Legal Responsibilities Of A Limited Liability Company’s Manager(s)
Att. Dilara Naz GULUM
A) IN GENERAL
The most preferred type of company established in Turkey is Limited Liability Company (“LLC”), and two compulsory bodies are foreseen in Section two of Part six of Turkish Commercial Code[1] numbered 6102 for this type of company. One of them is general assembly (“GA”) as a decision and administration body of LLC and the other is manager(s) as a management and representation body. Therefore, LLC’s manager(s) has the characteristics of a body like the Board of Directors in Joint Stock Companies (“JSC”). In this regard, an important question emerges: Under which conditions do responsibility of manager(s) arise?
The responsibility of managers is not specifically regulated in Turkish Commercial Code numbered 6102, and the provisions for Joint Stock Companies are referred only. The following is stipulated in Article 644/1/a of TCC:
“Article 644-(1): The following provisions regarding joint stock companies shall also be applied to limited liability companies:
- a) Article 549 regarding documents and declarations being in contradiction with law; Article 550 regarding false declarations concerning capital and awareness of payment deficiency; Article 551 regarding corruption in valuation; Article 553 defining the responsibility of founders, board members, managers and liquidation officer; Articles 554 to 561 regarding the responsibility of auditors and operational auditors.”
Accordingly, the provisions that are regulated in Articles 555 to 561 as common provisions regarding loss, joint liability, release of debt, time limitation and court of competent jurisdiction may also have an execution area in LLC.
B) GENERAL LEGAL RESPONSIBILITIES OF MANAGER(S)
In principle, company’s legal entity is responsible in LLC. Hence, irresponsibility of managers is taken as a basis in Article 632 of TCC, stipulating the following: “The company shall be liable for torts committed by the person authorized to manage and represent the company while performing his/her duties regarding company business.”
In addition, it is stipulated that Article 553 of TCC shall be applied to LLCs. Accordingly, the following is stipulated in Article 553/1 of TCC: “In the event that founders, board members, managers and liquidation officers breach their liabilities defined by the law and articles of association due to their fault, they shall be deemed responsible for the loss they cause against the company, shareholders and liquidation officers.”
TCC numbered 6102 does not require vote of partners, who represent at least one-tenth of company’s capital, in order to bring an action against company manager(s), which was stipulated in the old Turkish Commercial Code. Thus, the partners may directly bring an action for liability against managers without necessity of general assembly decision therefor. Furthermore, company’s articles of association foresees that managers shall submit certain decisions or individual problems to the approval of general assembly in accordance with Article 625/2 of TCC, and responsibility of managers shall not vanish, even if general assembly approves them; therefore manager(s) can be held responsible.
C) TERMS AND CONDITION OF RESPONSIBILITY
There are 4 conditions that should be met for holding LLC’s manager(s) responsible: (1) breach of the liabilities defined by the law and articles of association; (2) the breach is based on fault; (3) emergent of a loss; and (4) a compatible causal connection between breach due to fault and loss.
The liability of Manager(s) is compulsory performance and nonperformance of actions that are foreseen as a duty or an authority/power in the law and articles of association. The following is stipulated in Article 623 of TCC on management and representative authority of manager(s): ” The managers shall be authorized to adopt and to execute resolutions on all management issues which are not reserved to the authority of the general assembly by law or the articles of association.”
Within this framework, their duties and their authority, such as registry of articles of association to trade registry office, recording share transfers to share register, application to trade registry office for registering principal capital share, granting at least 15 days to partners for using their right of preference in capital increase, informing court about capital loss and being deeply in debt on time and etc., are considered as liability.
Legal responsibility of manager(s) can only arise in the event of objective fault. According to objectified fault, a person who is responsible should exercise due care for the same situation, where a conscious and reasonable person is required to exercise due care under same conditions. Therefore, such person cannot seek relief from his/her responsibility asserting lack of experience or of inspection. The percentage of fault has no significance in emergence of responsibility, and it is not taken into account during determination of compensation.[2] The principle of “differentiated joint and several liability” is applied according to TCC numbered 6102, and responsibility is allocated among managers based on their fault.
Occurrence of a loss is another condition for emergence of legal responsibility of manager(s). If there is no loss, manager(s) shall not legally be held responsible, even if there is a breach due to their fault. The last condition is that there should be a compatible causal connection between breaching action due to fault and loss.
D) SPECIAL RESPONSIBILITY CIRCUMSTANCES[3]
Even though it is regulated within the framework of Article 553/1 of TCC that manager(s) shall be held responsible because of their actions/behaviors contrary to liabilities, which arise from the law and articles of association, in general without bringing a special arrangement on legal responsibilities of manager(s), special arrangements are made on other issues that are stated in Article 644/1, which is a reference article, and involve responsibility, and a penal sanction is also foreseen for some of them.
1) Documents and Declarations Contradicting the Law
The following is stipulated in Article 549 of TCC: “If documents, prospectuses, circulars, representations and warranties regarding company transactions such as incorporation, capital increase and decrease, merger, division and conversion and issuance of securities and etc. are found to be false, incorrect, fraudulent, deceptive or misleading, those who are responsible for issuing or providing such documents shall be held liable for damages as a result of this and as a result of contradicting the law.”
