Joint Stock Companies’ Capacity Of Becoming A Surety

February 2015 Prof. Dr. H. Ercüment Erdem
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General

Before the entry into force of Turkish Commercial Code No. 6102 [1] (“TCC”) the capacity of joint stock companies with respect to becoming a guarantor or surety was an important issue, which was assessed within the scope of ultra vires principle (prohibition of transactions out of a company’s purpose). In accordance with the ultra vires principle, which was regulated by the abrogated Turkish Commercial Code No. 6762 [2] (“Abrogated TCC”), joint stock companies did not have legal capacity beyond the company’s subject of activity and, thus, transactions concluded beyond their subjects of activity were deemed to be null and void. The TCC has not included this principle, which limits the company’s capacity with its subject of activity, by taking into consideration the First Council Directive on Companies no. 68/151 of the European Economic Community (“EEC”) [3].

This newsletter article will analyze joint stock companies’ capacity to be the subject of rights, and the capacity with respect to becoming a surety in accordance with the ultra vires principle under the Abrogated TCC, the relevant provisions of TCC, and the Court of Cassation’s decisions rendered with respect to such topic.

Joint Stock Companies as Subjects of Rights

The joint stock companies’ ability to be the subject of rights is extended following the abandonment of the ultra vires principle. Pursuant to the TCC, the companies are entitled to exercise all rights and undertake all obligations pursuant to Art. 48 of the Turkish Civil Code[4] (“Civil Code”), without prejudice to the legal exceptions (TCC Art. 125/2). Moreover, pursuant to Art. 48 of the Civil Code, legal persons are entitled to exercise any rights and obligations apart from the rights and obligations that are specific to persons, such as gender, age, and kinship. Therefore, joint stock companies may enter into transactions, and undertake liabilities, without any limitation regarding the company’s subject of activity. In this respect, even though a company’s purpose and objectives must be stated in its articles of association, the company’s purpose and object is not of vital importance in determining the boundaries of the company’s being the subject of rights, and, in principle, the company is bound by those transactions that are beyond its subject of activity.

The same principle is also regulated in the first paragraph of Art. 371/2 of the TCC regarding representation. In accordance with the said provision, the company is bound by transactions that its authorized representatives conclude with third parties that are beyond the company’s subject of activity. However, Art. 371/2 of the TCC also provides an exception to this principle. If it is proven that the third party knew or was in a position to know that the transaction fell outside the company’s subject, then that joint stock company is not bound by the transaction. The third party who knew, or who was in a position to know, that the transaction fell outside of the company’s field of operation would not be able to claim that it was acting in good faith. The burden of proof lies with the joint stock company in such case. The fact that the articles of association stipulates such issue, or if the articles of association are announced, shall not be deemed as a sufficient proof by itself (TCC Art. 371/2), since the third parties are not under the obligation to know the scope of a company’s subject of activity. Therefore, the third party’s affirmative knowledge is necessary.

An important question that arises within this context is whether the transactions with respect to becoming a surety and providing a guarantee may be assessed within the scope of Art. 371/2 of the TCC. Likewise, if being a surety is assessed as being beyond the subject of activity of the company pursuant to TCC Art. 371/2, such surety shall not bind the company where the articles of association does not include the relevant provision. However, when the transaction of becoming a surety is assessed within the scope of a company’s subject, thus not falling within Art. 371/2 of the TCC, this will result in the joint stock company becoming bound by such surety.

Joint Stock Companies’ Capacity of Becoming a Surety

A joint stock company’s capacity of becoming a surety and providing a guarantee used to be analyzed in accordance with the ultra vires principle, pursuant to the Abrogated TCC. Art. 137 of the Abrogated TCC specified that the companies may acquire any right, and undertake any obligation, provided that they fall within the subject of activity of the company, as stated in the company’s articles of association. The ultra vires principle, and the literal interpretation of such article, could result in the conclusion that companies may not become a surety unless it is expressly provided for in their articles of association. However, the Court of Cassation prevents such interpretation, and concluded in clear and established precedents that such guarantee is in the ordinary course of business of a company.

The Court of Cassation, while evaluating the ultra vires principle, defines a company’s subject of activity as being comprised of the continuous transactions concluded by the company. Additionally, it states that businesses and agreements that are not directly included in a company’s articles of association, while evaluating the ultra vires principle, but which facilitates the business of the company, are required to be included in the company’s subject of activity, even though not specifically set forth in the articles of association. Otherwise, this would be contrary to the natural flow of life. Indeed, the subject of activity of a joint stock company must be evident in the title of the joint stock company, and stipulate the fundamental activity areas of the company, such as tourism, construction and commerce. Joint stock companies may be established for any economic purpose that is not prohibited by the law (TCC Art. 351). Since becoming a surety or providing a guarantee are not regarded as economic activities alone, they do not constitute the purpose and subject of the company. However, they are transactions that intend to effectuate such purpose and subject, and which are included in the ordinary course of business.

