Piercing the Corporate Veil, the Burden of Proof, and Its Reflection in Executive Proceedings

The concept of legal personality, which lies at the heart of commerce, is the cornerstone of entrepreneurial freedom and economic dynamism. However, this powerful shield can sometimes be abused. So, is it possible to escape from debts by hiding behind a company? This is where the law steps in: Piercing the corporate veil.

In this article, we examine the conditions under which the corporate veil can be lifted within the framework of the law of evidence, which principles are protected, and how this mechanism supports creditors in the pursuit of their rights. The article, prepared by Mehmet Aslan (Managing Partner), Berrak Cantürk (Senior Associate), and Seydican Yanarateş (Associate) from our firm, explores how justice is served when the boundaries between a company and its shareholders become blurred.

Introduction

Legal personality is structured with an independent asset base and liability regime separate from individuals to meet the needs of economic life and encourage entrepreneurship. Nevertheless, the protection afforded by legal personality can, in certain circumstances, be abused to conceal personal interests and to the harm creditors. In enforcement law, if a debtor hides their assets behind the corporate veil, thereby causing enforcement proceedings to become futile, it becomes possible to pierce the corporate veil and directly reach the truly responsible parties.

This study will address the theoretical and judicial criteria for piercing the corporate veil, the evidentiary issues it raises, and the creditor’s ability to initiate enforcement proceedings against the company’s shareholders.

Keywords: Corporate Veil, Piercing the Corporate Veil, Protection of Creditors, Burden of Proof, Enforcement Proceedings

I. The Concept Of Legal Personality And The Veil

Legal personality refers to entities recognized by the legal system as independent beings, capable of acquiring rights and incurring obligations in their own name, apart from natural persons. Legal persons can manage their own assets, thereby limiting the personal liabilities of real persons and facilitating risk-sharing. However, this principle of independence is not absolute. The legal system allows direct intervention against the real person(s) behind the entity in cases where the legal personality is abused.

The corporate veil symbolizes the independence provided by legal personality and the principle of limited liability. This veil is intended to prevent third parties from directly accessing the founders or managers of the entity, thereby separating business risks from personal liabilities^[1].

II. The Theory Of Piercing The Corporate Veil

Piercing the corporate veil refers to disregarding the independent existence of a legal entity in a specific case and holding the real person(s) behind it directly liable.

This theory is particularly applied in cases where the independence of the legal entity has been abused, aiming to uphold equity and the principle of good faith.

Although there is no explicit statutory provision serving as a direct legal basis, Article 2 of the Turkish Civil Code, which sets out the principle of good faith, and the provisions of the Turkish Code of Obligations prohibiting the abuse of rights constitute the main legal foundations for piercing the corporate veil. Furthermore, both legal doctrine and court decisions have treated this form of intervention as falling within the discretionary powers of the judiciary^[2].

2.1 In Which Circumstances Is The Veil Pierced?

Piercing the corporate veil is an exceptional remedy and can only be applied under specific circumstances, which are generally classified as follows:

Abuse of legal personality: If the entity is established primarily for fraudulent purposes or to defraud creditors, the veil may be pierced.

Personal benefit: If the entity is used as a façade to protect the personal interests of founders or managers.

Deceptive transactions: If transactions are conducted through the entity to the detriment of third parties.

Inadequate capitalization and artificiality: If the entity lacks an independent asset base or if all operations are conducted under the de facto control of a single person^[3].

In these situations, the court may pierce the corporate veil and allow direct recourse against the real persons or the members of the management body.

2.2 Examples Of Piercıng The Corporate Veil In Judicial Decisions

Turkish jurisprudence provides significant examples of piercing the corporate veil, with the Court of Cassation emphasizing certain criteria:

Use of Legal Personality to Defraud Creditors

In a decision by the 11th Civil Chamber of the Court of Cassation^[4],it was determined that the debtor transferred the company's assets to another company, rendering it impossible for creditors to collect their debts, thus committing a fraudulent act. The court, by examining the economic reality of the transaction, "pierced the veil between the companies" and held the managers who contributed to the asset stripping directly liable.

