INTRODUCTION
In Turkish Commercial Law, the liability of shareholders in joint stock companies (anonim şirket) against the company’s creditors is limited to the capital they have committed. Accordingly, shareholders cannot be held liable for the company’s debts to third parties, and the company itself is solely responsible with its legal personality and assets.
To balance the principle of limited liability for shareholders with the protection of creditors’ interests, the preservation of committed and paid-in capital has emerged as a fundamental principle of joint stock companies. This principle has led to the establishment of measures ensuring the fulfilment of cash capital commitments, as well as procedures for determining the true value of in-kind capital contributions.
The fundamental rule for incorporating in-kind assets into capital is that they must be valued by an expert, as stipulated in Article 343 of the Turkish Commercial Code (“TCC”) No. 6102. However, in response to evolving practical needs, an exceptionary regulation has been introduced, allowing a joint stock company’s debt to its shareholder to be included in a capital increase without the expert valuation requirement.
This article will examine the practice regarding the inclusion of debts to shareholders into capital and clarify its distinction from in-kind capital contributions.
A. ASSETS ELIGIBLE FOR IN-KIND CAPITAL CONTRIBUTION
According to Article 342 of the Turkish Commercial Code (TCC), for an asset to be contributed as in-kind capital in a joint stock company, it must: (i) be free from any rights in rem, liens, or precautionary measures, (ii) be monetarily assessable and transferable, and (iii) not constitute a service obligation, personal labor, commercial reputation, or a receivable that has not yet matured.
In this context, when evaluated together with Article 127 of the TCC, which regulates the types of assets that can constitute capital in commercial companies, it becomes evident that -without limitation to the listed items- ownership rights over tangible assets, industrial and intellectual property rights, partnership shares and receivable rights can be included as capital under the relevant provision.
B. VALUATION PROCEDURE
a. Procedure Regulated in TCC
Pursuant to Article 343 of the Turkish Commercial Code (TCC), an expert report must be obtained to determine the value of the relevant asset in order to ensure the full and accurate contribution of capital to the company. According to this provision, the valuation report prepared by an expert, who is appointed by the commercial court of first instance in the jurisdiction where the company is headquartered at, serves as the basis for determining the true value of the in-kind capital contribution. The said report must determine that;
- the valuation method applied is the fairest and most appropriate choice considering the specific characteristics of the case,
- the receivables contributed as capital are verified as real, valid, and meeting the necessary qualifications to constitute capital
- their collectability and full value, as well as the number of shares to be allocated for each in-kind asset and their equivalent amount in Turkish Lira.
b. Exceptionary Procedure Applied to Debts Owed to Shareholders
When a company’s cash debt to a shareholder is intended to be included in a capital increase, the existence of a determinable monetary value necessitated a departure from the expert valuation procedure and the adoption of a simplified process.
In this regard, a circular issued on September 27, 2013, by the Directorate General of Domestic Trade under the then Ministry of Customs and Trade stated that, instead of an expert report, a report prepared by a sworn financial advisor or a certified public accountant confirming the same matters would be sufficient for the inclusion of shareholder receivables as in-kind capital in a capital increase.
As mentioned above, Article 343 of the Turkish Commercial Code (TCC) aims to ensure the effective operation of the principle of capital maintenance by requiring court-appointed expert valuation for in-kind contributions, thereby determining their true value. Consequently, although not explicitly provided for in the law, the acceptance of valuations conducted through reports by sworn financial advisors or certified public accountants based on the Ministry of Trade’s circular raises concerns in terms of the hierarchy of norms.
This exceptionary practice has been in place since the era of the repealed Turkish Commercial Code No. 6762, and despite being criticized in legal doctrine regarding its place in the legislative methodology, it is clear that debts owed to shareholders differ from other in-kind assets in several respects. For instance, when incorporating a real estate asset into capital, its exact balance sheet value is unknown, and a valuation examining its technical and commercial attributes is necessary. In contrast, the amount of a debt owed to a shareholder is already determined and recorded as a liability in the balance sheet. In this context, the procedure was simplified by eliminating the need for an expert valuation.
Similarly, when a shareholder wishes to contribute a receivable from a third party as capital, no pre-existing recorded value exist and a valuation must be conducted considering factors such as the debtor’s payment capacity and the collectability of the receivable. In contrast, since a debt owed by the company to its shareholder has already been transferred to the company, there is no need for an assessment regarding its collection.
Finally, it is important to note that neither the TCC nor the Ministry of Trade’s practice differentiates between shareholder receivables based on their commercial or financial nature, nor do they examine the underlying relationship of the debt. Consequently, debts arising from the financing of the company and those originating from external services provided by the shareholder to the company are treated in the same manner when included in capital, and therefore this effectively allows the shareholder to determine the value of the debt. In such cases, the valuation should always be conducted in accordance with the arm’s length principle applicable to related party transactions.
CONCLUSION
Pursuant to Articles 127 and 342 of the TCC, in-kind assets eligible for inclusion in capital are primarily valued by court-appointed experts. However, in cases where shareholder receivables—particularly those with distinct accounting implications—are contributed as capital, a different procedure is applied, taking into account the roles of the company and the shareholder in the creditor-debtor relationship. Instead of an expert valuation report, a report prepared by a sworn financial advisor or a certified public accountant in accordance with Article 343 of the TCC is deemed sufficient for the capitalization of such receivables. Likewise, trade registry offices also require the submission of a sworn financial advisor or a certified public accountant report, rather than an expert valuation, for capital increases funded through the “debts to shareholders” account.
Although there are discussions regarding the compatibility of this practice with the hierarchy of norms, it is evident that the specific nature of the receivable in question and the practical necessity of capitalizing funds previously provided by shareholders outside of their capital commitment justify this approach.
Commercial debts owed by the company to its shareholders may also be included in a capital increase through the same procedure. However, it is essential to ensure compliance with related party transaction principles and to conduct transactions based on fair market values.
