Responsibilities of Joint Stock Company and Limited Liability Company Shareholders Regarding Public Receivables
I – INTRODUCTION
Public receivables refer to the taxes and other receivables imposed by law on behalf of public institutions. The procedures for the collection of these receivables, and the methods to be followed in cases where they cannot be collected, are regulated by Law No. 6183 on the Procedure for the Collection of Public Receivables (AATUHK). Article 1 of Law No. 6183 sets out the public legal entities subject to this law and the receivables falling within its scope.
In this article, the responsibilities of shareholders of Limited Liability Companies and Joint Stock Companies regarding unpaid taxes, as stipulated under the Tax Procedure Law (TPL) and the Law on the Procedure for the Collection of Public Receivables, are examined.
As is known, legal entities are represented in all matters by their legal representatives. Legal representatives are managers in Limited Liability Companies and the board of directors in Joint Stock Companies. This principle is also reflected in tax laws. The relevant regulation is set out in Article 10 of the TPL, which provides that if legal entities are taxpayers or tax responsible parties, their duties shall be fulfilled by their legal representatives. Taxes and related receivables (tax, tax penalties, default interest, late fees) that cannot be collected in whole or in part due to the failure of the legal representatives to perform these duties shall be collected from the personal assets of such legal representatives.
In the AATUHK, the matter is regulated in two separate articles. Article 35 provides a special provision for Limited Liability Companies, while the repeated Article 35 introduces a parallel regulation to the Tax Procedure Law, stipulating that public receivables that cannot be collected or are determined to be uncollectible shall be collected from the legal representatives. Since the law treats Limited Liability Companies differently from other legal entities, we will examine the issue separately for Limited Liability Companies and Joint Stock Companies.
II – RESPONSIBILITIES OF LIMITED LIABILITY COMPANY SHAREHOLDERS REGARDING PUBLIC RECEIVABLES
Limited Liability Companies are capital companies established as legal entities under Articles 503–512 of the Turkish Commercial Code (TCC). As noted above, such legal entities are represented by their legal representatives. In Limited Liability Companies, representation belongs to the managers (TCC Art. 540). Managers may be chosen from among the shareholders or appointed externally, provided they have legal capacity (TCC Art. 541). Furthermore, if no representative is designated in the articles of association, all shareholders are deemed managers under TCC Art. 540.
Legal representatives can bind the company in all matters of debt and liability. The same applies with respect to taxation. The company administration is entirely responsible for the preparation of tax returns and their accuracy. The regulation in repeated Article 35 of the AATUHK also applies here, holding company management liable for unpaid taxes and penalties. Article 35 of the AATUHK, however, differentiates Limited Liability Companies from other legal entities by also holding all shareholders responsible.
Prior to its amendment by Law No. 4369 dated 29.07.1998, Article 35 of the AATUHK was more consistent with the definition and structure of Limited Liability Companies under the TCC. Before the amendment, a shareholder’s liability for public receivables was limited to the amount of their share capital. For example, if a company had a public debt of 100,000 YTL, its share capital was 50,000 YTL, and shareholder Mr. K held a 10% share (5,000 YTL), his liability was limited to 5,000 YTL. This rule remains applicable for debts prior to 29.07.1998.
After the amendment, however, Article 35 of the AATUHK provided that if the taxpayer or tax responsible party is a Limited Liability Company, public receivables that cannot be collected, in whole or in part, from the company’s assets shall be collected from each shareholder in proportion to their shareholding. Thus, shareholders are directly liable for public receivables in proportion to their shares, not limited to their invested capital. In the example above, Mr. K’s liability would be 10% of the total debt (100,000 YTL × 10% = 10,000 YTL).
Furthermore, with the addition introduced by Law No. 5766 dated 06.06.2008, the liability was extended to include both the transferring and the acquiring shareholder. Accordingly, the acquiring shareholder is jointly liable, together with the transferring shareholder, for the company’s unpaid or uncollectible public debts prior to the transfer, in proportion to their shares.
For example, if Mr. K acquires a share in a Limited Liability Company that already has outstanding debts, or if tax assessments and penalties are imposed later for prior periods and these cannot be collected from the company’s assets, then both the transferring shareholder and Mr. K will be jointly liable for the portion corresponding to their shares.
If a Limited Liability Company shareholder also serves as a manager, they will be liable in two ways under the AATUHK:
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As a shareholder, they are liable in proportion to their shareholding (Art. 35 AATUHK).
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As a legal representative, they are liable for the entire debt (Repeated Art. 35 AATUHK).
The process is as follows: if the Limited Liability Company fails to pay its debt, the authorities first issue a payment order to the company’s registered address and initiate legal proceedings. If the company cannot be located, or if its assets are insufficient to cover the debt, then payment orders are issued against the managers and shareholders for the amounts corresponding to their liability.
III – RESPONSIBILITIES OF JOINT STOCK COMPANY SHAREHOLDERS REGARDING PUBLIC RECEIVABLES
Joint Stock Companies are capital companies established under Articles 269–278 of the TCC. They are typically suited to large-scale partnerships. Like Limited Liability Companies, Joint Stock Companies are represented by their legal representatives, which is the board of directors (TCC Art. 317). Board members are elected for a maximum term of three years and may be re-elected unless otherwise stipulated in the articles of association.
With respect to taxes (public receivables), representation and liability are more appropriately applied in Joint Stock Companies. Regardless of their shareholding (large or small), shareholders who are not on the board of directors bear no liability for public receivables. Liability rests entirely with the board of directors.
According to repeated Article 35 of the AATUHK:
“Public receivables that cannot be collected, in whole or in part, from the assets of legal entities, or from minors, legally incapacitated persons, foundations, and associations without legal personality, shall be collected from the personal assets of their legal representatives or administrators.”
The addition made by Law No. 5766 dated 06.06.2008 provides that if the legal representatives differ at the time the debt arose and when it became payable, all representatives are jointly liable. This means that if the board of directors changes, and tax debts exist or are later assessed for that period, and these cannot be collected from the company’s assets, both former and current board members are jointly liable for the entire debt.
If the board of directors appoints a managing director (provided the appointment is registered and announced in the trade registry), liability rests solely with the managing director. Other board members are not liable. If there is no managing director, all board members are jointly liable.
In order to proceed against the board members, it must be established that:
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The company has not paid its debts,
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Legal collection proceedings have commenced against the company, and
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The company cannot be located, has no assets, or its assets are insufficient to cover the debt.
IV – CONCLUSION
Both Joint Stock Companies and Limited Liability Companies are capital companies with legal personality. Both are represented by their legal representatives. In Joint Stock Companies, shareholders who are not involved in management bear no liability. Liability lies entirely with the board of directors. In Limited Liability Companies, while managers are liable for the entire debt, other shareholders are liable in proportion to their shares.
Author: Coşkun Gülen | CPA & Independent Auditor — Managing Partner