Liability Of Limited Liability Company Managers And Shareholders For Public Debts

I. Introduction

One of the principal reasons for preferring limited liability companies is the separation between the assets of the company and those of its shareholders, and the fact that, as a rule, shareholders are not personally liable for the company’s debts. Indeed, pursuant to Article 602 of Turkish Commercial Code No. 6102 (the “TCC”), a limited liability company is liable for its debts and obligations solely with its own assets.

However, where the company’s public debts are concerned, significant exceptions are introduced to this fundamental principle. Taxes, duties, administrative fines, late-payment charges and other public receivables that cannot be collected from the company may, where certain conditions are satisfied, be collected from the personal assets of the limited liability company’s shareholders or managers.

Nevertheless, the liabilities of shareholders and managers are not based on the same legal grounds, and the scope and limits of their respective liabilities also differ. It is therefore necessary to assess separately whether the person concerned is solely a shareholder, solely a manager, or both a shareholder and a manager of the company.

II. The Limited Liability Company Is Primarily Liable for Its Debts

Upon registration with the trade registry, a limited liability company acquires a separate legal personality from its shareholders. The assets of the company and the personal assets of its shareholders and managers are independent of one another.

Under Article 602 of the TCC, the company is liable for its debts and obligations solely with its own assets. Accordingly, as a rule, the company’s creditors may not directly pursue the personal assets of the shareholders in respect of rent, purchases of goods or services, loans or contractual debts arising from the commercial activities of the limited liability company.

The shareholders’ primary obligation toward the company is to pay the capital contribution they have undertaken. Where the articles of association provide for additional payment or ancillary performance obligations, the shareholders must also fulfil those obligations. However, such obligations do not render a shareholder generally liable for all the debts of the company.

Public debts, on the other hand, have been made subject by the legislature to a regime that differs from the limited-liability principle applicable in relation to the company’s other creditors.

III. Liability of Limited Liability Company Shareholders for Public Debts

The liability of limited liability company shareholders for public debts is a special form of liability attached to shareholder status. For such liability to arise, the shareholder is not required also to be a manager, representative or authorised signatory of the company.

A shareholder who does not participate in the management of the company, does not conduct transactions on behalf of the company and merely holds a capital share may nevertheless be held liable for the company’s public debts where the statutory conditions are satisfied.

IV. The Debt Must Be Uncollectible from the Company for Liability to Arise

Before the personal assets of a shareholder may be pursued, the public receivable must first have been wholly or partially uncollectible from the limited liability company, or it must have become apparent that it will be uncollectible from the company.

The shareholders’ liability is therefore not a primary liability that arises automatically and simultaneously with the company’s debt. The limited liability company is the principal debtor of the public debt. Recourse against a shareholder becomes relevant where collection from the company is impossible or insufficient.

V. The Shareholder Is Liable in Proportion to Their Capital Share

The liability of a limited liability company shareholder is limited to the proportion of the capital share held by that shareholder in the company.

For example, where the limited liability company has an unpaid public debt of TRY 1,000,000 and the shareholder holds 30 per cent of the company’s share capital, the shareholder’s liability in their capacity as a shareholder will, as a rule, be assessed on the basis of TRY 300,000.

The relevant criterion is not the income or dividends actually received by the shareholder from the company, or the extent of the shareholder’s participation in the company’s management, but the shareholder’s capital participation ratio.

Furthermore, the shareholders’ liability for public debts is not limited solely to their unpaid capital contribution. The fact that a shareholder has fully paid their capital debt to the company does not, in itself, eliminate the personal liability that may arise in respect of public debts.

VI. A Share Transfer Does Not Automatically Eliminate Liability for Debts Relating to Previous Periods

The transfer of a limited liability company share gives rise to significant consequences that must be considered separately in relation to public debts.

The transferor and the transferee may be held jointly liable, in proportion to the relevant capital share, for public debts relating to periods preceding the transfer. Accordingly, the transfer of a company share does not mean that all risks relating to public debts from previous periods have come to an end for the transferor.

