Liabilities of Shareholders, Directors, and Managers for Company Debts in Joint Stock (Jsc) and Limited Liability (Llc) Companies in Turkey

ADMD Law Firm
Helin Yıldız

A. Company Types and Liabilities of Shareholders, Directors, and Managers

In Turkey, the corporate landscape is predominantly comprised of two types of capital companies: Joint Stock Companies (JSCs) and Limited Liability Companies (LLCs). The liabilities of the shareholders, managers, and directors of these companies in relation to company debts are explained in detail below.

I. Joint Stock Company (JSC or Corporation)

1. Shareholders

1.1. Liability of Joint Stock Company Shareholders towards Private Individuals/Entities (Creditors)

Pursuant to article 329 of the Turkish Commercial Code (TCC), no. 6102, dated January 13, 2011, a joint stock company is characterized as a company with a predetermined capital divided into shares, which is liable for its debts only with its own assets. In the second paragraph of the said article, it is stated that the shareholders are liable to the company solely in proportion to the capital shares they have committed and only towards to the company.

This article differentiates the JSC from other types of commercial companies in that the liability of the shareholders arising from the debts of the company is limited to their committed capital shares. As a direct consequence, the liability of the shareholders of JSC both restricted and exclusively towards the company.

Therefore, in the event that the creditors of the company have receivables stemming from this company and demand such receivables, since the company has a distinct independent legal entity and is primarily liable for its debts with its assets and collection of receivables shall be carried out solely through the assets of the company.

1.2. Liability of Joint Stock Company Shareholders from Public Debts

As detailed below, shareholders of the LLCs may be held accountable for the public debts of the company. In contrast, shareholders of JSCs are not subject to liability for public debts, underscoring a significant distinction in the legal treatment of shareholder responsibilities between these two types of companies in Turkey.

2. Board of Directors

2.1. Liability of the Members of the Board of Directors of Joint Stock Companies Towards Private Individuals/Entities

Article 365 of the TCC stipulates that joint stock companies shall be managed and represented by the board of directors, thereby granting the authority of management and representation to the board of directors. With this provision, it is stated that the main liability for the damages and debts arising from the legal entity of the joint stock company belongs to the company, while the board members are not liable in this context.

However, Article 553 of the TCC introduces a significant exception to this rule. According to this article, board members who fail to fulfil their legal and statutory duties due to negligence become personally accountable for any resultant damages to the company's creditors. It is imperative for creditors to substantiate the negligence of board members to establish liability; in the absence of proven fault, board members cannot be pursued for compensation.

While the principal stance under the TCC is that creditors do not have recourse against board members for the company's debts, exceptions exist for situations where board members assume specific personal liabilities under the Turkish Code of Obligations, such as through bailment agreements. This indicates that board members may assume individual liability to creditors through additional commitments.

2.2. Liability of Members of the Board of Directors of Joint Stock Companies Towards Public Debts

Under Turkish law, the liability of board members regarding public debts is explicitly outlined in several legislative frameworks, highlighting their accountability in the event of non-compliance with financial obligations:

• Liability under Law on the Procedure for Collection of Public Receivables (PCPR): Article 35 of the PCPR No. 6183, dated July 21, 1953, stipulates that individual in managerial positions, including board members and executive directors, bear responsibility for the company’s unsettled public debts. This liability arises from their role in managing and representing the company, making them accountable for public debts that remain uncollected due to the company's failure to fulfil its obligations.

• Liability under Tax Procedure Law (TPL): The TPL No. 213, dated January 4, 1961, states the individual on whom the taxable event occurs is the taxpayer while the individual who is accountable to the authorities is the tax responsible. Article 10 of TPL specifies that legal entities must discharge their tax obligations through their legal representatives. Consequently, if taxes and associated receivables cannot be recovered from the entity due to the legal representative's failure to act, the responsibility shifts to the assets of these representatives, extending to those representing foreign taxpayers within Turkey.

