Liability of Shareholders and Directors of Limited Liability and Joint Stock Companies for Tax Debts
LIABILITY OF SHAREHOLDERS AND MANAGERS OF LIMITED LIABILITY COMPANIES FOR PUBLIC DEBTS
The basic rule in limited liability companies is that liability for company debts is confined to the assets of the company as a legal entity. Where public receivables (and tax debts in particular) are concerned, however, there are important exceptions to this principle. In single-shareholder structures especially, where the capacities of shareholder and manager overlap, liability may extend considerably further.
Liability is examined below separately for shareholders and for managers.
Liability of the Shareholder of a Limited Liability Company
Under Article 35 of Law No. 6183 on the Procedure for the Collection of Public Receivables, shareholders of a limited liability company are directly liable, in proportion to their capital shares, for public debts:
that cannot be collected from the company in whole or in part; or
that are understood to be uncollectable.
This liability is secondary in nature. That is to say, the administration may not proceed directly against the shareholder to recover the debt. It must first be established concretely that collection of the debt from the company is impossible.
When may recourse be had to the shareholder's personal assets?
The following conditions must be satisfied together:
it must be established definitively that the tax debt cannot be collected from the company (insolvency);
a payment order must have been issued against the company and the proceedings must have proved fruitless;
the payment order addressed to the shareholder must have been duly served; and
the debt must not be time-barred.
According to the settled case law of the Council of State, placing an attachment on a shareholder's bank accounts without any investigation of the company's assets, while the company continues to trade and without the impossibility of collection having been concretely established, is unlawful.
Liability of the Manager (Statutory Representative) of a Limited Liability Company
The manager of a limited liability company may additionally be liable for public debts in the capacity of statutory representative.
Pursuant to Article 10 of Law No. 6183, recourse may be had to the manager's personal assets where the public debt:
cannot be collected from the company's assets; and
the manager has failed to perform their statutory duties.
In that event the manager's bank and investment accounts may also be attached (Art. 62 of Law No. 6183).
The manager's liability is, however, fault-based. There must be negligence or fault in the failure to perform tax duties. The manager has a right of recourse against the company for public debts paid on the company's behalf.
The Position in Single-Shareholder Limited Liability Companies
Where the sole shareholder is also the manager, liability may arise both:
in the capacity of shareholder (Art. 35); and
in the capacity of statutory representative (Art. 10).
Moreover, in certain exceptional situations the Court of Cassation may treat the company and its sole shareholder as identical under the principle of piercing the corporate veil. This approach is exceptional and depends on the features of the particular case.
Conclusion
Liability of shareholders and managers of limited liability companies for public debts is possible; that liability is not, however, unlimited or automatic.
LIABILITY OF BOARD MEMBERS OF JOINT STOCK COMPANIES FOR TAX AND PUBLIC DEBTS
As a rule, joint stock companies are liable for their debts only with their own assets (Art. 329 of the Turkish Commercial Code). This principle is limited, however, as regards public debts. Tax and other public receivables that cannot be collected from the company may, under certain conditions, be recovered from the personal assets of board members.
In practice, the most frequent and most significant area of risk is tax debts.
Liability for Tax Debts (Art. 10 of the Tax Procedure Law)
The special provision governing tax debts is Article 10 of Tax Procedure Law No. 213.
Under that provision:
the tax duties of legal entities are performed by their statutory representatives; and
taxes and tax-related receivables that cannot be collected from the company owing to the non-performance of those duties are recovered from the assets of the statutory representatives.
In a joint stock company the statutory representative is, as a rule, the board of directors (Art. 365 of the Turkish Commercial Code).
For liability for tax debts to arise:
a tax duty must have been breached (declaration, payment, production of books and so forth);
the tax must not have been collectable from the company; and
fault and a causal link must be present.
Liability for tax debts is fault-based. Merely being a board member does not suffice on its own. A connection must be established between the breach and the impossibility of collection.
Furthermore, all avenues of enforcement against the company must first be exhausted in respect of the tax debt. Recourse may not be had directly to the board of directors.
Other Public Debts (Law No. 6183)
For public receivables other than tax (administrative fines, certain fund receivables and so forth), repeated Article 35 of Law No. 6183 applies.
Under that article:
public receivables that cannot be collected from the company's assets are recovered from the personal assets of the statutory representatives.
This liability is:
secondary (the company is pursued first);
joint and several; and
unlimited.
Unlike the position for tax, fault is here a matter of debate, and a more objective conception of liability is seen in practice.
Common Features of the Liability
The liability of board members for tax and other public debts:
is confined to the period during which they held office;
is joint and several where there is more than one member;
is directed at personal assets; and
requires as a fundamental condition that collection from the company be impossible (mandatory in the case of tax).
In the case of tax debts, fault and breach of tax duties are also specifically examined.
Conclusion
The principle of limited liability in joint stock companies is narrowed as regards public debts. However:
liability for tax debts is fault-based and is not automatic; and
liability for other public receivables may be construed more broadly.
For board members, therefore, the most critical area is the timely and correct performance of tax duties.
A tax debt that cannot be collected from the company may, where the necessary conditions are met, turn directly into a risk to personal assets.