In the joint stock company, whose capital is divided into shares and which is liable to its creditors with its own assets alone, the direction and management of the undertaking, together with its representation vis-à-vis third parties, is entrusted to the board of directors. The responsibility placed on board members in return for that authority runs along two separate axes: civil liability and criminal liability. The first arises where members breach the duties imposed on them by statute or by the articles of association without displaying the requisite care and diligence. The second, as a consequence of the principle of legality in offences and penalties, arises only where acts expressly defined in various statutes are committed. For the compensatory dimension of members’ liability, our note titled Civil Liability of Board Members in Joint Stock Companies may be consulted.
Since a joint stock company is a legal person, it cannot be sentenced to a penalty; only security measures may be ordered against the company. The natural consequence is this: an offence arising within the company finds its answer in the persons of the board members who hold the power of management and representation. For the detail of how management and representation powers are allocated, our note titled Management and Representation in Joint Stock Companies may be examined.
The criminal provisions addressed to board members are not gathered in a single statute but are scattered across different instruments. The sanction prescribed also varies with the gravity of the act; in some cases a fine is considered sufficient, while in others a term of imprisonment applies. Below we address this scattered picture statute by statute.
The Position of the Company as a Legal Person in Criminal Law
Article 329 of the Turkish Commercial Code No. 6102 defines the joint stock company as a company whose capital is definite and divided into shares and which is liable for its debts with its assets alone.
Legal persons have legal capacity and may assume obligations; they do not, however, bear criminal liability in the manner natural persons do. The reason lies in the mental element of the offence. Intent and negligence are concepts arising from the will of the perpetrator, whereas a legal person has no independent will that can be attributed directly to it. What we call the will of the company is in reality the will of those who manage it.
The principle of the personal nature of offences and penalties, one of the cornerstones of criminal law, leads to the same result. A penalty may be directed only at the person who manifests the will to carry out the act, that is, at the perpetrator. For joint stock companies, this principle makes it necessary for liability to shift from the company to its directors.
Article 20(2) of the Turkish Penal Code No. 5237 likewise expressly provides that criminal sanctions may not be applied to legal persons. There is, by contrast, no obstacle to the application of security measures to legal persons.
Article 60 of the Turkish Penal Code governs one of those measures: in the case of a private-law legal person carrying on its activity under a licence granted by a public authority, where an intentional offence has been committed for the benefit of the legal person through the participation of an organ or representative and by abusing the power conferred by the licence, and a conviction has been handed down, that licence is revoked. The remainder of the article provides that confiscation may also be applied to legal persons. The Misdemeanours Act No. 5326, for its part, allows administrative fines to be imposed on legal persons.
In sum, the sanctions that may be directed at the company as a legal person are confined to three headings: revocation of the licence, confiscation and administrative fine.
How Liability Materialises in the Board Members
Because the company bears no criminal liability, where a state of affairs requiring a penalty emerges, the party called to account is not the legal person but the board members responsible for the management of the undertaking.
The principle of personal responsibility also shapes investigative and prosecutorial practice here. Which member is to be held responsible for the act is not determined automatically; the authorities conduct a detailed examination and take as their basis the division of duties within the board. For this reason, whether or not a written and clear set of internal rules exists within the board may be decisive for the course of the criminal proceedings.
In the headings below, we examine the criminal provisions members may face, grouped by their source statute.
Criminal Liability Arising from the Turkish Commercial Code
The acts of commercial law origin that give rise to the criminal liability of board members are gathered in Article 562 of the Turkish Commercial Code. In return for the conduct listed in that article, an administrative fine, a judicial fine or a term of imprisonment is prescribed.