2) False Declarations Concerning Capital and Knowing Insolvency
Responsibility regulated under Article 550 of TCC is complementary of special responsibility for documents and declarations contradicting the law. Accordingly:
“Those who show as if the capital is fully subscribed or paid although the case is on the contrary, as well as the authorized persons of the company, if they are faulty, shall be assumed to have undertaken these shares and are severally and jointly held liable for payment of the consideration and damage, plus the incurred interest.
Those who cast affirmative vote being aware of incapacity of the subscribers to pay consideration shall be responsible for the damage caused by failure in payment of this debt.”
3) Fraud involving False Capital Valuation
According to this special responsibility regulated under Article 551 of TCC: “Those who appraise exorbitant price during appraisal of capital in kind, transfer of enterprises and revaluation of assets when compared with the precedents, or reflect the condition of the enterprise or property differently, or involve in a corruption in some other way, shall be responsible for damages encountered thereof.”
4) Becoming a Single-Partner Company and Nonperformance of Necessary Actions
Pursuant to TCC numbered 6102, the opportunity of establishing a single-partner limited liability company is provided, and the practice of registering people, who are not actually company partners, as company partners, which is called “straw man”, is prevented. While the old TCC stipulated that legal entity of the company became null and void after company had become a single-partner company, the new TCC numbered 6102 stipulates that the company can subsist as a single-partner company by taking certain actions.
According to Article 574/2 of TCC: “If the number of partners is down to one, the situation shall be reported to managers within seven days as of the date of the transaction that caused this result. The managers shall, until the end of seven days following notification, register and announce that the company is a single-member company with limited liability, and name, surname, nationality and domicile of the single partner; otherwise, the managers shall be responsible for damages to be incurred. The managers shall fulfill the same obligation where the company is incorporated with a single partner.”
In such a case, the managers shall be responsible if their nonperformance of this obligation causes any damages.
5) Bringing Nullity and Annulment Actions against General Assembly Resolutions with Malicious Intentions
The following is stipulated in Article 622 of TCC: “The provisions regarding the nullity and cancellation of joint stock companies’ GA resolutions in the New Law shall apply comparably to companies with limited liability.” Accordingly, Article 451 of TCC titled “Responsibility of the ones who bring Nullity and Annulment Actions with Malicious Intentions” will find an execution area in terms of limited liability companies. The following is stipulated in Article 451: “The malicious plaintiffs bringing nullity or annulment actions against general assembly resolutions will be jointly and severally responsible for the losses of the company.” Therefore, the managers can also be held liable for losses of the company in cases where they are proven to act as malicious plaintiffs.
6) Damages as a result of Structural Changes
According to Article 193/1 of TCC: “All persons who have in some way participated in the merger, division or conversion transactions shall be responsible for the damage to the companies, partners and creditors resulting from any negligence on their part.” In such a case, the managers, who participate in transactions that result with structural change, may be held liable.
7) Abuse of Dominance Between a Parent Company and its Subsidiary
Pursuant to Article 202 of TCC, a parent company cannot abuse its dominance in a way that will damage its subsidiary. However, if such loss is de facto balanced in the same activity year, or if a right to request related to such loss is granted to the subsidiary at least until the end of that activity year, provided that it is specified when and how the balancing transaction will be performed, parent company will not be held liable. Otherwise, each shareholder of such subsidiary may claim for those damages from such parent company and its members of board of directors.
E) CONDITIONS UNDER WHICH RESPONSIBILITY VANISHES
1) General Conditions
As there is no restriction related to the number of LLC managers in TCC numbered 6102, at least one manager or a management board composed of more than one manager can be appointed with a provision recorded in articles of association. LLC manager(s) may be exonerated from liability when they breach their liabilities that arise from the law and articles of association, provided that they prove their faultlessness.
While there was an explicit provision on irresponsibleness of managers when they use a negative vote in a decision in the old Turkish Commercial Code, there is no provision in this regard in the new TCC numbered 6102. In the doctrine, however, this is advocated by many authors.[4]. According to the doctrine, opposing opinion should be recorded and undersigned in corporate minutes for negative vote to prevent liability.
In the abolished TCC, there is also a provision stating that a manager, who does not participate in a meeting that the decision, which arise liability, is taken by providing an excuse, or a manager, who does not sign a decision without meeting, shall not be held liable. TCC numbered 6102 does not include this provision. In the doctrine, however, it is advocated that a manager, who has an acceptable and legitimate excuse and can prove this, cannot be held liable.[5] Otherwise, a manager can be held liable even if a decision is taken in his/her absence without an acceptable excuse. In fact, it is both a right and a liability for LLC managers to participate in meetings.
Responsibility of managers will also vanish upon release of the Board of Directors by General Assembly.
2) Responsibility in Duty and Authority Delegation
Pursuant to a special regulation in Paragraph 2 of Article 553 of TCC numbered 6102, which constitutes the basis of responsibilities of LCC managers, the opportunity of exoneration of liability is provided if duties and authorities are delegated to another people.
