Turkish Law Blog

Liabilities of the Board of Directors

Batuhan Serdaroğlu Batuhan Serdaroğlu/ Yılmaz Göksu Serdaroğlu Attorney Partnership
27 January, 2020
451

1. Introduction

Principal duties and obligations of board of directors of joint stock companies (“BoD”) are constituted under Turkish Commercial Code [1] (“TCC”).

Turkish Criminal Code [2], Social Security and General Health Insurance Law (“Social Security Law”) [3], Tax Procedural Law [4], Public Receivables Law [5] and Execution and Bankruptcy Law [6] stipulates penalties and liabilities of BoD in breach of such duties and obligations.

2. Duties and Obligations of the Board of Directors

As per the fundamental principle of TCC, joint-stock companies are managed and represented by BoD.  Whilst the authority to manage and/or represent the company could be delegated within the BoD members, and/or any third party real person(s) and/or legal entity(ies) could be assigned to partially or fully perform such authority in accordance, and compliance, with the articles of association (“AoA”), organizational internal regulations, and applicable law.  

However, Article 375 of TCC strictly stipulates that the below-mentioned duties and authority could not be delegated:

  • high-level management of the company;
  • determining the management organization of the company;
  • organizing the accounting, financial auditing, and financial planning as required for management of the company;
  • appointing and expelling directors, signatories, and similar management subjects;
  • supervising compliance of the management personnel with the AoA, internal regulations, and written directives of BoD;
  • managing and maintaining the corporate books, annual activity reports, corporate management declaration; presenting the said books and reports to the general assembly; summoning and organizing General Assembly meetings, and implementing resolutions of General Assembly; and
  • notifying the court of insolvency of the company.

When performing its duties, each member of BoD is to

  • to act prudently and diligently performing its duties and managing the business of the company;
  • to keep confidential the information at all times during and after the term of duty;
  • to monitor and oversee the management and business of the company to ensure compliance of the company with principles of good faith and the interests of the company and its shareholders;
  • not to conduct any transaction of commercial nature within the scope of the company in their accounts or any third person’s account and not engage with a company involved in the similar kind of business as a partner with unlimited liability, unless authorized by the General Assembly as per the Article 396 of TCC.
  • to refrain from participating in BoD meetings related to matters concerning the interest of their own or that of certain close relatives of them as per the Article 393 of TCC;
  • not to engage in transactions with the company unless the General Assembly authorizes the BoD as per Article 395 of TCC;

3. Liabilities of the Board of Directors

BoD members and the third parties having management powers are liable to perform their obligations with due care and to protect the interest of the company as expected from a prudent company executive.  The liability system based on negligence where the BoD members are held liable unless they prove that they are not at fault.

The liability in question basically arises from AoA and applicable law.  Should management or representation authority be partially or completely delegated or assigned to certain BoD member(s) any to any third party(ies), the other BoD members are released from the liability to the extent of delegated authority.  In other words, as a rule, where there is no authority over a certain function, there would be no liability.  However, in any way whatsoever, BoD members are liable for the appointment of assigned person with due care.

There are two types of liability, one of which is being the legal liability, and the other being the criminal liability. Legal liability results in payment of the damages suffered by the company, shareholders, or the creditors whereas criminal liability results in imprisonment and monetary penalties.

3.1. Legal Liability

BoD members are liable to the company, shareholders or the creditors depending on circumstances, whom are entitled to file lawsuit against the BoD as per the articles between Article 549 to Article 561 of TCC. A BoD member who proves that he has not at fault shall not be held liable.

The differentiated solidarity system is applied for the liability of the BoD members. According to the system, in the event that more than one BoD member is liable for compensation of damages, the BoD members will be held liable in proportion to their degree of fault and to the circumstances of the case. Therefore, claims against BoD members could be asserted to all BoD members in whole, in a single lawsuit and it’s in court’s discretion to determine the degree of fault by each BoD member and to recourse claims among liable BoD members. [7] The damages caused by the BoD members will be regrouped into two categories: damages caused collectively by the BoD members and personal damages caused individually by the BoD member in question, therefore, the distinction between collective damage and individual damage will be made, and different liability groups may be formed.

If the BoD members are released by a general assembly resolution once, the release may not be cancelled by another general assembly resolution reserving the Article 445 of TCC. However, the shareholders who object to such resolution have the right to file a lawsuit against the BoD members within six months. A resolution to release BoD members from their liability for incorporation and capital increases may not be adopted by a general assembly without an affirmative vote of the minority.

Lawsuits related to the liability of BoD members may be filed within two years starting from the time such liability-bearing action is discovered. But in any event, a lawsuit may be filed within five years starting from the occurrence of such liability-bearing action. The lawsuit must be filed with the court where headquarter of the company is located.

