| Berru Ceren ZİYAGİL Candidate Attorney | Berfin ÇELİK Summer Intern |
ABSTRACT
Pursuant to the Turkish Commercial Code No. 6102 (“TCC”), trading companies have been enumerated as collective, commandite, joint-stock, limited liability, and cooperative companies. Limited liability companies constitute a type of company established by one or more natural or legal persons¹, wherein the company partners bear liability for company debts with their entire assets.² The liability of limited liability company partners is proportionate to their subscribed capital shares and solely vis-à-vis the company. However, an exception to this situation has been introduced by Article 35 of the Law on the Procedure for Collection of Public Receivables No. 6183 (“LPCPR”). According to this regulation, if public receivables cannot be collected from the company in whole or in part, limited liability company partners may be held liable for these receivables in proportion to their capital shares in the company. The responsibility of the legal representative, which arises over a non-partner due to their debts and who is accepted as a public debtor, has been determined both in Article 10 of the Tax Procedure Law (“TPL”) and in Article 35 bis of the LPCPR. In this article, the definitions of legal representative and public debts will be provided, whereupon the degree and scope of legal representatives’ responsibility for public debts specifically in limited liability companies will be examined.
Keywords: Legal Representative, Public Receivable, Public Debt, Tax Debt, Responsibility for Public Debts.
INTRODUCTION
Limited liability companies are one of the most preferred company types in our country owing to certain advantages. The low minimum capital amount, the limitation of partners’ liability arising from public debts to the extent of their capital, et cetera, constitute some of these advantages. It is necessary to explain as thoroughly as possible to investors and to persons who will become legal representatives of the company during company establishment processes the responsibility for tax and public debts and the degrees of this responsibility. Hereby, both the collection of public receivables will be facilitated, and the risks that taxpayers and public debtors will encounter while fulfilling their obligations will be minimized. The subject matter of this article also comprises the responsibilities of legal representatives for public debts and the peculiar situations in this regard.
I. LEGAL REPRESENTATIVE
Legal persons, which do not possess certain characteristics specific to human beings, carry out all their legal and factual transactions through natural persons, and obligations concerning public and tax debts also fall within this scope. The obligation to fulfil duties related to public and tax debts has also been imposed upon legal representatives pursuant to the LPCPR and TPL. Prior to our explanations regarding the responsibilities of legal representatives and their degrees, it will be necessary to evaluate the matter of who the legal representatives shall be from the perspective of the relevant legislation.
a) Legal Representative within the Meaning of the TCC
In limited liability companies, the management and representation of companies are determined by the company’s articles of association. The management and representation of the company may be left to one or more managers, to all partners, or to third parties in accordance with the company’s articles of association. However, in every circumstance, at least one of the management and representation authorities of the company must be granted to a partner. If one of the managers of the company has been designated as a legal person, this legal person is obliged to appoint a natural person who will perform the duty on its own behalf. Managers, on the other hand, possess the authority to make decisions and to implement these decisions on all management matters that have not been delegated to the general assembly by law or by the company’s articles of association.
In the responsibilities of limited liability companies for public debts; legal representatives are addressed as managers appointed by the company contract or members of the board of managers elected by general assembly resolution.
However, persons who are not included in the company’s purpose and field of activity and who possess only limited representation and management authority cannot be accepted as legal representatives. In the temporal determination of the responsibilities of legal representatives, the publication dates in the Turkish Trade Registry Gazette are taken into consideration.
In limited liability companies, legal representatives are generally the manager or the board of managers. However, in the event that management authority is delegated to a third person, this person acquires the status of legal representative with the title of authorized member.
The responsibility of limited liability companies for public debts, on the other hand, is regulated in Article 10 of the TPL and in Article 35 bis of the LPCPR.
b) Legal Representative within the Meaning of the LPCPR and TPL
No definition has been provided in the LPCPR regarding who the legal representative is in limited liability companies. Instead, an explicit regulation has been included stating that the legal representative is also among the persons responsible for public debts. Article 2 of the LPCPR expresses the term public debtor as “natural and legal persons who are obliged to pay public receivables and their legal representatives or heirs and taxpayers, tax responsible persons, guarantors and representatives of foreign persons and institutions.”
When we make an evaluation from the perspective of the TPL, again, rather than definitions of legal representatives, a regulation is included stating that in the event that legal persons are taxpayers or tax responsible persons, the obligations falling upon them shall be fulfilled by their legal representatives.³
In light of these regulations, it is understood that the concept of legal representative in limited liability companies will encompass managers and third parties to whom management authority has been delegated. It will also be necessary to explain the definition and scope of the debts for which these persons are responsible.
