Ordinary partnerships, as regulated by Article 620 et seq. of the Turkish Code of Obligations numbered 6098 ("TCO"), are a type of a partnership in which two or more persons undertake to combine their endeavors and assets in an effort to achieve a certain purpose. Partnerships that are not vested with a legal personality that do not meet the distinguishing criteria of partnerships, and which are regulated under specific legal provisions, are deemed to be ordinary partnerships. Unless otherwise contractually agreed to, the contributions of the partners of ordinary partnerships should be equal and in the character and significance as required by the goal of such partnership1. These are two consequences of terminating ordinary partnerships, and are the finality of managers' duties and liquidation of the ordinary partnership1. The liquidation procedure of ordinary partnerships is regulated under the TCO. Through its recent precedents, the Court of Cassation introduces issues to take into consideration by the courts in the liquidation procedure of ordinary partnerships in addition to the provisions of the TCO. This article analyzes the liquidation procedure of ordinary partnerships.
Liquidation of Ordinary Partnerships within the Framework of the TCO
Pursuant to Art. 639 of the TCO, an ordinary partnership may be terminated due to (i) the achievement of the goals stipulated in the partnership agreement, or if the goals of the partnership become impossible to achieve, (ii) the death of a partner, (iii) a partner being declared legally incapacitated, a partner's insolvency or foreclosure of a partner's liquidation share, (iv) an unanimous decision of all partners, (v) the expiry of the term of the partnership agreement, (vi) the termination by a partner upon notice, if either the right of termination is reserved, or the partnership is formed for an indefinite period of time, or it is decided that the partnership shall operate throughout the lifetime of a certain partner, or (vii) a court decision rendered upon request, based on just cause.
Pursuant to Art. 644 of the TCO, the liquidation shall be conducted by all of the partners unless otherwise agreed under the partnership agreement. The partners may appoint a liquidator in order for him/her to conduct the liquidation procedure. The payment to be made to the liquidator will be covered by the assets of the partnership, and if that is not possible, jointly by the partners. Pursuant to the fourth paragraph of the same article, the disputes arising from the liquidation procedure or the distribution of the liquidation residuals will be resolved by the judge, upon the request of those concerned.
Pursuant to Art. 643 of the TCO entitled "Partition of Profit and Loss," the remaining profit and loss will be shared among the partners, following the discharge of the partnership's debts, refund of the advances and expenses borne by the partners, and the return of the partners' contributions. It should be noted that pursuant to the TCO, termination or liquidation will not extinguish the debts of the partnership, conversely, even after the termination, the partners shall remain jointly and severally liable from partnership's obligations against third parties.
Liquidation of Ordinary Partnerships within the Framework of Decisions of the Court of Cassation
Pursuant to recent decisions of the Court of Cassation2, liquidation is defined as the process of identifying partnership assets, finalization of the partnership by disengaging all relations of the partners within the scope of the partnership, disposition of partnership assets via sharing or sell-out. In other words, liquidation is a refinement procedure, having the aim of differentiation of the assets and liabilities of the partnership by evaluating the accounts and transactions of the company and by drawing a balance3.
The Third Civil Chamber of the Court of Cassation ("Court of Cassation") recently rendered three different decisions regarding the termination and liquidation procedures of ordinary partnerships. By means of these decisions, the Court of Cassation sets the framework and orders the procedure to be applied in liquidation of ordinary partnerships. Pursuant to the decision of the Court of Cassation numbered 2014/11009 E., 2014/15095 K. and dated 18.11.2014, the claimant and the respondent formed an ordinary partnership with the aim to construct the building which that is the subject matter. However, according to the expert report, the construction of the building has been finalized and the aim of the partnership has been fulfilled. The Court of Cassation has indicated that the request of the claimant regarding his contribution to the ordinary partnership shall require termination and liquidation of the partnership. Within this context, the Court of Cassation has set a course of action for the courts to pursue in termination of ordinary partnerships.
Pursuant to these decisions, the court will initially determine whether or not the partnership agreement contains a clause on the liquidation procedure. Where such clause is available, the court will carry out the procedure, accordingly. If no termination clause is available, the court will require the partners to appoint a liquidator. If the partners do not come to a conclusion in appointing the liquidator, the court will ex officio appoint a single liquidator, or three liquidators who are experts on the scope of the partnership activity. The liquidation procedure will be carried by the liquidator.