3.2. Criminal Liability

Criminal liability of BoD members is constituted under Article 562 of TCC. BoD members and/or representative(s) of a company are liable for the certain acts of the company such as smuggling, money laundering etc.

3.2.1. Keeping Company Books. The BoD Members are under an obligation to maintain a document ledger, general ledger, inventory ledger, and other books required by the Tax Procedural Law in compliance with the rules of TCC. Furthermore, the documents in support of the entries in the ledgers must also be kept.  Monetary penalty corresponding to at least 200 days of imprisonment will be imposed should record-keeping obligation is duly not fulfilled.  

Auditors of a company are entitled to have access to the books of the company. The BoD members refraining auditors’ access to the books are subject to a monetary penalty corresponding to imprisonment between 100 to 300 days.

3.2.2. Financial Statements of a Company. The BoD is under the obligation to prepare the company’s financial statements. Financial statements should be issued in compliance with the Turkish Accounting Standards.  

BoD members of the affiliates are obliged to issue report inter-related transactions effectuated between the parent company and the other affiliates, in any.  Furthermore, if required, an additional report to be submitted to the transactions took place between the affiliate and the shareholders of the parent company and relatives of the shareholders. These reports should reflect the real transactions and economic interests between the parent company and affiliates.  Upon breach of such obligations, the BoD members are to be subjected to a monetary penalty corresponding to at least 200 days of imprisonment.

3.2.3. No Debt. The company is not entitled to lend money or provide collateral to a BoD member or any of his relatives who is a non-shareholder. Breach of that obligations results in monetary penalty corresponding to at least 300 days of imprisonment against the BoD members.

3.2.4. Duty of Confidentiality. Any BoD member, having access to the confidential information of a company by virtue of his/her duties, is to be sentenced to imprisonment from one to three years and will be subject to a monetary penalty corresponding to a maximum of 5,000 days of imprisonment should he disclose such confidential information.

3.2.5. Documents and Declarations Contradicting the Law. In the event that documents that are related to incorporation, increase and decrease in capital, merger, spin-off, change in type, issuance of bonds and other similar documents have content that is contrary to the truth, the persons who have prepared such documents are to be held liable and sentenced to imprisonment from one to three years. Since BoD members are obliged to prepare the said documents, that rule constitutes part of their liability.

3.2.6. Misleading Declarations regarding Capital. If the capital of the company is falsely reflected in company records as paid off, the persons engaged in such false statement, together with the authorities of the company, are liable for the unpaid amount, provided that they are in fact negligent. They are also subject to imprisonment from three months to two years.

3.2.7. Irregularity in Assessment of Capital In-kind Value. Those who assess the value of capital in-kind, or business enterprise and its assets subject to acquisitions higher than actual value are liable for the loss incurred from such false assessment. Fraud is not a condition for that liability. Upon such breach, the BoD members will be subjected to a monetary penalty corresponding to at least 90 days of imprisonment.

3.2.8. Funding of Capital from the Public. Pursuant to the Capital Markets Law No. 2499, published in the Official Gazette dated 30 July 1981 and numbered 17416, no capital may be founded from the public without the prior permission of the Capital Markets Board (the “CMB”). CMB may apply to the Commercial Court of First Instance in Ankara to prevent such activities or such attempts.

Those persons attempting the fund capital for a company and the BoD members of that company who are involved in the funding are to be jointly liable for depositing the collected funds into the bank account assigned by the CMB and be sentenced from six months to two years imprisonment.

3.2.9. Requirement to Set Up a Company Website. Pursuant to Article 1524 of TCC, all capital companies subject to independent auditing as per Article 397/4, are also be required to maintain a website and make announcements as set forth in the relevant legislation. In the event of non-compliance with that obligation results in annulment of the related decisions, and those who fail to duly announce on their website the content required under Article 1524 are subject to a judicial fine up to 100 days. The BoD members who have fail to open and maintain the website shall be subject to a judicial fine between 100 to 300 days.

3.2.10. Non-payment of Company Debts. According to Article 333/a of Execution and Bankruptcy Law, if the “de jure” or “de facto” executives of a company partially or fully refrain from paying the debts of a company with the intention to damage the creditors upon the complaint of the creditors the executives may be subject to imprisonment and monetary fines. Should such deed not constitute any other criminal liability, the BoD members are subject to monetary penalty corresponding to at least 5.000 days of imprisonment and sentenced to imprisonment from 6 months to 2 years.

3.2.11. Negligent Bankruptcy. If the BoD members are aware that the company is in insolvency and yet still receive substantial amounts of loan or buy assets on account, and the company is to go bankrupt in negligent bankruptcy that results in the liability of the BoD members and to imprisonment from 2 months to 1 year.

