RIGHTS TO CLAIM FINANCIAL SETTLEMENT IN LIMITED LIABILITY COMPANIES 10 May 2024
Limited liability companies are among the preferred business structures in Türkiye, representing capital investment-based collaborations. In this type of company, the partners' liabilities are limited to their invested capital, protecting them from potential financial risks. However, partners may wish to leave the company from time to time for various reasons. At this point, the concept of 'financial settlement,' regulated by the Turkish Commercial Code (“TCC”), comes into play. Financial settlement is calculated based on the actual value of the invested capital and represents the compensation a departing partner receives while severing financial ties with the company. This article will discuss what financial settlement is, how it is calculated, and the rights of partners during this process.
What is Financial Settlement?
Financial settlement is the compensation a partner in a limited liability company can claim upon exiting the partnership, whether due to squeeze or exit. Article 641 of the TCC requires that this compensation be calculated based on the "actual value" of the partner's capital share during their exit. This assessment can vary depending on the company's financial health and market conditions. The difference between the actual and nominal value depends on the company's profitability. If the company is profitable, the actual value of the share could be higher than the nominal value. Proper calculation of the financial settlement ensures a fair return on the departing partner's investment and helps maintain the financial stability of the remaining partners and the company.
Calculation and Payment Terms of Financial Settlement
According to Article 641 of the TCC, the financial settlement is calculated based on the actual value of the partner's capital share. The actual value and nominal value are distinct concepts that vary with the company's financial condition. If the company is profitable, the actual value of the share may exceed the nominal value. In cases of dispute, the actual value of the share may be determined by a court decision. Company agreements may regulate the amount of financial settlement differently; this could depend on the company's last balance sheet or the financial status at the time of departure. However, the articles of association cannot include provisions that waive the right to financial settlement.
Article 642 of the TCC specifies the timing and conditions for the payment of financial settlement. If the partner departs when the company has sufficient equity or if the departure is based on a reduction of capital, the financial settlement can be made immediately. Insufficient equity situations are reported by an auditor, and decisions are made on how to provide the missing amount. If the free reserves are insufficient, the deficit can be covered by reducing the capital.
A partner has the right to inspect whether the company's equity is sufficient at the time of their departure. If the company's equity is adequate to cover the financial settlement, the payment becomes due and must be made. However, if the company's equity is insufficient, the necessary amount must be deducted from the company capital or planned for payment at a future date.
Additionally, if the company's equity does not suffice to cover the financial settlement, the unpaid portion of the financial settlement is ranked for payment after other liabilities. This becomes due and payable based on the amount of usable equity reported in the annual report. However, if the company lacks adequate equity and there is no possibility of capital reduction, the payment process may be deferred until sufficient capital is accumulated or resolved through capital increase and reduction.
Rights and Obligations of Partners
Partners have the right to examine the company's books and assess its financial situation before departing. This process ensures the financial settlement is calculated fairly. Moreover, the financial settlement can be transferable, attachable, and lienable.
Disputes and Resolutions
In case of a dispute, the amount of the financial settlement can be determined by a court decision. Relevant articles of the TCC contain provisions that protect the interests of partners and the company and ensure the process is conducted transparently. This process protects the partners' rights through general legal principles and aims to provide a just resolution.
Conclusion
In conclusion, the rights of departing partners to claim financial settlement in limited liability companies are subject to the provisions of the TCC and the company's articles of association. Proper understanding and implementation of these rights ensure a fair process among partners and contribute to the company's long-term success. The financial settlement is a complex financial process conducted in a way that protects both the interests of the partners and the company, and each step of this process should be carefully handled in accordance with the laws and company policies.