II. PUBLIC DEBTS
The collection of public receivables, their securing, and methods of compulsory collection have been regulated in the LPCPR.
In Articles 1 and 2 of the LPCPR, the areas to which the relevant law provisions shall be applied have been enumerated as “litigation costs pertaining to tax, fees, charges, penalty investigations and proceedings belonging to the State, provincial special administrations, and municipalities, tax penalties, monetary penalties such as principal public receivables, default surcharges, interest such as ancillary public receivables, and other receivables arising from the implementation of public services excluding those arising from contract, tort, and unjust enrichment of the same administrations; and the follow-up expenses thereof” and “all kinds of receivables indicated in various laws to be collected according to the Law on Collection of Receivables.”
For a debt to be considered a public debt, there are two conditions: the ownership of the receivable and the nature of the receivable.⁴ Since public receivables are specifically indicated in Articles 1 and 2 of the LPCPR, this distinction is theoretical.
In terms of the ownership of the receivable, the receivable in question must belong to any of the State, provincial special administrations, or municipalities. Receivables belonging to public institutions and organizations other than these, even if they may be evaluated as public receivables from a theoretical perspective, the provisions of the LPCPR shall not be applied thereto.
In terms of the nature of the receivable, the receivable belonging to the State, provincial special administrations, and municipalities must simultaneously be one of the receivables listed in Article 1 of the LPCPR, in other words, it must arise from public law. Receivables of the State, provincial special administrations, and municipalities that do not originate from public power and law and that arise from contract, tort, or unjust enrichment within the framework of private law provisions are not considered public receivables and are not followed up and collected according to the provisions of the LPCPR.
III. RESPONSIBILITY OF THE LEGAL REPRESENTATIVE FOR PUBLIC DEBTS IN LIMITED LIABILITY COMPANIES
The responsibility of legal representatives in limited liability companies for public debts has been regulated in Article 35 bis of the LPCPR. In the relevant article, a regulation has been made stating that “public receivables that cannot be collected in whole or in part from the assets of legal persons and minors and interdicted persons, foundations and congregations such as establishments without legal personality, or it is understood that they cannot be collected, shall be collected from the personal assets of legal representatives and those administering establishments without legal personality according to the provisions of this Law,” whereby the personal assets of the legal representative have been envisaged as a second mechanism after the company itself in order to collect the public receivable.
For the expressions “Public Receivable That Cannot Be Collected” and “Public Receivable That Is Understood Cannot Be Collected” to be clarified, an addition has been made to Article 3 of the LPCPR by the Law on Amendment of the Law on the Procedure for Collection of Public Receivables No. 5766 and Certain Laws. Accordingly:
» Public receivable that cannot be collected: Public receivables that cannot be collected due to reasons such as the public debtor not having any attachable assets as a result of the asset investigation conducted according to the provisions of the LPCPR, or the sale proceeds not covering the public receivable despite the seized assets being sold and converted into money,
» Public receivable that is understood cannot be collected, on the other hand: At any stage of the follow-up transactions conducted by collection offices, public receivables that emerge as cannot be collected from the public debtor due to reasons such as it being understood that the values assigned to the seized assets of the public debtor according to the provisions of this Law cannot cover the public receivable, or that the public receivable sought from the public debtor about whom a bankruptcy decision has been given cannot be collected from the bankruptcy estate. The relevant administrations, within this scope, will first proceed against the public debtor itself, that is, in terms of the subject matter of this article, against the limited liability company itself, and thereafter may resort to the path of collection against the personal assets of legal representatives.
From the perspective of the TPL, on the other hand, the responsibility of legal representatives for tax debts has been regulated in Article 10, and in the relevant article:
“In the event that legal persons and minors and interdicted persons, foundations and congregations such as establishments without legal personality are taxpayers or tax responsible persons, the obligations falling upon them shall be fulfilled by their legal representatives, those administering establishments without legal personality, and their representatives if any.
Taxes and receivables connected thereto that cannot be collected in whole or in part from the assets of the taxpayers or tax responsible persons due to the above-written persons not fulfilling these obligations shall be collected from the assets of those who do not fulfil their legal obligations. This provision shall also be applied to representatives in Turkey of taxpayers who are not found in Turkey.” Thus, it has been envisaged that the responsibility of legal representatives shall be resorted to for taxes and receivables connected thereto.
