Commercial Books and Their Losses

Hande Betül Yalçın co-authored this article.

Introduction

In order to ensure safe and orderly trade between the commercial merchants, commercial life has its specific rules and own practices. One of the most important ones of these rules and practices is the commercial bookkeeping. According to the Turkish Commercial Code No. 6102 ("TCC"), the purpose of keeping commercial books as a legal obligation is to record the administrative and financial status of the business, to determine the receivables and payables and to monitor commercial activities.

Commercial bookkeeping regularly reflects the managerial and financial status of the enterprise clearly. Recording revenues and expenses, monitoring debts and receivables, recording important decisions, and tracking issues such as tax payments ensure a healthy and ordered management of the business. In addition, keeping commercial books is a legal requirement and if the records are not kept in accordance with legal regulations, merchants may face with the criminal sanctions. Therefore, it is important for merchants to fulfil this legal responsibility in terms of ensuring the stability and long-term success of their businesses, as well as the compliance of their businesses with the legislation.

The Commercial Books and Bookkeeping Obligation

As per the TCC, "keeping commercial books" is amongst the fundamental obligations of being a merchant. As per the TCC, keeping the commercial books is regulated as a mandatory rule for all merchants, and there is no distinction in terms of the merchant status.

The TCC regulates the details of this obligation of the merchants under the article 64 and the following articles. The said provisions stipulates the obligation of keeping commercial books, which books shall be kept, creation of an inventory, preparation of balance sheet and financial statements, principles of arrangement and valuation, storage, submission, copying, delivery and auditing of the books, and the powers of the Public Oversight, Accounting and Auditing Standards Authority. However, this article does not cover all above-mentioned regulations in detail. In particular, issues such as the creation of an inventory, preparation of the balance sheet and preparation of the financial statements, which are more relevant to corporate accounting, are not addressed; instead, the obligations of merchants regarding commercial books and the legal remedies that can be applied in case of loss of these books within the framework of the TCC and the relevant legislation are explained.

According to the TCC, the commercial books are specified in paragraphs 3 and 4 of article 64. According to the said article the below listed ones are accepted as commercial books:

• Those related to the accounting of the commercial enterprise: (i) journal, (ii) general ledger and (iii) inventory book,
• Those are not related to the accounting of the commercial enterprise: (i) share ledger, (ii) board of directors' resolution book and (iii) general assembly meeting and negotiation book.

Obligation of Keeping Books Physically

The Communiqué on Commercial Books ("Communiqué"), which is another crucial regulation on the commercial books, determines how merchants shall keep their commercial books physically. According to the Communiqué, each merchant is obliged to keep the commercial books determined by the Communiqué in parallel with the TCC. The books to be kept according to the Communiqué are categorized as follows

• Every merchant, regardless of whether he is a real or legal person, is obliged to keep journal, inventory book and general ledger ("Accounting Books").
• Sole proprietorships shall keep the general assembly meeting and negotiation book in addition to the Accounting Books.
• Joint stock companies, limited partnership companies with capital divided into shares and cooperatives are obliged to keep a share ledger, board of directors' decision book and general assembly meeting and negotiation book.
• Limited liability companies are obliged to keep a share ledger and a general assembly meeting and negotiation book. The board of managers’ resolution book may be kept separately, and it is also possible to record the decisions of the board of managers in the general assembly meeting and negotiation book.

In addition to keeping these books in an appropriate manner, the storage of these books is also very important. Pursuant to the Communiqué, every merchant is obliged to keep the commercial books and the documents which are the basis of the recordings made for ten years. This retention period starts with the end of the calendar year in which the last entry was recorded into the books or the accounting documents were created. This retention obligation is particularly important for companies that are dissolved due to any reasons such as liquidation.

Indeed, even after liquidation, all books and documents of a company, including the books and documents should still be kept/retained. These documents may be used as evidence in various disputes that may arise after the termination of the company. For example, a creditor may claim that the company was closed without payment of its receivables. In such cases, the records and documents kept by the company are of great importance. According to the relevant provisions of the TCC, the books and documents of liquidated companies must be kept by the courts of peace for ten years. Although the law is not clearly specifying, the court of peace mentioned under relevant provision is the court of peace located at the headquarter of the partnership. Therefore, at the end of the liquidation, the books and documents of the company should be submitted to the court of peace by the liquidators. However, unfortunately in practices it is observed that the books and documents are not accepted by the courts due to their work and document load and such books and documents are kept by the liquidators in most of the cases.

