Legal Liability Of The Members Of The Board Of Directors Of Joint Stock Company

Pursuant to the Turkish Commercial Code numbered 6102 ("TCC"), joint stock companies are represented and managed by the board of directors; therefore, the board of directors is a mandatory and permanent organ of joint stock companies. Since the board of directors is the representation and management body of the joint stock company, it is important that the board of directors can use its broad powers effectively and efficiently and ensure accountability as a result of its authority. Therefore, since the board of directors manages the affairs of the joint stock company and represents the company, it also has legal and criminal responsibilities while fulfilling its duties. The board of directors represents the company against shareholders in internal relations and against third parties in external relations. The legal relationship between the board of directors and the company is a controversial issue in the doctrine, and the doctrine contains different opinions on whether this relationship is a sui generis contract, an agency contract or a service contract.

Article 553 of TCC stipulates that in the event that founders, board members, managers and liquidation officers breach their liabilities defined by the law and articles of association due to their fault, they shall be deemed responsible for the loss they cause against the company, shareholders and company creditors. According to this article, certain conditions must be fulfilled in order for the liability of the members of the board of directors to arise. These conditions are the violation of the obligations of the members of the board of directors arising from the law and the articles of association, the occurrence of the violation as a result of faulty behaviour, the occurrence of damage, and the existence of a causal relation between the faulty behaviour of the relevant member violating his/her duties and the damage. It should also be mentioned that even if a damage has occurred due to the faults of the members of the board of directors, if there is no violation of the law and the articles of association, the liability of the members of the board of directors of the joint stock company cannot be mentioned, and each condition must be met in order to be able to mention liability. In the relevant provision, it is regulated that the liability of the members of the board of directors will arise in case of violation of the law and the articles of association, in this case, whether the member of the board of directors will be liable for behaviours contrary to other regulations is uncertain and is a separate subject of discussion in the doctrine. Since the member of the board of directors is liable through fault, it is important which party bears the burden of proving the existence of the relevant fault. In the first version of the provision, the phrase "unless they prove that they are not at fault" was included, but this phrase was removed from the provision, so that with the final version of the relevant article, the party claiming that the member of the board of directors is at fault is obliged to prove its claim.

Article 553 of TCC regulates the general liability of the members of the board of directors, and within the framework of the relevant provision, the liability of the members of the board of directors is based on their fault. TCC also regulates the special liability of the members of the board of directors. While the general liability of the members of the board of directors regulated under Article 553 of the TCC is based on fault, in cases of special liability, the members of the board of directors are held liable even if they are faultless.

Pursuant to Article 369 of the TCC, the members of the board of directors and third parties in charge of management are under the obligation to fulfil their duties with the diligence of a prudent manager and to observe the interests of the company in accordance with the rules of honesty. With this provision, it is considered as a criterion for the members of the board of directors to act like a prudent manager while fulfilling their duties. In the preamble of the relevant provision, it is stated that the said diligence will be determined objectively, and that expert knowledge on the subject matter will not be sought. In addition, in the preamble of the article, it is stated that the prudent manager criterion recognises that the board member may make a " business judgement" in accordance with the corporate governance principles and is based on the principle that the member is not held liable in cases where the risk arises from this. Although the principle of business judgement is not directly referred to in TCC, it is referred to in the preamble of the article. In the presence of the businessman's judgement principle, fault is taken into consideration in the decision-making process, and it is evaluated whether the person has obtained the necessary information within the framework of the prudent manager criterion and whether the board member has exercised the necessary diligence in this process. This evaluation is also based on the criterion of objectivity. With the adoption of this principle, the liability of the members of the board of directors is improved in a predictable manner and it is known in advance according to which standards their decisions that cause their liability will be evaluated in a liability lawsuit against them.

