Ercüment Erdem Att. Tuna Colgar

Legal Liability of Limited Company Managers

January 2020

Through Turkish Commercial Code No. 6102 (“TCC”), with regard to limited companies, unless otherwise stated in the articles of association, the principle of “foundation organ” (“özden organ”), stating that all shareholders are fully competent for the administration and representation of the company, is fully abandoned, and that the company’s management and representation will be regulated by the articles of association.[1] Pursuant to Article 623/1 and Article 616/1-(b) of the TCC, the management and representation authority of the company may be granted to one or more shareholders through the articles of association or the general assembly of shareholders, as well as to the third parties. However, the management and representation of the company cannot be delegated entirely to third parties. At least one shareholder must have the management and representation right of the company.

Company managers are entitled to take and execute all of the decisions in all matters related to management, apart from those subjects left to the general assembly by law or the articles of incorporation/articles of association.

With the TCC, the application of the management understanding that is specific to the board of directors in joint stock companies is envisaged by indicating that if the managers are more than one, they will form a board. According to Article 624 of the TCC, if the company has more than one manager, one of them is appointed as the chairman of the management board. The manager, who is the chairman, is authorized to call the general assembly for a meeting and to conduct general assembly meetings. Having said that, if the general assembly does not take a decision to the contrary, or a different provision is not stipulated in the articles of association, the manager, who is also the chairman, makes all statements and announcements.

If there is more than one manager, decisions are taken by majority. For the sake of equality of votes, the chairman’s vote prevails.

In the new regulation, it is accepted that legal entities may also be appointed as managers. Within the framework of this new regulation, an association, a joint stock company, a limited or ordinary partnership may be elected as manager. In this case, the legal entity holds the title of manager. Pursuant to Article 623/2 of the TCC, “If one of the managers of the company is a legal entity, this entity assigns a natural person to perform this duty in the name of the legal entity.” Hence, although the legal entity holds the title of manager, the duty of the manager is performed by a real person representative appointed by the legal entity; thereby, the appointed real person may act as a representative only pursuant to the instructions of the legal entity.[2]

There is no necessity for limited company managers to be Turkish citizens or to have their residence in Turkey. In this regard, it is possible to appoint a foreign company with a legal entity as the limited company manager.

Responsibility of Managers

In limited companies, the provisions regarding liabilities of managers are regulated with reference to the provisions with regard to joint stock companies. Therefore, certain provisions governing the liability regime in joint stock companies should be evaluated. By reference to Article 644/1-(a) of the TCC, Article 549 concerning limited company managers’ responsibilities, illegitimacy of the documents and declarations, Article 550 on the misrepresentation of the capital and known lack of payment, Article 551 on corruption of the appraisal, and Article 553 regulating the responsibility of the founders, members of the boards of directors, managers, and liquidators, apply.

Accordingly, those who act contrary to Articles 549 and 551, which also apply to limited companies, are penalized as set forth in the eighth to tenth paragraphs of Article 562.

Appointment of a legal entity as manager is important in terms of responsibility. In the event of liability, the legal entity is responsible for all of its assets just like a real person. However, in the case of responsibility, as a rule, it is not possible for the creditors to make claim the assets of the shareholders of the legal entity that has been appointed as manager.

In the event that legal entities are appointed as managers, the responsibility belongs directly to the legal entity, not to the real person who acts and operates on behalf of the legal entity.

The liability of limited company managers is regulated by the provisions described, below.

Illegitimacy of the Documents and Declarations (Article 549 of the TCC)

Pursuant to Article 549, those who prepared the documents or made declarations, and those who participated in the preparation of the said documents and declarations, are responsible for the damages arising from incorrect, fraudulent, forged, sham, dissembled documents, pledges, commitments, declarations and guarantees, in relation to transactions, such as incorporation of the company, increase or decrease of capital, merger, division, conversion of the company type, and for other violations of law.

Through this provision, liability of those who participated in the preparation of the documents and declarations explicitly depends upon the proof of their fault. Therefore, it is concluded that the principle of liability without fault is accepted with regard to those who prepared the documents or made declarations.

False Statements about the Capital and Knowledge of the Incapacity to Pay (Article 550 of the TCC)

Pursuant to Article 550, those showing capital as if committed, while not fully committed, are deemed to undertake those shares and are liable for the payment of the loss incurred, with interest, in addition to the values of the shares. The principle of liability without fault is adopted for company executives. Therefore, company executives may be excluded from liability if they prove that they are not at fault with regard to the violation of the Article.