Commercial Books and the Law of Evidence

The article 222 of the Code of Civil Procedure No. 6100 ("CCP"), which regulates the provisions on the law of evidence, addresses this issue in detail. According to this provision of the CCP, it is stated that certain conditions must be fulfilled in order for a commercial book to be accepted as evidence in favor of or against its owner.

Accordingly, in order for the commercial books to constitute evidence in favor of or against the merchant, it is necessary to examine issues such as whether the parties to the dispute are merchants, whether the dispute is related to an issue that should be recorded in the commercial books, and whether there is no contradiction between the commercial book records. Another subject of examination is that the opening and closing approvals of the commercial books must be made. In the event that the approval obligations explained in detail below are not fulfilled, it will be possible to evaluate the commercial books as evidence against the merchant, while it is not possible for them to be evidence in favor of the merchant.

Ratifications of The Commercial Books

Opening and Closing Ratifications

The opening ratifications of (i) journal, (ii) general ledger, (iii) inventory book, (iv) share ledger, (v) board of directors' decision book and (vi) general assembly meeting and negotiation book, which are kept physically by the merchants, must be made during the establishment and before the book is started to be used. The commercial books to be used by joint stock and limited liability companies and cooperatives during the establishment phase are compulsorily certified by the trade registry directorate where the company headquarters is located.

The opening approvals in the activity periods after the establishment must be made by the notary public until the end of the month preceding the first month of the activity period in which the books will be used. Although there is no explicit legal provision on which notary office will approve the opening of the books, it is possible to say that in practice, notary offices located in a province other than the province where the company's head office is located refrain from approval procedures.

In cases where the opening approvals are made by a notary public, the current trade registry certificate must be submitted to the notary public.  In addition, in cases where it is necessary to renew the share ledger and the board of directors' resolution book, the books to be closed must also be submitted to the notary public.

The opening approvals of the accounting books and the board of directors' resolution book must be made for each accounting period. The share ledger and the general assembly meeting and negotiation book may continue to be used in the following accounting years without an opening approval, provided that they have sufficient leaves.

Similar to the opening approvals, the closing approvals of the books must also be made by a notary public in certain periods. The issues regarding the time and form of approval of the books to be approved for closing are stated in the Communiqué as follows

- The journal book must be submitted to the notary by the end of the sixth month of the following accounting period and the last entry must be approved by the notary with a seal and signature by writing the phrase "Seen" under it.

- The decision book of the board of directors must be submitted to the notary public until the end of the first month of the following accounting period, and the last entry must be approved by the notary public by writing the phrase "Seen" under the last entry, and must be approved by seal and signature.

In the places where a force majeure condition is declared by the Ministry of Treasury and Finance in accordance with Articles 13 and 15 of the Tax Procedure Law No. 213, the closing approvals of the books can be made until the end of the second month following the end of the force majeure.

Renewal of the Approvals of Commercial Books

Within the scope of the Communiqué, it has been decided that the journal and board of directors' resolution books subject to the closing approval may continue to be used by subjecting them to interim approval instead of closing and opening a new book, if the book has sufficient pages and can continue to be used in the next accounting year.  The relevant transaction can be made by submitting the trade registry certificates and the books to the notary public.

In the general ledger and inventory book, which are not subject to the closing approval, the approval renewal can be made on the page after the page containing the last entry, similar to the procedure for the interim approval of the books subject to closing approval.

Violation of the Obligations Regarding Commercial Books and Sanctions Determined

The sanctions of the breach of the obligations regarding commercial books are regulated under the TCC and the CCP.

As stated above, the only sanction under the CCP is related to the nature of the books as a means of proof. According to the CCP, if the opening and closing approvals required by the law are not made, or if the records in the books do not confirm each other even if the approvals are made, the books will not be evidence in favor of its owner and may even be considered as an adverse evidence.

