General rule under Turkish law is that a contract creates rights and obligations only in between the parties to/executors of such contract. Unless a third party beneficiary is lawfully designated, a third party distant to the contractual relationship does not assume any right under such contract which it is not a formal party thereto. Similarly, in the absence of an explicit legal intention to guaranty or undertake some or all of the obligations of one of the contractual parties, a third party cannot be held liable as a rule as for obligations under a contract to which it is not a party.
However, in very exceptional circumstances, a distant third party can be held liable as for an obligation arising out of a contract which it is not a party. In these cases, the law may provide a default liability for a third party as for a distant legal relationship. The rationale behind establishing such a theory is to prevent legal personality to be used as a shield by persons owning or controlling it.
A related/parent company may be held liable for obligations of another related or subsidiary company under Turkish law based on the principle of "piercing the corporate veil (in other words, lifting the veil of corporation or disregard of legal entity)". In this case a third-party shareholder/parent is certainly not a direct or indirect party to a contract entered into by an affiliate or related party, neither provides any guaranty or alike and stands purely as a distant third party. In these cases, there would be no "contractual" legal basis to deem that such third party parent shall be in any way liable as for the obligations assumed by a related but a separate legal entity but case law provides for a rather unique source of contingent liability under this theory. Similarly, a shareholder of a company may also be held personally liable under this theory for certain obligations of the company in which it is a shareholder.
The purpose of this short article is to throw a glance at the Supreme Court practice and not to explain the piercing the corporate veil theory as we presuppose that the reader already has a fundamental understanding thereof. In fact, the mentioned theory is one way or another similar from theoretical view in many jurisdictions in which this theory is said to be applicable. Under Turkish law as well this theory is often applied in specific instances where; (i) properties/assets and organization of a company and its shareholders/parent are commingled or often passed through in between, suggesting that parties do not in general respect self and separate corporate existence, (ii) a company operates in spite of an insufficient capital (suggesting a constant funding by the parent as opposed to self-sufficiency), (iii) separate corporate and legal entity structure is abused or is often used to disguise assets from creditors.
In any way, it should be noted that piercing the corporate veil is a theory where applied in very exceptional circumstances. Relaxing the use of the theory may damage the idea of separateness of legal entity's personality and discourage business persons in making a transaction1 . That being the case, Turkish law practice also follows a narrow application of the theory. After all, assessing personal shareholder or related party liability arising from corporate debt would be a fundamental blow to the very basic principle of corporate law and may eventually lead to scare away investors from initiating a corporate organization.
Approach of the Supreme Court to the Theory
Piercing the corporate veil theory is not explicitly recognized by the code but shaped up by various court decisions in the form of case law and generated from a necessity over the years to avert fraudulent asset stripping acts. Scholars often state that article 2 of Turkish Civil Code in which principle of good faith is set is the fundamental legal basis of the creation and application of this theory2 .
The idea is that a creditor having trusted a contractual party shall be protected against instances where the shareholder or parent of such contractual party is abusing this company thus damaging interest of a creditor. In almost all cases, Supreme Court seeks existence of an abuse of legal entity's separate personality by its parent or related company. Supreme Court defined abuse as intention to eliminate or avert creditors (of the affiliate) in a case in which a shareholder continued the same commercial activities in another company (after stripping the assets of the liable affiliate)3 . Similarly, the Supreme Court accepted in another case that claiming that company which does not seem obligor at first sight has a separate legal personality means abuse of right under article 2 of the Civil Code and it is not protected by order of law4 .
In practice, creditors usually rely on the fact that a third party company (which should be held liable) and debtor company have various similarities such as shareholding structure, managers, address, field of activity etc. in order to prove their claim that separateness of legal personality is abused. However, the Supreme Court sets a precedent on this issue and rules that being shareholder or manager in various group/affiliated companies does not prove per se that the shareholder or manager abuses the companies' separate personality. In order to pierce corporate veil, it must be proven that the legal entity is used by persons behind it aiming to escape from liabilities5 . In other words, existence of organic bond is not solely adequate to pierce corporate veil6 . Supreme Court focuses on both legal and organic bond between a debtor company having no property or ability to pay the debts and the other parent/related company7 .