In this respect, Court of Cassation decisions that are rendered under the Abrogated TCC with respect to ultra vires principle may be relied upon in order to determine whether becoming a surety or providing a guarantee should be included in the scope of Art. 371/2 of the TCC. Likewise, the established precedents of the Court of Cassation conclude that becoming a surety and providing a guarantee is in the ordinary course of business, and are included in the company’s subject of activity.

Accordingly, the 11th Civil Chamber of the Court of Cassation, in its decision dated 19.07.2005 and numbered 4621/7778[5], ruled that in accordance with established practices in Turkish Law, companies must be deemed capable to conclude surety and guarantee agreements due to their commercial activities, even if such activities are not explicitly stated in their articles of association as an area of activity. Similarly, the 11th Civil Chamber of the Court of Cassation, in its decision dated 07/02/1978 and numbered 7/354[6], stated that: “A company’s subject of activity means commercial transactions concluded regularly by such company. Such transactions are related to the transactions as set forth in the company’s articles of association. However, it is necessary to accept that the businesses and transactions, which do not directly fall into the scope of the company’s subject of activity as specified in its articles of association, but which facilitate the company’s commercial activities, shall be assessed within the scope of the company’s subject of activity. Those companies with commercial purposes may jointly undertake liabilities in order to obtain loans from banks and, therefore, support each other, and maintain their commercial activities in such a way. Such transactions are considered to be among ordinary commercial transactions. Therefore, the surety contract in question shall be deemed within the scope of the company’s subject.”

It is clear from the Court of Cassation’s decisions that surety and guarantee transactions are accepted as those transactions that lie within the scope of a company’s subject of activity, even if they are not included in the articles of association. In other words, being a surety may not be regarded as a transaction, which is beyond the company’s subject of activity, pursuant to Art. 371/2 of the TCC. Art. 371/2 of the TCC shall not apply to surety and guarantee transactions and, thus, joint stock companies may not claim that they are not bound by such transactions. In this respect, a company’s capacity of becoming a surety and providing a guarantee shall be determined pursuant to Art. 125 of the TCC, and the guarantee provided by a joint stock company shall be valid. Considering the fact that the relevant decisions were rendered when the ultra vires principle was valid, Art. 125 of the TCC, which does not refer to the ultra vires principle, will not introduce any novelty on the freedom of becoming a surety, which was already acknowledged by the commercial companies, but will assure the application of this practice setting forth such freedom[7]. For all these reasons, in practice, the banks’ requiring an explicit provision in the articles of association of the joint stock companies with respect to being a surety, or providing a guarantee when taking a guarantee from the companies in order to secure their loans, is inconsistent with the spirit of the TCC, as well as being inconsistent with the established Court of Cassation precedents.

Conclusion

Following the entry into force of the TCC, the principle that limits the companies’ ability to be the subject of rights concerning their subject of activity has lost its validity. However, Art. 371/2 of the TCC, by setting forth a special provision for joint stock companies, ensures that the effect of a company’s subject of activity over representation continues against third parties. In this respect, it is important to understand and examine the meaning of the subject of activity. Pursuant to the established precedents of the Court of Cassation, and pursuant to the doctrine, surety and guarantee transactions are considered to be ordinary transactions of companies, and they are included in companies’ subjects of activity in accordance with the ordinary flow of commercial life even, if they are not explicitly set forth in those companies’ articles of association. Therefore, joint stock companies are entitled to become a surety and provide guarantees even though there is no explicit provision in their articles of association.

[1] Published in Official Gazette dated 14 February 2011 and numbered 27846, and entered into force on 1 July 2012.

[2] Abrogated on 1 July 2012 by the entry into force of the TCC.

[3] http://eur-lex.europa.eu/ date of access: 3 March 2015.

[4] Published in the Official Gazette dated 8 December 2001 and numbered 24607, and entered into force on 01 January 2002.

[5] www.kazancı.com.tr date of access: 3 March.2015.

[6] Seza Reisoğlu, Türk Kefalet Hukuku, Ankara 2013, p. 56.

[7] Burak Özen, Kefalet Sözleşmesi, İstanbul 2012, p.172.

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