• Liability under Social Security and General Health Insurance Law: Article 88 of Law No. 5510, dated May 31, 2006, states that if insurance premiums and other dues to the Social Security Institution are not timely paid without a valid reason, the board of member of the company shall incur joint and several liability with the employer for these obligations.

It is crucial to note that for the liability of the members of the board of directors of the company arising from the public receivable, it is obligatory to first apply to the JSC, which is the main debtor, and if the said proceedings are inconclusive or it is understood that they will be inconclusive, the liability of the members of the board of directors shall be possible.

II. Limited Liability Company (LLC)

1. Shareholders

1.1. Liability of Limited Liability Company Shareholders to Private Person/Entity (Creditors)

The principle of "single debt", which delineates the limited liability of shareholders for the company's obligations, is equally applicable to the LLCs. According to Article 602 of the TCC, an LLC's liability is confined to its assets. Further elaboration in Article 573, paragraph two, of the TCC specifies that shareholders' liability is not liable for the debts of the company but are only obliged to pay the capital shares they have committed and to fulfil the additional payment and ancillary performance obligations stipulated in the company agreement. this obligation is regulated only against the company.

Shareholders of the LLCs are only liable to the legal entity of the company and hold no liability towards the company's creditors. Unlike the JSCs, LLCs’ shareholders may also be liable to the company for these debts by agreeing on additional payment obligations in addition to the capital debt they have undertaken, if included in the articles of association. These debts remain obligations solely against the company and do not impact the company's creditors directly. Consequently, creditors cannot directly seek payment from the shareholders for unpaid capital debts owed to the company.

However, there are exceptions to this rule. In instances where the company is owed receivables by shareholders or when shareholders have agreed to assume additional liabilities towards the company's creditors, such creditors have the right to pursue claims against the shareholders. This can be done by issuing a levy notice under Article 89 of the Execution and Bankruptcy Law (EBL), aligning with the provisions applicable to JSC shareholders as previously discussed.

1.2. Liability of Limited Liability Company Shareholders for Public Debts

As a general principle, shareholders of LLCs are obligated towards the company to the extent of their committed capital shares, along with any additional payments or performance obligations specified in the articles of association. A critical exception to this principle is provided by Article 35 of the PCPR. This exception stipulates that LLC shareholders may incur liability for the company's public debts under certain conditions.

Article 35 clarifies that shareholders are directly responsible for public debts that cannot be fully or partially recovered from the company's assets, with their liability proportional to their share in the company's capital. This liability occurs following unsuccessful attempts to collect the debt from the company itself, meaning the company's assets are first considered for debt recovery. In the event that these assets are insufficient, unpaid public receivables are claimed from the personal assets of the shareholders in line with their share in the company's capital. This provision emphasizes the importance of a company-first approach in debt collection processes before assessing shareholders' liability for public debts.

2. Managers

2.1. Liability of Limited Liability Company Managers against Private Law Persons/Legal Entities

LLCs operate under a legal framework where they are managed and represented by appointed managers. Within this framework, should managers fail to adhere to their legal responsibilities or breach the duties outlined in the company's articles of association, they become personally liable for any resulting damages to the company, its shareholders, and creditors. Therefore, managers of LLCs do not bear personal liability for the company's debts towards private individuals or legal entities and their responsibility is strictly limited to cases of misconduct or negligence in fulfilling their managerial duties, without extending to the broader financial obligations of the LLCs.

2.2. Liability of Limited Liability Company Managers Arising from Public Debts

Managers of LLCs bear significant responsibility for the company's public debts, especially when such debts cannot be settled using the company's assets. This liability extends to their personal assets without limitation, under various legal provisions:

• Liability under Tax Procedure Law (TPL): The TPL stipulates that legal entities must discharge their tax obligations through their legal representatives. In the event that these representatives neglect their duties, resulting in taxes and associated receivables being uncollected from the LLC's assets, the liabilities shift to the managers. For a manager to be held liable, it must be demonstrated that their failure to fulfil tax-related obligations in a timely manner was due to their own fault.
• Liability under Law on the Procedure for Collection of Public Receivables (PCPR): Article 35 of the PCPR asserts that if public receivables are uncollectible in whole or part from the LLC's assets, these debts must be recovered from the personal assets of the LLC managers, who act as legal representatives.
• Liability under Social Security and General Health Insurance Law (Law No. 5510): This law stipulates that if insurance premiums and other dues are not paid within the prescribed timeframes without a justifiable reason, company managers shall be liable for the resulting public debts.