The decision particularly emphasizes that, despite the apparent independence of the companies, if they are under the control of the same person or people, if the transactions lack economic substance, and if they are organized to the detriment of creditors, these factors constitute justifiable grounds for piercing the veil. This decision shows that, when the corporate veil is lifted, the creditor can direct enforcement proceedings against the company’s managers personally. In other words, enforcement proceedings are not limited to the company’s legal personality but may also extend to the personal assets of the managers.

However, in order to initiate enforcement proceedings, it is first necessary for the court to issue a determination or ruling on piercing the veil. The enforcement office cannot exercise this authority directly; a court decision is required.

Formation of New Companies and Indirect Transactions

In another case from the 19th Civil Chamber of the Court of Cassation^[5], it was found that during the enforcement proceedings against an old company, the debtor established a new company in the same line of business and transferred the assets to this new company. The court held that these transactions violated the principle of good faith and treated the new company's legal personality as non-existent, holding the new company and its managers jointly liable for the old company's debts.

As can be seen, the apparent distinction between legal entities can be disregarded, and the newly formed company can also be held personally liable for the debts of the old company.

However, with regard to enforcement proceedings, it is important to note that the creditor must pursue the enforcement of the judgment in order to initiate an additional enforcement action against the new company and/or its managers. In enforcement law, what is most important is how the "change of parties in the proceedings" or "extension of proceedings" request is handled; during this process, the court decision must serve as the enforcement document.

Sole Ownership and Inadequate Capitalization

In another example^[6], it was determined that the entire assets, operations, and activities of a company were under the control of a single individual. It became apparent that the company did not possess an independent will and was used solely to protect the individual’s assets and evade debts. In this case as well, the Court of Cassation pierced the corporate veil and held the individual personally liable.

Once the veil is pierced, enforcement proceedings can be initiated directly against the individual’s assets. However, it must be emphasized once again that a final and binding court ruling is required before such proceedings. Enforcement offices cannot identify new debtors on their own; determining the debtor is a judicial act.

III. Burden Of Proof

Documents relating to a company’s internal operations are typically in the possession of the company itself, and the creditor’s access to such documents is limited^[7]. Therefore, it is argued in practice that the burden of proof should be alleviated^[8].

Some scholars advocate that courts should lift the veil based on strong presumptions, particularly when companies are evidently inactive or when shareholders’ assets are mixed with the company's assets. Others caution that lowering the evidentiary standard could weaken the protection of legal personality and threaten entrepreneurial freedom, indicating a lack of consensus in academia regarding the burden of proof^[9].

The Court of Cassation supports applying a balancing test based on the specifics of each case. In particular, when it is proven that a debt is not solely organized through the company but by its true beneficial owners, the court accepts that the veil should be pierced. Examples from practice include:

Debt Incurred By An Inactive Company

A joint stock company that has reported inactivity to the tax authority yet suddenly incurs significant debt without sufficient assets, used merely as a vehicle for personal debts by its sole shareholder.

Commingling of Assets

A limited liability company regularly transferring funds from its bank accounts for the personal use of shareholders, with no commercial justification in company records.

Shielding Personal Debts

For example, as indicated in the 11th Civil Chamber of the Court of Cassation, Case Number: 2018/2873, Decision Number 2019/4565, “a company established solely to shield personal debts without independent economic existence necessitates piercing the corporate veil.”

Use Of Corporate Assets For Personal Purposes In Family Companies

Although the family business founded by three siblings is legally a separate legal entity, the company’s cars, summer house, bank accounts are used by the siblings for personal purposes, and the company’s revenues are being diverted for personal expenses. In such cases, courts examine whether the company actually operates as an independent economic entity. If the company has become an extension of the partners, the corporate veil may be lifted.

