Turkey: Practise Differences About Interpretation Of Representation Rules

Last Updated: 1 August 2017
Article by Hakki Cihan Turk

The New Turkish Commercial Code ("TCC") brought completely different rules about the representation of Companies, among which especially two deserve special mention. The first of these rules is the mandatory condition that a board member must be authorized to represent the Company without any limitation with its sole signature or two with their joint signature. The other one is about the limitation of the authorization of signatories through a so called "Internal Directive", which scope should be determined with a board resolution.

Even though, the rules seem to be very simple and applicable at the first look, the practise thereof by trade registries have caused a huge frustration at Turkish Lawyers, who had to explain to their foreign clients that the top management may not be involved in daily operations of the Company, as they had to make a choice between "limitless authorization" and "limited authorization".

The reason why the top management were requested to make such choice was the latest addition to TCC through Art. 371/7, which is as follows: "Additionally to the representatives stated above, the board of directors, may also appoint board members without representation authority and employees of the company as trade representatives or trade representative assistants with limited authority. The scope of the authority of trade representatives appointed in this manner must be determined with an internal directive in accordance with Article 367. In such case, the internal directive must be registered and announced. However, the representatives subject to the internal directive, may not be appointed at the said internal regulation. The Board of Directors are jointly and severally responsible for the damages caused to the corporation or third parties because of the actions or inactions of the trade representatives, appointed in accordance with this clause."

The trade registry interpretes this regulation as a prohibition for "limitless authorized board members" to be appointed also as a representative subject to an internal directive. In other words, a board member or board members, who was/were authorized by the Board of Directors to represent the Company withhout any subject or money limitation with its sole or their joint signature, may not be appointed, for example, as a A Group Signatory, who can sign a contract having a value under 100.000 USD together with a B Group Signature, since such authorization "limitation" would be in contradiction to Art. 370/2, which says that at least one board member must be authorized to represent the Company without any limitation. Another conclusion of this interpretation is the fact, that a board of directors consisting of, for example, 5 persons must appoint at least one member with sole signature authorization, whereby the remaining board members may be (not must!) appointed as "limited representatives" subject to an internal directive.  

The application of the abovementioned rules by the trade registries in Turkey are common with regard to cases, where the board of directors have appointed a board member to represent the Company with its "sole signature". However, there is a different practise between the Istanbul Trade Registry and the other Trade Registries at Turkey about the interpretation of Art. 371/7 TCC, if the Company has appointed two or more board directors to represent the Company with their joint signature. In such case, the Istanbul Trade Registry says that a board member, who needs the signature of another board member to bind the Company, may be also appointed as a signatory subject to the internal directive. The logic of the Istanbul Trade Registry is actually not wrong, since the "joint signature structure" requires an additional signature, whereby the "sole signature structure" requires only one signature, which has the natural consequense that a "limitless representative" is in deed limited, if he/she needs also the signature of, for example, a B Group Signatory to bind the Company for a contract having a value of, for example 100.000 USD, according to the internal directive. The Trade Registries are of the opinion, that it makes no sense to appoint a person, who may bind the company with his/her sole signature without any limitation, also as A Group or B Group signatory, whose authority is limited through the internal directive rules. However, if a board member may represent the company only together with another board member (joint signature structure), it should be also possible that such board member may represent the Company also with an A Group or B Group signatory subject to the internal directive (says the Istanbul Trade Registry). The other trade registries in Turkey prefer to apply directly the wording of Art. 371/7 TCC, which clearly says that only "board members without representation authority" may be appointed as signatories subject to the internal directive.

We are of the opinion that both interpretations are not fully correct, since the appointment of a board member as a "limitless representative" should not prevent him/her to participate to daily operations of lower degree signatories and have a control over them. If the law and the practise thereof should not be interpreted flexible enough to allow limitless representatives to participate daily operations, the regulation about the liability of board members for actions of limited representatives (according to Art. 371/7, last sencetence) would not have a legal ground and could not be considered as fair. Nevertheless, the law says that a board member shall be liable for the caused damages of "limited representatives", even though they cannot sign with them. Therefore, we believe that it would be much more practical, if the limitless representatives regardless if they have sole or joint signature authority, should be entitled to be appointed also as a lower degree signatory (A Group, B Group, 1st or 2nd Degree Signatory) subject to an internal directive.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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