The Turkish Commercial Code No. 6102 entrusts the power of management and representation in joint stock companies to the board of directors. Board members hold the capacity of statutory representative of the company as a legal person and both manage the company internally and represent it externally. In discharging these duties they are bound by the obligations laid down both by the Turkish Commercial Code and by the company’s articles of association. Conduct contrary to those obligations gives rise to liability within the framework of Article 553 of the Code. For the scope of the power of management and representation, our note titled Management and Representation in Joint Stock Companies may be examined.
This liability is fault-based liability. Accordingly, before recourse may be had to a member, an obligation arising from statute or from the articles of association must have been breached with fault. A culpable breach alone is not sufficient, however; the other conditions required by the general provisions must also be present together. Where those conditions are met, members become answerable for the loss suffered by the company, by the shareholders and by the creditors.
Nor is liability open-ended. A decision of the general assembly to grant discharge, or the expiry of the limitation periods laid down by law, are the two principal circumstances that bring liability to an end. Below we address each component of this picture in turn.
The General Framework of Civil Liability in Joint Stock Companies
Since joint stock companies have legal personality, they may acquire rights and assume obligations. Where loss arises from a transaction carried out in the name of the company as a legal person, the party addressed is, as a rule, the company itself. In respect of public debts too, the party initially liable is again the company.
In certain circumstances, however, liability extends to the board members. Where members breach the obligations arising from statute or from the articles of association, they become personally liable for the loss caused by that breach. A second avenue of recourse concerns public receivables: where the company’s public debts cannot be collected from the legal person, recourse may be had to the assets of the board members for those receivables.
Obligations Arising from the Turkish Commercial Code
From the moment a person is elected to the board of directors, that person becomes the addressee of a series of obligations laid down by the Turkish Commercial Code. Breach of these obligations brings liability into question and the member becomes answerable for the loss suffered by the company, by the shareholders and by the creditors. A culpable breach of the obligation does not, however, suffice on its own for liability. All the elements required by the general provisions must be present. These are an unlawful act, that is, the breach of the obligation; the loss that arises; the causal link between that act and the loss; and, finally, fault. Where the four elements come together, the route of a liability action is opened.
Alongside their statutory obligations, members must also act in conformity with the duties imposed on them by the articles of association and must not breach those duties through their fault. The obligations arising from statute are common to the board members of all joint stock companies; those arising from the articles of association, by contrast, vary from company to company, since every joint stock company has articles of association of its own. For detail on this subject, our note titled Articles of Association of a Joint Stock Company may be consulted.
The statutory obligations may essentially be gathered under five headings.
The Upper-Level Management of the Company
The non-transferable and inalienable duties and powers of the board of directors are governed by Article 375 of the Turkish Commercial Code. At the core of those duties lie the upper-level management of the company and the giving of instructions in that regard.
The concept of upper-level management denotes the drawing of the company’s structural, strategic and legal boundaries by the board of directors within the field of activity determined in the articles of association. The definition alone shows that this power is the most fundamental and the weightiest of the exclusive powers.
The matters assessed under the heading of upper-level management and supervision are the following: determining and resolving upon the company’s objectives in areas such as general business policy, financing and investment; selecting the means to be used in order to reach those objectives and identifying the strategies to be followed; and setting out the position reached by comparing it against the objectives. As will be seen, the power of upper-level management encompasses three fundamental duties and powers; members who breach them with fault may incur liability.
The Duty of Care and Loyalty
The duty of care and loyalty is governed by Article 369 of the Turkish Commercial Code. The provision requires board members to perform their duties with the attention and care of a prudent manager and to have regard to the interests of the company in accordance with the rules of good faith.
Members must observe this standard in Art. 369 of the Turkish Commercial Code in performing all their duties, whether arising from statute or from the articles of association.
What is to be understood by the duty of care is that the member should decide as a prudent and attentive manager would when managing and representing the company. Whether the decision ultimately carried the company to success falls outside that assessment. What is decisive is that the member displayed the requisite care at the moment of the decision and weighed all reasonable and foreseeable possibilities. Even where a decision of that quality turns out badly for the company, recourse cannot be had to the member’s liability under Art. 369 of the Turkish Commercial Code.
The Prohibition on Competition
The provision prohibiting board members from competing with the company is likewise contained in Article 369 of the Turkish Commercial Code. Accordingly, unless they obtain the permission of the general assembly, members may not carry out on their own account commercial business and transactions falling within the company’s field of business. Nor, in the same way, may they participate in companies of that kind in the capacity of a partner with unlimited liability.
In determining the business falling within the scope of the prohibition, the text of the articles of association is not taken as the sole basis. As much as the business and transactions written in the articles of association, the activities actually carried on by the company fall within the prohibition even where they are not set out in the articles. For this reason, a member who engages in commercial activity on his own account in a field in which the company is actually engaged cannot escape liability by arguing that the activity in question is not written in the articles of association.