We must note that being shareholder or having the same location or field of activity are indicators suggesting intention to avert creditors8 . Indeed, there are many examples in which Supreme Court concluded to pierce corporate veil. For example, in a case in which defendant company's and a non-joinder company's shareholders are the same individuals, and these companies run their business on the same premise and also the non-joinder company makes sale and marketing of products that the defendant company manufactured and the plaintiff actually works in the defendant company9 . Similarly, Supreme Court considered two companies located at the same address and workplace as single personality and single employer since their address exists together on letterheaded papers indicating one company is an affiliate company of other holding company10
. Regardless of whether the Supreme Court explicitly states in its decisions or not, we believe that intention to harm creditors is a main requirement to exercise this theory11 . Given that proving an intention is one of the greatest challenges in trials, we observe that courts do not seek for hard evidences proving intention but they seek for indicators which should be evaluated in each individual cases.
In a very recent decision, the Supreme Court comprehensively evaluated piercing corporate veil concept and reaffirmed principles that we set forth above. The Supreme Court explained that this theory should be applied 'circumspectly' and only under certain exceptional circumstances. It ruled that it was not proven that obligors attempted to avert creditors and being located at the same address, having the same field of activity, being managed by same persons and gathering shareholder meetings on the same date were not adequate per se to held defendants liable for other company's debts. It further resolved that similarity in commercial title of companies and shareholder structure do not directly lead to pierce corporate veil. The Supreme Court prioritized legal remedies such as cancellation of collusive transaction and cancellation of disposal comparing to piercing the corporate veil theory. Significantly, the Supreme Court expressed that it could not discover any proof suggesting existence of intention to harm creditors12 .
Conclusion
It is undisputed that piercing the corporate veil theory is not explicitly regulated under Turkish law. Some scholars rely on good faith principle in explaining the source of the theory while it is widely submitted that this theory is formed by jurisprudence. In any way, this theory is applied in very exceptional circumstances and providing absolute formula to pierce corporate veil is not practical but a fraudulent act of debtor is key element to trigger this theory under Turkish law.
We conclude that Supreme Court applies this theory against parent company/shareholder in cases of fraud or abuse of company's separate personality. It is deduced from above decisions that a close relation between two companies does not lead to piercing corporate veil per se. Intention to harm creditors is key element for application of this source of contingent legal liability.
Footnotes
1 Ticaret Ortaklıkları Bağlamında Perdenin Kaldırılması Kuramı ve Yargıtay Uygulaması, Prof. Dr. Ersin Çamoğlu, p.5.
2 Ticaret Ortaklıkları Bağlamında Perdenin Kaldırılması Kuramı ve Yargıtay Uygulaması, Prof. Dr. Ersin Çamoğlu, p.2.
3 Supreme Court, 17th CC, E. 2010/12173, K. 2011/3938, T. 26.04.2011.
4 Supreme Court, 23th CC, E. 2015/9728, K. 2018/3743, T. 12.06.2018.
5 Supreme Court, 11th CC, E. 2013/8411, K. 2014/13676, T. 12.09.2014; Supreme Court, 11th CC, E. 2015/1107, K. 2015/6980, T. 15.05.2015
6 Supreme Court, 22th CC, E. 2016/23075, K. 2019/21551, T. 26.11.2019; Supreme Court, 22th CC, E. 2016/12703, K. 2019/12574, T. 11.06.2019.
7 Supreme Court, 11th CC, E. 2013/9984, K. 2014/1248, T. 21.1.2014.
8 Supreme Court, 22th CC, E. 2016/29852, K. 2020/2033, T. 10.02.2020.
9 Supreme Court, 23th CC, E. 2013/4903, K. 2013/6314, T. 11.10.2013.
10 Supreme Court, 9th CC, E. 2007/7542, K. 2007/34765, T. 22.11.2007.
11 Supreme Court, 11th CC, E. 2012/7997, K. 2013/7966, T. 22.04.2013; Supreme Court, 13th CC, E. 2013/820, K. 2013/7793, T. 28.03.2013; Supreme Court, 13th CC, E. 2013/820, K. 2013/7793, T. 28.03.2013; Supreme Court, 11th CC, E. 2016/5148, K. 2017/7084, T. 11.12.2017.
12 Supreme Court, 3rd CC, E. 2019/593, K. 2019/9655, T. 03.12.2019.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