Cases Attracting an Administrative Fine
- Failure to draw up an inventory upon the opening of the commercial undertaking
- Failure to reflect fully and accurately in the inventory drawn up the immovables, receivables, debts, cash holdings and other assets belonging to the undertaking, and failure to show separately the values of the asset and liability items
- Failure, in respect of the journal, general ledger and inventory ledger kept in physical form and the books falling within Art. 64(4) of the Turkish Commercial Code, to obtain notarial opening certification at the incorporation stage and before the books are taken into use
- Keeping the books in a manner contrary to the qualities required by Article 65 of the Turkish Commercial Code
- A system of books that is not capable of enabling experts, upon examination, to form a view as to the activities and financial position of the undertaking
- Failure to keep the books in such a way as to show how the activities of the undertaking arose and what course they followed
- Failure to preserve a copy of documents connected with the undertaking in written, visual or electronic form
- Failure by a person who can produce documents subject to mandatory retention only through an image or another data carrier to keep available the auxiliary means enabling those documents to be read
- Failure, in preparing the financial statements, to observe the Turkish Accounting Standards published by the Public Oversight, Accounting and Auditing Standards Authority and the accounting principles and interpretations in the conceptual framework
- Failure to transmit to the Central Securities Depository the information relating to holders of bearer shares and the records concerning the shares they hold before the certificates are distributed
Cases Attracting a Judicial Fine
- The complete absence of commercial books, or the absence of even a single entry in them
- Failure to produce in full the books required by law to be kept when they are requested by persons vested with audit powers, and obstruction of those persons in the performance of their duties
- The lending of company funds to shareholders who have failed to discharge a due obligation arising from their capital subscription
- The lending of money in cash out of the company’s assets to board members who are not shareholders and to those relatives of such members listed in Art. 393 of the Turkish Commercial Code who are not shareholders
- The transmission to third parties, by a board member who reviews books and documents opened to his examination by reason of his office, of business and trade secrets learned in the course of that review
- The appraisal of contributions in kind, or of undertakings and assets to be acquired, at an excessive value compared with their equivalents, the presentation of the nature or condition of the undertaking or the asset otherwise than it is, or any other form of impropriety in the valuation process
- The complete failure, in companies under an obligation to set up a website, to open such a site, or the failure to include on the site, in due form, the content required to be published there
- Failure by the board of directors of a controlled company to prepare, within the first three months of the financial year, the report on relations with the controlling and controlled companies
- Failure by the controlled company to supply the information and documents requested by the experts appointed by the controlling company for the report on the transactions carried out by the controlled company and their results
Cases Attracting Imprisonment
- The knowing and wilful making of entries in the commercial books that do not correspond to the truth
- Presenting capital as subscribed or paid up although it has not been subscribed in full or its value has not been paid in accordance with the law or the articles of association
- The false preparation of documents, prospectuses, undertakings, declarations and guarantees relating to transactions such as mergers, divisions, changes of legal form or the issue of securities
- 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 existing capital
- The intentional commission of one of the acts of unfair competition listed in Article 55 of the Turkish Commercial Code
Criminal Liability Arising from the Turkish Penal Code
Like the Commercial Code, the Turkish Penal Code contains a number of provisions that directly concern board members.
As regards Article 158 of the Turkish Penal Code, the commission of fraud by a member of a company’s board of directors in the course of carrying on commercial activity renders the offence aggravated; in that case both imprisonment and a judicial fine are imposed on the member concerned.
Article 164 of the Turkish Penal Code, for its part, penalises the inclusion, in statements addressed to the public or in reports submitted to the general assembly, of untrue information of a material nature capable of causing loss to those concerned; the sanction is again imprisonment and a judicial fine. For the offence to arise, the member must know that the information he gives is not true and must nevertheless act with the intent of presenting it as though it were true. By contrast, neither the existence of a purpose of obtaining a benefit nor the actual occurrence of loss is required.
Under Article 239 of the Turkish Penal Code, a person who transmits or discloses to unauthorised persons information or documents in the nature of a trade secret, a banking secret or a customer secret learned by reason of his office is punished, upon complaint, with imprisonment and a judicial fine. Board members, by virtue of their position, have access to a great many secrets; the sharing or disclosure of such information with unauthorised persons gives rise directly to criminal liability.
A similar picture applies in the field of the protection of personal data. The provisions in force afford strict protection to personal data and prescribe various sanctions in support of that protection. Some of these are contained in Articles 135 to 140 of the Turkish Penal Code.
Under Article 135 of the Turkish Penal Code, a person who records personal data unlawfully is punished with imprisonment.
Article 136 of the Turkish Penal Code prescribes imprisonment for a person who unlawfully gives personal data to another, disseminates it or obtains it.
Article 138 of the Turkish Penal Code attaches imprisonment to the failure of those under a duty to destroy data from the system, once the periods laid down by law have expired, to discharge that obligation.
A significant proportion of joint stock companies collect personal data both from their employees and from their customers. Since those responsible for the fate of that data are the board members, the occurrence of any of the situations listed above brings the criminal liability of the members directly into question.
Criminal Liability Arising from the Tax Procedure Act
The offence of tax evasion is governed by Article 359 of the Tax Procedure Act No. 213. It is possible for this offence to be committed through the legal person of a joint stock company; in such a case the addressees of the sanction are the company’s board members. The Act groups the acts falling within tax evasion according to three separate sentencing ranges.
