Liquidation Proceedings in Joint Stock Companies

I. PREPARATION OF THE INITIAL INVENTORY AND BALANCE SHEET

A. In General

The first obligation the liquidators must fulfil immediately upon taking office is to prepare an inventory and a balance sheet in order to determine the company’s assets.¹ This balance sheet differs fundamentally in nature from the annual balance sheets. In the liquidation opening balance sheet, which constitutes an asset (net worth) balance sheet, it is accepted in legal doctrine that assets are shown not at their book value but on the basis of their probable sale prices (market value); no depreciation is set aside, and it is accepted that no hidden reserves may be created. This characteristic of the liquidation balance sheet stems from its purpose of revealing the company’s liquidation value: the balance sheet, on the one hand, protects creditors and, on the other, provides shareholders with the most realistic information available as to the liquidation proceeds that may be obtained.

B. Balance Sheet Date and Application to the Court in Case of Insolvency (Over-Indebtedness)

The date to be taken as the basis for determining the balance sheet date is the date on which the company was dissolved by court decision or dissolved by operation of law;2 registration with the trade registry is, in this respect, declaratory rather than constitutive. The balance sheet so prepared serves two fundamental purposes: (i) to determine the company’s assets at the commencement of liquidation and (ii) to reveal whether the company’s debts exceed its existing assets. If it is found that the debts exceed the assets, the liquidators are obliged to notify the situation immediately to the commercial court of first instance at the place of the company’s registered office; the court, upon conducting the necessary examination, orders the opening of bankruptcy.³ It is accepted that this obligation remains applicable in the subsequent stages of the liquidation as well, that is, the liquidators remain under the same obligation where the state of over-indebtedness emerges at a later stage.

C. Approval by the General Assembly and Registration

The initial inventory and balance sheet so prepared are submitted to the general assembly for approval; the meeting may be held as an ordinary or extraordinary general assembly meeting. A noteworthy point is the following: even where the general assembly cannot convene or cannot adopt a resolution, the liquidation proceedings cannot be suspended; it is accepted in legal doctrine that the liquidation must proceed even without such approval.⁴ A notarised copy of the approved minutes is registered with the trade registry directorate and announced. Furthermore, since the tax liability of a company in liquidation continues until the tax procedures are entirely concluded, notification must also be made to the relevant tax office.

II. TAKING POSSESSION OF THE COMPANY’S ASSETS, DOCUMENTS AND BOOKS

Following the approval of the inventory and balance sheet by the general assembly, the liquidators take possession of all the assets of the company listed in the inventory together with its documents and books.⁵ The legal rationale for the taking of possession is that the nature of the liquidation becomes definitive only after the approval of the balance sheet: taking possession of the company’s assets and books before it is clear whether the liquidation will proceed would not be a sound practice. Where the liquidation proceedings are, by operation of law, conducted by the board of directors, no separate act of taking possession is required, since the books and documents are already in the board’s hands.

The books and documents taken into possession must, following the completion of the liquidation, be kept in a safe place for a period of ten years pursuant to Article 82/5 of the TCC. The safekeeping obligation rests with the liquidators; if the liquidators’ office terminates for any reason before the expiry of this period, the safekeeping duty is transferred to the civil court of peace (TCC Art. 82/8).

III. CALLING AND PROTECTION OF CREDITORS

A. Obligation to Call Creditors and the Procedure

Pursuant to Article 541 of the TCC, the liquidators’ obligation to call creditors is mandatory in nature; distributing the company’s assets among the shareholders without making such a call is prohibited, and any distribution made to the contrary is characterised as unjust enrichment.⁶ The call procedure varies according to the type of creditor: creditors recorded in the books and whose residence is known are notified by registered letter, whereas other creditors are called by announcement published three times at one-week intervals in the Turkish Trade Registry Gazette; in addition, announcements must be made on the company’s website and in the manner set out in the articles of association. Whether the liquidators fulfil the obligation to call creditors is not a matter left to their discretion; failure to fulfil this obligation gives rise to the liquidators’ liability towards the creditors.

B. Scope of Claims, Waiting Period and Payment of Non-Matured Debts

No limitation is contemplated as to the claims that must be notified: all claims, whether matured or not, conditional or unconditional, disputed or undisputed, fall within the scope of the call. In order for the liquidation surplus to be distributed among the shareholders, a three-month waiting period must elapse from the date of the third call made to the creditors.⁷ Historically, this period was reduced from one year to six months and then to three months; this change indicates that the waiting period now essentially serves the purpose of concluding the liquidation as soon as possible. Non-matured debts, on the other hand, are paid immediately by being discounted at the rate applied by the Central Bank of the Republic of Türkiye to short-term loans.⁸ Within the framework of these provisions aimed at protecting creditors, the liquidators may not distribute the company’s assets unless the amounts corresponding to the claims of known or unknown creditors have been deposited with a bank or a notary, or adequate security has been provided.

