A joint stock company is a type of company whose capital is determined and divided into shares, and which is liable for its debts only with its assets. As indicated in its legal definition, the company is solely liable to its creditors with its capital. Being a capital company, a joint stock company necessitates liability on the part of its managers. When the board members, who constitute the executive body of the company, neglect their obligations arising from the law or the articles of association and cause damage to the company, they become liable for compensation. The purpose of such liability is to ensure that the board fulfills the duties and responsibilities imposed by law and the articles of association. This regulatory framework prevents leaving creditors and shareholders of the company unsecured.
1. Legal Nature and Conditions of Liability
a. Legal Nature of Liability
Board members may be held liable to the company, the shareholders, and the creditors of the company. The company's right to initiate legal action is based on a contractual relationship. However, there is no complete consensus on the legal nature of the contract between the company and the board members. Since the nature of this relationship affects both the competent court and the applicable legal framework, the Turkish Court of Cassation General Assembly resolved the dispute in decision E. 2001/13-1026, K. 2001/765, holding that commercial courts shall have jurisdiction and commercial law shall apply.
Articles 553, 555, 556, and 557 of the Turkish Commercial Code (Law No. 6102) provide the legal basis for the liability of board members toward shareholders and creditors.
b. Conditions for Liability
For board members to be held liable, the following elements must be present: unlawful conduct, fault, damage, and a causal link. As stipulated in Article 553/1 of the TCC, board members must have violated obligations arising from the articles of association or the law.
Liability is based on fault, and even slight negligence is sufficient. The burden of proof rests with the board members to demonstrate their lack of fault.
Liability arises when the board member’s faulty conduct results in damage. The law differentiates between direct damage (to shareholders and creditors) and indirect damage (to the company). In cases of direct damage, the company itself does not suffer loss, but the assets of shareholders or creditors diminish. These parties may seek compensation in their own name. In cases of indirect damage, the loss is initially borne by the company, indirectly affecting its shareholders and creditors. Compensation in such cases is payable to the company.
A causal link must be established between the damage and the wrongful act, based on the ordinary course of life.
2. Parties to Liability Lawsuits
The right to sue in liability actions is granted to the company, the shareholders, and the creditors. For the company to bring an action against its board, a general assembly resolution must be adopted with the ordinary quorum specified in Article 418 of the TCC.
3. Jurisdiction and Procedure in Liability Lawsuits
Pursuant to Articles 4 and 5 of the TCC, commercial courts of first instance have jurisdiction over liability lawsuits against board members. The competent court is the one located where the company has its registered office. Such lawsuits are subject to simple trial procedure under Turkish procedural law.
4. Termination of Board Members’ Liability in Joint Stock Companies
Liability of board members may be terminated by discharge (release) or statute of limitations. These are the two fundamental mechanisms that extinguish or prevent liability.
a. Discharge (Release)
At the end of each fiscal year, the general assembly of a joint stock company may review the compliance of board members’ actions with the law and articles of association and may adopt a release resolution indicating that the board members will not be held liable for their actions. This resolution constitutes a unilateral negative acknowledgment of debt under legal doctrine.
The discharge decision holds critical importance for both the beneficiaries and the board members. The Court of Cassation requires that a valid discharge resolution must exist for the board members to be relieved of liability.
Only the general assembly is authorized to adopt such a resolution, and this power is listed among the non-delegable authorities of the general assembly under the TCC. The ordinary quorum under Article 418 applies, as no special majority is required. Board members or those involved in management cannot vote on resolutions related to their own discharge.
Discharge may be explicit or implicit. Approval of the balance sheet constitutes an implicit discharge, provided that the general assembly has properly reviewed the financial statements and that the statements are accurate and transparent.
Once granted, a discharge cannot be revoked by another general assembly decision. This principle upholds legal certainty and protects board members from indefinite legal threats. However, the discharge resolution may be subject to an annulment lawsuit, since it is ultimately a general assembly decision.
Although a discharge eliminates the company’s right to sue, it does not affect the right of shareholders and creditors to file liability claims, since the discharge binds only the general assembly and is deemed a unilateral acknowledgment of debt.
b. Statute of Limitations
Three types of statutes of limitations are regulated under the TCC for liability lawsuits:
- A 2-year period from the date the damage and the liable parties are discovered, applicable to the company, shareholders, and creditors.
- An absolute 5-year period from the date the damaging act was committed, regardless of when the parties learned about it.
- If the wrongful act also constitutes a criminal offense punishable under Turkish Penal Code, and the statute of limitations for such crime is longer, then the criminal statute of limitations will apply to the liability claim as well.
References
Legal Liability of the Board of Directors in Joint Stock Companies under the former and draft Turkish Commercial Code, Levent UYSAL
Prof. Dr. Oruç Hami Şener, Theoretical and Practical Company Law Textbook, Ankara 2015
Legal Liability of Board Members in Joint Stock Companies, Dr. Serhan Dinç
Turkish Commercial Code No. 6102