It is critical to note that before pursuing the LLCs’ board members for public receivables, the initial step involves seeking payment from the company itself, as the principal debtor. Should this approach be unsuccessful or deemed likely to fail, only then will the liability potentially extend to the board members, emphasizing the direct link between managerial conduct and the financial liabilities of the company.

B. Other Situations for Company Shareholders and Managers or Directors to Become Liable for Company Debts

In Turkey, the general rule is that shareholders or board members of a company are not typically held liable for the company's debts. However, there are notable exceptions to this principle, supported by legislation and judicial precedents, which include:

Surety: An exception arises when board members or shareholders provide personal surety for company obligations. Personal Surety Agreements enable creditors to claim against the personal assets of those who offer guarantees beyond the principal debtor. Governed by Article 603 of the Turkish Code of Obligations (TCO), these agreements necessitate strict compliance with formal requirements, including a written document specifying the surety's maximum liability and the surety date, as detailed in Article 583 of the TCO. Notably, Article 584 exempts the need for spousal consent in certain conditions, making these agreements a significant basis for personal liability in debt recovery.

Additional Assurances and Collaterals: Shareholders or board members may also face liability through the provision of additional securities, like personal checks or promissory notes, or by offering an "aval" (a type of guarantee) on company-issued financial instruments. Stipulated by Articles 700-702 of the TCC, an aval commits the guarantor to ensure the payment of bills of exchange, necessitating specific formalities for its validity.

Use of Company Funds for Personal Use: Situations such as unpaid shareholder capital, the misappropriation of company funds, and other similar actions can enable creditors to pursue claims against shareholders or board members directly. Court precedents indicate that personal creditors may initiate proceedings against the company for recoveries in such cases.

Liabilities in Cases of Fraud: Fraudulent bankruptcy or conduct that manipulates legal processes for personal gain or to the detriment of creditors can expose shareholders, managers, and directors to liability. The Turkish Penal Code (TPC), TCC, and the Enforcement and Bankruptcy Law (EBL), among other laws, provide a legal framework to address, prevent, and penalize fraudulent bankruptcy and related deceptive practices. These laws aim to protect creditors' interests, ensuring the integrity of bankruptcy proceedings and penalizing misconduct with criminal charges, fines, and other legal consequences.
In Turkey, fraudulent bankruptcy encompasses a variety of deceptive practices aimed at undermining the integrity of the bankruptcy or konkordato process. Common manifestations of such fraud include:

• Concealment of Assets: Debtors may engage in the deliberate concealment or transfer of assets to exclude them from the konkordato process, unjustly depriving creditors of their rightful claims.
• Misrepresentation of Financial Information: Providing inaccurate or misleading financial information to courts or creditors, such as minimizing the value of assets, inflating liabilities, or misrepresenting income and expenses, is one of the main fraudulent acts that hinder a fair trial and debt collection process.
• Collusion with Creditors: Instances where debtors conspire with select creditors to disadvantage others, offering them undue advantages or benefits in return for favorable treatment during the konkordato proceedings, are considered fraudulent.
• Abuse of Legal Procedures: In the event that legal procedures related to insolvency laws are deliberately abused in order to obstruct creditors' rights, the shareholders or board members who caused this situation are also liable for fraudulent acts.

The repercussions of engaging in fraudulent bankruptcy activities in Turkey are significant, potentially leading to criminal prosecution, monetary fines, and imprisonment for those convicted. Moreover, these actions can precipitate financial repercussions for the personal assets of shareholders, directors, and managers.