AUTOMATIC TERMINATION CLAUSES UNDER TURKISH LAW

AUTOMATIC TERMINATION CLAUSES UNDER TURKISH LAW

With the increase of electricity trading volume in Turkey, market players tend to use standardized trading contracts which are widely used in Continental Europe[1]. Along with such agreements, new risk management systems are introduced into Turkish legal market.

These kinds of contracts include, risk management provisions regulating bankruptcy case of one of the contract parties. Accordingly, in the event a bankruptcy procedure is initiated against one of the contract parties, the contract shall be terminated automatically without need of a notification[2].

The validity of these automatic termination provisions are not analysed in accordance with Turkish law. This paper aims to examine validity of such provisions from a general perspective.

Freedom of Contract

In accordance with Article 26 of Turkish Code of Obligation, the parties of a contract are free to determine to conclude a contract and to determine the content of the contract. In other words parties of contract are free to structure their contracts provided that the mandatory ordre public rules are regarded, the contract does not violate any personal rights or the subject of the contract is not impossible. The law defines contracts, which do not regard these limits, as null and void.

Under the light of the foregoing, contracts structured in accordance with free will of the parties and which do not breach limitations determined under Article 26 of Turkish Code of Obligations are valid contracts. This should also mean provisions regarding automatic termination in case of bankruptcy should also be valid contract provisions.

However, in case of bankruptcy, disposal rights of the bankrupt entity on all of its assets will be transferred to the bankruptcy estate. Therefore whether automatic termination provisions are valid or not must be analysed in accordance with the Turkish Enforcement and Bankruptcy Law.

Since electricity trading agreements can be categorized as sale agreements, Article 98 of Turkish Code of Obligations will also be applicable. Article 98 sets forth that under synalagmatic contracts if one of the contract parties are not able to fulfil its obligations under the contract, especially if it is bankrupt, other party is entitled to request guarantee for the fulfilment of the obligations. Otherwise this party can abstain from fulfilling its obligations. This will be analysed below.

Effects of Bankruptcy on Contacts

Some contracts listed under diverse legal regulations are terminated automatically with the bankruptcy of one of the contract parties. Ordinary partnership agreements and running account agreements are examples of such agreements.

In principle, bankruptcy does not have an effect on sale agreements. In other words, sale agreements (i.e. electricity trading agreements) do not terminate automatically if one of the parties goes bankrupt. However, depending on the fulfilment of obligations of the parties, there will be different outcomes. The subject has to be analysed under various presumptions.

Under specific circumstances, the non-bankrupt party is entitled to request the fulfilment of the contract. For example, in the event of bankruptcy if the price under a sale contract has been paid but the contract subject is not delivered, the buyer can request the price from the bankruptcy estate as bankruptcy receivable. However, if the bankruptcy administration is of the opinion that the contract is in favour of the bankruptcy estate the administration is entitled to opt to fulfil the contract.

If under a sale agreement none of the parties fulfilled their obligations, the buyer can request warranty shows that the seller can perform its obligations under the contract in accordance with Article 98 of Turkish Code of Obligations. If not, the buyer can refrain from paying the price. In this case if the bankruptcy administration does not provide guarantee, the non-bankrupt party can renege on the contract. If the bankruptcy submits a guarantee, the parties shall fulfil their obligations under the contract.

Furthermore Article 198 of the Enforcement and Bankruptcy Law entitles the bankruptcy administration to specific performance. If the bankruptcy administration determines the contract as in favour of the estate, it is entitled to perform the contract[3].

Thus, under Turkish law bankruptcy administration has a cherry picking right over the contracts, if it is of the opinion that the contract in question is in favour of the bankruptcy estate.

Cherry Picking Right of the Bankruptcy Administration

As summarized above, under Turkish law the bankruptcy administration has cherry picking right with regards to the contracts that the bankrupt entity is a party of[4]. Under these circumstances, it can be argued that automatic termination clauses in sale agreements are circumventing the cherry picking right of the bankruptcy administration.

In fact, the German Federal Court Decision mentioned below ruled the same.

German Federal Court Decision

On 15 November 2012 the German Federal Court analysed in its decision numbered IX ZR 169/11[5] whether automatic termination clauses in the event of a bankruptcy in sale contracts are valid or not. The contract subject to the decision is regarding delivery of energy.

With its decision the Court ruled that such automatic termination clauses abrogate the cherry picking right of the bankruptcy administration regulated under Article 103 of German Insolvency Law (Insolvenzordnung) and are therefore invalid[6].

In accordance with German Insolvency Law Article 119, agreements violating Articles 103 – 108 of the Law are null and void. Thus agreements, abrogating/limiting the application of Article 103 are null and void in accordance with Article 119.

 

Conclusion

As mentioned several times above, the bank administration has cherry picking right in accordance with Article 198 of Enforcement and Bankruptcy Law. Depending on the status of the obligations of the parties, contract party which shall fulfil its obligation is entitled to request warranty from the bankruptcy administration. Other than this, the parties shall fulfil its obligations. Thus under Turkish law, sale contracts are not terminated automatically in the event of a bankruptcy.

Whether such automatic termination clauses are valid under Turkish law are not tested before Turkish courts. Taking the similarities between Turkish and German insolvency rules we are of the opinion that Turkish courts may rule in the same direction regarding validity of these contract provisions.

For detailed information ozlem.ege@ege-law.com or info@ege-law.com

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[1] European Federation of Energy Traders (“EFET”) General Agreement Concerning the Acceptance and Delivery of Electricity

[2] EFET General Agreement Clause 10.