The conduct falling within the first group attracts imprisonment from eighteen months to five years:
- Falsifying books, records and documents, concealing them, drawing up documents that are misleading in content, or using documents of that nature
- Resorting to accounting and bookkeeping artifices in the books and records
- Opening accounts in the names of persons who do not in fact exist or of persons unconnected with the transaction recorded
- Entering accounts and transactions required to be recorded in the books into other books, documents or different recording media in a manner leading to a reduction of the tax base
The sanction prescribed for the second group of acts is imprisonment from three to eight years:
- Destroying books, records and documents kept or drawn up under tax legislation and subject to mandatory retention and production
- Removing pages of the books and inserting other sheets in their place, or leaving the gap unfilled altogether
- Drawing up the original or a copy of documents, wholly or in part, as forgeries, or using forged documents
The third group contains a single act, for which the sanction is imprisonment from two to eight years: printing, without any such agreement, documents that persons holding an agreement with the Ministry of Finance are authorised to print, or knowingly using such documents.
Criminal Liability Arising from the Occupational Health and Safety Act
Article 14 of the Occupational Health and Safety Act No. 6331 imposes on the employer the obligations to keep records of occupational accidents occurring at the workplace, to prepare a report and to notify the event to the Social Security Institution (SGK). Board members who neglect these obligations face an administrative fine.
Article 25(8) of the Act prescribes a more serious sanction: imprisonment is imposed on the employer or the employer’s representatives who cause work to be carried out without authorisation at a workplace where work has been suspended.
The employer is obliged to take the measures required by occupational safety at the workplace and to display the necessary diligence in that regard. Criminal liability comes into question in respect of loss arising from the neglect of that obligation.
Criminal Liability in Respect of Occupational Accidents
The occupational accident is defined in Article 3 of the Occupational Health and Safety Act. Accordingly, an occupational accident means an event occurring at the workplace or by reason of activities connected with the work which results in death or which renders the person physically or mentally disabled in his bodily integrity.
Whether an event may be regarded as an occupational accident depends on the injured person being insured. Even an accident sustained by an insured employee on the first day of starting work is in the nature of an occupational accident. Nor is the employee required to have completed a particular number of premium days.
For the compensatory dimension of the subject, our note titled Action for Damages Arising from an Occupational Accident may be consulted.
Article 14 of the same Act sets out the duties falling on the employer after an accident. The employer must record all occupational accidents that occur, complete the necessary examinations and draw up a report on them, and notify the event to the Social Security Institution (SGK) within three working days of the accident. An employer who acts contrary to these duties faces an administrative fine.
If the accident occurring at the workplace has caused the injury or death of the insured person, the employer’s liability for the offences of negligent injury or negligent killing may arise. Since the abstract capacity of employer is concentrated in the board members in joint stock companies, they will also be the addressees of these offences. However, for liability to be established, the members must have breached obligations relating to workplace safety and the loss must also stem from that breach.
Criminal Liability in Respect of Workplace Safety
The grave consequences of occupational accidents have led the legislation to impose a great many preventive obligations on the employer. This heading, referred to generally as the securing of occupational health and safety, covers more than one subsidiary obligation. The employer is under obligations to watch over and protect the employee, to provide training on occupational health and safety, to monitor and supervise the employee, to combat risks and to establish an occupational health and safety committee.
Since the joint stock company is managed and represented through the board of directors, the abstract capacity of employer lies with the company itself and the concrete capacity of employer with the board of directors. Because of this structure, recourse may be had to the criminal liability of board members for occupational accidents occurring within the company. That said, in determining who is responsible, the allocation of duties and powers within the company must be examined with care.
The decision of the 12th Criminal Chamber of the Court of Cassation, File No. 2014/20438, Decision No. 2015/13325, dated 14.09.2015 sheds light on this point. In the dispute before the court, the company in which the accident occurred was managed jointly by the defendants M.G. and K.G. Under the division of work between them, K.G. was responsible for the company’s commercial relations and customer affairs, while M.G. was responsible for technical and administrative matters. Having established that the areas of responsibility had been determined in advance, the Court of Cassation concluded that no fault could be attributed to K.G. in the incident.
Board members are obliged to implement both the measures set out in statute and regulation and those notified by occupational health and safety experts. If the failure to take those measures leads to an occupational accident, the liability of the members comes into question. Here the mental element of the offence differs according to whether the member foresaw the result. If the result was not foreseen at all, ordinary negligence is in issue; if the result was foreseen but no preventive step was taken in the confidence that it would not materialise, conscious negligence comes into question. Where conscious negligence is accepted, the penalty to be imposed is more severe.
The most striking example of accidents arising from a failure to secure workplace safety is the Soma Mining Disaster, which took place on 13 May 2014 in the Soma district of Manisa and in which 301 miners lost their lives. Caused by a fire that broke out in the coal mine, the event is recorded as the occupational and mining accident that has caused the greatest loss of life in our country.
The first-instance proceedings concerning the event were heard before the Akhisar Assize Court, which imposed prison sentences on fourteen defendants, including the chairman of the board of directors of Soma Kömür İşletmeleri. When the file was taken to the Court of Cassation for review, the 12th Criminal Chamber found the decision unlawful and quashed it. Whereas the first-instance court had held the chairman of the board liable for ordinary negligence, the Court of Cassation held that conscious negligence was present and that the penalty therefore had to be increased.