The Prohibition on Transacting with and Borrowing from the Company
Article 395 of the Turkish Commercial Code governs the prohibition on transacting with the company and borrowing from it. Under the provision, a board member is prohibited from transacting with the company in his own name or on the account of another without the permission of the general assembly.
Where such a transaction is carried out, the company may assert that the transaction is void. The member who carried out the transaction may not, by contrast, raise the same assertion; the member remains bound by the transaction he has concluded.
In addition, board members who do not hold the capacity of shareholder are prohibited from borrowing from the company. The company may not give a guarantee, surety or security in favour of such members, nor may it assume their debts. Where the prohibition is breached, the company’s creditors may pursue the members concerned directly, limited to the amount for which the company has become indebted.
The Prohibition on Taking Part in Deliberations
Article 393 of the Turkish Commercial Code governs the prohibition on taking part in deliberations. Under the provision, members may not take part in discussions on matters in which there is a conflict between the personal interests of themselves or of the relatives expressly specified in the article and the interest of the company.
This prohibition is the reflection of the rule of good faith at the level of the board of directors. If whether the interest in question is of a personal nature becomes a matter of dispute, the board of directors convenes without the participation of the member concerned and itself makes the final assessment of that question.
Determining Liability According to the Capacity of the Member
Board membership is not confined to natural persons; legal persons may also acquire the capacity of member. For this reason, the question of liability must be addressed separately according to whether the member is a natural person or a legal person.
The Liability of a Natural Person Member
A board member who is a natural person is held personally liable for the loss he causes through his fault.
The Position of a Legal Person Member and Its Representative
Where the capacity of member lies with a legal person, a natural person is appointed to represent that legal person on the board. Since the board member here is the legal person, the addressee of any loss arising is likewise the legal person directly. The representative appointed bears no liability in this respect.
The Legal Grounds on Which Liability Rests
Fault-Based Liability
Board members are obliged to act in conformity with the obligations laid down by statute and by the articles of association. Where they breach those obligations with fault, they are liable for the loss suffered by the company, by the shareholders and by the creditors.
Because that liability rests on the basis of fault, a member who is able to prove that he displayed the attention and care incumbent upon him has the possibility of escaping liability.
Liability Arising from Contract
A contractual bond exists between the company and the board member. Although the legal nature of this contract is debated in the doctrine, the prevailing view is that the relationship is one of agency and the contract a contract of agency. Accordingly, conduct by the member contrary to his obligations amounts at the same time to a breach of the contract between him and the company. It is for this reason also possible to rely on the ground of breach of contract in a liability action to be brought.
The fact that the relationship is contract-based has the consequence that the presumption of fault comes into play. For this reason the burden of proof in a liability action lies with the member; the member must show that he was not at fault in the concrete case. Not having taken part in the transaction that caused the loss, or not having been present at the deliberation in which the decision was taken, are among the facts that may be used to rebut the presumption.
Joint and Several Liability
The cases in which more than one board member is held liable for the same loss are governed by Article 557 of the Turkish Commercial Code under the heading of joint and several liability.
Under the provision, where more than one member has caused the loss, each member is jointly and severally liable together with the others according to his fault and the requirements of the situation, to the extent that the loss can be attributed to him personally.
In such a case, in the action for damages to be brought, all those liable may be sued together for the whole of the loss; the judge may be asked to determine the compensation obligation of each defendant separately within the same proceedings.
Special Cases of Liability
Under Article 549 of the Turkish Commercial Code, for loss arising from documents relating to transactions such as the incorporation of the company, the increase and reduction of capital, mergers, divisions, changes of legal form and the issue of securities being incorrect, fraudulent or forged, those who draw up those documents and those who make the declarations, together with those who take part in them provided they are at fault, are liable. For incorporation procedures, our note titled Incorporation of a Joint Stock Company may be examined.
Under Article 550 of the Turkish Commercial Code, those who present capital as subscribed or paid up although it has not been subscribed in full or its counter-value has not been paid in accordance with the law or the articles of association, together with company officers found to be at fault, are deemed to have assumed the shares in question and pay the loss with interest, jointly and severally, together with the counter-value of the shares. Similarly, those who give their approval knowing that the persons who have subscribed for capital lack the means to pay are also liable for the loss arising from the non-payment of the debt.
Article 551 of the Turkish Commercial Code targets the valuation stage: those who appraise contributions in kind, or undertakings and assets to be acquired, at a value higher than that of their equivalents, those who present the nature or condition of the undertaking or the asset otherwise than it is, and those who engage in impropriety in any other manner, are liable for the loss arising therefrom.
