Almost every legal system in the world provides obligations to keep company books and documents. Company books, in general, consist of records of a company that reflect its structure, history and current status. This is why, company books, by and large, are the sole indicators for companies to which private and official institutions can refer. Moreover, even some commercial documents which are not in the form of a company book can play a crucial role in determining the status of a company in many respects. Therefore failure to keep them properly, up to date, and reachable if and when needed is subject to various legal sanctions.
Likewise, Turkish law considers maintenance of company books essential in terms of the order and nature of commercial life and a significant tool for the governments to manage business life in general and collect taxes properly, fully, and in a timely manner. Therefore, the rules relating to maintenance and preservation of company books and records are set out in different regulations in the Turkish legal system. A Turkish company and even real person merchants should maintain and preserve a specific set of books and documents with regard to their commercial activities, depending on their company structure, which would then be monitored in a proper manner and for a defined period of time. The type of books that are subject to the obligation for maintenance, the scope of the obligation, and the liabilities that may arise in case of non-compliance with such obligations are stated under various regulations, such as the Turkish Commercial Code ("TCC"), the Tax Procedure Code ("TPC"), the Bankruptcy and Enforcement Code and the Social Insurance and General Health Insurance Code ("SIGHIC").
Obligation to Preserve Company Books
According to relevant provisions of the TCC, all types of companies shall maintain a day-book, ledger, shareholders book, and a decision book wherein Board of Directors decisions are kept. Additionally, joint-stock companies shall keep a shareholders book and a bond book in case there are any issued. The TCC also requires that members of the Board of Directors and company managers in some cases are obliged to preserve company books and documents. There are varying time periods set for keeping the books defined under the TPC, the TCC and the SIGHIC.
Where and How Shall Company Books Be Preserved
Even though there are no specific provisions under Turkish law as to where commercial books must be preserved; literal interpretation of the relevant provisions of the TCC points out that the books must be preserved in the company's registered office.
Accordingly, companies shall keep the books and documents in a safe place in their registered office, wherein only a limited number of authorized people have access. Furthermore, it is recommended that each and every action is taken to ensure that the place is safe and secure. To that effect, the room in which the books are placed should be locked and the key should be held only by authorized persons.
Loss of Company Books
No matter how safely the books and documents are preserved, they still can be lost, go missing or be stolen.
Considering the vital role that commercial books and documents, in business, the lawmaker has differentiated the consequences of losing the books or documents by taking into account whether the company lost its books with or without negligence. With this understanding, the differentiation between a diligent and negligent merchant can be made by examining the existence and/or level of fault or negligence. As a result, the company and/or the related individual may face sanctions and penalties stipulated in the relevant legislation.
Having a "Loss Document" decision
In some limited occasions the law provides that books and records are lost without negligence or fault. By obtaining a "loss document" decision from a court, companies can avoid the negative consequences set out in Turkish law.
The TCC regulates that in case the company books and documents are lost because of disasters such as fire, flood or earthquake, the company can apply to court within 15 days after the occurrence date of the incident, and request for an official document, namely, "Loss Document", which confirms that the company was not negligent in relation to the loss of the books and/or documents. Even though the above mentioned provision is not established under numerus clausus principle in respect of the disasters; the courts have been narrowly interpreting the wording of this provision and therefore have been trying to exclude any incident that is not mentioned in the article as grounds for application.
Accordingly, with regard to book and document theft, a special note should be mentioned here, because, even though theft is not stated among the type of disasters listed in the article and may not be regarded as a disastrous event in daily life; when it comes to books and document preservation, the end result of theft can be deemed as disastrous. This is why in some cases, The Court of Appeals, by diverting from its settled approach, have accepted book and document theft as a valid reason for the issuance of a 'Loss Document' by the courts when the circumstances of each event allow. This approach of the Court of Appeals in respect of book theft, which widened the interpretation of the TCC's valid grounds to obtain a "Loss Document", found its place in the New Turkish Commercial Code which will enter into force on July 2012 ("New TCC") wherein theft is included alongside other disasters.
Consequences of being unable to obtain a "Loss Document" decision
Besides constituting conclusive evidence against the company who fails to submit its books in a dispute; pursuant to the TCC, the TPC and the SIGHIC, various sanctions and fines can be imposed to those companies that do not maintain and/or keep books and documents for the stipulated periods of time, and/or make them available for the inspections of authorities. Moreover, in a potential tax assessment, such non-compliance will directly constitute non-compliance with tax rules that can entail a tax penalty. Another tax related outcome can be inapplicability of VAT deductions entailing fines arising from the Value Added Tax Law.
In cases where the bankruptcy of a company that does not keep the relevant books, provisions of negligent bankruptcy can be applied to that company in accordance with the bankruptcy rules and the company's application for bankruptcy protection can be dismissed by the court.
Furthermore, since not submitting the books to the tax office is considered as an act of concealment, criminal prosecution can be made against the company, on the grounds of smuggling, and it can be tried before the Serious Crimes Court.
As to criminal sanctions, the New TCC adopts a slightly different approach. According to provisions of the New TCC, a judicial fine corresponding up to 200 days will be imposed against companies that do not comply with book maintenance obligation by not (i) obtaining company books approval, (ii) duly maintaining the company books and (iii) submitting the documents when requested.
Furthermore, according to the New TCC, in case a company fails to submit its company books and documents to official auditors when requested; a penalty of imprisonment of 3 months to 2 years shall be imposed on the representatives of that company.
As explained, merchants who are either real persons or legal entities should maintain specific commercial books depending on their structure and preserve them for a specified time as requested by law. Otherwise, they may face serious civil, tax, and criminal sanctions. Those can be avoided with a document called "Loss Document" that can be requested from a court and given only in certain special circumstances. This is why, any company operating in Turkey should be very careful in determining which commercial books and documents they should maintain, where and under which conditions they should preserve them, bearing in mind the catastrophic results that may arise if they fail to comply with book maintenance and preservation requirements. Besides these negative consequences, our practical experience shows that notwithstanding having a foreign share, Turkish companies still need to review their methods for maintenance and storage of their commercial books and records to avoid potential legal issues.
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.