Similarly, where the shareholders of the company on the date when the public receivable arose are different from the shareholders on the date when it became payable, the liability of the persons who held shareholder status during the relevant periods may arise.

For this reason, before acquiring a share in a limited liability company, it is important to conduct a comprehensive review not only of the company’s financial statements but also of its tax, social security and other public debts.

The share transfer agreement may contain provisions stipulating that public debts relating to previous periods will be borne by the transferring shareholder. However, such contractual arrangements between the parties do not eliminate the public authority’s statutory power to pursue the relevant persons. These provisions principally produce consequences in respect of the internal relationship between the parties and any subsequent recourse claims.

VII. Liability of Limited Liability Company Managers for Public Debts

The liability of limited liability company managers is based not on their status as shareholders, but on their position as the company’s legal representatives and executives.

Under Article 623 of the TCC, the management and representation of a limited liability company are regulated by its articles of association. Management and representation authority may be granted to one or more shareholders, all shareholders or third parties. Nevertheless, at least one shareholder must have the authority to manage and represent the company.

Consequently, a person is not required to be a shareholder in order to serve as a company manager. A person appointed externally who does not hold any capital share in the company may also be held liable for public debts in their capacity as a manager.

VIII. Management and Supervisory Duties of Managers

Article 625 of the TCC regulates the non-transferable and inalienable duties of managers. Within this scope, managers are responsible in particular for:

• The senior management of the company;
• Establishing the company’s management organisation;
• Establishing the necessary accounting, financial audit and financial planning systems;
• Supervising whether persons to whom authority has been delegated act in accordance with the law, the articles of association and applicable instructions;
• Preparing the financial statements and annual activity report;
• Implementing general assembly resolutions; and
• Making the necessary notifications where the company is over-indebted.

Pursuant to Article 626 of the TCC, managers are also required to perform their duties with due care and to protect the interests of the company in accordance with the principle of good faith.

The filing of tax returns, payment of assessed taxes and social security premiums, monitoring of notices received from public authorities and timely fulfilment of the company’s financial obligations are directly connected with the managers’ management and supervisory responsibilities.

IX. A Manager’s Liability Is Not Limited to Their Capital Share

Unlike the liability of shareholders, the liability of managers in their capacity as legal representatives is not determined according to the proportion of the capital share they hold.

Even where a manager holds no shares in the company, their personal liability may arise in respect of the entirety of a public debt relating to the period during which they served as the company’s legal representative. Accordingly, while a shareholder holding a 10 per cent capital share may be liable for 10 per cent of the debt in their capacity as a shareholder, the same person’s liability may be assessed more broadly where that person also serves as the company’s manager.

Where a person is both a shareholder and a manager, liability arises on the basis of two separate legal capacities. However, the same public debt may not be collected more than once by the public authority.

X. Liability of Managers for Tax Debts

Pursuant to Article 10 of the Tax Procedure Law, the tax-related obligations of legal entities are fulfilled by their legal representatives.

Taxes and related receivables that cannot be collected wholly or partially from the company because the legal representatives failed to fulfil these obligations may be collected from the personal assets of the legal representatives.

For the purposes of this liability, the relevant consideration is not limited to whether the person was registered as a manager with the trade registry. It is also important to determine the period in which the relevant tax obligation arose, the dates on which the declaration and payment obligations were required to be fulfilled, and whether the person had authority to represent the company on those dates.

A legal representative may have recourse against the company in respect of the principal tax amounts paid from their personal assets. Nevertheless, the scope of liability must be assessed separately in each specific case, taking into consideration the type and period of the debt and the legal representative’s term of office.

XI. Liability of Managers for Other Public Receivables

The liability of legal representatives for public receivables other than taxes and tax-related receivables arises within the framework of Law No. 6183 on the Procedure for the Collection of Public Receivables.

Public receivables that cannot be wholly or partially collected from the assets of the company, or that are understood to be uncollectible from the company, may be collected from the personal assets of the company’s managers where the statutory conditions are satisfied.

