It is widely recognized that a company has a legal personality
that is distinct from those of its shareholders. Accordingly, while
doing business with a company, one is not dealing with its
shareholders, but with an artificial entity to which the law
attributes a separate personality.
In capital companies such as joint stock companies (anonim
sirket) or limited liability partnerships (limited
sirket), the liability of shareholders towards the
company's creditors are limited to the amount of their
respective contribution to the equity capital of the
company1. This means only companies (not their
shareholders) are responsible for the debts they incur. In other
words, from the separate legal personality of companies derives an
invisible shield of limited liability in favor of their
Occasionally, shareholders of a certain company (which may be
either natural persons or legal entities) intentionally use the
same to escape from liability towards the creditors of the relevant
company. This approach triggered the development of the piercing
the corporate veil, which is also known as the alter ego
theory (the Theory). The Theory suggests that only
in exceptional situations where the principles of equity
necessitate doing so, the rights and obligations of a company may
also be treated as those of its shareholders. This results in the
corporate veil being lifted and the shareholders, who have been
hiding behind that, being held liable. The Theory is used when a
company is insolvent or when it is operated as a mere business tool
of a certain natural person or legal entity to avoid exposure to
The Theory under Turkish Legislation
The Turkish Commercial Code does not contain any provision
explicitly allowing the piercing of the corporate veil. Therefore,
the Theory is taken into consideration by the courts on a
case-by-case basis and applied when really necessary. One should
bear in mind that he cannot resort to the Theory every time he
wants to chase the shareholders of a certain a company. The general
rule, which provides that only the company (not its shareholders)
is liable for the debts the company incurs, remains untouched.
The Draft Turkish Commercial Code, which is before the
Parliament for discussion, does not expressly refer to the Theory.
However, it regulates "group companies" whereby under
specific circumstances a parent company could be held liable for
its affiliates' debts.
Application of the Theory by the Turkish Court of
Although some isolated judgments of the Turkish Court of Appeals
(the Court) contain traits of the Theory, the
Court had never expressly admitted it until its judgment dated 12
May 2006 and numbered 2005/8774E., 2006/5232K. (the
Judgment). The Judgment related to a case
involving two sister companies and the application of the Theory
was based on the following grounds: (i) financial identity of the
two sister companies; (ii) participation of the sister companies to
a common enterprise; (iii) similarity of the scope and objective of
both companies; and (iv) commercial and financial unity between the
The legal ground of the Judgment was Article 2 of the Turkish
Civil Code, which provides that "Every person is bound to
exercise his rights and fulfill his obligations according to the
principles of equity. The legal order does not protect the evident
abuse of rights." Within the framework of the Judgment,
the Court disregarded the separate legal personalities of the two
sister companies because (i) the corporate structure had been being
used to escape from a financial obligation; (ii) the companies were
operated so that one could be held responsible for the acts of the
other; and (iii) to do so would lead to justice being served.
Although the Court admits the existence of the Theory, it is
still not possible to discern any broad principle indicating the
circumstances where a court shall pierce the corporate veil.
Evolution of the Theory by further decisions of the Court should be
awaited. Anyway, it can be inferred from the Judgment that the
Court will tend to adopt a fact-based approach as regards the
application of the Theory, and the circumstances of each case will
be reviewed thoroughly. It is also clear that the corporate veil
will not be lifted simply because it would be in the interest of
justice. Otherwise, judicial security may be impaired.
1. Such rule is not applicable to the public debts of
limited liability partnerships, e.g., tax debts, whereby
the liability of shareholders is proportional to their stake in the
equity capital of the relevant partnership.
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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