Liabilities of Board Members of Capital Companies in Turkey

Av. Ali Yurtsever

1. Overview

The main legislation governing the duties, responsibilities and the liabilities of board members of capital companies in Turkey, (JSCs and LLCs) is the Turkish Commercial Code No. 6102, (TCC). As a rule, the TCC requires the Board Members to act as cautious executives and protect the interests of the company while performing their duties with good faith, which means that no general liability can be stipulated against Board Members in event of damages or losses if those members can prove that they acted as cautious executives in good faith.

2. Legal Liabilities of Board Members of Capital Companies

The TCC lists a number of different duties and obligations to Board Members, which all have separate liabilities imposed upon the members if violated. The obligations and their corresponding liabilities arising from the TCC are listed below:

a) General Rule for Liabilities of Board Members

The general rule governing all obligations and liabilities of board members of capital companies is set forth at Article 553 of the TCC, which states that  in cases where the shareholders, board members and managers (those with delegated powers) breach their obligations arising from the Law or the Articles of Association of the company (AoA), they will be held liable for damages incurred by the company, company shareholders and/or company creditors, as a result of such breach. 

b) Specific Duties & Liabilities of Board Members

Once the Tourism License is obtained, the company will need to proceed with the application for a Medical License (Health Tourism Certificate) to the Ministry of Health. These applications are to be submitted to the relevant Provincial Directorate of Health where the company is located and are subject to a separate set of requirements. These requirements include (but are not limited to) signed protocols with different licensed medical facilities, infrastructure for a call center and employment of qualified personnel. 

Apart from this general rule, there are specific provisions provided for in TCC and in other secondary regulations that govern the duties and liabilities of board members. These include liabilities and obligations such as:

  1. Duty of care & loyalty
  2. Prohibition of transacting with the company & to take out loans from the company
  3. Duty to keep proper company Books
  4. Documents and declarations contradicting the Law
  5. Misleading declarations regarding Capital
  6. Irregularity in determination of in-kind capital value
  7. Proper collection of capital from the public

It is important to note here that the above is not exhaustive list of potential liabilities of board members. It should also be noted that each duty and liability have their own set of sanctions and consequences, both legal and criminal. 

For example, one of the duties and liabilities of board members of capital companies is to provide truthful declarations to the authorities regarding the company’s capital, and a specific set of provisions will be applicable in case of violation of this duty. Accordingly, Article 550 TCC sets forth that if the capital of the company is shown as paid off when in fact it is not, the persons who have created this illusion, together with the authorities of the company, are liable for the unpaid amounts, provided that they are in fact negligent. This also includes the board members of the company. A penalty of imprisonment from three months to two years may also be applicable for this violation.

3. Legal Liabilities of Board Members with Delegated Powers

The TCC allows board members to delegate their duties and representation powers to other board members and/or to third parties. However, it is important to note here that at least one board member must always hold the power of representation of the company.

Delegation of power is an important tool for board members as it can allow for the board members who delegate their representation powers to be released from the liabilities associated with being a board member. As according to TCC 553/2, in the event of delegation of powers, those who delegated powers may not be held liable, unless a breach of the obligation to choose appropriate persons to delegate powers can be proven.

Although a delegation of power is possible, it also has its limits. According to the Law, some of the powers and duties that cannot be delegated to third parties are as follows (the following is not an exhaustive list):

  1. High-level management of the company and the power to give orders for high level management; 
  2. Determining the management organization of the company; 
  3. Establishing the organization for the accounting, financial auditing and financial planning;

Accordingly, if a power is delegated, and this power may not be so delegated according to Law or the AoA, such delegation will be deemed illegal, and the BoD member(s) will still be held liable even if the negligent act was performed by the third party with delegated powers.

4. Public Debt Liabilities of Board Members 

Liabilities of board members of capital companies arising from the public debts of the company are regulated separately and are subject to different rules and conditions. Accordingly, board members can be held personally liable (with their personal assets) for the tax liabilities of a company, regardless of their fault or negligence, in the event any of the below shall occur:

  1. initiation of collection proceedings against the company for a tax payment obligation (tax, default interest or tax penalty) arising from the failure of performance of tax liabilities in a timely and proper manner; 
  2. as a result of the collection proceedings in (i) above, failure of the tax administration to collect its tax receivables due to the insufficient assets of a company after the collection process by the tax authorities; or 
  3. (iii) a tax obligation of the company becomes due as a result of the failure of the legal representative to perform his duties with respect to the payment of taxes.

The failure of a board member to perform their tax duties (i.e., occurrence of a tax payment obligation) is automatically deemed as the legal representative’s fault and/or negligence. 

4. Conclusion 

It is important to note here once again that the above does not provide a full list of all potential liabilities a board member will undertake. The liabilities of board members in capital companies is a complex subject that is regulated under different laws and secondary regulations. Since directors are the ones that are effectively in charge of the JSC’s day to day operation and are the signatory representatives of the company, they undertake significant liabilities for their actions that result in loss or damages, or unpaid debts. It is therefore, imperative that persons who will be taking on board member roles in companies in Turkey understand the duties, liabilities and risks involved with such a position.

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