3.3. Tax Liability

Primary tax obligor under the Turkish taxation system is the tax owner itself.  However, according to Article 10 of Tax Procedural Law, BoD is liable against the tax authorities for the unpaid tax of the company.  Once it is legally deemed that the collection of tax from the company is impossible, tax authority could charge BoD members in person and each BoD member would be severally liable for the tax debts of the company. The same is applicable for the social security premium debts as per Article 88/20 of Social Security Law.

Public Receivables Law sets forth a wider liability. According to Article 35 of Public Receivables Law, authorized representatives of a company (in our case, the BoD) are held liable for all public debts of the company.  Public debts, if not duly paid by the company, could be directly collected each BoD member, who is jointly and severally liable with the other BoD members.

3.4. Liability of Non-Executive BoD Members

The liability of the BoD members is collective. According to the article 367 of TCC, management of the company belongs to BoD unless delegated or assigned as pointed out above.  Moreover, the liability is based on the negligence.  Therefore, as a general principle, we could state that should a BoD member not have any execution power may not be liable for the damages suffered by the company or any third party. However, this principle does not per se relieve the non-executive BoD members since the burden of proof lies on the BoD claiming no liability.

3.5. Jurisdiction over Foreign BoD Members

The courts in Turkey do have jurisdiction over the actions and transactions which are either done in Turkey or have consequences in Turkey, regardless of the nationality of persons doing or executing them. Therefore, as a rule, any foreign person shall be subject to the jurisdiction of Turkish courts for such actions and transactions, and as long as such foreign person and/or his property is within the borders of the Republic of Turkey, the court order is to be directly executed.  However, the consequences of the court orders over foreign persons/property out of Turkish borders should be scrutinized under two subsections, first one of which is of private law courts, and the second one of which is of the criminal courts. 

The issue whether an order of a private law Turkish court is executable against the foreign persons in their country of origin or of residence, or in the country where their assets are located could be answered by the legislation of such country. 

The issue whether an order of a criminal court be executable against the foreign persons absent within the Turkish border, on the other hand, is regulated by the Turkish Criminal Code, along with the international treaties and bilateral agreements signed with Turkish and foreign governments. 

As it may be appreciated, in modern legislations, persons are subject to the criminal codes of the country of presence.  The Turkish criminal legislation stipulates the same structure:  Any criminal action or transaction taken place in Turkey, regardless of the nationality of the perpetrator, falls under the jurisdiction of the Turkish Criminal courts.  The Turkish legislation goes even further, though, regulating by the Article 12/3 of the Turkish Criminal Code, that should a foreign citizen commits an act against a Turkish citizen or a an entity incorporated under the Turkish laws, provided that such crime is stipulated as a crime of at least a one year penalty of imprisonment by the Turkish Criminal Code, and that he/she is present in Turkey, he/she is to be tried by the relevant Turkish criminal court.  Therefore, we could conclude that, specifically criminal liability of the company directors, whether they are foreign or not, shall be subject to the Turkish Criminal Code and the jurisdiction of the Turkish Criminal Courts, as a rule. 

4. Conclusion

Following TCC enacted in 2011, BoD membership become an important responsibility due to its legal, criminal and tax liabilities that are even more significant to those of shareholders.

The general fault liability and burden of proof sets forth essential responsibility on each BoD member.  Even delegating the powers to professionals requires high attention and good care.  The liabilities of the BoD members under TCC entitle the company, shareholders and the creditors to compensate their losses arising from the fault of the BoD members.

BoD members are to act carefully and diligently in performance of their duties. Furthermore, non-payment of public receivables by the company puts the BoD members under the risk to have to pay the company’s public debts (tax, custom duties, social security premiums etc.) by their personal assets.  

As a result of this extensive care duty and legal and criminal liability, however, TCC sets forth some rights and benefits for the BoD members. According to article 394 of TCC, as addition to salary, a per diem fee or premiums or bonuses, or any other additional benefits may be provided to the BoD members by the General Assembly.  Also, professional insurance may be provided to the BoD members to help them focus on business without dealing with court procedures or compensation problems.

References

[1] Law No. 6102, published in the Official Gazette dated 14 February 2011 and numbered 27846.

[2] Law No. 5237, published in the Official Gazette dated 12 October 2004 and numbered 25611.

[3] Law No. 5510, published in the Official Gazette dated 16 June 2006 and numbered 26200.

[4] Law No. 213, published in the Official Gazette dated 12 January 1961 and numbered 1075.

[5] Law No. 6183, published in the Official Gazette dated 28 June 1953 and numbered 8469.

[6] Law No. 2004, published in the Official Gazette dated 19 June 1932 and numbered 2128.

[7] Poroy/Tekinalp/Çamoğlu, Law of Partnerships I, 14th Edition, Istanbul 2019, P.434.

 

 

 

 

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