Criminal Liability in Respect of Loss Suffered by Customers
The safety obligation of joint stock companies is not confined to employees alone; the safety of the customers to whom they provide services also falls within its scope.
If an injury or death occurs while the service is being provided, board members may be held liable for the offences of negligent injury or negligent killing. For this, the member must have failed to display the requisite care and diligence in performing his duties and the loss must also stem from that failure.
In the incident before the 12th Criminal Chamber of the Court of Cassation in its decision File No. 2013/14727, Decision No. 2014/1491, dated 24.01.2014, a customer examining furniture on the mezzanine floor of a business premises fell through an opening that had no railing and was surrounded only by sofas placed with gaps of about one metre between them. The Court of Cassation found the employer at fault, citing the failure to close the gaps with suitable measures capable of preventing a fall, the failure to make use of lighting in that section, the failure to take measures to prevent customers from going up to the mezzanine, and the failure to establish a workplace organisation capable of ensuring that customers were kept under supervision.
Criminal Liability Arising from the Capital Markets Act
Under Article 103 of the Capital Markets Act No. 6362, an administrative fine is imposed on board members who act contrary to the provisions of the Act and to the decisions taken by the Capital Markets Board.
Article 106 of the Capital Markets Act, for its part, attaches a sanction to insider dealing. A board member who, acting on information not yet disclosed to the public and capable of affecting the prices or values of capital market instruments or issuers or the decisions of investors, places a purchase or sale order, amends an order he has placed or cancels it, and thereby secures a benefit for himself or for another, is punished with imprisonment and a judicial fine.
Criminal Liability Arising from the Enforcement and Bankruptcy Act
It is a statutory requirement that bankruptcy be requested in respect of a company that has fallen into a state of over-indebtedness. Under Article 345/a of the Enforcement and Bankruptcy Act No. 2004, where a joint stock company has become over-indebted and the board members do not file for bankruptcy, imprisonment is imposed on the members upon the complaint of one of the creditors.
Article 333/a of the Enforcement and Bankruptcy Act, for its part, targets the director who acts with the intent of causing loss to creditors. A board member who, with that intent, fails to pay the debts of the commercial undertaking and thereby causes loss to creditors is punished with imprisonment and a judicial fine.
Frequently Asked Questions
When a criminal complaint is filed against the company, against whom is the investigation directed?
A criminal complaint is the reporting to the public prosecutor or to the police of an act alleged to have been committed. Where a complaint is filed in respect of an offence occurring within the company, the investigation is directed not at the legal person but at the board members. The reason is that companies are legal persons and legal persons bear no criminal liability.
What sanctions may board members face?
Just as a fine may be imposed as the counterpart of members’ criminal liability, a term of imprisonment may also be handed down depending on the nature of the act.
Can an administrative fine imposed on the company be passed on to a member?
A contractual relationship exists between the company and the board member, and the member is obliged to display the requisite care and diligence in performing his duties. Recourse may be had against a member who, by conduct contrary to the duty of diligence, causes an administrative fine to be imposed against the company.
Can the company hold the status of suspect?
Since legal persons bear no criminal liability, the investigation is not conducted against the company; consequently the company cannot occupy the position of suspect.
Independent Legal Assessment
Board membership is, beyond a commercial office, a position carrying direct personal criminal risk. The problem encountered most often in practice is that the division of duties within the board has not been set down in writing; in the absence of such a document, the investigating authorities tend to assess all members on the same footing. As the decisions of the Court of Cassation also indicate, a clear and previously determined allocation of powers plays a decisive role in individualising liability.
Managing the risk depends on the criminal provisions being reflected in advance in the company’s internal workings. In designing a concrete structure, the following headings should be addressed as a priority:
- Preparing internal rules within the framework of Art. 367 of the Turkish Commercial Code so as to document the delegation of management powers and the limits of each office
- Auditing the system of commercial books, the opening certifications and the inventory processes with regard to the administrative sanctions falling within Art. 562 of the Turkish Commercial Code
- Recording in writing the notifications of the occupational health and safety expert and documenting the measures taken in a traceable manner
- Reviewing personal data processing activities in the light of the risks under Arts. 135–140 of the Turkish Penal Code and putting retention periods under monitoring
- Assessing in good time the obligation to declare bankruptcy once signs of over-indebtedness emerge
- Restricting access to inside information in companies open to the capital markets and monitoring dealing prohibitions
Independent Legal advises throughout the entire process, from building a defence strategy in criminal investigations faced by the board members of joint stock companies to establishing corporate structures that reduce liability risks.