Legal Effect of Economic Turmoil: Technical Insolvency Problem in Turkey

Legal Effect of Economic Turmoil: Technical Insolvency Problem in Turkey

M. Ugur Akdogan
Copyright: © 2013 |Pages: 11
DOI: 10.4018/978-1-4666-3006-2.ch011
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Abstract

For companies that have been unable to succeed in transforming the economic turmoil into opportunities for growth, it is not surprising to observe either higher losses or lower profits in comparison to their previous years. Apart from efforts to struggle against the economic crisis, management teams also have legal responsibility to manage the technical insolvency position of their companies. In Turkey, “technical insolvency” mainly occurs when one-third of a company’s capital is lost as a result of their losses and increases bankruptcy pressure on financial management. Moreover, it also causes other difficulties such as losing legal grounds for increasing capital or carrying out various structuring plans such as mergers and spinoffs. Accordingly, it is crucial for companies to resolve technical insolvency. There are alternatives for overcoming technical insolvency problems, but each alternative also has disadvantages that need to be carefully taken into consideration.
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Research Methodology

During this research, primarily the definition of technical insolvency across various territories was analysed together with scientific research carried out by various international institutions. In particular, the regulations in the Turkish Commercial Code were examined to identify the local understanding of the technical insolvency concept.

During this analysis, companies that are subject to the Turkish Commercial Code were mainly taken into consideration. Accordingly, companies listed on the Istanbul Stock Exchange or banks and insurance companies that have their own specific regulations apart from the Turkish Commercial Code were not the focus of this research. As per the current legislation applicable in Turkey, since there is no obligation for privately held companies to publicly share their information, in order to obtain information from unlisted companies, either internal or external audit reports of the companies were used. Moreover, the financial statements attached to corporate income tax returns and the tax certification reports written by the companies’ sworn financial advisors were used for further data gathering and verification purposes.

During the analysis of advantages and disadvantages of alternatives that can be used when struggling against technical insolvency, real-life experiences and other potential positive and negative effects of the applicable alternatives were analysed.

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