The scope of the obligations envisaged in Article 10 of the TPL has also been regulated in Articles 153 et seq. of the Second Book of the Law entitled “Obligations of the Taxpayer.” The main ones of these obligations are the obligation to notify the commencement of business and other notification obligations, filing tax returns, keeping books, complying with rules concerning the order of records, complying with rules concerning the order of documents, and other obligations. In the event that legal representatives do not fulfil these obligations, their responsibility with their personal assets will come to the fore. In the third paragraph following Article 10 of the TPL, the right of recourse to the principal taxpayers for taxes paid by legal representatives in this manner has been reserved.
a) Gradation of Responsibilities of Legal Representative and Partners for Public Receivables
The responsibility of legal representatives of limited liability companies for public debts has been envisaged as “partners of the company shall be directly liable in proportion to their capital shares for public debts that cannot be collected in whole or in part from the company or it is understood that they cannot be collected….”
However, there is no provision in the TPL and LPCPR that makes a direct priority ranking regarding these responsibilities. In this circumstance, in practice, it has given rise to debate from whom public debts such as tax debt shall be collected primarily. This debate has been concluded with the Decision of the Council of State’s Unification of Case Law Board dated 11.12.2018, E.2013/1, K.2018/1, published in the Official Gazette dated 20 June 2019:
“…Although it has not been regulated in the Tax Procedure Law and the Law on the Procedure for Collection of Public Receivables, each of which is a procedural law, whether to resort to the legal representative or to the partner first for the collection of tax debt, since a provision has been brought regarding the responsibility of partners with Article 35 of the Law No. 6183, it has been concluded that this aims to enable resorting to the partner without resorting to the legal representative first, as well as being directed towards protecting the public receivable and ensuring its rapid collection. As a matter of fact, in the aforementioned Article 35, it has been accepted that the direct responsibility envisaged for the partner is for the tax receivable. In the face of these explanations, it has not been found legally possible to accept that it is necessary to resort to the legal representative before resorting to the partner in the collection of tax debts of the limited liability company… Since there is no priority ranking between the legal representative and the partner in the Tax Procedure Law No. 213 and the Law on the Procedure for Collection of Public Receivables No. 6183 regarding the follow-up and collection of tax debt that cannot be collected or is understood cannot be collected from the limited liability company legal personality, it is clear that the follow-up of the legal representative is not necessary in order for the follow-up of the partner to be commenced in the collection of the tax debt of the limited liability company…”
In summary, in the majority opinion of this decision, since no priority ranking is envisaged in the TPL and LPCPR, the administration may resort to whomever it wishes without priority ranking. In the decision, the basis of this thought has been stated as “protecting the public receivable” and “ensuring rapid collection.”
In the dissenting opinion of the decision, there are two different views. One view is that priority should be given to the responsibility of legal representatives, while the other view is that it should commence with the company partners first.
According to the view advocating that the responsibility of the legal representative should be primary, pursuant to Article 10 of the TPL, for legal representatives to be held responsible, they must have failed to fulfil their tax obligations.
Article 35 bis of the LPCPR, on the other hand, bases the responsibility of legal representatives on the principle of strict liability. In the event that the public debt cannot be collected from the debtor company, legal representatives may be held responsible even without any fault on their part.
In this context, there exist two different provisions regarding the responsibility of legal representatives, and uncertainty arises as to which one shall be applied. However, this uncertainty has been clarified in the rationale of Article 35 bis added to the LPCPR by the Law on Making Amendments in the Tax Procedure Law No. 213, the Law on the Procedure for Collection of Public Receivables No. 6183, the Income Tax Law No. 193, the Corporate Tax Law No. 5422, and the Value Added Tax Law No. 3065 No. 4108 (“Law No. 4108”). In the rationale of Law No. 4108: “Accordingly, in order to ensure the collection of such receivables that cannot be obtained from the assets of the public debtor from the assets of their legal representatives, those administering the establishment, or representatives of foreign persons or institutions according to the provisions of the Law No. 6183, and to ensure that persons who are responsible within the scope of the Tax Procedure Law are also responsible for the payment of other public receivables, Article 35 bis has been added to the Law No. 6183.” A distinction has been made with this expression.
According to this rationale, in the responsibility of legal representatives, Article 10 of the TPL shall be applied for taxes and receivables connected thereto, whereas Article 35 bis of the LPCPR shall be applied for other public debts. According to this practice, the responsibility envisaged for legal representatives in the TPL is in the position of “lex specialis” compared to the regulation in the LPCPR.
