Corporate / M&A

Turkey: Liabilities of Members of the Board of Directors in a Joint Stock Company

Liabilities of members of the Board of Directors in a joint stock company are regulated by the Turkish Commercial Code, Tax Procedural Law and Law on Collection Procedure of Public Receivables.

Board of Directors and liability

The Board of Directors (Board) is the administrative body of a joint stock company responsible for the management and representation of the company. It has the right to exercise all powers not delegated to and reserved for other bodies of the company by law or by the articles of association. Board members are liable if they breach their obligations under the laws or articles of association, unless they prove that they are not negligent.

Criminal and legal liability

The Turkish Commercial Code (TCC) has separate provisions for legal and criminal liability for activities conducted while managing and representing a company. The liability under this provision is not exclusive to Board members. If managers of the company breach such TCC provisions, they may be held legally or criminally liable. Sanctions vary from fines to several years’ imprisonment. The actions are, inter alia, as follows:

  • inaccuracy of documents and declarations;
  • misrepresentation of share capital and awareness of incapability to satisfy capital undertakings;
  • irregularity in valuation of capital in-kind;
  • failure to keep company books;
  • raising money from the public; and
  • breach of obligations regulated under the TCC, laws and/or articles of association.

Limitations of liability

Art.553 of the TCC regulates the limitation of liability of Board members. Board members are not liable for illegal acts beyond their control. The obligation of supervision and the duty of care cannot be used as grounds for a Board member’s liability.

Another limitation is set forth in Art. 203 of the TCC for Board members of group companies in which the parent has absolute power over the subsidiary. Since the Board members are obliged to follow the instructions of the parent company, they will not be liable for actions taken as a result of the orders or instructions of the parent company.

Release of directors

Under the TCC, shareholders and creditors of the company may file a lawsuit against the Board members. A release of the Board members is one of the mandatory items to be decided in a general assembly meeting. If the shareholders decide in a general assembly meeting to release the Board members, the resolution may not be revoked.

On the other hand, shareholders who attended the general assembly meeting and did not vote for the release of the Board members or rejected the release resolution may file a lawsuit against the Board members within six months from the general assembly meeting. Without the affirmative votes of the minority shareholders, a resolution to release Board members from their liability of incorporation and capital increases may not be adopted.

Liabilities due to non-payment of public debts

The liability of a Board member arising from non-payment of the public debt of the company arises from the Tax Procedural Law and Law on Collection Procedure of Public Receivables.

If the Board members do not fulfill their obligations, taxes and the related receivables, and which are not totally or partially satisfied by the company’s assets, the Board members must pay the amount from their private assets.

The law on the Collection Procedure of Public Receivables extends the liability of Board members by contemplating that public debts other than taxes will also be collected from the private assets of the representatives, and that the debts will be paid by the representatives if the company cannot or if it is prima facie evident that they cannot pay such public receivables. Board members are held jointly and severally liable for taxes and other public receivables that have accrued during their term in office.

The liabilities of Board members are regulated by law, and Board members are liable if they breach their obligations under the law or articles of association, unless they prove that they are not negligent.