Liability of Members of Board of Directors Regarding Public Debts of Joint Stock Companies 14 July 2015
As it is possible to collect public debts of a joint stock company from its legal representatives, it is of the importance to determine the scope of such liability. Below is a general review regarding the liability of legal representatives of joint stock companies, who are appointed in accordance with the Turkish Commercial Code No. 6102 (“TCC”), against the public debts of the same.
1. Legal Representatives of Joint-Stock Companies
In accordance with the related provisions of TCC regarding joint-stock companies, the board of directors, as being the body of will and representation of company, acts in the capacity of the legal representative of company by virtue of the authority to represent the same in the external relations and to manage it in internal relations. Therefore, as a general rule, the persons, who are responsible for the fulfillment of its obligations including the payment of public debts, are the members of board of directors of such company.
In fact, pursuant to the provisions of General Communique of Collection (Serial:A, Item No:1) regarding the public debts of joint stock companies, the legal representative, acting within the scope of Repeated Article 35 of the Law on Collection Procedure of Assets No.6183 (“Law”), is the board member, who has been appointed as per the articles of association of company or by the general assembly, or is the third person appointed as managers by the board of directors provided that at least one board member still holds the power to represent the company.
2. Liability Arising from Unpaid Public Debts
The liability of legal representatives, which arise from the public debts within the scope of the Law, is taken into account in Repeated Article 35. According to the said provision, if the public receivables cannot be fully or partially collected from the assets of company or it is understood that such receivables cannot be collected from the assets of the same, then such receivables shall be collected from the personal assets of the legal representatives as per the Law. As could be seen, it will be possible to render enforcement proceedings against the personal assets of the legal representatives of a joint stock company in order to collect the public receivables fully, when those cannot be obtained through the company assets. In that respect, the liability of the legal representative due to the public debts of joint stock company under the Law are secondary. It should also be stated that the impossibility to collect the public debts from the assets of company being happened in actual terms is not an absolute condition and it would be enough to hold the same liable when the inability to collect such receivables is“understood”.
3. Liability Arising from Unpaid Tax Debts
According to Article 10 of the Tax Procedure Law No. 213 (“TPL”), if the tax payer is a legal entity, such obligations in this regard shall be fulfilled by their legal representatives. Pursuant to the same provision, any taxes and its consequent receivables, which cannot be collected from the assets of the tax payers because of not fulfilling such legal obligations, shall be collected from the assets of the ones, who have not fulfilled those obligations on behalf of the said tax payers.
Given the abovementioned provisions, the liability of joint stock companies due to unpaid taxes is primary and the legal representatives cannot be held liable without having rendered any legal proceedings firstly against the company for the said unpaid tax debt. In other words, in order to hold legal representatives of joint stock companies liable for the unpaid tax debts pursuant to Article 10 of the TPL, it is compulsory that the legal proceedings against the company must have been completed and the collection of tax receivables must be impossible as a result of the said proceedings. In that respect, the liability of legal representatives of joint stock companies due to unpaid taxes is secondary. In addition, in accordance with the Repeated Article 35 of the Law, in order for the board of directors to be legally liable for the unpaid tax debts of the company, the determination of unavailability of tax debt collection in advance is not enough alone, as the legal proceedings against the company must have been rendered firstly.
4. Liability Arising from Unpaid Debts to SSI
According to Article 88 of the Social Insurance and General Health Insurance Law No. 5510 (“Law No.5510”), if the insurance premiums and other receivables of Social Security Insurance (“SSI”) are not paid within the periods stated therein without a rightful reason, the legal representatives, including the executive directors and officials, shall be jointly and severally liable against the SSI along with their employers as well as the ones having the capacity of legal entity. In that respect, the members of board of directors shall be primarily liable along with the employer company for the debts not paid to the SSI as per the respective terms without a rightful reason along with the employer company.
As could be seen from abovementioned explanations, the SSI is not obliged to conduct legal proceedings against the company firstly and the same can directly hold the members of the board of directors liable in order to collect its receivables. In that respect, contrary to Repeated Article 35 of the Law, conducting legal proceedings against the company and determining or prior understanding of inability to collect such receivables from the same is not a precondition to hold the board members liable for the debts to the SSI.
