The new Turkish Commercial Code ("TCC") has been heavily criticized since the very date it took effect on July 1, 2012 due to the radical changes made on the draft text just before the said date as well as the uncertainty of some provisions and inadequate grounds of the Code.
On the other hand, it is an undeniable fact that the Code has introduced a number of favorable novelties in terms of professionalized business life, the transparency and harmonization with the global developments.
Since July 1, 2012, it is possible to establish a one-man simplified joint stock company, convene the Board and General Assembly meetings via the electronic mean, assign non-partners as board members and even to assign legal persons directly as the members of the Board of Directors.
"STRAW PARTNERS" REMAIN IN THE PAST
The "straw partners" which was a common practice for many years now remain in the past with the introduction of the new Code. As per the former TCC, the number of partners had have to be completed to five at the foundation stage of a joint stock company and the professional board member be given a share of the company, even if symbolically. And as the company itself would not possibly be a board member, the real person who represented the company had have to assume entire liabilities of the Board of Directors so that the companies had used to decline their liabilities by hiding behind such real persons.
The new TCC, however, makes all those practices unnecessary. A new period based on transparency and professionalism of the boards has commenced as of July 1, 2012.
WHO IS THE INDEPENDENT DIRECTOR (BOARD MEMBER)?
An independent director is a real or legal person assigned as a member of the Board of Directors without holding any shares of the company. Those directors are not partners of the company but have all the rights of a board member and assume all liabilities and risks intrinsic to the board membership. Liabilities and risks assumed by an independent director can be reviewed under two main headings namely the legal liabilities and the criminal liabilities.
"DIFFERENTIATED SUCCESSION" IN LEGAL LIABILITY
As per the former TCC, liabilities of the directors were several where, for example, a liability action would be litigated against one of the 5 directors and the entire damages would be collected from that director if the court ordered so. In such cases, the sentenced director would indemnify the damages and then recourse the other directors in proportion with their defaults and therefore would be held liable for his/her own default only.
However, pursuant to the differentiated succession rule introduced by the new Code, default rates shall be determined prior to conclusion of the case and each director shall be held responsible for his/ her share of default which has caused the damage taking into consideration the conditions reigned in occurrence thereof.
For example, a director who has not attended the board meeting where the decision that has caused the damage was taken or voted against such decision shall not be held responsible for the damage or participate in the amount of indemnification even if to be reimbursed for such amount later on.
LIABILITY OF THE INDEPENDENT DİRECTOR FOR PUBLIC DEBTS
Directors shall be liable for the tax debts and the debts to the Social Security Institution (SSI) to a specific extent regardless of whether they are the shareholders of the company or not.
As to the tax debts, the company should be in default of paying a part of or the entire tax debt for the directors to be held liable therefor. The directors cannot be personally recoursed for collection of the company's tax debts before all other remedies towards the company have been exhausted. On the other hand, the director should personally be in default in accrual of the tax debt which means that the tax debt should have arisen during the office term of the director and the director should have been authorized to bind and sign on behalf of the company. And as to the debts to SSI, the company should again be in default of paying a part of or the entire tax debt to SGK and the directors should be in default in accrual of the debt and authorized to bind and sign on behalf of the company.
It should be pointed out in terms of both the tax debts and the debts owed to SSI that the "differentiated succession" rule defined above is not applicable to the public debts where liability of each director should be considered as default-based, personal, unlimited and several.
EXPIRATION OF LIABILITY
Liabilities of an independent director expire upon discharge from liability and/or due to prescription, as is the case for the shareholding directors.
The Board of Directors is discharged from liability at the General Assembly. The shareholders who affirm discharging of the board from liability with their votes lose their right to sue the directors for any of their liabilities. Other shareholders' right of litigation expires after six months following the date of discharge at the General Assembly.
It should be noted here that the liabilities of the directors arisen from the foundation of the company and capital increase cannot be removed by way of compromise and release unless 4 years elapse after the registration date of the company. Furthermore, removal of liabilities arisen from the foundation of the company and capital increase by way of compromise and release cannot be approved at the General Assembly if 10% of the shareholders representing the registered capital and 5% of the shareholders of a publicly-held company use dissenting votes.
The prescription period for liability is 2 (two) years following a shareholder granted the right of action becomes aware of the damage and the director liable therefor, and 5 (five) years in any case following the act that led to the damage is performed. However, if the act requires a punishment and therefore is subject to a longer period of prescription as per the TCC, the same period of prescription applies to relevant action for damages.
CRIMINAL LIABILITY OF THE DIRECTORS
To this end, a dual separation can be made in terms of criminal liability: cases requiring an administrative fine and cases requiring a punitive fine.
As is known, an administrative fine is only a sanction payable in cash whereas a punitive fine results in imprisonment if not paid. A combination of an administrative fine and a punitive fine is usually applied when a director fails in performing his/her duties with due care. For example, activities, financial status, origins and progression of transactions found to be unrecorded in a traceable and comprehensible manner as reported by an independent auditor require an administrative fine whereas any failure in delivering the document requested by the government agencies may result in imposing a punitive fine which may be converted to imprisonment of the director if not paid in full.
Some transactions or acts of a director including violation of confidentiality, forgery of official documents, intentional falsification of commercial ledgers, misstatement of capital transactions when founding a corporation and collection monies from the public by giving promises for increasing the corporate capital require imprisonment.
Board membership is a prestigious position requiring utmost care when managing and representing a company as well as assumption of great liabilities which may result in both administrative and punitive fines and even imprisonment.
RESTRUCTURED BOARD OF DIRECTORS
Assignment of non-partners as directors of a company is a revolutionary development in the Turkish commercial law and maybe one of the best examples of shaping the law in the course of practice. This regulation in our new Commercial Code shall eliminate pious transfers of shares to directors and therefore the backlog of transactions and push the companies to adopt the professional management concept and pave the way for improvement of institutionalization in Turkey.
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.