Turkey: Transfer Of Assets Along With Liabilities As In Transfer Of Enterprise/Business

Enterprise Concept in Light of TCC and NTCC

The term of "commercial enterprise" is defined under Turkish legal doctrine as conducting commercial activity under an organization, which contains capital, labor and management¹. Under Turkish Commercial Code numbered 6762 ("TCC"), the most important factor for defining a commercial enterprise is indicated as "being commercially operated -going concern".

As per art. 11/I of TCC, "the enterprises such as businesses, factories or others that are being commercially operated are considered as commercial enterprise". Although TCC is considered the commercial operation term as a cornerstone, it does not contain a sufficient definition or illustrate the factors of it but only enumerates its kinds. Under art. 12 and 13, some types of activities, the conduct of which are considered as business or other types of commercial enterprises.

On the other hand, even if an enterprise conducts activities listed under TCC art. 12 and 13, the important criterion scale is whether there is a level commercial activity, which could be considered as higher than commercial activities of a craft type or micro enterprises. This rule is set forth under art. 14/II of Trade Registry By-laws as "the activities, which do not target for revenue, which are not going concern and level of which are not higher than the one of a craft or micro enterprises set forth under art. 17 of TCC shall not be considered as commercial enterprise. In addition, in the decisions of Court of Appeal, it is also accepted that in order to be deemed as a commercial enterprise, an enterprise shall have the necessary business volume -above a certain threshold- and importance, which requires a commercial accounting. On the basis of the foregoing, "having higher activity level than the craft or micro business" is accepted as a fundamental factor of determining the concept of "commercial enterprise" under art. 11 of the new Turkish Commercial Code numbered 6102 ("NTCC").

Transfer of Enterprise/Business Concept and Discussions of Transfer of Assets Along with Liabilities

Under the currently applicable laws, "transfer of commercial enterprise" concept is governed by Turkish Code of Obligations numbered 818 ("TCO"). According to Article 179 of the TCO, in case the "whole of an enterprise" is transferred including all assets and liabilities thereof, the transferee automatically becomes liable for the debts of the said enterprise, starting from date of the notice to the creditors or the publication of newspaper advertisements to that effect.

In addition, there is a complementary provision under Turkish Labor Act numbered 4857 ("TLL"). As a general rule of the Turkish Labor Act, the employees of a business place are automatically transferred and become the employees of the new employer, when such business place is transferred to a new owner, who will keep the business running.

Theoretically, in order to qualify an asset transfer as a "transfer of business" or "transfer of commercial enterprise", it is necessary for the transferee to obtain the entirety of such business or a separable (stand-alone) part of a business ("line of business") including all assets and liabilities thereto. Therefore, if the transferor only transfers certain assets (e.g. immovable properties, vehicles, etc.), but retains the obligations and liabilities arising out of or in connection with such assets, in general the transaction is not considered as a "transfer of business", but merely as transfer of certain assets.

On the other side, as per the established doctrine² and the Court of Appeal decisions³, even if some components of a business or commercial enterprise are not transferred, in case the transferred components are sufficient to continue commercial activities as an enterprise, it is accepted that such transaction is an enterprise/business transfer as per art. 179 of TCO. Moreover, art. 179 of TCO is considered as a mandatory provision of law and decisions are given which are restricting the transfer of entire assets of a business without having the liabilities.

In light of the above, the transfers, the subjects of which are fundamental components -equipments, fixtures and fittings- of a business are considered as "implicit transfer of business" even if it does not contain the liabilities.

In other words, transferring certain aspects of a business in parts or in separate steps would not prevent the transferee to inherit the liabilities attached to the business and the transferee would not be able to avoid the legal consequence of a "business transfer".

As indicate above, art. 179 of TCO is accepted by the established opinions as mandatory provision of law. Therefore, it is also indicated in the established decisions of Court of Appeal that the declaration of nullity for the decisions contrarily taken to conduct asset transfers which contain fundamental components of a business without transferring liabilities could always be claimed by any person who has a legal interest.⁴

On the other side, there are voices under Turkish legal doctrine who are not participate such opinion. As per the contrary opinion, transfer of fundamental components of an enterprise/business are not necessarily requires the transfer of assets along with liabilities. This opinion claims that in order for the transfer of liabilities, the transfer of a business with the entirety of its assets and liabilities, however, it does not restrict the transfer of its assets without the liabilities and art. 179 of TCO shall be read as indicated. In other words, transfer of whole assets or fundamental components of the assets of an enterprise shall not necessarily be considered as the transfer of liabilities along with such assets. According to this, assets of a commercial enterprise could be transferred without transferring the debts and liabilities⁵.

According to another opinion, in the transfer agreement, the transfer of liabilities may be agreed by the parties either explicitly or implicitly⁶. Unless otherwise explicitly indicated in the agreement, the transferee shall also bear the liabilities of the business while transferring it. However, for such a conclusion, the business shall be transferred entirely with its assets and liabilities⁷.

The most important argument of the established opinion, which considers art. 179 of the TCO as mandatory provision and restricts the transfer of entire assets of a business without the liabilities, is that the transfer of the assets of an enterprise without the liabilities will harm the enterprise, the creditors or other person who has legal benefits or even, such a transfer can only be made for such purpose.

