Amendments on Capital Loss and Insolvency

Revisions on Capital Loss and Insolvency

Many amendments have been introduced into Article 376 of Turkish Commercial Code No. 6102 (“TCC”) through the Communiqué on Procedures and Principles on the Implementation of Article 376 of Turkish Commercial Code No. 6102 published in the Official Gazette dated 15.09.2018 and numbered 30536 (“Communiqué”).

If happened that half of total capital and statutory reserves appear to be uncovered from the final annual balance paper, the directors board shall immediately call for the general assembly to the meeting and present the remedial measures it deems appropriate in accordance to Article 376/1 of the TCC.

Details of “remedial measures” to be submitted by the directors board were excluded in Article 376 of the TCC. In addition to the regulation stipulated concerning submission of remedial measures, the remedial measures may be submitted by the board of directors are exemplified, as follows:

  • Alteration on marketing system
  • Completion of the capital amount deemed appropriate by the directors board;
  • Capital increase;
  • Closure or reduction of certain production units or departments; and
  • Sale of subsidiaries.

If happened it appears from the last year’s balance paper which is 2/3 of the total of the capital and legal reserves are uncovered due to loss, and the general assembly which is invited to the meeting, resolves neither to continue with one-third of the capital, nor to complete the capital, the firm is automatically terminated in accordance to Article 376/2 of the TCC.

As it happened 2/3 of the total of the capital and legal reserves are uncovered, the TCC does not grant capital increase choice to the firms. However, firms falling under this clause had been conducting capital decreases and increases, concurrently, in accordance with the way presented in the preambles of the TCC. Such way has been frequently conducted in practice and is included in Article 7/1(c) of the Communiqué.

Also, the firms within the light of this paragraph have been granted with the choice to directly increase their capital without engaging in a capital decrease. However, as distinct from the procedure of concurrent capital increase and decrease, such opportunity is conditioned to payment of one-half of the capital amount prior to registration.

As it happened the current and fixed assets of a firm are insufficient to cover the debts of the same, provisions on insolvency are applied. The provision stipulated under Article 376/3 of the TCC stipulating issuance of an interim balance papers on the basis of both continuance of the business and potential sale prices, is also included in the Communiqué.

The TCC needs fulfillment of the some conditions prior to a bankruptcy decision as it happened firm assets are insufficient to cover its liabilities. For example to hereby some conditions are debtors of the firm having receivables from the firm which are sufficient to eliminate insolvency of the firm waives, in writing, the priority of their receivables; and verification of the relevance, reality and validity of such waiver by the experts appointed by the court to which the board of directors submitted the bankruptcy.

The choices granted to the firms whose 2/3 of the capital and legal reserves are uncovered under Article 7 of the Communiqué, are also granted for insolvent firms, and they are required to apply to the court for bankruptcy, unless such choices are not exercised.

In pursuance of Article 14 of the Communiqué, a firm that has lost its capital or is insolvent, may merge with a firm having disposable assets sufficient to cover the lost capital amount.

As it happened a firm, subject to a merger, has lost its capital or is insolvent, one of following should be presented such information the other firm subject to the merger has disposable assets sufficient to cover the lost capital amount, and calculation way as to the same; or verification of the absence of capital loss or insolvency in a financial and fiscal report.

General Assembly’s Decision on Arbitral Awards Related to Action to Set Aside

In the Court of Cassation General Assembly’s decision on the Unification of Judgments (“General Assembly”) numbered 2016/2 E. 2018/4 K. (“Decision”), legal remedies available in response to the arbitral awards derived from arbitration agreements concluded prior to 01.10.2011, the date of the entry into force of the Code of Civil Procedure numbered 6100 (“CCP”), were discussed.

The General Assembly ruled the aforesaid arbitral awards shall be subject to the action to set aside under Article 439 of the CCP, instead of the appeal process regulated under Article 533 of the former Code of Civil Procedure numbered 1086 (“fCCP”). The General Assembly reached this conclusion through a detailed assessment within the scope of the nature of the arbitration agreements and the rule of immediate implementation of the procedural provisions.

As to Decision, the nature of the arbitration agreements was analyzed under the material law contract, the procedural law contract and the mixed contract arguments.

