The deterioration of joint stock company's financial situation

Joint stock companies have a significant role in a country?s economic situation because they are able to create big business enterprises and greatly contribute in national economics. Besides, joint stock companies have big investments which one or more than one persons cannot do by their selves.Joint stock companies, concern a wide environment and interest group compared to other cooperation/partnerships. Share holders, persons who will have shares in companies, workers, persons who have a trade relation with the joint stock company, consumers and lastly the state get benefit from joint stock companies? activities.It causes big economic problems if an joint stock company falls into economically decay. For that reason, it is provided some measures to protect joint stock company?s capital and stock.TTK article 324 is a measure provided to protect joint stock company. This article is also arranged in new Turkish Trade Code numbered 6102 which is adopted in 13 January, 2011 and will become effective in 01 July, 2012.In article 324, duties of joint stock company in case of distortion of its economy. The measures are as follows; 1)1/2 loss in capita 2) 2/3 loss in capital 3) going into debt which means that company?s assets do not meet creditors? credits. Besides, ?insolvency? is also written in the article. In addition, distortion in company finance is not only formed in TTK but also in IIK( Bankruptcy and Enforcement Law).Economic disruption changes and verifies company to company. Wrong production, marketing, organization, staff, investment and buy policies; uncollectable receivables, overspending, natural disasters, unexpected economic disruption in domestic and foreign markets, new arrangements upon laws, long term strikes, lack of raw are the some examples for economic disruption.In article?s first paragraph, it is foreseen that loss of half of capital will be determined according to ?last annual balance sheet?. Annual balance sheet of joint stock company is a balance sheet which is prepared by board of directors and submitted to general assembly which holds meetings in three months as of the end of every business year.Aim of annual balance sheet, first of all, is to present result of annual activity. In annual balance sheet, the main aim is not to determine the real value of assets, on the contrary, the main aim is to determine and show the net profit or loss. For that reason, annual balance sheet is called ?balance sheet?.Valuation articles which are subject to joint stock company?s annual balance sheet written in TTK art 457 and the rest. According to those articles, because the aim is to show and present result of annual activities, tangible and intangible assets are registered to balance sheet on the basis of their maximum cost, (TTK art 460) but current assets are registered according to their maximum cost value or market value. (TTK art 461). It is possible to write the assets in balance sheet with a value lower than their current value for the purpose of reserving fund,According to TTK art. 324, in case of existence of signs showing that cooperation is insolvency, an interim balance sheet shall be issued. In that situation, interim balance sheet is a balance sheet which is issued, sales value of assets are taken as basis, between end of two accounting years to determine going into debt due to suspicious of being in debt. This issued interim balance sheet will be a basis to determination of both 2/3 loss of capital and going in debt.This interim balance sheet?s aim and function is determination of whether cooperation?s? all assets would be enough to pay off the company?s debts.After preparation of balance sheet or interim balance sheet, it will be understood from the balance sheet whether capital decreased or not. This stated balance sheet is principal capital. Principal capital is a constant figure. In determination of half loss in capital which is foreseened in the article is, it is taken as a basis of relationship between equity capital and principal capital. Equity capital is difference between total assets costs and debts.Therefore, to understand loss in a company?s capital, firstly, equity capital value will be determined and then this value shall be compared with principle capital value. If equity capital value is lower than principle capital, it means there is a capital loss here.In case of existence -suspicion of insolvency, a sales price of assets based interim balance sheet shall be issued. Hereby, only valuation principles value changes. The measures stated in articles shall be taken in case of determined loss value shows 2/3 loss of capital. As a result of acquired value, it may be determined that company is heavily in debt.In case of determination of that Joint Stock Company is in heavy debt as a result of issued interim balance sheet, this situation is required to be notified to Court and declare bankrupt.Being in debt is not indentified in The Code. Being in debt means failure of a company?s assets to meet company?s receivables. Debts to be more than assets are the materiel element of being in debt.Being in debt is different from insolvency. Insolvency means non temporality not to pay due pecuniary debts.Being in debt is different from suspension of payments. Suspending payments is a situation of failure to pay peaceable and due debts generally and permanently. Suspension of payments is an obvious image of insolvency. However, suspension of payments is not only image of insolvency because being in debt is determined according to balance of assets and debts, not according to payment adequacy.Although it is stated in the Code that an interim balance sheet shall be issued to determine being in debt in case of suspicious of insolvency, there is a false consideration. As it is mentioned above being in debt and insolvency does not mean same and it may not be the situation of being in debt. In that case, according to TTK art 324, the time when the board of directors shall issue an interim balance sheet should be time when there is a suspicious of being in debt.According to TTK art 324, first paragraph, on the realization of loss of the half of capital, board of directors shall hold a meeting immediately and inform the situation to the general assembly. Capital loss which is less than half of principal capital is not considered as significant so that it is not provided in TTK. Even though there is no a regulatory rule for this issue, board of directors which determined that there is capital loss can take some steps to improve company?s financial situation without informing general assembly, on the other hand cause general assembly to take decision by explaining the current financial situation and measures to be taken or by including these issues in extraordinary