Where individuals and capital companies fall into a position in which they can no longer meet their debts, the duty incumbent upon the partners and the authorised officers is to wind the business up in accordance with the liquidation procedure laid down by law. Where liquidation is not carried out properly, the company continues to appear active in the official registers. If discontinuation effected in this irregular manner has caused loss to creditors, the criminal liability of the partners and the authorised officers may arise. Indeed, in respect of those who discontinue trading contrary to Article 44 of the Enforcement and Bankruptcy Act (EBA), Article 337/a of the same Act provides, upon the complaint of the creditor who has suffered loss, for imprisonment of three months to one year.
While the incorporation of a company in Türkiye can be completed within a very short time, closure procedures do not advance at the same pace. For that reason many businesses take the route of ceasing operations in fact without terminating their entry in the register. Such a termination is, however, irregular. Since the company appears active in the records, enforcement proceedings may be commenced against it and attachment may be carried out at the address recorded in the register. A finding, in the course of attachment, that the address has been abandoned lays the ground for the offence of irregular discontinuation of trade. Criminal liability is not confined to natural-person merchants; it also arises in respect of the authorised officers of legal persons deemed to be merchants.
How Is Trading Lawfully Discontinued?
Discontinuation of trade is defined as ceasing to operate a commercial enterprise in one’s own name, or closing down or dissolving the enterprise. This act may take the form of bringing operations to an end by following the legal method prescribed by legislation, or it may occur as a de facto cessation even though the enterprise legally continues to exist. Whether a discontinuation may be regarded as regular depends on the framework drawn in Article 44 of the EBA. Discontinuations carried out without observing that framework are predominantly aimed at concealing assets from the creditor.
Under Article 44 of the EBA, a merchant who ceases trading must notify the trade registry directorate with which he is registered within 15 days of the date of discontinuation. A mere declaration of discontinuation is not sufficient in that notification; the entirety of the assets and liabilities, together with the names and addresses of the creditors, must also be set out. The content of the notification is published by the trade registry directorate in the trade registry gazette and in the places where the creditors are located. The costs of publication are borne by the merchant; if those costs are not met, the merchant is deemed not to have made a declaration.
The trade registry directorate that receives the declaration of assets communicates the merchant’s discontinuation of trade to the land and ship registry offices and to the Turkish Patent and Trademark Office. Upon that notification, an annotation is entered against the relevant assets for a period of two months. The situation is also notified to the Banks Association of Türkiye.
For two months running from the date on which the declaration of assets is filed, the merchant may not dispose of assets capable of attachment. Rights acquired in good faith by third parties on the basis of the provisions on possession and on the land registry are not affected by that prohibition. By contrast, no plea of good faith may be raised in respect of acquisitions between spouses, between ascendants and descendants, between relatives by blood or by marriage up to and including the second degree, or between an adopter and an adoptee.
Conditions Required for the Offence to Arise
Article 337/a of the EBA provides for imprisonment of three months to one year, upon the complaint of the creditor who has suffered loss, in respect of a debtor or merchant who fails to file a declaration of assets in conformity with Article 44 of the same Act, who understates the assets in that declaration, who fails to disclose an asset forming part of the assets or the value substituted for it during attachment or bankruptcy, or who disposes of such assets after the declaration. When that provision is assessed together with the settled practice of the Court of Cassation, the following elements are required for the offence to arise:
- That the debtor subject to the proceedings holds the status of merchant within the meaning of Turkish Commercial Code No. 6102
- That the enforcement proceedings conducted against the debtor have become final
- That any one of the alternative acts set out in Article 337/a of the EBA has been carried out
- That no declaration of assets has been filed within the framework of Article 44 of the EBA
- That the assets have been understated in the declaration of assets filed
- That an asset forming part of the assets, or the value substituted for it, has not been disclosed at the attachment or bankruptcy stage
- That the assets covered by the declaration have been disposed of after the declaration of assets was submitted
- That the creditor has suffered loss by reason of that conduct of the debtor
Right of Complaint and Time Limit for Application
Within the scope of Article 44 of the EBA, the right of complaint is conferred upon the creditor who has suffered loss by reason of the irregular discontinuation. The second paragraph of Article 337/a of the EBA reverses the burden of proof: the obligation to establish that the creditor has not suffered loss rests with the debtor. In other words, the creditor is not required to prove separately that he has suffered loss.
As to time limits, under Article 347 of the EBA the complaint must be made within three months of the date on which the act became known and, in any event, within one year of the date on which the act was committed.
