerce. .
If it is necessary to reduce the amount of the shares by amendment or stamp or in any other way for the decision to reduce the capital to be executed, the shares which are not returned despite the formal notice may be canceled by the public limited company. If the amount of share certificates returned to the company for replacement by the shareholders is insufficient to change, these shares will be canceled and the new share certificates to be returned are sold and the amount of their shares is retained in the company. .
Finally, a request for a capital reduction must be made in the commercial register and the required documents must be filed with the commercial register.
V. Simultaneous capital decrease with capital increase
The capital reduction may also be carried out at the same time as the capital increase when new fully paid-up shares are issued in the amount of the capital reduction. Before amending the relevant law by the Communiqué, a quarter of the increased amount must be paid as a deposit before registration. According to the Communiqué, there is no longer a specific payment rate. It is important to note that, simultaneously with the same general meeting, the capital increase must be carried out first and then the capital must be decreased.
VI. Technical bankruptcy
The Communiqué sets out the procedures and principles relating to the implementation of Article 376 of the TCC which regulates the remedies available to companies in the event of over-indebtedness and loss of capital and sets out the obligations of the board of directors of the company in these cases. moments like that. In the event that the company is fully indebted, the board of directors should prepare an interim balance sheet based on assets using a going concern concept and conditional selling prices and should immediately convene the general meeting at a meeting and suggest remedies. If it emerges from the interim balance sheet that the assets do not cover the debts of the company’s creditors and that the company does not take any of the measures referred to in article 7 of the Communiqué (capital reduction, completed capital and capital increase) , the board of directors must notify the situation to the commercial court of the address of the registered office of the company and request the bankruptcy of the company.
As a result, capital decrease is one of the ways to recoup losses of the stock company along with the other remedies briefly explained in this article and stock companies may decide to reduce their capital as a remedy in order to recoup their stated losses. the balance sheet prepared the board of directors. In order to carry out the capital reduction process, the necessary procedures must be followed. In this article, we have tried to explain such steps for capital reduction and other options that can be taken rather than capital reduction.
(First published by Mondaq on September 29, 2021)