Article 552 of the Turkish Commercial Code, for its part, prohibits the collection of money by making a public call in any manner for the purpose of, or with the promise of, incorporating a company or increasing its capital.
The commission by board members of any of these acts with fault makes it possible for recourse to be had to their liability.
Liability for Public Receivables
The first addressee for the public debts of a joint stock company is the company, which is the principal debtor. If it becomes apparent that collection cannot be made from the company, or if it cannot in fact be made, the debt is met out of the assets of the board member, who is liable in the second degree.
Liability for Tax Debts
Because they are legal persons, joint stock companies may hold various rights and assume obligations; tax debts are one of those obligations. The rule is that the tax is collected first from the legal person, which is the principal debtor, and, if that is not possible, that recourse is had to those liable in the second degree.
Article 10 of the Tax Procedure Act No. 213 provides that, where the legal person is the person responsible for tax, the duties arising from that responsibility are to be performed by the company’s statutory representative. The second paragraph of the article provides that taxes and related receivables which cannot be collected, wholly or in part, from the assets of the taxpayers or of those responsible for tax because the statutory representatives have failed to perform those duties are to be collected from the assets of those who have failed to perform their statutory duties.
Since board members are in the position of statutory representative of the company, they are charged with performing the duties arising from tax responsibility. Otherwise, recourse is had first to the company for the collection of the tax debt; if collection cannot be secured from the company, the debt is met out of the member’s assets.
Liability for Other Public Receivables
Under repeated Article 35 of the Act No. 6183 on the Procedure for the Collection of Public Receivables, public receivables which it is apparent cannot be collected in full from the company as a legal person, or which cannot be collected at all, are collected from the assets of the company’s statutory representatives.
In conclusion, board members are in the position of being liable in the second degree in respect of the company’s public debts that are not paid within time.
The Position of Liability Where Powers Are Delegated
The Turkish Commercial Code allows the board of directors to delegate its duties or powers to third parties. Where such a delegation takes place, board members are, as a rule, not held liable for the acts and decisions of the persons to whom the power has been delegated.
The legislator has, however, introduced an exception to this general rule. Under that exception, termed the duty of upper-level supervision, the liability of the board of directors may continue to a certain extent even where a delegation has taken place. Members must display a reasonable degree of attention and care in selecting the persons to whom they delegate duties and powers. Where that standard is not observed, the member who effected the delegation may be held liable for the acts and decisions of those to whom it was delegated.
The Termination of Liability
There are two circumstances that extinguish the liability of members. The first is a decision of the general assembly to grant discharge to the member, and the second is the completion of the limitation period laid down by law.
Discharge
In company law, discharge is a declaration of intent showing that the economic and legal consequences of the business and transactions relating to the accounting period covered by the discharge have been adopted by the general assembly.
The power to grant a discharge decision lies with the general assembly. The general assembly may grant discharge to all the members, or it may decide to grant discharge to only some of them.
Recourse to the civil liability of members depends on there being no discharge decision taken by the general assembly. Where an express discharge decision has been given, or discharge has occurred through the approval of the balance sheet account, those who voted in favour of the discharge cannot bring an action asserting the civil liability of the board of directors unless the general assembly decision to that effect is annulled. A separate examination of the annulment of general assembly decisions may be required. By contrast, shareholders who did not vote in favour of the discharge decision retain the right to bring an action based on the civil liability of members within 6 months from the date of the decision.
The scope of the discharge is limited to the circumstances and events within the knowledge of the general assembly. Where a matter has not been submitted to the knowledge of the general assembly, the discharge decision taken does not extinguish the member’s liability arising from that matter.
Under Article 424 of the Turkish Commercial Code, where a decision approving the balance sheet has been taken at the general assembly and the contrary is not expressly stated in the decision, that decision at the same time has the result of discharging the board members.
It must be emphasised that the discharge decision is directed at the company’s internal relationship and is binding only in that relationship. For this reason discharge has no effect in respect of actions to be brought by the company’s creditors.
Statute of Limitations
The statute of limitations concerning the liability of board members is governed by Article 560 of the Turkish Commercial Code.
Under the provision, the right to claim damages becomes time-barred upon the passage of two years from the date on which the loss and the person liable are learned of and, in any event, five years from the day on which the act causing the loss occurred. If the act at the same time constitutes an offence and is subject to a longer prosecution limitation period under the Turkish Penal Code, that longer period applies in the action for damages as well.
Compensation for the Loss Suffered by the Company
For loss arising as a result of conduct contrary to the obligations, an action for damages may be brought against the board member who caused the loss. In this action the court with subject-matter jurisdiction is the commercial court of first instance; as regards territorial jurisdiction, the court of the place where the company’s registered office is located is decisive.