In limited liability companies, partners generally administer company affairs with the title of manager and are authorized to represent the company. By company contract or general assembly resolution, legal representative authority may be granted to some partners or third parties, however, it envisages that the management and representation of the company be regulated by the company contract and that at least one partner must have the right of management and authority of representation.⁵ In this plane, it is necessary to underline that pursuant to Article 35 of the LPCPR, legal representatives are responsible for the entirety of tax debts that cannot be collected from the company legal personality in limited liability companies, whereas partners are responsible only in proportion to their capital shares. According to this view, it has been advocated that in the event that taxes and connected receivables cannot be collected in whole or in part from the company assets, making collection from the legal representative first and thereafter resorting to the responsibility of partners in proportion to capital share will eliminate legal uncertainty.
On the other hand, according to the view advocating that the primary responsibility of partners should be resorted to by virtue of the principle of legal certainty, the absence of a priority ranking for tax administrations provides flexibility and assurance in the collection process. However, it is important for legal representatives and company partners to know at which stage they will be addressed with the receivable. It has been stated in the Decision of the Council of State’s Unification of Case Law Board that taking company partners into consideration primarily in the collection process and resorting to the legal representative in the event of impossibility of collection will ensure legal certainty and constitute a lawful approach.
b) Examination of the Concepts of Tax Debt and Public Debt within the Scope of Article 10 of the TPL and Article 35 bis of the LPCPR
It has been explained above that Article 10 of the TPL regulates the responsibilities of legal representatives in the event of not fulfilling tax obligations. Article 10 of the TPL is valid only for taxes and receivables connected thereto.
With the amendment made in the TPL, the expression “with intent and negligence” has been removed. With this amendment, the obligation of the collection administration to prove that the legal representative did not fulfil their obligations with intent and negligence has been eliminated.
Moreover, the expression “tax receivables” has been changed to “taxes and receivables connected thereto.” With this amendment, in addition to tax debt, receivables connected to tax such as default interest, deferment interest, default surcharge have also been included within the scope.
Article 35 bis of the LPCPR regulates the responsibility of legal representatives based on the principle of strict liability. That is to say, in the event that the public debt cannot be collected from the company, representatives may be held responsible without demonstrating any fault.
In terms of fault-based and strict liability, the regulation of fault-based liability has been eliminated with the amendment made in Article 10 of the TPL. Article 35 bis of the LPCPR envisages strict liability. Consequently, there is no debate here. The greatest difference between them is that the TPL is applied specifically in the collection of tax debts; whereas the LPCPR is used in the collection of general public debts. Technically, tax is also a public debt, however, in practice, in the event that the public debt is in the nature of tax debt, pursuant to the decision of the 7th Chamber of the Council of State dated 09.06.2003 and numbered E.2002/4619, K.2003/3476: “In receivables falling within the scope of Article 10 of the TPL and connected thereto, the provisions of Article 35 bis of the Law No. 6183 shall not be applied.”
CONCLUSION
Limited liability companies are one of the most preferred company types in our country due to reasons such as rendering the responsibility of legal representatives secondary and limiting the responsibility of partners to the extent of their capital through incorporation, the minimum capital amount being lower compared to joint-stock companies, et cetera. However, the legislator has regulated resorting to the responsibility of legal representatives for receivables that cannot be collected from the limited liability company itself in order to prevent the possibility of the public receivable being endangered, as a mechanism to prevent loss to the treasury. Therefore, bearing in mind also that the final opinion of the Council of State is in the direction that there is no priority ranking between legal representatives and partners in the matter of collection of public receivables, taxpayers and concerned persons must act consciously regarding risks.
¹ Article 573, Paragraph 1 of the TCC states: “A limited liability company is established under a trade name by one or more natural or legal persons; its capital is determined and this capital consists of the sum of the capital shares.”
² Article 602 of the TCC states: “The company is liable only with its assets due to its debts and obligations.”
³ Paragraph 1 of Article 10 of the TPL: “In the event that legal persons and minors and interdicted persons, foundations and congregations such as establishments without legal personality are taxpayers or tax responsible persons, the obligations falling upon them shall be fulfilled by their legal representatives, those administering establishments without legal personality, and their representatives if any.”
⁴ Gonca Özkan, “Responsibility of Board of Directors Members of Joint-Stock Companies Arising from Public Debts”, Master’s Thesis, 2019, p.5
⁵ Article 623 of the TCC: “(1) The management and representation of the company shall be regulated by the company contract. The management and representation of the company may be given to one or more partners bearing the title of manager, or to all partners, or to third parties by the company contract. At least one partner must have the right of management of the company and authority of representation. (2) In the event that one of the managers of the company is a legal person, this person shall designate a natural person who will perform this duty on behalf of the legal person. (3) Managers are authorized to make decisions on all matters concerning management that have not been left to the general assembly by law or by the company contract, and to execute these decisions.”