Piercing the Corporate Veil Under Turkish Law

The Concept has been developed through US law and is absent from the legislations in many legal systems. In this article we examined US law and Turkish law applications of the Concept.

Practice in US Law

In US law, State of Wyoming became the pioneer of the practice of piercing the corporate veil. In US law practice, there are three general situations wherein a court will decide upon piercing the corporate veil and hold shareholders personally liable:

– Alter ego;

– Undercapitalization;

– Fraud.

Alter Ego

In Corporate Law, the doctrine of “alter ego” addresses to a situation where a business owner or corporate shareholder does not respect corporate formalities and is essentially using the corporation as a means of benefiting from the protection offered by the corporation externally while treating the corporation’s assets like his or her own internally. There are several possibilities where alter ego doctrine is applied as follows:

Failure to observe corporate formalities

Nonpayment of dividends

Intermingling of personal and business funds

Treatment by an individual of assets as if they were their own

Non-functioning officers and directors

Absence of corporate records

Corporation merely a facade for shareholder(s)

For instance, if a shareholder commingles personal and corporate funds, uses the corporations’ assets for his/her own benefit or uses the corporations’ resources to pay for personal expenses; a court will probably, look to the corporate shareholder’s personal assets to satisfy the obligations where the corporation has failed to pay its bills.

Undercapitalization

Undercapitalization addresses to a situation where the corporate founders have not invested enough capital into the corporation at its establishment to cover its reasonably foreseeable debts, liabilities and other obligations.

As an example, if a corporation which started business with an initial share capital of $ 1.000, active in the transportation sector and failed to carry insurance; the founding shareholders could be found personally liable when someone is injured by an accident due to the actions of the corporation.

In this case, shareholders of the corporation would have failed to undertake sufficient capital to cover what were the reasonably foreseeable liabilities of the corporation.

Fraud

The most common and debated reason for piercing the corporate veil is the fraud. When the corporate legal entity is used to act against public interests, justify wrongdoings and mostly protect fraud; a court shall disregard the corporate entity and refer to the liability of shareholders. For example, where shareholders of a corporation know that they will fail to pay debts but still negotiate in business deals; this may constitute a misuse of corporation funds. In these cases, a court would possibly determine that the shareholders committed a fraud and dismiss any claim of limited liability on behalf of the shareholders.

Practice in Turkish Law

Shareholders of a corporation are only held liable to pay capital subscription pursuant to Article 480 of the Turkish Commercial Code Numbered 6102 and dated 14/02/2011 which is referred as the principle of single debt in the doctrine. As per the article, any debt of the corporation could only claimed from the corporation so it cannot be claimed from the shareholders or affiliated companies of the corporation. However, relying on Article 2 of Turkish Code of Obligations numbered 6098 and dated 04/02/2011, the Turkish courts as a method of making shareholders responsible for misusing the legal personality and using it as a shield against principle of good faith, may apply Concept as an exception. Turkish jurisprudence has embarked to adopt the Concept into practice throughout the years and for the first time, The Turkish Supreme Court of Appeals in 15.05.2006 approved the decision of the lower court by relying on the Concept of piercing the corporate veil.

There are three general situations accepted by the doctrine wherein a court possibly address the Concept as follows:

-Undercapitalization,

– Dominance of a particular group on the corporation,

– Commingling the assets of corporation and shareholders.

Undercapitalization

When shareholders do not fulfill their liabilities regarding payment of their share capital contributions pro rata their shareholdings or when the corporation lacks share capital to cover its operations; the corporation goes into undercapitalization. In case where a corporation operates within an insufficient equity, the shareholders would not benefit from the principle of single debt and the courts may pierce the corporate veil.

Dominance of a Particular Group on the Corporation

Dominance of a particular group in a Corporation might be invoked in case of abuse of the corporation.  If this dominance causes loss of third parties especially the creditors, the principles of separation of assets and independence may not be applied, and the areas of responsibilities and assets of the corporation and its dominant shareholders would be considered.

Commingling the Assets of Corporation and Shareholders

The principle of single debt is based on the separation of the assets of shareholders and the corporation. In some situations, such as fraud, the personal assets of shareholders and assets of corporation are commingled. Allocation of the corporate assets to the use of a shareholder or transfer of an asset of an affiliated company to another by the parent company can be given as examples to such case. In this case, shareholders possibly would be responsible for the debts of the corporation with its personal assets.

Piercing the corporate veil is a Concept that has been adopted in judicial decisions and doctrine in Turkish Law and has been applied in US Law for a long time. Within the application of the Concept; also related legal principles such as good faith is invoked, hidden purpose under the veil are surfaced and shareholder(s) would be held responsible within their personal assets upon corporations’ operations.

Bibliography:

[1] Kaycee Land and Livestock v. Flahive, Supreme Court of Wyoming, 2002.

[2] Çamoğlu, E. (2016) Ticaret Ortaklıkları Bağlamında Perdenin Kaldırılması Kuramı ve Yargıtay Uygulaması.

[3] Gürkaynak, G. (2018) Turkey: Non-liability of the Shareholders and Piercing the Corporate Veil.

Author: Ezgi Ceren Aydoğmuş