Changes to the Turkish Commercial Code: company loans

 I would bet that a vast majority of companies follow the famous Turkish proverb that says, “The caravan is set on its way,” rather than follow the corporate governance rules. On the other hand, some serious companies are already progressing in their compliance with the new commercial code.

One of the most important changes introduced in the new law regards loans provided by shareholders to companies.

The new Turkish Commercial Code limits the use of company money, which was the traditional way of doing business in Turkey. According to Article 358 of the new Turkish Commercial Code, shareholders cannot become indebted to their company, excluding debt arising from subscription, unless the debt results from a transaction conducted with the company or as a requirement of the company’s scope of activity or the business of a shareholder’s enterprise.

Real person shareholder

The prohibition of shareholders becoming indebted to their company has been enacted for the sake of shareholders’ personal debts rather than commercial debts. Legal entities have no personal needs, so their debts to the company will be of a commercial kind. Therefore, the prohibition of owing money to a company should only be with regards to real person shareholders.

It is explained in the law’s preamble that “the provision aims to prevent shareholders from using the company’s treasury for their personal expenses and from drawing money from company accounts. It has been taken into consideration that the absolute implementation of this article would cause inequity in practice, so it is intended for shareholders to purchase goods from the company via consignment, deferred payment etc., as ordinary customers of the company.”

Only JSC and limited companies

The prohibition of shareholders’ becoming indebted to their company applies solely to joint stock companies (JSC) and limited liability companies. This prohibition does not apply to unlimited companies, ordinary partnerships or real person merchants.

Construction companies to distribute dividends before completion of work

As contract income will be determined annually, it will be possible under the new account standards to distribute dividends to shareholders before the completion of construction, at profitable periods, in cases in which said construction is spread over more than a year. On the other hand, shareholders or board members working for the company may be compensated with attendance fees, to be paid in return for their services.

Discussions based on unrecorded economy

A shareholder’s current account is the best place to record undocumented expenses. Although shareholders who are not indebted to the company have the right to receive dividends, the shareholders’ withdrawal of money from company accounts results in the spending of capital even when there is no gain. As a matter of fact, creditors have the right of first priority over company money, before any shareholder.

The best way to avoid an unrecorded economy is for the market to cure itself, which will hopefully be possible upon the entry into force of the above-explained article. However, there are currently some attempts to change this legislation and make it softer, which would indeed mean a step backwards in development.

NOTE: Berk Çektir is a licensed attorney at law and available to answer questions on the legal aspects of living in Turkey. Please kindly send inquiries to b.cektir@todayszaman.com. If a sender’s letter is published, names may be disclosed unless otherwise expressly stated by the sender.

DISCLAIMER: The information provided here is intended to give basic legal information. You should get legal assistance from a licensed attorney at law while conducting legal transactions and not rely solely on the information in this column.