According to the second paragraph of the Article, the person who knows that the person who makes a capital commitment during the establishment or capital increase does not have the ability to pay, and still approves the commitment, is responsible for the damages arising from non-payment of the debt, on the basis of their fault.

Corruption in Valuation (Article 551 of the TCC)

This Article is applied in establishment and capital increases. Reasons of responsibility include high pricing in valuation, misrepresenting the quality and the condition of the business and the capital in kind, or to make corruption in another way. Since there is no special legal regulation, it is accepted that the responsibility is based on the principle of faulty responsibility.

The Responsibility of the Founders, Members of the Board, Managers and Liquidators (Article 553 of the TCC)

Pursuant to Article 553 of the TCC, managers are liable for the company, partners and company creditors in case of faulty violation of their obligations arising from the law and the articles of association, or other provisions determining working conditions. Here, the defect presumption stated in Turkish Commercial Code No. 6762 is removed. Thus, the burden of proof reverses the burden of proof of the managers’ fault that is borne by the person who claims the responsibility.

In the new regulation, in the case of transfer of duty or delegation of authority arising from the law or articles of association, the assignor is not responsible for the actions and decisions of the assignee by proving that the transfer is based on law; that is, in matters to the extent permitted by law, and that she/he acted with reasonable care. The burden of proof rests with the claimant.

Liability for Public Debts

In limited companies, the legal representatives are personally responsible for uncollected public debts alongside the company and its shareholders. This responsibility of legal representatives is collected in accordance with Social Insurance and General Health Insurance No. 5510, Tax Procedure Law (“VUK”) and the Law on Procedure for Collection of Public Receivables (“AATUHK”).

Article 10 of the VUK regulates the responsibility of the legal representatives, as follows: “In the event that legal entities are taxpayers or tax officers, the duty assigned to them is performed by their legal representatives. Taxes and related receivables that cannot be fully or partially collected from the taxpayers or tax officers, due to the failure of the legal representatives to fulfill these duties, are taken from the assets of those who do not perform their legal duties.”

According to this Article, in order to collect the taxes and other related debts of the limited company from the assets of the managers, the taxes should not have been collected the by tax administration on the grounds that the managers did not fulfill their tax-related duties. The manager could be released from the tax-related liability only by proving that the failure to perform tax-related duties on time is not due to his own fault.

Pursuant to bis Article 35 of AATHUK, which is another provision regarding the personal liability of the legal representatives for the tax debt of limited companies, public receivables that are not fully or partially collected, or those that seem to be uncollectible from the assets of the legal entity are collected from the personal assets of the legal representatives. Bis Article 35 does not seek a condition as to the fulfilment of the obligation in order to collect the debt from the assets of the legal representatives.

 “However, the legal provision stating that in cases where the public receivable exists and needs to be fulfilled, if the legal representative or the ones who manage the company are different entities, these entities should be jointly liable, was brought to the Constitutional Court by the Fourth Chamber of the Council of State with a request for cancellation via concrete norm control.

The Constitutional Court abrogated the provision stating that this regulation is contrary to the rule of law and would lead to the joint accountability of the legal representatives who fulfilled their duties and responsibilities on time, and in full, from any action that took place at a time when they were not on duty and had no chance to intervene, and stated that in light of principles of justice and equity, this situation would cause, in an uncertain and precarious way¸ the individuals being held responsible in a way not derived from their fault, for the liability that may arise as a result of the action or negligence of others. (E. 2014/144 and K. 2015/29 numbered decision).” [3]

Pursuant to bis Article 35 paragraph 2 of the AATHUK, this Article applies to the "representatives of foreign individuals or institutions in Turkey." This Article should be understood in the way that the foreign legal entity manager is liable for the assets of the legal entity.

In addition, no limit is stipulated for the liability of legal representatives or company executives for public debts.

Conclusion

As can be understood from the content of the study, the practices and decisions vary regarding the responsibility of the limited company managers, since the lawmaker did not make any explicit regulation, it refers to the provision concerning the joint stock companies and, as well, regulations exist both in the VUK and AATHUK.

[1] Kendigelen, Abuzer: Yeni Türk Ticaret Kanunu Değişiklikler, Yenilikler ve İlk Tespitler, XII Levha Yay., 2011 p. 472.

[2] Tekinalp, Ünal: Sermaye Ortaklıklarının Yeni Hukuku, 4th ed., Istanbul, 2015, p. 594.

[3] Naklen, İnelli Ender, www.vergidegundem.com, 17 August 2018.