Accordingly: “People or bodies, whose duties or authorities that arise from the law or articles of association are delegated on a legal basis to other persons, may not be held liable as a result of delegatee’s actions and decisions, unless it is proven that the delegator did not exercise reasonable care when choosing the delegate.”
It is allowed to delegate duties and authorities that fall outside of “non-delegable duties and authorities” of a LLC, as in Joint Stock Companies, which is regulated under Article 625 of TCC. At the same time, based on the reference in Article 329 of TCC to Article 370 of TCC, the authority of representation can be left to Managing Directors.[6] In principle, delegator will not be responsible for delegatee’s actions and decisions. However, as it is understood from Article 633/2, delegator can be held liable if he/she did not exercise reasonable care when choosing the delegate.
3) Responsibility in Contradictions and Violations beyond Control
The following is stipulated in Article 553/3 of TCC: “no one may be held liable due to contradictions to or violations of the law or the articles of association that are out of his control; nor the circumstance of not being liable may be declared null and void on the grounds of the duties of observation and due care”.
This provision is not stipulated in Swiss Code of Obligations, and therefore, led to many discussions in the doctrine. According to the opinion that we also share, if a manager delegates his/her authorities, it does not necessarily mean that this is beyond his/her control, and the manager should prove that contradiction with the law could not be detected in spite of his/her due care.[7]
F) Action for Liability
1) Plaintiff
If there is a “direct” loss of partners and creditors that is exposed independently of the company, the have the right to litigate against managers and the compensation that is obtained as a result of litigation will be given to the partners and creditors.
If a company has a loss, the partners have the right to litigate, provided that they claim compensation to be paid to the company (Article 555 of TCC). At the same time, LLC may seek for holding the managers liable. On the other hand, if the creditors litigate and claim payment to be made to the company, it is limited in Article 556 of TCC with the condition that the company went bankrupt. In addition, it is required that the administration of bankruptcy has not yet brought an action for liability.
2) Defendant
The defendant is a company manager. If the manager or one manager of the management board is a legal entity, then the action should directly be brought against the legal entity, instead of the real person representing the legal entity.[8]
3) Court of Competent Jurisdiction
The court of competent jurisdiction in action for liability of LLC managers is the Commercial Court of First Instance located at the same place of company headquarters. If there is no Commercial Court of First Instance located at the same place of company headquarters, the Civil Court of First Instance is the competent jurisdiction.
4) Time Limitation
The following is stipulated in Article 560 of TCC: “The plaintiff is entitled to claim for compensation within a period of 2 (two) years starting from learning of the loss and the responsible manager(s), and under any circumstances, the lapse of time expires after 5 years’ period starting from the action that caused the loss. This action requires punishment, and the same time limitation is also applied on action for damages, if it is subject to a longer time limitation pursuant to Turkish Criminal Code.’’
[1] Hereafter shall be referred to as “TCC”.
[2] YILDIZ, Sükrü: “Limited Ortaklıklarda Müdürlerin Sorumlulugu” (“Responsibility of Managers in Limited Liability Partnerships”), Istanbul Ticaret Üniversitesi Sosyal Bilimler Dergisi (Istanbul Commerce University Journal of Social Studies), p. 24, Istanbul 2013, p. 67.
[3] YAVUZ, Mustafa: “Limited Sirketlerde Müdürlerin Hukuki Sorumlulugu” (Legal Responsibilities of Managers in Limited Liability Companies), Mali Çözüm Dergisi (Journal of Financial Solution), January-February 2013, p. 185 and etc.
[4] PULAŞLI, Hasan: “Türk Ticaret Kanunu Tasarısı’na Göre Anonim Sirket Yönetim Kurulu Üyelerinin Özen Yükümlülügü ve Müteselsil Sorumlulugu” (“Liability of Care and Joint and Several Liability of JSC’s Members of BoD pursuant to Draft TCC”), BATIDER C. XXV, S. 1, Ankara 2009, p. 37; TEKINALP, Ünal: Yeni Anonim ve Limited Ortaklıklar ile Tek Kisilik Ortaklıgın Esasları (Principles of New JSC and LLC and Single-Partnership), 2nd Edition, Istanbul 2012, p. 271.
[5] GÜNEY, Necla Akdag: Anonim Sirket Yönetim Kurulu Üyelerinin Hukuki Sorumlulugu (“Legal Responsibility of JSC’s Members of BoD”), Istanbul 2008, p. 77; PULAŞLI, p. 37; TEKINALP, p. 284, YILDIZ, p. 72.
[6] YILDIZ, p. 73.
[7] YILDIZ, p. 76.
[8] PULAŞLI, Hasan: Türk Ticaret Kanunu Tasarısına Göre Anonim Sirketlerde Yöneticilerin Hukuki Sorumlulukları (Legal Liabilities of Managers in JSCs pursuant to Draft TCC), Prof. Dr. Ali Naim Inan’a Armagan, Ankara 2009, p. 584.