One of the frequently encountered problems in commercial life is that despite the debtor company having no assets, the company directors or partners possess significant personal wealth. Especially in small-capital, single-partner, or family-structured companies, this situation creates a major risk for creditors.
The Turkish Commercial Code (TCC), through the provision of Article 553, has established a fault-based personal liability mechanism for directors in order to prevent the abuse of corporate legal personality. Thanks to this provision, if company debts have been deliberately rendered unpayable or if company assets have been concealed from creditors, the director may now become liable with their personal assets.
The Purpose of Article 553 of the TCC and the Legal Nature of Liability
Article 553 of the Turkish Commercial Code (TCC) stipulates that persons serving on the company's management and representation body shall be held personally liable for damages arising from their actions that violate the law, the articles of association, and their duties of care and loyalty. As explicitly stated in the established case law of the Court of Cassation, this liability is in the nature of tort liability. Therefore, the existence of fault, damage, and a causal link is required.
The director is held liable not only for “company debt”, but also due to their own unlawful acts. Indeed, in the ruling of the 11th Civil Chamber of the Court of Cassation with case number 2019/3452 E. and 2020/2215 K., it is clearly stated that unlawful transactions by organ members that cause loss to the creditor constitute a tort.
Company Debt Does Not Make the Director Solely Liable
In corporate and commercial law The fundamental principle is that the corporate entity of the company is liable for the company's debts. A manager, partner or director is not directly the debtor of the company's debt. However, if this principle is abused, director liability comes into play.
If the company loses or conceals its assets after a debt has arisen, if new debts are incurred while it is known to be insolvent, if financial statements are kept deceptively, or if the company is de facto liquidated to the detriment of creditors, the personal liability of the manager arises within the scope of Article 553.
The decision of the 17th Civil Chamber of the Court of Cassation with docket number 2017/4512 and decision number 2019/2178 is critical at this point, emphasising that if it is determined that the corporate veil is abused to the detriment of the creditor, the veil may be lifted and recourse may be had to the personal assets of the manager.
Transactions Giving Rise to Personal Liability of the Manager
Transferring company assets to third parties or relatives after a debt has arisen, emptying the company's assets and reducing it to a state of de facto liquidation is considered by the Court of Cassation as asset evasion from creditors. Likewise, if a manager continues to incur new debts knowing that the company has no solvency remaining, this behaviour constitutes fraudulent incurrence of debt and gives rise to personal liability.
Actions such as keeping company books untruthfully, or concealing a loss of capital or over-indebtedness, are also deemed sufficient for the acceptance of managerial liability. All of these constitute a severe breach of the duty of care and loyalty stipulated in Article 553 of the Turkish Commercial Code (TCC).
Professional Strategic Roadmap for Creditors
Accessing the manager's personal assets depends on the proper execution of a certain legal process. First, against the company a enforcement proceeding it must be done and it must be concretely demonstrated that collection could not be achieved. The absence of assets in attachment proceedings, the lack of money in accounts, or the determination that the company is effectively inactive ensures the clarification of the damage element in terms of an Article 553 lawsuit.
Subsequently, the defective transactions of the manager must be identified. At this stage, the submission of the company books and records should be requested, bank records examined, transfers of real estate and vehicles investigated, and expert witness examination resorted to when necessary. Even the avoidance of submitting books constitutes, according to the Court of Cassation, a presumption against the manager. In cases where the company assets are fraudulently transferred, the creditor may also be protected through an action for annulment of disposition.
Following all these findings Court of First Instance (Commercial)’A personal liability claim based on Article 553 of the TCC is filed. This claim is a tort action aiming for the compensation by the manager of the receivable that cannot be collected from the company. During the proceedings, orders for precautionary attachment or interim injunction are requested to prevent the manager's personal assets from being concealed. Thus, it becomes possible to place an injunction on the manager's immovable property, bank accounts, or other assets.
It is important that the request for piercing the corporate veil is clearly stated in the statement of claim. This request enables the court to examine the corporate structure and, where necessary, remove the distinction between the company and the director. Especially in single-shareholder and family companies, this request is decisive for the direction of the lawsuit.
When the lawsuit is concluded in favour of the creditor and the judgement becomes final, the party liable for the debt is no longer the company, but the manager themselves. Following this stage, the creditor can directly initiate enforcement proceedings against the manager's real estate, vehicles, bank accounts, deposits, salary income and all other personal assets. Thus, even if the company lacks the ability to pay, the creditor's loss can be recovered from the manager's assets.
Frequently Asked Questions
Is a director liable for company debt in every situation?
No. Liability only arises if there are faulty, fraudulent or malicious transactions.
Can the manager's personal assets be seized directly if the company has no assets?
No. First, a lawsuit must be filed based on Article 553 of the Turkish Commercial Code (TTK), liability must be established, and the court judgment must become final.
Is the management company liable if it incurs debt despite being insolvent?
Yes. This situation is considered fraudulent incurrence of debt by the Court of Cassation and gives rise to personal liability.
Is it easier to pierce the corporate veil in single-member companies?
Yes. The Court of Cassation particularly accepts the abuse of the corporate veil more readily in single-member companies.
Does the failure to pay a promissory note give rise to directors' liability?
The fact that the promissory note was drawn up in the company's name is not sufficient on its own; however, the manager may be held liable if the borrowing is done in bad faith or fraudulently.
Result
Article 553 of the Turkish Commercial Code is a strong legal mechanism that prevents the abuse of corporate personality and protects creditors. In situations such as the company's debt being deliberately rendered unpayable, assets being kept away from creditors, or the company being fraudulently incurred debts, the manager now becomes personally liable, and creditors may resort to the manager's personal assets. The Court of Cassation's case law in recent years reinforces this practice and adopts an approach that protects creditors.
As Azel Law and Consultancy, we aim to ensure the full protection of our clients' receivables by addressing this multi-dimensional responsibility mechanism from the perspectives of both commercial law and execution law, and we manage all necessary legal processes with a professional approach.