In a liability action to be brought for compensation of the company’s loss, the capacity of claimant is accorded to the company, to the shareholders and, exceptionally, to the company’s creditors. The creditors’ right of action arises only in the event of the company’s bankruptcy and on condition that the bankruptcy administration does not claim compensation. The respondent party is the member or members who carried out the act giving rise to liability.
Even where the action is brought by shareholders or creditors, payment of the compensation to the company must be sought. The reason is that the loss suffered by the shareholders and the creditors is in the nature of reflective loss.
Tort and Criminal Liability
Under Article 371 of the Turkish Commercial Code, the company is liable for the torts committed by the persons authorised to represent and manage the company in the course of their duties. That said, the company’s right of recourse against the member who committed the tort is reserved; that is, the company which meets the loss may subsequently claim the amount paid from the member concerned.
The provisions on criminal liability directed at board members are, for their part, scattered across various statutes. Under those provisions, judicial and administrative fines may be imposed on members, and a term of imprisonment may likewise be handed down.
By way of example, neglect of the duty to keep books attracts an administrative fine, obstruction of the audit of the company attracts a judicial fine, and making a declaration to the contrary although the capital has not been subscribed in full and its value has not been paid attracts imprisonment.
For detail on the subject, our note titled Criminal Liability of Board Members in Joint Stock Companies may be examined.
Frequently Asked Questions
Must the activity be continuous for the prohibition on competition to be breached?
The prohibition on competition prevents a member from carrying out on his own account commercial business and transactions within the company’s field of business. Whether an activity falling within the prohibition that is carried out on a single occasion without being continuous falls within that scope is debated in the doctrine. The prevailing view is that continuity is not required; accordingly, a member’s carrying out of such a transaction even once is regarded as a breach of the prohibition and gives rise to civil liability.
May a member become a partner in another company active in the same field?
In the context of the prohibition on competition, the law provides that a member may not participate in another company falling within the company’s field of activity in the capacity of a partner with unlimited liability. The liability of shareholders of joint stock companies and of partners of limited liability companies is not, however, unlimited. For this reason, a member’s holding shares in another joint stock or limited liability company operating in the same field of activity as the company is not regarded as a breach of the prohibition on competition and gives rise to no liability.
In what circumstances may a member escape liability?
Breach of the obligations arising from statute or from the articles of association gives rise to liability, and that liability rests on the basis of fault. Accordingly, if the member proves that he displayed the attention and care incumbent upon him, no liability arises. In addition, the event giving rise to liability becoming time-barred, or a discharge decision having been taken at the general assembly, likewise brings liability to an end.
When is the board liable for the company’s tax debt?
In a joint stock company the principal tax debtor and taxpayer is the company itself; the person responsible for tax, by contrast, is the board of directors. For this reason the payment of tax debts is also among the board’s duties and responsibilities. Where the debt is not paid, recourse must first be had to the joint stock company; if the enforcement proceedings prove fruitless, recourse may be had to the liability of the board members.
How is compensation apportioned where more than one member is liable?
Where the obligation to compensate the same loss belongs to more than one member, differentiated joint and several liability applies. Under this system, the amount of loss caused by each member is determined on the basis of the degree and gravity of that member’s fault, and liability is shaped accordingly.
Independent Legal Assessment
In liability actions arising from board membership, the factor that determines the outcome is most often not the debate on the merits but how the burden of proof is distributed. Since the presumption of fault operates against the member by reason of the contractual relationship, keeping the board’s decisions and the minutes of deliberations in sufficient detail to show which member argued which position becomes decisive in practice. It is difficult for a member who has not entered a dissenting note to show subsequently that he stood apart from the decision.
In the same way, the scope of the discharge decision is frequently misjudged. Since discharge covers only matters submitted to the knowledge of the general assembly, it affords no protection in respect of concealed or unreported transactions. In building a concrete structure, we recommend that the following headings be given priority:
- Keeping the board’s decision book in such a way as to make dissenting notes and abstentions visible
- Where powers are to be delegated, documenting the care displayed in selecting those to whom they are delegated and operating the duty of upper-level supervision
- Making a clear allocation of responsibility within the board for monitoring public debts and tax duties
- Obtaining the permission of the general assembly in advance in respect of the prohibitions on transacting with and borrowing from the company
- Calculating the limitation periods separately, having regard to the distinction between the date of knowledge and the date of the act
- Reviewing the completeness of the financial information submitted to the general assembly agenda in the light of the protective effect of discharge
This text has been prepared for general information purposes and it would be appropriate to obtain legal support in the field of commercial law before taking any step in a concrete dispute. Independent Legal provides advisory services at every stage of the process, from managing the liability risks of board members to conducting liability actions.