Obligations of Board of Directors Members - II 14 January 2020

1. TYPES OF LIABILITIES OF THE BOARD OF DIRECTORS MEMBERS

The liabilities of the Board of Directors members can be categorized into three groups as indicated below.

1. Legal Liability

According to the Turkish Commercial Code (“TCC”), the liabilities of the Board of Directors members may arise, inter alia, due to:

1. illegality of the documents and declarations;
2. misrepresentation of the capital;
3. knowledge of the payment difficulty;
4. corruption in valuation of the in-kind capital;
5. collecting money from the public;
6. failing to fulfill the obligations arising out of the articles of association of the company;
7. failing to fulfill the duty of confidentiality.

2. Criminal Liability

Article 562 of TCC lays down the circumstances which may cause the criminal liability of the Board of Directors members along with the sanctions to be applied as judicial fine and administrative fine. In addition; the Board of Directors members can be subject to prison sentence due to the illegality of the documents and declaration[1]; misrepresentation of the capital and awareness of payment deficiency[2] and collecting money from the public although it is prohibited[3]. Furthermore; although it is not directly specified as Board of Directors members, some crimes regulated in Turkish Criminal Code may cause criminal liability of the Board of Directors members such as misuse of trust, fraud and qualified fraud in case the conditions are met.

3. Liability for Public Debts of the Company

According to Article 10 of the Law No.213[4], the official authorities may pursue the personal assets of the Board of Directors members who have failed to fulfill the obligation of the company to pay its taxes, only if they cannot collect their receivables from the assets of the company with the exhaustion of all legal proceedings against the assets of the company. According to Duplicated Article 35 of the Law No. 6183[5], the exhaustion of all legal proceedings against the company assets is not a must to cover public debts under the concept of the said code. If it appears that the collection of the public receivables cannot be obtained from the company assets, the official authority can commence proceedings against the Board of Directors members.

The Code no. 5510[6] on the other hand, extends the liability of the Board of Directors members for the payment of the premium receivables of the Social Security Institution (“SSI”) in such a way that the respective authority is empowered to pursue their personal assets directly. Therefore, while the Board of Directors members’ obligation to pay tax and public debts of the company is secondary, their duty to pay premiums to the SSI is primary unless they prove the absence of their fault in the non-payment.

2. TYPE OF LIABILITY

Under the general provisions of Turkish Code of Obligations (“TCO”), ones who caused the damage together shall jointly be responsible from the whole damage and its compensation against the injured and different ratio of faults shall only matter for their inner relationship and revocation, which is regarded as whole joint liability.

However, a different type of joint liability is brought by the TCC under the name of “differentiated joint liability”. If there is more than one party liable for the compensation of the same damage, each of the liable parties will be jointly and severally liable to the extent that liability can be attributed to that party according to the fault or negligence and the circumstances of the situation.[7] Accordingly; the Board of Directors member will be held liable for the compensation of the occurred damage to the extent that liability can be attributed to that person. In other words; the Board of Directors member will not be held liable for the compensation of the whole damage.

No one can be held liable because of the violation of the law or the articles of association or corruption which falls beyond his/her control. In addition, neither the obligation of supervision nor the duty of care may be used as grounds for holding the relevant person liable.[8]

3. LIABILITY IN DELEGATION OF MANAGEMENT AND RESPRESENTATION

Article 367 of TCC allows the Board of Directors to issue an internal directive in which the management powers are fully or partly transferred to some of the Board of Directors members or any third person. Similarly, the Board of Directors is also entitled by Article 370 of TCC to transfer their powers fully or partly related to representation of the company to some of the Board of Directors members or any third person.

Furthermore; it is regulated under Article 553 that the organs or individuals, who transfer a duty or power arising from the law or articles of association to someone else by the authority granted by the law, cannot be held liable from the acts and decisions of the people they have transferred such duty or power as long as the Board of Directors members show reasonable attention while choosing these people.

A new kind of representation is foreseen under Article 371/7 of TCC which enables the Board of Directors members to appoint limitedly authorized signatories via an internal directive to be registered to trade registry. It is regulated that Board of Directors members shall be jointly and severally liable from the acts of the limitedly authorized signatories appointed via an internal directive. There are different opinions in doctrine regarding the sense of the liability mentioned in Article 371/7, whether it is differentiated joint liability under TCC or whole joint liability under TCO. However; since Paragraph 7 has been included into Article 371 of the TCC in 2014, there is not any Supreme Court decision given on this matter. Therefore; abovementioned discussions are still ongoing.

4. CONCLUSION

As mentioned above, the liability of the Board of Directors members may vary. In general; the liabilities are categorized as legal and criminal liability. On legal liability, the Board of Directors members have a liability on;

a. Illegality of the documents and declarations;

b. Misrepresentation of the capital;

c. Knowledge of the incapability to pay;

d. Malpractice in valuation of in-kind capital;

e. Collecting money from the public;

f. Failing to fulfill obligations arising out of the articles of association of the company;

g. Failing to fulfill the duty of confidentiality.

Criminal liability of Board of Directors members may arise from illegality of the documents and declaration; misrepresentation of the capital and awareness of payment deficiency; collecting money from the public although it is prohibited and some crimes regulated in Turkish Criminal Code such as misuse of trust, fraud and qualified fraud in case the related conditions exist.

Board of Directors members may also be liable with their personal assets from tax and public debts of the company which cannot be satisfied from company’s assets, in case the Board of Directors members have fault in their non-payment.

Lastly, Board of Directors members may be held liable from the acts of the people to whom they have transferred their management or representation power, if they have failed to show care at a reasonable level while choosing them. Board of Directors members shall also be jointly and severally liable from the acts of the limitedly authorized signatories appointed by the company.