The prohibition on shareholders' borrowing from the company is regulated under Article 358 of the Turkish Commercial Code numbered 6102 ("TCC"). Pursuant to this provision, shareholders may not borrow from the company unless they have fully discharged their due debts arising from their capital subscription obligations and unless the company's profit, together with its freely disposable reserves, is sufficient to cover the company's accumulated losses from previous years.
What Conditions Shall Be Met For Shareholders To Borrow From the Company?
The purpose of this provision in TCC is to prevent shareholders from utilizing the company's funds or capital for their personal benefit and to avoid companies acting in effect as a credit institution for their shareholders. In order for the restriction imposed by Article 358 of the TCC on shareholders of joint stock and limited liability companies to be lifted, the following two conditions must be met:
- First condition: The shareholder shall have paid in full all due debts arising from their capital subscription, whether at the time of incorporation or during a capital increase; in other words, there must be no outstanding capital subscription debt.
- Second condition: If the company has accumulated losses from previous years, the sum of its freely disposable reserves and its profit shall be sufficient to offset such losses.
For a shareholder to be able to borrow from the company, the shareholder requesting the loan shall have fulfilled their own capital subscription obligation as described above; it is irrelevant whether other shareholders have fulfilled theirs. Article 358 of TCC expressly provides that only the fulfilment of due capital subscription obligations is required for borrowing to be permitted. The company's financial statements and balance sheet are of particular significance when determining whether its profit, together with freely disposable reserves, is sufficient to cover accumulated losses from previous years.
The provision does not specify what constitutes "freely disposable reserves"; however, reserves are generally regulated between Articles 519 and 523 of the TCC. According to Article 519, 5% of the annual profit shall be set aside as statutory reserves until these reserves reach 20% of the paid-in capital.
Once this threshold is reached:
- Any portion of the share premium generated from the issuance of new shares that has not been used for issuance expenses, amortization reserves, or charitable contributions,
- Any amount remaining from the payments made for cancelled shares due to redemption after deducting the issuance costs of new shares issued in their place, and
- After payment of a dividend of 5% to the shareholders, 10% of the amount to be distributed to those entitled to a share in the profit,
shall be added to the statutory reserves.
Which Shareholders Are Subject to the Company's Borrowing Prohibition?
Pursuant to Article 358 of TCC, the prohibition on borrowing from the company applies to all shareholders. As is evident from the title of the article, all shareholders are subject to this prohibition, regardless of whether they hold any position in the company's management bodies. Consequently, the application of the borrowing prohibition does not depend on whether the shareholder is a controlling shareholder, whether the shares held grant voting rights, whether they are privileged, or whether they are represented by share certificates.
Which Transactions Can Be Considered as Borrowing?
Article 395 of the TCC regulates the prohibition on members of the board of directors entering into transactions with the company and borrowing from it. Paragraph two of the relevant provision states that board members who are not shareholders, as well as the relatives listed in Article 393 who are not shareholders, may not borrow cash from the company. The company is also prohibited from providing sureties, guarantees, or securities for these individuals, assuming liability on their behalf, or taking over their debts. However, no such explicit provision exists in Article 358 of the TCC. The prevailing opinion in the legal doctrine is that the legislator did not intentionally refrain from introducing such a provision in Article 358. Therefore, transactions such as the company granting sureties, guarantees, or securities to third parties for the debts of shareholders, assuming liabilities on their behalf, or taking over their debts, should also be considered as borrowing within the meaning of Article 358 of the TCC.
What Are the Sanctions for Breach of the Prohibition?
Article 358 of TCC prohibits shareholders from borrowing from the company unless certain conditions are met; however, it contains no provision on the legal consequences of breaching this prohibition. By contrast, another provision regulating the borrowing prohibition, Article 395(1) of the TCC, expressly provides that transactions in violation thereof shall be null and void. Borrowing transactions concluded without fulfilling the conditions stipulated in Article 358 shall be deemed null and void due to contravention of the law and mandatory provisions and shall give rise to an obligation of restitution. In such a case, shareholders shall return any value they have obtained in breach of Article 358 to the company pursuant to the provisions of the Turkish Code of Obligations on unjust enrichment. Furthermore, pursuant to Article 1530(1) of the TCC, borrowing transactions carried out in violation of Article 358, a provision of commercial nature, shall be deemed null and void.
Article 562(5)(b) of the TCC provides for the sanction applicable in the event that loans are granted to shareholders in breach of Article 358. Under this provision, any person who grants a loan to a shareholder in violation of Article 358 shall be subject to a judicial fine of not less than three hundred days. As can be seen, while the prohibition on borrowing is addressed to the "shareholder," the penal sanction applies to the person granting the loan to the shareholder.
Although borrowing from the company by a shareholder is permitted if the conditions stipulated in Article 358 are satisfied, this permission is not unlimited. To protect the company's assets, such borrowings must be short-term and of small amounts. Otherwise, shareholders of a joint-stock company could exploit this borrowing mechanism to deplete the company's assets or divert company resources for their own benefit. In such cases, those who provide loans to shareholders may be deemed to have committed the offence of breach of trust under Article 155 of the Turkish Criminal Code and the offence of fraudulent bankruptcy under Article 161 of the Turkish Criminal Code.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
