The Ultima Ratio Principle in Piercing the Corporate Veil: An Analysis of the Decision of the General Assembly of Civil Chambers of the Court of Appeal Dated 14.05.2025
Introduction
Legal personality is one of the cornerstones of corporate law. The principles of asset independence and limited liability afforded by legal personality directly affect commercial predictability and investor confidence. However, the abuse of these principles to the detriment of creditors is a result that the legal order cannot tolerate. The theory of piercing the corporate veil is a legal instrument that comes into play precisely at this point of tension, and its exceptional nature is widely accepted among legal scholars. The conditions and limits of its application continue to be debated both in academic literature and judicial practice. One of the central questions in this debate is whether piercing the corporate veil should be regarded as a remedy of last resort (ultima ratio), to be invoked only where other legal remedies fail to provide adequate protection in the specific case. The decision of the General Assembly of Civil Chambers of the Court of Appeal dated 14.05.2025 and numbered E. 2023/1138 and K. 2025/287, does not directly answer this question; however, the language employed in its reasoning and the conclusion reached may be regarded as an important precedent implicitly supporting the ultima ratio approach.
Piercing the Corporate Veil: Concept and Legal Basis
Pursuant to Article 125 of the Turkish Commercial Code No. 6102, commercial companies possess legal personality; such legal entities may enjoy rights and assume obligations. By virtue of the principle of asset independence, which is a natural consequence of legal personality, the natural or legal persons constituting the legal entity are, as a rule, not liable for the debts of the legal entity they have formed.[1] However, where the absolute application of this principle of separation leads to unjust results, it is accepted among legal scholars and in practice that the separation between the legal entity and its members may be lifted and the members may be held liable.[2] This is referred to as piercing the corporate veil, and its legal basis is the principle of good faith and the prohibition of abuse of rights enshrined in Article 2 of the Turkish Civil Code No. 4721 (“Civil Code”). Three forms of piercing the veil are recognized in doctrine: direct piercing, where shareholders are held liable for the company’s debts; reverse piercing, where the company is held liable for a shareholder’s debts; and lateral (cross) piercing, where a sister company affiliated with the same parent company is held liable alongside the debtor company.[3] The concept of organic connection, which is closely related to but distinct from piercing the corporate veil, provides the possibility of holding one legal entity liable for the debts of another. Although both concepts derive from Article 2 of the Civil Code, organic connection has a broader meaning and its application does not require conditions such as economic unity, commingling of assets, or capital inadequacy. The existence of an organic connection does not, by itself, necessitate piercing the corporate veil.
The Exceptional and Last Resort Nature of Piercing the Corporate Veil
Since piercing the corporate veil constitutes an exception to the fundamental principles of corporate law — namely, the separation of legal personality and limited liability — the prevailing view in Turkish doctrine is that its conditions of application must be construed narrowly. Çamoğlu emphasizes that piercing the corporate veil constitutes a significant exception to the principle that others cannot be held liable for the debts of legal entities and points to the necessity of keeping the theory within strict limits.[4] The General Assembly of Civil Chambers has consistently characterized this theory in its established case law as a remedy that must be applied with diligence in exceptional and limited circumstances and approached with caution. Beyond the principle of exceptionality, whether piercing the corporate veil should be further regarded as a remedy of last resort (ultima ratio) is a separate matter of debate. The ultima ratio approach holds that piercing the corporate veil may only be invoked where other legal remedies fail to provide adequate protection in the specific case. This approach finds its counterpart in the Swiss Durchgriffshaftung debate; the Swiss Federal Court has rendered decisions characterizing piercing the corporate veil as a last resort. In Turkish law, the General Assembly stated in the decision under review that piercing the corporate veil “should be resorted to only in cases where it is not possible to rely on another legal basis in order to hold the legal entity causing the harm liable.” While this formulation does not employ the term “ultima ratio” as such, it reflects the essence of the last resort principle in substance.
Analysis of the Decision of the General Assembly Dated 14.05.2025
In the dispute underlying the decision, the plaintiff subcontractor had undertaken the mechanical installation works of a hospital in İzmir under a contract dated 15.05.2013 executed with one of the defendant companies (“Contractor Company”), carried out additional works beyond the scope of the contract, and claimed that the price of these works had not been paid. The claimant sought to recover its receivables jointly and severally for not only from the Contractor Company, the direct party to the contract, but also from another company which it alleged was identical to the Contractor Company (“Identical Company”), and from a further company which was the ordinary partner of the Identical Company (“Partner Company”). The First Instance Court found that the Contractor Company and the Identical Company were identical in terms of their shareholding structures, board members, addresses, and cash flows, and held that piercing the corporate veil between these two companies was justified. In addition to this finding, the court constructed the following chain of reasoning: since the Identical Company had become liable for the debts of the Contractor Company through piercing the corporate veil, and since an ordinary partnership existed between the Identical Company and the Partner Company, the Partner Company should also be held liable for this debt pursuant to the joint and several liability of ordinary partners under Article 638/3 of the Turkish Code of Obligations. The Regional Court of Appeal adopted this reasoning and rejected the Partner Company’s appeal on the merits.
