Piercing the corporate veil in the collection of public receivables and the personal liability of board members for a joint stock company's public debts
- Under the provisions of the Turkish Commercial Code on board membership:
Power of representation of the board of directors of a joint stock company under the Turkish Commercial Code (No. 6102), which entered into force on July 1, 2012
Article 365 (1) A joint stock company is managed and represented by its board of directors.
Article 367 (1) By a provision in the articles of association, the board of directors may be authorized to delegate management, in whole or in part, to one or more board members or to a third party under internal regulations it prepares. These internal regulations govern the management of the company. They set out the necessary duties, define them and show their place in the organization, and in particular determine who reports to whom and who is obliged to provide information to whom. Upon request, the board of directors informs shareholders, and creditors who convincingly demonstrate an interest worthy of protection, in writing about these internal regulations. (2) If management has not been delegated, it belongs to all members of the board of directors.
- Law No. 6183 on the Collection Procedure of Public Receivables
Article 35 bis (added by Article 11 of Law No. 4108, published in Official Gazette No. 22301 dated June 2, 1995)
Public receivables that cannot be collected, in whole or in part, from the assets of legal entities, minors, persons under guardianship, or organizations without legal personality such as foundations and communities, or that are understood to be uncollectible from those assets, are collected under this Law from the personal assets of the legal representatives and of those who manage the organizations without legal personality.
This provision also applies to the representatives in Türkiye of foreign persons or institutions.
The fact that a legal entity has gone into liquidation or has been liquidated does not remove the liability of its legal representatives for the period before the start of liquidation.
Legal representatives, managers of organizations and agents may seek recourse against the principal public debtor for the amounts they have paid under this article.
- Tax Procedure Law (No. 213), Article 10: Duties of legal representatives
Article 10: Where legal entities, minors, persons under guardianship, or organizations without legal personality such as foundations and communities are taxpayers or tax withholders, the duties incumbent on them are performed by their legal representatives, by those who manage the organizations without legal personality and, if any, by their representatives.
Although a joint stock company as a legal entity is liable for its debts to private persons only with its own assets, the statutory provisions quoted above show that, in the collection of public debts, the corporate veil is pierced beyond a certain stage.
After a similar dispute, the Constitutional Court found inadmissible an application alleging a violation of the right to property.
The provincial directorate of the Social Security Institution sent the applicant a payment order for the social security premium and late payment surcharge debts of the company in which he was a shareholder and board member. The applicant applied to the Labor Court and requested the annulment of the payment order. The court had an expert report prepared on the matter and, relying on that report, dismissed the case. The Court of Cassation upheld the decision on appeal.
Allegations
The applicant alleged that his right to property had been violated because he was held liable for the public debts of the company of which he was a board member, even though he had no power of representation.
The Court's assessment
There is no doubt that holding the applicant liable for the debtor Company's social security premium and late payment surcharge debts constitutes an interference with the right to property. For an interference with the right to property to comply with the Constitution, it must have a legal basis, pursue a public interest aim and respect the principle of proportionality.
Both the repealed law (Law No. 506) and the law that entered into force on July 1, 2008 (Law No. 5510) aim to ensure that premiums are collected on time and on a regular basis. The ability of the Social Security Institution (SGK) to provide social insurance benefits also depends on insurance premiums, its most important source of income, being paid on time and in full.
In this context, it is clear that, in the way it was applied in the case at hand, holding all board members liable, even those without the authority to sign for and bind the company, is suitable and necessary to secure the effective, complete and timely collection of premium receivables. This rule aims to secure the collection of premiums and to encourage their timely payment.
There is no doubt that collecting the public receivable directly from the applicant is suitable and necessary to achieve the public interest aim pursued. Moreover, the applicant, who filed an objection action before the Labor Court and then appealed, had the opportunity to present all his claims and defenses effectively throughout this process.
In addition, the applicant will be able to seek recourse against the other shareholders of the Company, in proportion to their shares, for the amount subject to collection that he paid. For the payment corresponding to his own share, he also has the possibility of recourse against the Company as a legal entity.
In conclusion, it was held that holding the applicant liable for the public receivable arising from the Company's unpaid social insurance premium debts and late payment surcharges did not impose an excessive and extraordinary personal burden on him. Accordingly, the Court concluded that the interference with the right to property did not upset, to the applicant's detriment, the fair balance to be struck between the public interest and the right to property.
For these reasons, the Constitutional Court held that the right to property guaranteed by Article 35 of the Constitution had not been violated.
The public administration must follow a specific procedure before it can pierce the corporate veil and pursue board members. When facing such disputes, it is necessary to take legal action quickly. Obtaining legal advice is essential.