Liquidation of Capital Companies

By Ayça Bayburan
ADMD Law Office, Istanbul TURKEY

There are different types of commercial companies that are available to establish by investors in Turkey in accordance with the Turkish Commercial Code (TCC). Such commercial companies are governed by specific legal rules which regulate their formation, operation and dissolution. Capital companies are the most common form of commercial entities in Turkey. The most common capital companies which are; joint stock companies ("Corporations" / Anonim Şirket in Turkish) and limited liability companies ("LLC's" / Limited Şirket in Turkish) and their liquidation procedures will be reviewed by this article.

Under Article 269 of the TCC, Corporations can be described as companies, whose capital is determined and divided into shares, being liable for its debts only up to the amount of its estate. The liability of Corporation shareholders is limited by the shares of capital that they own. Article 503 of TCC defines LLC's as companies founded under a trade name by two or more real persons or legal entities, which has a determined basic capital and in which the liability of members is again limited by the capital subscribed by them. However for LLC companies it shall be noted that such limitation of liability is not effective against government related debts such as employee social security premiums and taxes.

Capital companies are formed in order to provide a specific economic purpose. Furthermore, realization of such purpose or an impossibility of its realization, the expiration of the term of the entity, the loss of two thirds of the share capital or the reduction of the number of shareholders below five for joint stock companies and below two for limited liable companies shall result in the dissolution and liquidation of such entities. Except for cases of mergers into another entity and conversions of company types, the capital companies shall liquidate in conditions mentioned.

All types of capital companies are not regulated under one section of the TCC and TCC designates different corporate governance rules for each type separately however, according to Article 552 of TCC, provisions of joint stock corporations regarding appointment and dismissal of liquidators, procedures of liquidation, cancellation of entry in the Trade Registry and preservation of accounting books shall also be applied to LLC's.

The company that will dissolve shall enter into a phase titled liquidation. Under Article 440 of TCC, the company is wound up, duties and powers of its organs shall be limited to operations that are indispensable for such dissolution procedure.

In principal, the winding up of operations shall be carried out by the board of directors. However, if a liquidator is designated by General Assembly Resolution or by the Articles of Association of the company, than the Board may delegate such responsibility. Even if the winding up is performed by the Board, liquidators shall be registered to the Trade Registry and be announced accordingly. If not decided otherwise, the liquidators shall be entitled to an appropriate amount for their activities. The same rights may be applied to the Board or one of its members accordingly.

In cases of LLC's it shall be noted that there is no General Assembly or Board of Directors but instead only one management body that is titled ‘Board of Shareholders', accordingly all the references to the Board or General Assembly shall be read to mean Board of Shareholders for LLC's).

Liquidators shall be appointed by the Articles of Association (AoA) or by a resolution of the General Assembly and accordingly dismissed with a similar procedure. General Assembly is entitled to limit or extend their powers. On the contrary, a liquidator that is appointed by the Judge (in cases of Court decisions for an involuntary dissolution or technical bankruptcy) then they cannot be dismissed by General Assembly resolutions. During liquidation, General Assembly is also entitled to decide upon amending AoA, increasing the basic capital and collecting unfulfilled commitments of share contributions from shareholders. However, it should be noted that such powers of General Assembly shall be limited to the operations that are indispensable for the liquidation only and in principle the companies that are being liquidated cannot operate commercially if not authorized specifically by a Court decision otherwise.

As soon as liquidators start to perform their duties, they shall examine the situation of the company at the beginning and shall draw up inventory and balance sheet as a consequence. They shall then submit those to the attention and approval of General Assembly of the company. Liquidators than take possession all of the records, documents and the ledgers of the companies and take control of the assets. Thereafter, persons who have been ascertained to be creditor according to the books of the company or the contents of other instruments shall be invited to declare their debts and credits. If those who are known to be creditors do not make any action accordingly the amounts of their debts noted in the company records shall be deposited to the administrative authorities to be named by the Courts under their name and benefit.

In pursuit of realizing the assets and collecting debts, if the liquidator foresees that the debts of the company would be very much likely to exceed its assets, then the liquidator shall immediately inform the Court. In such case, the Court will decide the execution of bankruptcy proceedings, if necessary (it shall be noted that liquidation in most cases is a voluntary procedure and unlike bankruptcy, in liquidation the balances of the company shall read a zero sum meaning that the company shall have no debts or credits remaining to finalize the procedure). If the winding up lasts a longer time, the liquidators shall draw up an interim balance sheet for each year which shall be submitted to the attention of General Assembly.

After payment of the debts, the remaining net assets of the company in liquidation shall be distributed in cash among the shareholders proportional to their capital commitments and the privileges attaching to such shares unless otherwise is decided by AoA of the company. Such procedure is titled ‘liquidation margin right'. After the distribution of such assets, the liquidators shall draw up a final balance sheet at the end of the liquidation which shall be submitted to General Assembly.

At the end of the procedures the trade name shall be deleted from the Trade Registry permanently (please also note that at the commencement of the liquidation the company title is amended to include a phrase to show that the company is in liquidation) and such fact shall be announced.

Finally liquidators shall hand over all of the books and documents of the company to a notary public designated by the Court for preservation for a period of ten years following the liquidation. Naturally relevant tax offices are also informed of the liquidation and company's tax registration is also erased from tax database.