5. Liability of Legal Entities in Capacity of Board Members
One of the innovations brought by the TCC is that a legal entity itself can be appointed as a member of the board of directors (Article 359). In case of such appointment, the legal entity must elect a real person, who will be acting on its behalf. Since a legal entity board member will be fulfilling its duties by virtue of the real person elected to act on its behalf, the question whether the legal entity itself or its representative will be held liable in case of non-payment of public debts should also be answered. Unfortunately, there are not any provisions enacted in the Law, TPL or the Law No.5510.
When we look at the preamble of Article 359/2 of the TCC, it is sought by enabling the legal entitles to become a board member is;
- to be able to hold the legal entity board member itself liable;
- to prevent the legal entity hide behind the real person representing the same;
- to provide the continuance of the liability of legal entity due to its representative’s actions and decisions by providing the continuance of the bond between the legal entity and its representative.
As could be seen from the abovementioned preamble, the TCC does not envisage the liability of real person acting on behalf of the legal entity but rather seeks the liability of the legal entity itself. In fact, the legal entity board member is responsible and liable against the company, the shareholders and creditors of company due to the actions and transactions of its representative made with such title pursuant to Article 553 of the TCC and the following provisions. In that respect, the legal entity board member can be held liable because of the unpaid public debts of company and in such a case, the same will be entitled to have recourse to the real person acting on its behalf as per the internal relations between them.[1] However, it should be also noted that since there is not any precedent concerning this issue, it is not possible to make a certain evaluation neither.
6. Defect Liability of Legal Representatives
Repeated Article 35 of the Law does not require fault as a condition for the liability of legal representatives due to unpaid public debts. In that respect, a mere holding of title of legal representative is considered enough to hold such representative liable for unpaid public debts without questioning whether or not the same has duly performed its obligations. Therefore, since the Law imputes strict liability on the legal representatives, it will be sufficient to hold the board members liable for unpaid public debts, when it is understood or anticipated that such debts cannot be collected from the assets of the company.
On the other hand, the Law No.5510 and the TPL consider fault as a condition for holding the legal representative liable for the unpaid insurance premiums and tax debts. As could be clearly understood from the expression in Article 10 of the TPL, which is “… because of not fulfilling these duties ….”, the legal representatives can only be held liable as per the said code if they have any fault. Similarly, we may reach the same result pursuant to Article 88 paragraph 20 of the Code No.5510 through the expression of “without a just cause” that the executive directors or officials and legal representatives must have fault in the fulfillment of payment of premium debts.
The fifth paragraph of Repeated Article 35 of the Law, which was amended by the Code No. 5766, previously stated that: “If the persons, who are legal representatives or managing the institution, are different from each other at the times when the public receivable accrued and the same must be paid, they shall be severally and jointly liable for the payment of public debt.” In addition, paragraph 6 of the same article previously stated that “the provisions in the Tax Procedure Code No.213 regarding the liabilities of legal representatives do not remove the liabilities stated herein.”
As is mentioned above, while the fault of legal representative is a requirement for holding the same liable with respect to the tax debts accrued as per the TPL, the Law adopts the principle of strict liability for the unpaid public. In this regard, the fifth and sixth paragraphs of Repeated Article 35 of the Law are not in line with the condition of fault that is required by the TPL. The reason is that if the persons who are legal representatives at the dates when the tax debt accrued and when the same must be paid are different from each other, then the legal representative who is not legally obliged to make such payment will be considered as liable for non-payment of the tax debt pursuant to the Law but this will be contrary to the fault liability principle adopted under the TPL.
The Constitutional Court annulled these two provisions mentioned above within the scope of our general explanations provided herein (numbered E.2014/144 – K.2015/29 and dated 19.03.2015) due to the reason that both codes can be applied to an incident at the same time as a result of which will cause an uncertainty regarding one of which code shall be taken into account and it will be also contrary to the legal security, if a legal representative is made liable only because of holding such title, although the same has fully fulfilled its duties.
As a result, pursuant to the annulment judgment of the Constitutional Court, we are of the opinion that if a member of the board of directors of a joint stock company has duly performed its duties and responsibilities regarding the payment of public debts of company, the same cannot be held liable for the unpaid public debts that have not accrued during his term of office.
[1] Kırca, İ./Şehirali Çelik, F. H./Manavgat, Ç.: Anonim Şirketler Hukuku, C. 1, Temel Kavram ve İlkeler, Kuruluş, Yönetim Kurulu, Ankara 2013, s.407.
Türkçe Versiyonu İçin