TCC adopts the principle of differentiated succession regarding the limits of liability of the members of the board of directors; with this principle, the members of the board of directors are obliged to indemnify the damages incurred in proportion to their fault. In this context, the liability of the members of the board of directors shall not arise due to behaviors that do not arise from their faults in the performance of their duties. Article 557 of TCC regulates the determination of the liability of the members of the board of directors. Pursuant to the relevant provision, in the event that more than one person is liable to compensate for the same damage, each of them shall be jointly and severally liable with the others to the extent that the damage can be attributed to him/her personally, according to his/her fault and the requirements of the situation. The plaintiff may sue several liable persons jointly for the full amount of the damage and request the judge to determine each defendant's liability for compensation in the same action. The application between multiple responsible parties shall be determined by the judge, considering all the requirements of the situation. By adopting the principle of differentiated succession in TCC, an equitable arrangement has been introduced. Therefore, it is an equitable arrangement for each member to be liable only for the damages caused by the member, and not for the damages caused by another member.

Articles 549, 550, 551 and 552 of the TCC regulate the special liability of the members of the board of directors, regardless of whether they are at fault or not. According to these provisions, regardless of whether the members of the board of directors are at fault or not, they will be held liable in case the company suffers a loss. Article 549 of the TCC regulates the liability in case the documents and declarations are contrary to the law. Article 549 of the TCC regulates the liability in case the documents and declarations are contrary to the law. Pursuant to the relevant provision, those who issue the documents, prospectuses, undertakings, declarations and guarantees related to the establishment of the company, increase and decrease of its capital, merger, spin-off, change of type and issuance of securities are liable for the damages arising from false, fraudulent, forged, untrue, concealment of the truth and other unlawfulness, as well as those who issue the documents or make the declarations, and those who participate in them, if they are at fault.

Article 550 of TCC regulates the liability in the event of misrepresentations about the capital and the knowledge of insufficient payment. Pursuant to the relevant provision, those who, while the capital has not been fully subscribed or its equivalent has not been paid in accordance with the provisions of the law or the articles of association, pretend that it has been subscribed or paid, and the company officials, provided that they are at fault, shall be deemed to have assumed these shares and shall jointly and severally pay the equivalent of the shares and the damages together with interest. Those who are aware of the insufficiency of the payment capacity of those who have made capital commitments, and who authorize the same, shall be liable for the damages arising from the non-payment of the said debt.

Article 551 of the TCC regulates liability in case of fraud in valuation. Pursuant to the relevant provision, those who overestimate the value of the capital in kind or the business to be acquired and the real property, or who show the nature or condition of the business or the real property differently, or who commit fraud in any other way, shall be liable for the damages arising therefrom.

Article 552 of the TCC regulates the liability in case of collecting money from the public. Pursuant to the relevant provision, without prejudice to the provisions of the Capital Markets Law, it is prohibited to collect money from the public by making a call by any means for the purpose of establishing a company or increasing the capital of the company or with the promise thereof.

Article 560 of TCC sets forth the statute of limitations regarding the liability of the board members. The right to claim compensation against those responsible shall be time-barred after two years from the date on which the plaintiff learns of the damage and the responsible person, and in any case after five years from the day on which the act giving rise to the damage occurred. However, if this act requires a penalty and is subject to a longer statute of limitations according to the Turkish Penal Code, this statute of limitations shall also apply to the claim for compensation.

The members of the board of directors are also responsible for the public debts of the company. It should be mentioned here that if the joint stock company has any public debt, this debt is firstly collected from the company. If it is understood that the debt cannot be collected from the company, it can also be collected from the members of the board of directors. Within the framework of Article 10 of the Tax Procedure Law numbered 213, if legal entities are responsible for tax, the legal representatives of the legal entity fulfil their duties. Taxes and related receivables that cannot be fully or partially collected from the assets of taxpayers or tax responsible persons due to their failure to fulfil these duties are collected from the assets of those who do not fulfil their legal duties. According to Article 35 of the Law on Procedure for Collection Public Receivables numbered 6183, public receivables that cannot be collected in whole or in part from the assets of legal entities or that are understood to be uncollectible are collected from the personal assets of legal representatives.

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.