IV. COMPLETION OF PENDING TRANSACTIONS AND CONVERSION OF ASSETS INTO CASH

A. Completion of Current Transactions and Prohibition of New Transactions

The liquidators are obliged to complete all transactions commenced before the dissolution of the company but not yet concluded, and they are prohibited from entering into new transactions not required by the liquidation.⁹ Examples of transactions falling within this scope include completing and delivering orders in production, performing obligations undertaken towards third parties, and finishing construction works already begun. That said, the prevailing view in legal doctrine is that new transactions which do not conflict with the purpose of the liquidation and which serve the company’s interests may be carried out. The general assembly may at any time give orders and instructions to the liquidators in this respect.

B. Conversion of Assets into Cash and Deposit of the Proceeds with a Bank

The conversion of the company’s assets into cash constitutes a mandatory stage of the liquidation. The liquidators may sell the assets individually or in groups; however, the bulk sale of a significant amount of assets is subject to the authorisation of the general assembly.¹⁰ The criterion for what constitutes a sale of a “significant amount” has been left undefined in the law, this matter being left to legal doctrine and to the liquidators’ discretion. The ordinary method of sale is public auction; sale by private negotiation is an alternative route available to the liquidators unless the general assembly has resolved otherwise.¹¹ Monies obtained during the liquidation, other than those required for the company’s ongoing expenses, are deposited in a bank account in the name of the company.

V. PAYMENT OF DEBTS AND DISTRIBUTION OF THE LIQUIDATION SHARE

A. Payment of Debts and Conditions for Distribution

At this stage of the liquidation, the primary objective is the satisfaction of all creditors. For the distribution to take place, it is mandatory that (i) the debts have been paid, or the amounts corresponding to non-matured and disputed debts have been deposited with a bank or adequately secured, and (ii) the three-month waiting period has elapsed. Tax debts, obligations owed to employees and liquidation expenses must be met on a priority basis. After the creditors have been satisfied, the remaining assets are distributed to the shareholders as the liquidation surplus.

B. Calculation of the Liquidation Share and Form of Distribution

The criterion applied in calculating the liquidation surplus is the ratio of paid-in capital; this ratio applies unless the articles of association provide otherwise. For holders of privileged shares, their privilege rights must additionally be taken into account.¹² Distribution is, as a rule, made in cash; distribution in kind may also be made possible by a resolution of the general assembly or a provision of the articles of association. No separate general assembly resolution is required for the distribution of the liquidation surplus; taking this decision falls within the liquidators’ authority. Nevertheless, a distribution carried out in violation of the law — commencing distribution without satisfying the creditors or before the three-month period has expired — gives rise to the liability of both the liquidators and the shareholders who benefited from such distribution.

VI. FINAL BALANCE SHEET AND DELETION FROM THE REGISTRY

A. Year-End Financial Statements and the Final Balance Sheet

If the liquidation is prolonged, the liquidators prepare the financial statements relating to the liquidation for each year-end and submit them for the approval of the general assembly; approval of these statements by the general assembly amounts to the release (discharge) of the liquidators in respect of that accounting period.¹³ At the end of the liquidation, upon payment of the company’s debts and reimbursement of the share prices, a final balance sheet showing the remaining assets is prepared and submitted for the approval of the general assembly. The assets side of the final balance sheet shows the cash on hand and at banks together with possible claims against shareholders, while the liabilities side shows the capital. Approval of the final balance sheet by the general assembly results in the release of the liquidators in respect of all the liquidation proceedings.

B. Deletion of the Trade Name from the Registry and Termination of Legal Personality

Following the completion of the liquidation, the liquidators request the trade registry directorate to delete the company’s trade name from the registry.¹⁴ There are two principal views in legal doctrine as to the legal nature of deletion from the registry: the declaratory view and the dual-element view. In Turkish law, the dual-element view is considered the more accurate in legal doctrine. According to this view, in order to speak of the termination of legal personality, both the actual completion of the liquidation and the deletion of the company’s trade name from the registry must be present together. The deletion is finalised by announcement in the Turkish Trade Registry Gazette.

VII. CONCLUSION

Liquidation proceedings in joint stock companies constitute a complex legal process which the legislator has designed and regulated as a series of interconnected steps. The fundamental principle governing this process is that the protection of creditors takes priority over any distribution to shareholders at every stage. The valuation of assets at market value, the mandatory call to creditors, compliance with the three-month waiting period, the prohibition on distributing the liquidation surplus before the debts have been paid in full, and the approval of the final balance sheet by the general assembly followed by the deletion of the company’s trade name from the trade registry constitute the most critical legal points of the process.