In the decision stated above, the Court of Cassation ordered that all of the liquidation operations will be concluded within three stages, comprising of three months each (these three-month periods may be shortened or extended if required) and listed the liquidation operations that will be conducted by the courts via liquidators. Pursuant thereto, the court will initially request the managing partner to produce a list of expenses. If the managing partner does not produce this list, he will be deemed to have avoided this obligation.
In the event of a dispute amongst the partners of the accounting list, this dispute will be resolved by evidence collected from the partners. The income and expenses, as well as the assets and liabilities of the partnership, will be determined as per the final accounting list. The compatibility of the documents used in this determination, as well as the aim of the partnership, will be assessed. Consequently, the asset value of the partnership will be determined. The liabilities will be deducted from the assets. The advances and expenses borne by the partners will be refunded, and the partners' contributions will be returned. Following the completion of these stages, the profit and the loss of the partnership will be shared amongst the partners, and liquidation will be finalized. In its same decision, the Court of Cassation stated that the non-fulfillment of a partner's obligation of contribution will not inhibit the liquidation, and will only constitute a point to consider in the course of the liquidation procedure.
In the Court of Cassation decision numbered 2014/10535 E., 2014/15088 K. and dated 18.11.2014, an ordinary partnership established with the aim of collection and the trade of textiles residuals is in question. The claimant requests his share in the partnership income, and the immovable property acquired by partnership assets, but to be registered in the name of the respondent. The Court of Cassation specified that the partnership incomes cannot be shared prior to the liquidation, and that there is co-ownership of the partnership incomes; for this reason primarily, the liquidation procedure should be carried out.
In its decision, the Court of Cassation clarified the three stages of liquidation that were referred to in its previous decision. Accordingly, in the first stage, all assets of the partnership are to be identified, the partnership account is to be requested from the managing partner, the parties are to be notified of the balance of the assets determined by the liquidator, and the objections thereof are to be assessed in accordance with the evidence collected from the partners. In the second stage, sell-out and cashing operations should be carried out, via application by analogy of the "official liquidation" provisions set forth under the Turkish Civil Code, and if the partnership assets are not available, their valuation should be made via an expert. In the third and last stage, initially, the debts of the partnership are to be paid from the amounts that are identified, in conclusion of the first and second stages, the advances and expenses borne by the partners are to be refunded, the partners' contributions are to be returned and, consequently, the remaining profits and losses are to be distributed to the partners. The Court of Cassation established stages in the liquidation process, and set a course of action for the courts regarding the liquidation of ordinary partnerships.
In its decision numbered 2014/13639 E., 2015/1168 K. and dated 20.01.2015, the Court of Cassation determined that the parties have established an ordinary partnership with the intention to construct a building, and upon the completion of the construction, the parties have requested termination and the liquidation of the partnership. The Court of Cassation again explained the liquidation operations and stages thereof in its decisions. In addition to the procedure stated in its two former decisions, the Court of Cassation clarified the valuation method for the expenses of the partnership that will be used in the event of a dispute. If the partners do not settle the expenses for the construction of the buildings, or upon the sales of the independent sections of such buildings, the construction costs will be determined pursuant to the current value of the date of the completion of the construction, but not pursuant to the unit rate of the Ministry of Public Works and Settlement. In its decision, the Court of Cassation resolved that the valuation of the expenses made in relation to the aim of the partnership are to be determined based upon current values.
The termination and liquidation procedure of ordinary partnerships is set forth under Article 639 et seq. of the TCO. The Third Civil Chamber of the Court of Cassation establishes the framework of the liquidation procedure, in addition to the procedure provided for in the TCO. Accordingly, the courts should conduct and finalize the liquidation procedure within three stages, each one usually comprised of three months. The Court of Cassation's successive publication of three decisions regarding the termination and liquidation process of ordinary partnerships can be interpreted as an effort to create a precedent.
1. Please see; http://www.erdem-erdem.av.tr/articles/adi-ortakliklar/ for the Newsletter article dated April 2014.
2. Y3HD, E.2014/11009 K.2014/15095, T.18.11.2014 (Yargıtay Kararları Dergisi, Volume: 41, Number: 1, January 2015).
3. Y3HD, E.2014/10535 K.2014/15088, T.18.11.2014 (Yargıtay Kararları Dergisi, Volume: 41, Number: 2, February 2015).
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.