At this point, it should be emphasized that each case must be evaluated based on its specific facts in terms of the rules of evidence. To go deeper and provide examples of tools that could serve as evidence based on concrete cases, here are some examples:

- During the examination of the company’s bank accounts, transfers directly made to the personal accounts of the partners; luxury consumption, holiday payments, and personal expenses (such as purchases from jewelers, hotels, and personal loan payments) may be uncovered. It should be noted that, pursuant to Article 199 of the Code of Civil Procedure, bank records are considered written evidence. Upon request, it is possible to send an official letter to the bank from the court.

- Expert examination can be conducted on the company’s legal books (journal, general ledger, etc.). Off-the-record transactions, suspicious payments, and unexplained cash outflows that show the company’s revenues being used for personal expenses by the partners can be identified. In accordance with Article 253 of the Tax Procedure Law and its subsequent provisions, the company’s books serve as evidence both administratively and legally.

- The submission of witness statements is also crucial in forming a legal opinion in court. Testimonies from employees such as accountants, secretaries, or warehouse staff can demonstrate how company assets were used for personal purposes by the partners.

- In cases like the company issuing invoices for household items or luxury consumption products on behalf of the partners, it can be shown that invoices issued in the name of the company relate to personal consumption.

- It should also be noted that documents obtained through social media posts and publicly available accounts can serve as preliminary evidence and create a significant impression during the litigation process.

It is possible to gather concrete evidence from social media showing that the partners used company assets for personal purposes. For example, if one of the partners shares a vacation trip in a luxury car registered in the company’s name on platforms like Instagram or Facebook, announces family gatherings or birthday parties held at a summer house registered to the company on their social media accounts, or shares luxury restaurant expenses paid with a company card, tagged with comments like "@...Wonderful dinner at SteakHouse!"

In the decision of the Court of Cassation, 12th Civil Chamber, Case No. 2022/3442, Decision No. 2023/7856, it was explicitly stated that social media content can be considered as evidence if it is publicly accessible, not denied, and obtained without altering the integrity of the content. In this context, social media posts can serve as the starting point for evidence, and if necessary, a content verification protocol can be conducted through a notary.

IV. Impact Of Judicial Decisions On Enforcement Proceedings

If an enforcement proceeding against a legal entity fails due to the absence of attachable assets or insolvency, the creditor may invoke piercing the corporate veil. The creditor must file a separate declaratory action in the court of general jurisdiction, seeking a ruling to pierce the corporate veil and continue the enforcement proceedings against the shareholders.

If the court grants the request, pursuant to Article 6 of the Turkish Enforcement and Bankruptcy Code, the creditor may initiate new enforcement proceedings against the shareholders or managers. Once the decision becomes final, the creditor can apply to the enforcement office to extend the enforcement proceedings under Article 43 of the Turkish Enforcement and Bankruptcy Code.

The creditor must visit the enforcement file and request the extension of the debtor status based on the court's decision. The enforcement office will then add the shareholders as new debtors to the enforcement file without issuing a new payment order; enforcement measures, such as attachment, can commence directly.

Conclusion

The institution of piercing the corporate veil is essentially an exceptional legal mechanism designed to prevent abuses while ensuring the security of commercial life. When shareholders misuse the corporate shield to the detriment of creditors' rights, this protection should be lifted under the principles of good faith and equity. However, such intervention must be based on clear abuse and supported by concrete evidence, without undermining the legal security provided by the concept of legal personality.

In enforcement law, piercing the corporate veil serves as an effective protection for creditors, especially when debtors deliberately diminish their asset base to harm creditors. Therefore, establishing the correct balance between protecting entrepreneurial freedom and ensuring creditors' rights is of critical importance. Ultimately, piercing the corporate veil is an exceptional but necessary path to securing justice and must be evaluated carefully and proportionally based on the specifics of each case..