or stated general assembly meeting agenda.In article 324, paragraph 1, it is acted in contemplation of protection of company and shareholders firstly. In the article the aim is not to protect share holders? interests so that no rights are entitled to creditors and third parties.In the first paragraph of the article, it is foreseened that general assembly shall be called for a meeting. According to article, obviously, board of directors liable to call general assembly for a meeting. For that reason, alienating of this duty by general assembly is impossible, they have to use this right together. It is not always necessary for Board of directors to call for a meeting. According to TTK art 330/II, board of directors can take decision by other members? written assent to one member?s offer. Besides, there is no any restrain for board of members to hold a meeting to discuss measures to be taken about capital loss.Although, in the article, it is written that general assembly shall be called for a meeting by board of directors, it is possible that general assembly can be called for a meeting by auditors and minority too.Law did not load general assembly with a charge to decide in case of half capital loss. General assembly, in case realizing of loss of half capital, can take some measures like rising capital, changing board of directors? members or instructing other directors. However in fact it is not obliged to take measures.In TTK art 324, paragraph 2, heavily financial distortion is mentioned. According to this article if there is some suspicions that the company is insolvency, board of directors shall issue a interim balance sheet base on sales price. In case of determination of 3/2 loss in principal capital, the company shall be regarded as defunct if general assembly does not decide to cover this loss. In paragraph 2, law-maker shows what decisions to take by preventing general assembly to decide however it wants. This kind of financial distortion is seen very dangerous for creditors.Although in this article it is not written that board of directors must call general assembly for a meeting, the 1st paragraph of the article is valid for calling a meeting time. According to this board of directors shall immediately call general assembly for a meeting in case of 2/3 loss in capital. Because 2/3 loss in capital will be determined via an interim balance sheet , board of directors will be obliged to call general assembly for a extraordinary meeting. The agenda is determined by the law same as ordinary meeting. It is necessary for to make share holders to realize importance of the meeting, it must be mentioned that unless one of these decisions are taken, the company wick be dissolved.In the Code, in case of 2/3 loss in capital, an obligation is imposed to general assembly like board of directors. Notification of loss in capital to general assembly, it is admitted that general assembly shall decide whether to cover this loss or content with the rest, 1/3 capital, otherwise the company shall be regarded as dissolved.What is intended here by ?contentment with 1/3 capital? is reduction of at least 1/3 in principal capital. Equities are leaved as they are, in other words, by decreasing capital in that way, company capital is adapted to fact so that it is not only taking contentment decision by doing no transaction by general assembly. What is intended here is ?simplified? principal capital reduction like it is regarded in TTK art 397/II.In order to apply simplified capital reduction, a deficit in the balance sheet as a result of losses is primarily necessary. The purpose of capital reduction must be to close the balance sheet deficit in order to abandon the prosedure of inviting creditors, paying or providing their rights. According to the article 324 of TTC, balance sheet deficit required is 2/3 or more capital loss, as stipulated in the article. When capital reduction is applied after balance sheet deficit is determined, reduction must be no higher than the rate of balance sheet deficit.Simplified capital reduction will be at balance deficit scale and additionally principal capital will never be reduced below the sub-level stipulated in the law in any way. (TTC article. 396/4). Moreover, in case of capital loss, nominal value of stocks will be reduced no lower than 1 new kuruş even in case of recovery of partnership. (TTC article. 399/3).According to the 397/2 article of TTC, where simplified principal capital reduction is applied, board of executive may abandon inviting creditors and paying or procuring their rights. However, receiving expert report by simple entry is still compulsory. That is, with a report received from an expert committee made up of three persons appointed by the court, it must be determined that assets completely responding to credits of the partnership creditors are available despite reduction of principal capital.One of the other resolutions that may be made where 2/3 of the principal capital is uncovered according to the 324/2 article of TTC, completion of capital as agreed by majority in teaching expresses completion of the loss in assets and adapting it to the amount in master contract. Here the purpose is to rebalance the assets (equity capital) and principal capital in order to protect shareholders, creditors and third persons who will interact with the company. Completion of capital is performed in two ways as stipulated by law: Increasing commitment of shareholders or increasing capital through primary capital reduction.While completing capital by increasing commitments of shareholders, shareholders are indebted to bring new equity capital to the partnership with a general assembly resolution. After deciding to complete capital, if completion through additional payment to the shareholders is not chosen or qualified majority vote for that option is not achieved, then the second option must be applied, that is reducing the principal capital primarily to the level of assets then raising to the previous level. Legal basis of this method is the article 396/I of TTC.Even though the law stipulates resolutions that the general assembly may make as contenting with the residual capital and completing the capital, general assembly may resolve to terminate as well where they do not wish financial recovery and continuation of business activity, without being obliged to wait for the termination of partnership.According to the law, if general assembly do not resolve either to content with the residual capital or complete capital in cases where 2/3 of partnership capital is lost, partnership dissolves.According to the article 436 of TTC, creditors may ask the court to decide on termination of the company that has lost 2/3 of the principal capital.According to the article 324/2 of TTC, if it is understood from the balance sheet prepared