It was emphasized, as to the mixed contract argument combining the above mentioned points on a common basis, the arbitration agreements have both procedural and material contract qualities. It was stated, whereas the characteristics of a material law contracts are visible in the process of contract conclusion and the areas that are subject to the will of the parties; the enforceability of the arbitral award is an important reflection of the procedural law contracts.

It was emphasized by the General Assembly evaluated the aforementioned opinions, the results of the arbitration agreements are seen predominantly in procedural law and the arbitration agreements do not have the characteristics of the material law contract, such as creation or abolition of a right. In this respect, it was concluded the arbitration agreements are predominantly procedural contracts.

In the Decision, following the assessment of the procedural nature of the arbitration agreement, the difference between the ratione temporis application of the amendments on the material and the procedural law was discussed.

In this scope, it was emphasized the amendments on the material law are not retroactive, that is to say are applied to the legal cases and relations that occurred after their entry into force; whereas, the amendments to the procedural law are subject to the principle of immediate implementation.

In the preamble of the dissenting vote, the importance of the parties’ will to determine the procedure in arbitration was emphasized and it was argued the arbitration agreement is a material law transaction. It was emphasized that subjecting parties to provisions that could not be foreseen at the time of the conclusion of the contract would constitute a violation of the parties will and the principle of legal certainty stipulated under Article 2 of the Constitution.

Adjusting Bilateral Agreements based on Natural Gas

Natural gas plays a key role in the generation of electrical energy. In fact, the proportion of natural gas fueled power plants in the field of licensed electrical energy production increased to 37.18% in 2017. Considering the high margin of natural gas in electrical energy generation, the decisions of the Petroleum Pipeline Firm (“BOTAS”) concerning the sales prices of natural gas have a crucial impact on the electricity market. In this context, as BOTAS announced on 31.07.2018, the new regulations concerning the wholesale prices of natural gas produced some repercussions in the electricity market.

It is important to define that not all of the unforeseen and unexpected to be foreseen events, but only extraordinary events are accepted as reasons for adaptation. In other words, any misfortunes and negativities encountered whilst performing the contract shall not allow for the adaptation. Under our law system, the adaptation of the contracts arises with the distortion of the balance of performances due to economic crisis. However, the foreseeability of economic crisis is disputed in judicial decisions. For instance, the decision of the General Assembly of the Civil Chambers of the Court of Appeal states “Since 1958, in our country, devaluations are declared, frequently, money adjustments are made, and the value of Turkish Lira has been decreased against the dollar and other foreign currencies. The economic instability in our country is a foreseeable situation to the merchant plaintiff. In a solid case, the unforeseeability criteria amongst adaptation conditions has not been met” and indicates that economic instability does not always satisfy the unforeseeability condition.

Turkish legal system adopted the principle of pacta sund servanda and in pursuance of the principle of it, after a contract is duly formed, the parties are obliged to perform their obligations, accordingly, regardless of the changed situation. However, changed and aggravated situations after the formation of the contract can sometimes be an exception to the principle of pacta sund servanda. In fact, unforeseen developments parties did not take into account during the formation of the contract may take place, and the subsequent change of state may cause the collapse of the basis of the transaction. For example, as it realized of an undertaking given to deliver a product consistently and at a certain price, it would not be fair and just to expect the obligor to perform its obligation under the same conditions if the value of the money decreases significantly. In such cases, the parties of the agreement in which the situations have changed, or have been aggravated, may either agree to adapt the agreement to new situations or, if that is not possible, use their right to revoke the contract. However, there are certain conditions for the adaptation of the contract according to the changed situations, or the revocation of the contract.

Bilateral agreements are commercial agreements related to private law provisions that have been made concerning the purchase and sale of electrical energy and/or capacity between natural and legal persons, and which are not subject to the Energy Market Regulatory Authority’s approval. A significant part of the trading energy in the Turkish electricity market is traded through bilateral agreements. The possibility of adjusting due to the changed situations concerning these bilateral agreements playing a significant role in the energy market shall be addressed from a legal perspective. Given the fact that above data, it is possible to say the increase of natural gas sales prices by BOTAS, and the fluctuations in currency exchange rates has had a direct impact on bilateral agreements.