The broad discretion granted to the liquidators by reason of the legal nature of the liquidation process simultaneously gives rise to a heavy burden of responsibility. Liquidators who culpably breach these obligations will incur joint and several liability towards the company, the shareholders and the creditors.15

Att. Batuhan Adanur

Footnotes

1. TCC Art. 540/1: “The liquidators are obliged, immediately upon taking office, to examine the state of the company at the commencement of the liquidation and to prepare an inventory book and a balance sheet accordingly.” On the mandatory nature of the provision and the distinction between the liquidation balance sheet and the annual balance sheet, see Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1578 b; Legislative Reasoning (Gerekçe), TCC Art. 540.
2. Pursuant to TCC Art. 533/1, the dissolution of the company is deemed the commencement of the liquidation; that date is taken as the balance sheet date. See Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1578. On the declaratory nature of registration and announcement, see Legislative Reasoning (Gerekçe), TCC Art. 533.
3. TCC Art. 542/1-c provides that “where the company’s debts exceed the company’s assets, the liquidators shall immediately notify the situation to the court.” See Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1590.
4. Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1579, 1579 b. On the point that the liquidation cannot be suspended where the general assembly cannot convene or cannot adopt a resolution, see Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1579 b.
5. TCC Art. 540/2: “After the approval of the inventory and balance sheet by the general assembly, the liquidators shall take possession of all the assets of the company recorded in the inventory as well as its documents and books.” See Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1580; Legislative Reasoning (Gerekçe), TCC Art. 540. On the safekeeping of the books taken into possession, see TCC Art. 82/5 and 82/8.
6. TCC Art. 541/1: Creditors recorded in the books and whose residence is known are notified by registered letter, while other creditors are called by announcement published three times at one-week intervals in the Turkish Trade Registry Gazette; announcements must also be made on the company’s website and in the manner set out in the articles of association. Legislative Reasoning (Gerekçe), TCC Art. 541. On the mandatory nature of the call obligation and the liquidators’ liability arising from its non-fulfilment, see Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1581.
7. TCC Art. 543/2: “Distribution of the remaining assets may not commence until three months have elapsed from the third call.” On the mandatory nature of the waiting period, see Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1583.
8. TCC Art. 542/1-h provides that “the company’s non-matured debts shall be paid immediately, discounted at the rate applied by the Central Bank of the Republic of Türkiye to short-term loans.” Pursuant to TCC Art. 541/2-3, the amounts corresponding to non-matured or disputed debts are deposited with a bank to be designated by the Ministry; see Official Gazette No. 29301, 20.03.2015. On the discount/deposit tension regarding deferred debts, see Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1585.
9. TCC Art. 542/1-a and 542/1-b: The liquidators are obliged to complete the company’s current transactions and may not enter into new transactions not required by the liquidation. See Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1591.
10. TCC Art. 538/2: “The bulk sale of a significant amount of the company’s assets is subject to the approval of the general assembly.” It is provided that the general assembly shall grant such approval with the quorums set out in TCC Art. 421/2 and /3. On the vagueness of the concept of “significant amount” and the invalidity of a bulk sale made without the general assembly’s authorisation, see Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1596.
11. TCC Art. 538/1: “Unless the general assembly has resolved otherwise, the liquidators may sell the company’s assets by private negotiation.” See Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1596. Pursuant to TCC Art. 542/1-g, monies obtained during the liquidation, other than those required for ongoing expenses, are deposited with a bank in the name of the company; see Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1597.
12. TCC Art. 543/1 and 508/1: Unless the articles of association provide otherwise, the liquidation surplus is distributed among the shareholders in proportion to the capital paid in and their privilege rights. TCC Art. 543/3: Distribution is, as a rule, made in cash; distribution in kind requires a resolution of the general assembly or a provision of the articles of association. See Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1598 et seq.
13. TCC Art. 542/1-d: If the liquidation is prolonged, the liquidators prepare the financial statements relating to the liquidation for each year-end and submit them to the general assembly. On the point that approval of the final balance sheet results in the release of the liquidators, see Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1597.
14. TCC Art. 545 provides that “upon the termination of the liquidation, the company’s trade name must be deleted from the registry.” On the refusal of the deletion request, see TCC Art. 34. On the dual-element view and the re-registration, for supplementary liquidation, of a company deleted from the registry but with remaining assets, see TCC Art. 547; Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1604.
15. TCC Art. 553/1 provides that “the founders, members of the board of directors, managers and liquidators shall be liable for the damage they cause to the company, to the shareholders and to the company’s creditors where they culpably breach their obligations arising from the law and the articles of association.” See Tekinalp (Poroy/Çamoğlu), Ortaklıklar Hukuku I, İstanbul 2014, No. 1591.

BIBLIOGRAPHY

Tekinalp, Ü. (Poroy, R. / Çamoğlu, E.): Ortaklıklar Hukuku I, İstanbul, 2014.

Turkish Commercial Code No. 6102 (dated 13.01.2011, Official Gazette 14.02.2011, No. 27846).

Tax Procedure Law No. 213.

“Regulation on the Procedures and Principles of the General Assembly Meetings of Joint Stock Companies and the Representatives of the Ministry of Customs and Trade to Attend These Meetings”, Official Gazette 28.11.2012, No. 28481.

“Communiqué on the Determination of the Bank with Which the Claims of Company Creditors Shall Be Deposited in the Liquidation of Capital Companies”, Official Gazette No. 29301, 20.03.2015.