by executive board over sales prices that the assets of the partnership will not be sufficient to respond to credits of the creditors this time, executive board is obliged to notify the board of this immediately. The court rules the bankruptcy of the partnership in such case. However, if financial recovery of the partnership seems possible, the court may delay bankruptcy decision upon the request of the executive board or a creditor. The court takes necessary measures such as stock taking or appointing a trustee in order to protect the assets of partnership. It is observed in the regulation that the rule is bankruptcy in case of heavy debt and exception is financial recovery by delaying.To be able to notify heavy debt, assets of the partnership must be insufficient in responding to credits, which means that the company is really under heavy debt. There is no need to know how big the deficit is in order to notify. After determining that the partnership is under heavy debt, the Executive Board either (i) notifies the Court only the state of heavy debt or (ii) applies for opening bankruptcy or (iii) claims delaying bankruptcy.After the executive board notifies the authorized court that the compnay is heavily under debt, this notification cannot be recalled or renounced.Article 179 of Enforcement and Bankruptcy Code stipulates the rights of creditors to claim opening of bankruptcy. This gives the creditors chance for systematic and equal distribution of residual assets of the partnership by risking receiving part or none of their claims. There is no liability but voluntary authority for the creditors. Creditors primarily have to prove that they are creditors.As persons except for the ones listed in article 324/2 of TTC and 179/1 of EBC are not authorized to notify heavy debt, for example shareholdes will not be able to claim opening or delaying bankruptcy due to heavy debt.of the partnership, that is they won?t be abe to notify heavy debt. Otherwise, the court will reject the claim for opening or delaying bankruptcy a limine as there is no right to notify heavy debt. On the other hand, shareholders will be able to perform bankrupty petition if they are creditor from the partnership.According to the article 154/3 of EBC, the official authorized court in bankruptcy cases is the commercial court of the place where the business center of the debted is located. Heavy debt notification and following petitions to open or delay bankruptcy are included in ex parte proceeding. Therefore, no opponent is indicated in notifications and applications. Simple jurisdiction proceeding will be applied.Even when it is accepted that heavy debt notification and hearing are not compulsory, in accordance with the principal that the counrt may perform a direct prosecution, the case will be announced to the creditors in order to collect evidence and they will be given chance to intervene and object to the case at the trial.Executive Board who make the notification have to submit interim Balance Sheet to the court as well. Moreover, in addition to interim Balance Sheet, they must submit all documents showing that the partnership is under heavy debt. The court has to directly research and determine whether the partnership is really under heavy debt or not. If the court determines heavy debt, it will decide on the bankruptcy of the partnership. If the Court determines that partnership debts have not exceeded the assets yet despite heavy debt notification, it will decide ?there is no place for bankruptcy? or ?there is no condition requring bankruptcy? instead of rejection of petition.Though bankruptcy of a partnership under heavy debt is the rule according to the article 324 of TTC and article 179 of EBC, the court will be able to delay bankruptcy upon the claim of executive board or a creditor if financial recovery of the partnership is possible. Within this context, capital companies and cooperatives under heavy debt will get rid of bankruptcy after acceptance of a recovery project by the court and its application in the period given by the court.In order to rule on delaying bankruptcy, before anything, heavy debt has to be notified to the court by persons authorized to manage and represent, or officials in case of insolvency or a creditor. Ruling on bankruptcy of a partnership under heavy debt depends on such a claim. The court cannot rule on bankruptcy on itself.A recovery project must be submitted to the court in order to determine whether there is hope for financial recovery of the partnership and to rule on delaying bankruptcy. This project has to include what recovery measures will be taken and how financial recovery will be achieved and all data and documents to prove that the project is serious and convincing.. Decision to delay bankruptcy depends on the condition that the court finds this project serious and convincing.Where the executive board do not perform their liabilities arising from article 324 of TTC, legal and penal liability will occur. Executive board members are severally liable to the partnership as well as shareholders and company creditors if they do not perform liabilities imposed by both the law and master contract. Likewise, where reolutions of general assembly are not obeyed for no reason, executive board members are severally liable. Though the law suggests that joint liability does not apply and the liability belongs to the executive director where some of the duties imposed by law are left to the executive directors, duty of the executive board arising from article 324 of TTC has to be performed by the board and cannot be transferred to executive directors. Therefore, as the executive board have to perform their liability arising from article 324 of TTC as the board according to the predominantly accepted teaching, executive board members are severally responsible in case of neglect in any way.Likewise, auditors who do not at all or duly perform liabilities imposed by law or master contract will be liable. Therefore, auditors who neglect their duties are liable against the company, shareholdres and creditors for the losses incurred as are the executive board (TTC. article 359). Shareholders may use their right to file lawsuit against executive board members as well as collectively or individually after making a resolution. Moreover, due to the refernce of TTC article 359 to article 341, if the general assembly decide to file lawsuit against auditors, they will be able to file lawsuit against minority auditors as well. In case of liability of audiors, provisions about legal liability of executive board members apply comparatively. Where the financial circumstances of the partnership decline and the auditors do not at all or duly perform their duties, they are severally liable for the losses that incur unless they prove that they are faultless.