Over-indebtedness

Also known as: Balance Sheet Insolvency, Insolvency, Interim Balance Sheet, TCC Art. 376/3, Borca Batıklık

In short

The situation where a company's assets are insufficient to cover its debts, valued both on a going-concern basis and at likely sale prices; it triggers the management body's duty to notify the court.

Over-indebtedness is the situation where a company’s assets are insufficient to cover its debts. The third paragraph of Art. 376 of the Turkish Commercial Code requires the management body to prepare an interim balance sheet and notify the court in case of over-indebtedness. This duty is among the board’s non-delegable duties.

Determining Over-indebtedness

If there are signs raising suspicion that the company is over-indebted, the board prepares an interim balance sheet on two separate bases:

Going concern: On the assumption that the company continues operating,
Likely sale prices: At the values that would be obtained if the assets were sold.

If assets are insufficient to cover debts on both bases, the company is over-indebted.

Notifying the Court

The board of an over-indebted company notifies the commercial court of first instance where the company has its seat and requests the company’s bankruptcy. Notification may be avoided if there are written statements by creditors subordinating their claims behind all other creditors to the extent necessary to eliminate the over-indebtedness. In practice, loans from shareholders to the company are subordinated this way.

Exchange Rate Loss Exemption

Under the Ministry of Trade communiqué, exchange rate losses on unpaid foreign currency liabilities may be disregarded in over-indebtedness calculations until 1 January 2028; see Capital Loss.

Concordat

A company unable or at risk of being unable to pay its debts when due may request a concordat under the Enforcement and Bankruptcy Law to avoid bankruptcy. The concordat process allows debts to be restructured with creditors under court supervision.

Directors’ Liability

Managers who fail to notify despite over-indebtedness and continue operating, increasing the company’s debts, may be liable for creditors’ losses; see Directors’ Liability. The same rules apply to limited liability companies.

Frequently Asked Questions

What must management do when the company is over-indebted?

If there is suspicion of over-indebtedness, the board prepares an interim balance sheet on both a going-concern and a likely-sale-price basis. If assets do not cover debts on either basis, it notifies the commercial court where the company has its seat and requests bankruptcy. Notification may be avoided if creditors subordinate their claims.

Is there an alternative to bankruptcy for an over-indebted company?

A company showing signs that it cannot pay its debts when due or is over-indebted may request a concordat under the Enforcement and Bankruptcy Law. A concordat allows restructuring with creditors, but requires a realistic recovery plan.

← Glossary A–Z