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Key issues facing company directors in relation to COVID-19

13 April 2020 – Under the provisions of the Turkish Commercial Code, company directors are required to act diligently and prudently in the performance of their duties relating to company management. The duty of care imposed on company directors covers all aspects of company business, including the management of labour, the supply chain, customer relations, operations and finance. Directors may be liable towards company shareholders and creditors for losses arising from their negligent actions.

The COVID-19 pandemic has affected most businesses negatively: it creates unpredictability and uncertainty in managing a company and raises the question of how directors should ensure the continuity of the business while taking steps to protect the health and safety of employees. In this context, we have highlighted the following key issues that company directors in Turkey should consider and recommendations on how to address them.

1. Employment matters and occupational health and safety

From the aspect of Turkish labour law, the main obligation of company directors in the context of the COVID-19 pandemic is to ensure the health and safety of employees in the workplace by (i) closely monitoring the regulations and announcements of the public authorities related to the precautions to take in relation to COVID-19, and (ii) ensuring effective implementation of such regulations in the workplace to the extent relevant and possible. In this regard, it is critical to provide a health and safety plan for employees that should include, inter alia, the following actions: (i) providing a sufficient number of hygiene products such as hand sanitizers, masks, and gloves in the workplace; (ii) regular cleaning and disinfection of the workplace; (iii) ensuring social distance in the workplace by changing seating plans if necessary; (iv) replacing physical meetings with teleconferences; (v) shifting to a remote working plan, if possible; and (vi) implementing flexible working hours to assist employees to restrict the use of public transportation during rush hour.

2. Crisis management

Public authorities in Turkey are implementing new regulations each day to avoid the spread of the virus and to minimise its adverse effects on businesses. It is crucial to monitor these measures and to implement them within the company to the extent that they are relevant to the business. On the other hand, it is inevitable that some businesses may require urgent action to manage the unexpected impacts of the pandemic.

Company directors must establish and develop a crisis management system to follow official regulations in relation to COVID-19 and to respond swiftly to urgent requirements that may arise during the course of extraordinary governmental measures.

3. Planning to ensure liquidity and financing

Company directors are also required to take suitable measures to maintain the solvency of the business. In this respect, the company’s cash-flow and liquidity level must be monitored and a risk assessment needs to be made. The company’s financing position also needs to be monitored and the availability of potential restructuring opportunities should be sought. Government programs and special funding offers provided in connection with the COVID-19 crisis should also be considered.

Several banks in Turkey have announced that they will postpone loan payments and will open new credit lines for companies directly suffering from the COVID-19 pandemic. Alternatively—and depending on company structure—shareholder loans may be preferred if external credit lines are restricted before cash-flow levels are fully restored.

It should be noted that the Ministry of Commerce has recommended that companies do not distribute net profits generated in respect of periods prior to the 2019 financial year and not more than 25% of net available profit generated in 2019. As of the date of publication of this update, it is widely expected that this recommendation may become a mandatory restriction applicable for a temporary period through an amendment to the Turkish Commercial Code. Company directors should monitor such proposed measures and restrictions.

4. Contract management

As a result of the various impacts of the pandemic (including related state measures) on both cash-flow and the ability to perform certain contracts, most companies have suffered a decrease in service capacity, and many have become unable or find it difficult to perform their contractual obligations.

While a pandemic may be defined as a force majeure event for specific types of contracts, company directors should evaluate carefully whether the force majeure clauses of their contracts or the law applying to their contract are triggered in the current situation. It is often the case that the relevant law or contract sets a high bar regarding the applicability of force majeure and requires the factual or legal impossibility of fulfilling a contract, whereas what may be facing businesses is the impracticality of performance due to customer cancellations or reduction of supplies. There may be provisions in either the contract or relevant law that allow, in effect, the suspension of or processes for revisions to the contract, in addition to its termination. These cases will be very fact specific and would require the input of legal advice.

As part of its efforts to mitigate the impact of the pandemic the Turkish government has adopted several other measures regarding various types of contracts, including certain employment contracts, lease agreements and execution proceedings. Please refer to our previous articles on these measures available in this section: https://www.gentemizerozer.com/insights. Company directors are also required to consider the measures taken as a result of the new regulations when assessing their own liabilities or those of counterparties in the relevant contracts.

5. Tax and other public debt liabilities

While certain tax procedures and subsequent payments in respect of VAT and income tax have been postponed due to COVID-19, corporate income tax (kurumlar vergisi) obligations have not been postponed. Company payments of social security premiums for its employees have also not been suspended. Therefore, companies must continue to comply with all declaration and payment requirements in respect of corporate income tax and social security premiums.

Under Turkish law, members of the Board of Directors of a company may be held personally liable for tax and other public debts if the company fails to pay them. Therefore, during this period of financial stress, company directors should ensure continued compliance with and payment of all applicable taxes and other public debts.

6. Legal action in case of insolvency

Under the Turkish Commercial Code, a company’s Board of Directors is required to comply with the following provisions:

  • if the last annual balance sheet of the company indicates that half of its paid-in capital and statutory reserves have been lost, the Board of Directors must immediately call for a General Meeting of shareholders and present remedial measures;
  • if the last annual balance sheet of the company indicates that at least two-thirds of its capital and statutory reserves have been lost, the Board of Directors must immediately call for a General Meeting of shareholders to vote on whether to inject cash to compensate for the lost capital or to decrease the company’s registered capital to the actual level of its assets. If the company fails to do so, the company will be deemed to have dissolved.
  • if the assets of the company are not sufficient to cover its liabilities, the Board of Directors must file for bankruptcy at the relevant Commercial Court.

Currently in Turkey, execution and bankruptcy proceedings have been suspended and the deadlines in most litigation proceedings have been postponed. However, no suspension or postponement has been published with respect to the liabilities of company directors. Therefore, directors must continue to closely monitor their company’s financial situation and take any action required from both the business and legal perspectives.

For any questions please contact COVID_IST_CoreTeam@gentemizerozer.com.