[3] Baki Kuru, İcra ve İflas Hukuku p. 1245

[4] Article 198 of Turkish Enforcement and Insolvency Law

[5] BGH, 15.11.2012, IX ZR 169/11 – OLG Celle LG Hannover

[6] Michael Cieslarczyk and Dr. Stefan Schröder Das Aus für Insolvenzabhaengige Lösungsklauseln.

EXPULSION OF SHAREHOLDERS UNDER TURKISH COMMERCIAL CODE NO. 6102

EXPULSION OF SHAREHOLDERS UNDER TURKISH COMMERCIAL CODE NO. 6102

Introduction

Under Turkish Commercial Code (“TCC”) the liability of shareholders of a joint stock company is limited with the payment of the contributed share capital (“single dept principle – tek borç ilkesi”). According to this principle, Save for exceptions stipulated under the TCC, no obligation shall be conferred upon the shareholders by the articles of association, other than the premium exceeding the share price or nominal value of the shares. (TCC 480). The payment obligation of the shareholder is to the company (TCC 329).

A shareholder, who does not pay the contributed share capital in due time will be in default without needing to serve a notification to that end (TCC 482).

In the event that a shareholder is in default in paying its share capital the company is entitled to initiate (i) enforcement proceedings for the payment, or (ii) expulsion procedures against the defaulting shareholder.

This brief note will only analyse expulsion of shareholders in general terms.

Requesting the Outstanding Share Capital

Who is entitled to request the payment?

In the event a shareholder of a joint stock company is in default for paying its share capital, the board of directors of the company is entitled to deprive this shareholder of its rights arising out of its partial payment and expel the shareholder from the company (TCC 482). The board of directors’ decisions regarding expulsion of a shareholder are subject to TCC 390 with regards to quorum.

How to request the payment?

In order to request the payment, the board of directors must issue a notification, addressed to the defaulting shareholder, for the payment. This notification has to be published in Trade Registry Gazette in accordance with Article 35 of TCC.

The content of the notification is also determined under TCC. Accordingly, the board of directors must notify the defaulting shareholder that the payment must be made within a month and inform the consequences of the non-payment.

Consequences of non-payment of the share capital despite notification?

If the defaulting shareholder insist on not paying the share capital within the notified one month, the board of directors deprives of the shareholder’s right arising out of its partial payment and the defaulting shareholder can be expelled from the company in accordance with the decision of board of directors (TCC 390).

The board of directors should find a potential acquirer for transferring the shares of the defaulting shareholder. The shares of the defaulting shareholder will not be transferred to any other shareholder or the company automatically.

Legal Consequences of Expulsion

Upon expulsion the defaulting shareholder will lose its shareholder title for the shares for which he is in default. The board of directors cannot deprive of the shareholders rights for the shares which the shareholder has already paid its contribution amount. The shareholder title of the defaulting shareholder continues for these shares.

Statute of Limitation for Due Share Capital Payments

The Court of Appeal has different decisions regarding statute of limitation on payment of share capital. However in its latest decision the Court ruled that share capital contribution shall not be subject to any statute of limitation unless the company still exists. On the other hand, the interests and secondary payments arising out of the non-payment of the contributed share capital are subject to general statute of limitation terms.

For detailed information ozlem.ege@ege-law.com or info@ege-law.com

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LIQUIDATION OF A FOREIGN BRANCH OFFICE UNDER TURKISH LAW

Introduction

Instead of establishing a Turkish company, foreign corporate entities prefer to establish a Turkish branch office in order to operate in Turkey. As Turkish companies these branch offices can also be liquidated.

Liquidation of branch offices is subject to provisions valid for liquidation of joint stock companies. Accordingly there are different corporate actions to be taken in order to validly liquidate a branch office.

  1. Commencement of liquidation

In order to commence with the liquidation procedures, a decision has to be taken by the authorised corporate body of main company. The authorised corporate body is to be determined in accordance with the local laws. In other words, if the main company is a German company and pursuant to German law, the authorised corporate body to decide on liquidations is the board of directors, the board of directors must take necessary resolution for the liquidation of Turkish branch office.

The decision basically has to include the followings:

– Reason of the liquidation:

Even stating that the operation of the branch office is not commercially feasible, is a valid liquidation ground.

– Release of the branch office director:

According to Article 553 of Turkish Commercial Code, the founders, board of directors members, managers and liquidators have legal responsibilities for their activities during their offices. The decision takers can face a wide range of sanctions from administrative fines to imprisonment. In order to ensure the impunity of these decision takers, it is crucial to release such from their acts. A corporate decision serves to this result.

The release of the branch office director shall therefore be mentioned within the liquidation decision.

– Appointment of a liquidator:

The decision must include the appointment of a liquidator who will be responsible for the next steps of the liquidation.

The liquidator can be the former director or a third party, however, Turkish Commercial Code Article 536 requires that one of the liquidators to be Turkish citizen and resident in Turkey.

  1. Interim Period Procedures

The liquidation decision must be registered with the trade registry and announced in the trade registry gazette. Once the liquidation decision is registered and announced, the liquidator shall issue a notification to the creditors of the branch office, if any. This notification shall be published at least three times in the trade registry gazette. The publication is made automatically by the trade registry, subsequently each week.

In the event there are company creditors, paying these debts even before the commencement of the liquidation process would shorten the liquidation process.

iii. Closing of the branch Office

After all notifications are completed the liquidator has to prepare a closing balance sheet.

The closing balance sheet has to be approved by the authorised corporate body of the main company which then has to be registered with the trade registry.

Once the balance sheet is registered with the trade registry, the liquidator has to take another decision regarding the completion of the liquidation process. This decision has also be registered. The registered decision will be submitted to the tax offices and social security authorities in order to complete the deletion of the branch office from these authorities.

For detailed information ozlem.ege@ege-law.com or info@ege-law.com

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