The sanctions under the TCC are explained separately in the table below:

Loss of the Books

In practice, an important issue that causes difficulties for the companies in the proof of evidence is related to the remedies that the merchants may apply in case the commercial books are lost.

Pursuant to Article 82/7 of the Turkish Commercial Code: "If the books and documents that a merchant is obliged to keep are lost due to a disaster such as fire, flood or earthquake or theft and within the legal retention period, the merchant may request the competent court of the place where its commercial enterprise is located to provide him with a document within thirty days from the date he learnt of the loss. This lawsuit shall be filed without an adversary. The court may also order the collection of evidence it deems necessary."

When it is taken into consideration that the physical storage of commercial books is mandatory, it is possible to say that their loss also constitutes a significant risk for companies. In case the commercial books are damaged or lost as a result of the force majeure events mentioned in the article, a certificate of loss must be obtained from the relevant court. However, obtaining a certificate of loss is subject to certain and strict conditions.

Another important issue is the existence of force majeure. The legislator and the Court of Cassation consider the loss of the commercial books due to force majeure as a fundamental condition.  The force majeure must be unavoidable and unforeseeable, and the loss of commercial books must occur without the fault of the merchant. Especially with regard to theft, considering the decisions of the Court of Cassation that the negligence/inattention that causes the theft is the fault of the merchant and is not considered as force majeure, it is possible to say that it is very difficult to obtain a certificate of loss as a result of theft in practice, although it is stated in the law.

The precedent decision of the Regional Court of Appeal regarding the books lost/stolen during transportation is as follows:

"Article 82/7 of the TCC No. 6102 stipulates that if the books and documents that a merchant is obliged to keep are lost due to a disaster such as fire, flood or earthquake or theft and within the legal retention period, the merchant may request the competent court of the place where his commercial enterprise is located to give him a document within fifteen days from the date he learned of the loss.

The plaintiff party is a company and has the obligation to act as a prudent merchant in all its transactions according to the provisions of the TCC. The event must have occurred against its will even though it has shown the necessary care and attention for the protection of the books and documents for which it has requested the loss. It is understood that the book reported to be lost due to fire, earthquake, flood or other reasons is not based on concrete evidence regarding the loss of the book, and it is understood that he did not show the necessary care and attention in the storage of the said books. Within the scope of the reasons explained, since the conditions for issuing a certificate of loss do not exist, there is no inconsistency in the decision of the first instance court." (Decision of the Regional Court of Appeal - Izmir Court of Appeal, 11th HD, E. 2023/1740 K. 2023/1518 T. 30.10.2023)

It is important to note that, the decisions of the district courts of appeal regarding the request for a certificate of loss cannot be appealed before the Court of Cassation.

The authorized court is the Commercial Court of First Instance, and where there is no Commercial Court of First Instance, it is the Civil Court of First Instance as a commercial court. The authorized court is the court where the commercial company is located, not where the loss occurred.

Finally, the application to the court must be made within thirty days after the loss is learned. Especially in case of force majeure, we believe that it would be more appropriate to start the thirty-day period after the end of the force majeure, in case the merchant affected by the force majeure will be able to apply to the court within thirty days after the date of learning the loss.

Problems Faced in Practice Regarding the Certificate of Loss

In the ordinary course of the life, it is quite possible for a prudent merchant to lose a book due to unavoidable and involuntary reasons - such as loss during transportation, theft, etc. - despite all due care and diligence.  However, as can be understood from our explanations above, the judicial authority attributes importance to the existence of force majeure circumstances in the loss of the ledgers, and rejects the requests for the certificate of loss on the grounds that the merchant did not act prudently  and did not fulfill the obligation to keep the ledgers, especially if the ledger is lost by the merchants.

In practice, the failure to issue a certificate of loss in the event of loss of the books in this way also prevents the opening of the new books. In order to open new books, notaries request either the old book to be closed or, in case of loss, the certificate of loss obtained from the court. However, neither the legislation nor the judicial decisions provide any guidance on how the merchant who loses his/her books can continue his/her commercial life without books.  Thus, the merchant who loses his commercial book is forced to continue his commercial life without a solution and without his commercial book. In order to eliminate this deficiency, which leaves the merchants in a very difficult situation in practice, we believe that the legal gap needs to be filled as soon as possible.