On the other hand, the contrary opinion stressed that if sufficient value is paid in accordance with the market conditions, the transaction for transferring the assets of the business shall be considered as valid. Because the market value of business assets transferred along with the liabilities shall not be equal to the market value of business assets transferred without the liabilities.

As per Article 280 of the Execution and Bankruptcy Code ("EBC"), all transactions realized by a legal entity, whose equity is not sufficient to cover its liabilities, with the intention of not compensating its creditors, are deemed null and void, provided that the other parties of the transactions in question are aware of the economic situation of the transferring legal entity and its intention of defeating its creditors, or if there is explicit evidence which would require such third parties to be aware thereof. Moreover, pursuant to the third paragraph of the same article, in case an enterprise (as a whole) or significant part of its assets are transferred, the transferee is automatically deemed to be aware of the economic situation of the transferor and transferor's intention of defeating its creditors. In order to enforce this provision under the aforementioned Article 280 of EBC, the transferor legal entity must have been subject to an attachment or bankruptcy which is initiated within two years as of the transaction by a specific creditor claiming annulment of the above mentioned transaction within five years statute of limitations following the date of such transaction. As is seen, in order to claim that a transaction null and void according to EBC, the transfer of assets without the liabilities is not indicated as a matter, however, it is necessary that occurrence of an adverse economic situation which requires certain conditions and intention of damage during the execution of the transaction are required.

This provision of EBC is in supportive nature to the contrary opinion which claims that art. 179 of TCO is not mandatory for the transfer of assets along with liabilities.

The ultimate goal of the parties is the decisive factor in determining whether a transfer is only an "asset transfer" or a "business transfer".

When reviewing the provisions of the new Turkish Code of Obligations numbered 6098 ("NTCO"), which will enter into force on 1 July 2012, art. 202 relevant to the transfer of business, it is possible to say that the provision is repetitive when compared with art. 179 of TCO. On the other hand, since the NTCO embrace a more simplistic language, it is easier to claim that in order to transfer the business; the law does not make it mandatory to transfer assets along with the liabilities. As per art. 202 of NTCO, a transferee who acquires a business will bear the liabilities if he transfers the business assets along with the liabilities. In other words, in light of the provision of NTCO, it will be possible to claim that the transferee will only transfer the assets but not the liabilities.

The common practice for transfer of enterprise/business is to enter into a framework "asset/business transfer agreement". However, as per the provisions of TCO and the TCC which are still in effect, at the closing stage each asset constituting the acquired business must be transferred through a different procedure e.g. in case of a conveyance of an immovable, such conveyance must be conducted before the land registry office, or in case of transfer of vehicles, such transfers shall made before a notary public and shall be registered before the traffic registry branches or offices of the police departments whereas title to moveable assets are conveyed through invoicing.

As per art. 13/III of the NTCC, which will enter into force on 1 July 2012: "The commercial enterprise will be transferred as a whole which will not necessitate conducting the legally required transactions for the transfer of each asset separately. Unless otherwise indicated, the transfer agreement is considered as covering the fixed assets, enterprise value, tenancy rights, trade name and other intellectual property rights, and other assets which are permanently attached to the business. The transfer agreement and other agreements subject to which is a whole enterprise shall be in written form and shall be registered and announced with the trade registry.

On the basis of the foregoing, the above mentioned provision of NTCC supports the claim that for transfer of commercial enterprise, the togetherness of assets and liabilities are not mandatory and it is possible for parties to freely determine the components of a transaction. Because, the relevant article explicitly indicates that otherwise may be agreed and there is no reference to any debt and liability in such article.

Conclusion

As discussed above in detail, the provisions of both NTCO and NTCC related to the transfer of enterprise/business is in a nature supporting the idea that it is not mandatory to transfer assets and liabilities together for a transfer of enterprise. However, we will simply see how Court of Appeal will interpret and evaluate the actual situations which will occur after the new laws enter into force.

Footnotes

1. Poroy/Yasaman; Ticari İşletme Hukuku, Vedat Kitapçılık, İstanbul 2010, 13th Edition, p. 27-28.

2. Poroy/Yasaman; s. 46; s. 46; Ülgen/Teoman/Helvacı/Kendigelen/Kaya/Nomer/Ertan; Ticari İşletme Hukuku, Vedat Kitapçılık, İstanbul 2006, 1st Edition, p. 170.

3. Court of Appeal 21. Civil Chamber E. 2005/1077 K. 2005/1752 T. 1.3.2005; Court of Appeal 21. Civil Chamber E. 2004/6582 K. 2004/6965 T. 14.9.2004; Court of Appeal 21. Civil Chamber E. 2001/6728 K. 2001/6742 T. 15.10.2001; 15. Civil Chamber E. 1995/1063 K. 1995/1252 T. 6.3.1995.

4. Court of Appeal 11. Civil Chamber E. 1978/3158 K. 1978/3661 T. 6.7.1978.

5. Mehmet Fatih Ar Ticari İşletmenin Aktifi ve Pasifi ile Devri, Vedat Kitapçılık, İstanbul 2008, p. 79, 148, 156, 157, 165.

6. Abuzer Kendigelen, Hukuki Mütaalalar IV, p. 12.

7. 75 Claus-Wilhelm Canaris, Hendelsrect, 24., vollstandig neu bearbeitete Auflage, München, C.H. Beck'sche Verlagsbuchhandlung, 2006, 8, II, N. 11.

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.