In this connection, our note entitled The Offence of Causing Loss to a Creditor and Its Penalty may also be consulted.
Who Bears Criminal Liability?
As stated above, the imposition of a penalty for the offence of discontinuation of trade depends on the debtor being a merchant within the meaning of Turkish Commercial Code No. 6762. Article 14 of that Act characterises as a merchant any person who operates a commercial enterprise in his own name, even if only in part. Article 18, for its part, deems to be merchants general partnerships, limited partnerships, joint stock companies, limited liability companies and cooperative commercial companies; associations operating a commercial enterprise; and the bodies and institutions established by public legal persons such as the State, the province and the municipality in order to be administered under the provisions of private law or operated in a commercial manner pursuant to their own founding statutes.
Article 44 of the EBA uses the expression “a merchant who discontinues trading”, yet it lays down no restrictive provision to the effect that this wording is confined to natural-person merchants alone. Accordingly, the managers authorised to represent and administer general partnerships, limited partnerships, joint stock companies, limited liability companies and cooperative companies deemed to be merchants likewise face criminal liability under Article 337/a of the EBA, in the same way as natural-person merchants, where the company discontinues trading.
The Procedural Framework
Articles 349 to 354 of the Enforcement and Bankruptcy Act set out the framework of the proceedings relating to this offence. The complaint is addressed directly to the enforcement criminal court by way of a petition. If the accused fails to attend the hearing despite a duly issued summons, the proceedings may be continued in his absence.
A stricter regime has been adopted in respect of the complainant. Where a complainant fails to appear at the hearing without showing an excuse and does not send a representative either, it is ruled that his right of complaint lapses; since the presence of the complainant or of his representative at the hearing is mandatory, no judgment of conviction or acquittal may be delivered in respect of the accused even if the excuse is accepted. The complainant is moreover bound by the evidence indicated in his petition or statement, and the proceedings are conducted solely in respect of the offence made the subject of the complaint.
There is also a particular limit as regards repetition of the offence: irregular discontinuation of trade can be committed only once in respect of the place of business at which the same commercial enterprise operates. For it is not possible to abandon the place of business in which the same enterprise carries on its activity more than once without complying with the statutory obligations.
Since the offence is subject to complaint, if the complainant waives his complaint or if it is established that the debt has been discharged, the action and the penalty lapse together with all their consequences. Judgments delivered by the court of first instance in such actions are open to appeal.
Proving the Offence and the Evidence Gathered
Whether the company has irregularly discontinued trading is established by an inquiry conducted by the court. In this context the enforcement file is called in, it is verified whether the proceedings have become final, and the attachment record is examined. Records relating to the company are obtained by writing to the Trade Registry Directorate and to the Tax Office. In addition, an on-site inquiry is made through the law enforcement units as to whether the company has ceased its activity. If the information gathered shows that a discontinuation contrary to Article 44 of the EBA has taken place, the accused is ordered to be punished.
Court With Subject-Matter and Territorial Jurisdiction
Actions relating to the offence of irregular discontinuation of trade are heard before the enforcement criminal court, and such actions may not be joined with criminal actions pending before other courts. As regards territorial jurisdiction, the court to be taken as the basis is the enforcement criminal court of the place where the enforcement proceedings were conducted.
Independent Legal Assessment
In practice, irregular discontinuation of trade most often arises not from a deliberate plan to conceal assets, but from a reflex to avoid the cost and time burden of liquidation procedures. What changes the outcome, however, is not the motive but whether the notification obligation under Article 44 of the EBA has been complied with. For businesses that have ceased operating, the 15-day notification period is a threshold for which there is no subsequent remedy.
On the creditor’s side, the factor that determines the fate of the file is most often the content of the attachment record and the correct calculation of the complaint period. The date on which the record establishing that the address has been abandoned was drawn up directly affects the starting point of the three-month period running from knowledge.
In a concrete file, the following matters should be considered first:
- Verifying from the file, before the complaint is lodged, whether the proceedings have become final
- Checking whether the attachment record expressly contains a finding as to abandonment of the address
- Calculating the three-month period running from knowledge and the one-year maximum period by reference to the date on which the act was established
- Establishing the company officer’s capacity to represent and administer by means of the registry records
- Not overlooking the obligation to attend the hearings, failing which the right of complaint will lapse
- On the debtor’s side, preparing from the outset the documents showing that the creditor has not suffered loss
Independent Legal provides advisory and litigation services in relation to the conduct of liquidation processes for commercial enterprises and the pursuit of complaints of irregular discontinuation of trade heard before the enforcement criminal court.