However, certain public receivables, such as social security premiums, may also be subject to separate liability provisions under specific legislation. Accordingly, when determining the scope of liability, the type of public debt and the specific legislation on which it is based must also be examined.

XII. Do the Allocation of Duties and General Assembly Approval Eliminate a Manager’s Liability?

Where a limited liability company has more than one manager, duties may be allocated among the managers. For example, one manager may be made responsible for sales and operations, while another manager may be made responsible for finance and accounting processes.

However, such an internal allocation of duties does not automatically eliminate liability toward the public authorities. In particular, the duties regulated under Article 625 of the TCC concerning senior management, the establishment of accounting and financial systems, and supervision are non-transferable.

Similarly, the fact that certain transactions have been submitted to or approved by the general assembly does not automatically eliminate the liability of the managers. Article 625 of the TCC expressly provides that general assembly approval does not eliminate or limit the managers’ liability.

Managers therefore cannot automatically avoid liability arising from public debts by relying on internal company arrangements and arguing that “the accounting procedures had been entrusted to the financial adviser,” “the other manager was monitoring the payment,” or “the general assembly had adopted a resolution to that effect.”

Nevertheless, the managers’ terms of office, the scope of their representation authority, the applicable signatory arrangements, the actual allocation of duties and whether the necessary degree of care was exercised may be relevant when assessing the specific circumstances of a case.

XIII. Does Resignation from the Position of Manager Terminate Liability?

Although the termination of a manager’s position means that the person will not automatically be liable for all public debts arising after the date on which they left office, it does not eliminate liability relating to previous periods.

It is therefore important that the resolution concerning the manager’s departure be duly adopted, registered with and announced by the trade registry, and that the company’s records be completely handed over to the new management.

It would be beneficial for a departing manager to retain, in particular, the following documents:

• The resignation letter or removal notice;
• The general assembly resolution;
• Trade registry registration and announcement documents;
• The handover and delivery record;
• Records showing the company’s tax and public-debt position as of the date of departure;
• Filed tax returns and payment records; and
• Documents relating to ongoing inspections, notifications and disputes.

Failure to keep the manager registration in the trade registry up to date may result in a person continuing to appear to third parties as a manager despite having left office in practice, thereby giving rise to disputes concerning liability.

XIV. Principal Differences Between the Liability of Shareholders and Managers

The liability of a limited liability company shareholder is principally based on shareholder status and the shareholder’s capital participation ratio. The shareholder is not required to participate in the management of the company or to represent the company.

A manager’s liability, on the other hand, arises from management and legal representation authority. Whether the manager holds shares in the company is irrelevant, and the manager’s liability is not limited to their capital participation ratio.

In summary:

• A shareholder may be liable for public debts that cannot be collected from the company in proportion to their capital share.
• A manager may be held liable, in their capacity as a legal representative, for the entirety of the relevant public debt.
• The liability of shareholders who transfer their shares may continue in respect of debts relating to previous periods.
• The liability of managers who leave office may continue in respect of their own terms of office.
• Where a person is both a shareholder and a manager, both liability regimes must be considered together.
• The internal allocation of duties or general assembly approval does not automatically eliminate liability toward the public authorities.

XV. Conclusion

The separation between the assets of a limited liability company and those of its shareholders, and the principle that the company is liable for its own debts solely with its own assets, constitute the fundamental rule applicable to limited liability companies. However, in order to protect public receivables, provisions imposing personal liability on limited liability company shareholders and managers have been introduced as exceptions to this principle.

While the liability of shareholders is attached to their shareholder status and limited to their capital participation ratio, the liability of managers arises from their legal representation and management duties and may have a broader scope.

Accordingly, when acquiring shareholder or manager status in a limited liability company, transferring a share or terminating a management position, it is necessary to conduct a detailed assessment not only of the applicable corporate-law procedures but also of the company’s existing and potential public debts.

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.