The 6th Civil Chamber of the Court of Appeal reversed the First Instance Court’s chain liability finding with respect to the Partner Company. While the Chamber accepted the organic connection between the Contractor Company and the Identical Company and the conditions justifying piercing the corporate veil, it held that this chain of liability could not be extended to the Partner Company through ordinary partnership provisions. Upon the First Instance Court’s decision to adhere to its original judgment, the case came before the General Assembly. The General Assembly reversed the insistence decision unanimously. The following findings in the reasoning of the decision are particularly noteworthy: First, piercing the corporate veil is a theory that must be applied with diligence in exceptional and limited circumstances and should be resorted to only in cases where it is not possible to rely on another legal basis. Second, the existence of an organic connection alone does not necessitate piercing the corporate veil; for piercing to apply, it must be proven with concrete evidence that transactions were carried out in bad faith solely for the purpose of concealing assets from creditors and causing them harm. Third, the case file revealed no similarity or connection between the Partner Company and the other defendant companies in terms of address, shareholding structure, board of directors, representatives, or current account relationships. Fourth, it could not be demonstrated with concrete evidence that the Partner Company had carried out bad faith transactions aimed at concealing assets from creditors.
Assessment of the Decision from the Perspective of the Ultima Ratio Principle
The decision under review is largely consistent with the existing case law of the Court of Appeal; it reiterates and concretizes the principles adopted in its prior decisions. The principal point in the decision is the explicit statement that liability reached through piercing the corporate veil cannot be extended along a chain through other legal institutions, such as the joint and several liability of ordinary partners. The formulation “should be resorted to only in cases where it is not possible to rely on another legal basis” indicates that the ultima ratio principle has been adopted in substance, even if not in terminology. However, a distinction must be underlined at this point: in its reasoning for not holding the Partner Company liable, the General Assembly did not directly state that “piercing the veil was not resorted to due to the availability of alternative legal remedies”; rather, it found that the condition of bad faith transactions required for piercing the corporate veil had simply not been met with respect to this company. It is therefore difficult to assert that the decision formulates the ultima ratio principle as a systematic doctrinal choice; however, the overall framework of the reasoning and the conclusion reached provide a basis amenable to such an interpretation.
One of the strengths of the decision is its clear emphasis on the need for concrete evidence in claims for piercing the corporate veil. The General Assembly drew a definitive boundary against expansive interpretation of the theory by stating that “if the corporate veil were pierced in every legal relationship and every minor connection between companies, the institution of legal personality would cease to function.” The most important message of the decision for practitioners is as follows: the fact that a company has been rendered liable through piercing the corporate veil does not automatically trigger that company’s legal relationships. The conditions for piercing the corporate veil must be independently examined with respect to each link in the chain of liability.
Conclusion
The decision of the General Assembly dated 14.05.2025 is a significant precedent that reinforces the exceptional nature of piercing the corporate veil and draws a clear boundary against its chain application. The decision establishes that the conditions for piercing the corporate veil must be independently examined with respect to each defendant, confirming that the effects of piercing the veil in respect of one company cannot automatically be extended through other legal relationships, such as an ordinary partnership. The formulation “should be resorted to only in cases where it is not possible to rely on another legal basis” reflects the essence of the ultima ratio principle, even if it does not employ the term as such. Nevertheless, the actual ground for not holding the Ordinary Partner Company liable was not the ultima ratio principle but rather the finding that the conditions for piercing the corporate veil had simply not been met with respect to that company. For this reason, rather than deriving a direct ultima ratio rule from the decision, it is more accurate to state that the overall framework and language of the decision are amenable to such an interpretation. In conclusion, piercing the corporate veil should be narrowly construed as an exception to the principles of separation of legal personality and limited liability, and applied as a legal instrument whose conditions must be diligently examined in each specific case. This decision serves as an important reference for practitioners, demonstrating the stringent evidentiary requirements applicable to claims for piercing the corporate veil and the limited scope of application of the theory.
- Antalya, Gökhan: “Tüzel Kişilik Perdesinin Aralanması Teorisi”, 1st International Symposium on Commercial Law, 2008, p. 146; Poroy, Reha / Tekinalp, Ünal /Çamoğlu, Ersin: Ortaklıklar Hukuku I, 2014, p. 90.
- Pulaşlı, Hasan: Şirketler Hukuku Şerhi, Vol. I, 2011, p. 476.
- Öztek, Selçuk / Memiş, Tekin: “Borçlu Şirketin Alacaklılarının Hakim Ortağa Karşı Korunması”, 1st International Symposium on Commercial Law, 2008, p. 199.
- Çamoğlu, Ersin: “Ticaret Ortaklıkları Bağlamında Perdenin Kaldırılması Kuramı ve Yargıtay Uygulaması”, BATİDER, Vol. 32, No. 2, 2016, s. 12.
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