1. INTRODUCTION
It is very common in our day that generally natural persons damage corporate bodies and third parties by hiding behind the independent structure of the corporate bodies in order to obtain a result banned by the law or to discard the obligations. Regarding this situation encountered the theory of lifting the veil of incorporation which has first developed with the implementation in the American law and then reflected on civil law by being adopted in the doctrine. It aims to lift the veil of incorporation and prevent inequitable result, which is desired to be derived through a corporate body in case of fraud against the law by hiding behind the aforesaid corporation and the concept of the corporate body or the natural persons behind the veil of incorporation hiding the concept of corporate body who are making corporate bodies parties instead of themselves or damaging third parties.
Apart from some exceptional cases, there are not any “direct” regulation within the Turkish law regarding lifting the veil of incorporation. Therefore, both the doctrine and the Court of Appeals consider that the prevention of the intendments through the corporate body could be ensured by the good faith and prohibition of abuse of rights regulated in the Article 2 of Turkish Civil Code (“CC”) No. 4721. As a beginning, the concept of the corporate body and independence elements of corporate body, principles of separation of assets and limited liability have been explained in this article. Afterwards, lifting the veil of incorporation has been analysed in terms of good faith which has been regulated in the Article 2 of CC within Turkish law and holding liable by lifting the veil of incorporation and the legal characteristic of the relevant liability has been explained by exemplifying the special cases where being held liable lifting the veil of incorporation might be in question. Finally, examples from the relevant decisions of Court of Appeals have been examined.
2. Concept the Corporate Body
Corporate body is defined as “groups of independent persons and assets allocated for a specific reason” in the Article 47 of CC.
In accordance with the Article 47 and the following articles of CC, in state that the corporate body validly exist;
i. The body to be formed should have assets of its own and these assets should be introduced within the scope of a purpose of achieving a specific goal and as independent assets,
ii. Assets in question and the corporate body should have a specific area of responsibility,
iii. In concern with the allocated assets; assets and obligation of the organization should always exist within the corporate body independent and separate from the change of members or change of administrators,
iv. In accordance with the regulation, group of bodies or assets in question should be accepted as a corporate body.
3. Independence Element and Consequences of Incorporation: Separation of Assets andthe Principle of Limited Liability for Joint Stock Companies
Organizations in accordance with the regulations, the elements of perpetual goals and independence are obligatory for incorporation.
As it is stated above, groups of persons and assets with the corporate body have a legal structure separate and independent from the persons and the members of the bodies which are forming it. The presence of the corporate body is not limited to the lifetime of natural persons forming it, and also it is not possible for the founding partners of the corporate body to dissolve it excep from the circumstances stated in the law. As a result of this, the corporate body owns separate assets.
As per the principle of separation of assets, it is accepted that the assets of corporate bodies are separate from the assets of persons forming or administrating the corporate body as they have a personality separate and independent from the persons forming or administrating it in order to achieve a perdurable goal. In other words, rights and debts in respect of the activities of corporate bodies through its bodies belong directly to the corporate body, not to the persons forming or administrating it. Corporate body partnership joins the economic life as a legal person and undertakes the responsibilities towards creditors only with its own assets separate from the persons forming or administrating it. Hence, the assets of the corporate bodies cannot be interfered due to the personal liabilities of the persons persons forming and administrating the corporate body.
Another consequence of having separate assets comes out in the limitation of liability in joint stock companies that are corporate bodies. In accordance with the Article 50/2 of CC, the corporate body would have a limited liability with its assets due to the actions by the managing body of corporate body, contrary to credits. In corporations, the liability of the shareholders as a consequence of the debts of the company is limited to the capital they have committed to inject; therefore the shareholders would not have any liabilities due to the debts of the joint stock company. Similarly, assets of the corporate body may not be interfered due to the personal liabilities of the persons persons forming and administrating it.
4. Meaning of Theory of Lifting the Veil of Incorporation and Its Place Within Turkish Law
In the strict sense, lifting the veil of incorporation means disregarding the fact that the members forming the corporate body are legally separate and independent. In other words, the members forming the corporate body are held liable due to their commitment and relations by ruling out the legal independence of corporate body. Thus, the principles of separation of assets and independence would not be applicable and the areas of responsibilities and assets of the corporate body and its members are considered as a whole.
4.1. Lifting the Veil of Incorporation within Article 2 of CC, Good Faith in the Turkish Law
Evaluating the theory of lifting the veil of incorporation in Turkish Law within the scope of Article 2 of CC is the dominant view both in the decisions of Court of Appeals and the doctrine1. The reason for this there are not any specific regulations on lifting the veil of incorporation in our law except some circumstances. As it is known, by the clause stating “every person abide by the rules of correctness while using their rights and fulfilling their obligations” in the Article 2 of CC, the principle of good faith is regulated. Additionally, in the following parts of Article 2 of CC, the legislator prohibits the abuse of the right by stating that the legal order would not be protected from the abuse of right. In accordance with the dominant view in Turkish law2 and the precedents by the Court of Appeals exemplified below, when the abuse of right within the second sub clause of Article 2 of CC is in question, the veil of incorporation should be lifted and the inequitable goal to be reached through the corporate body should be prevented. In other words, in case of a fraud hiding behind the veil of incorporation or in case the natural persons behind the veil of incorporation breach their obligations in respect of agreements which they have a party of or seeking to damage third persons, the veil of incorporation shall be lifted and it shall be possible to reach the liabilities of the persons behind the veil of incorporation.
4.2. Special Cases Where Holding Liable Could Be Possible by Lifting the Veil of Incorporation
Although there are not direct regulations which have been stipulated in our laws which stipulates regarding the lifting the veil of incorporation, in the doctrine it is foreseen that it might be possible to reach the liabilities of the persons behind the veil of incorporations within the special cases listed below. These cases are;
i. Assets or Areas Blending into Each Other; Area of activity of the company and the area of activity of the member forming the corporate body blending into each other, introducing the separation of member forming the corporate body and company insufficiently (for example, it would not be clear whether some individual assets belongs to the corporate body or to the member forming the corporate body, bringing the vehicles owned by the corporate body into the use of the member forming the corporate body etc.),
ii. Deficiency of Equity Capital; it occurs when the shareholders do not fulfill their liabilities about injecting the capital amounts or when the company does not have enough money compared to the activities of the company,
iii. Foreign-capitalized Companies or Transferring the Activities of Foreign Shareholders; In case of an abuse of the veil of incorporation as a result of a foreign-capitalized company or the activities of foreign shareholders; although it differs according to its acceptance in the legal system to be applied, if it is possible to lift the veil of incorporation and there are not any rules causing a liability within the law to be applied, it would be possible to prevent foreign capitalized corporate bodies from hiding behind the principle of limited liability,
iv. Corporate Abuse; Abuse or misuse of the corporate body in order to damage the creditors (e.g. a bank carrying out transactions apart from banking)
5. Lifting the Veil of Incorporation In Terms of Persons to be Held Liable and Holding Liable
5.1. In Terms of Members
In case of an enlargement of the area of responsibility of the members of the corporate body due to a credit or a liability with respect to the corporate body which is only liable to creditors with its own assets, it would be in question to lifting the veil of incorporation in terms of members and holding the members liable. In this case, in spite of preserving the corporate body structure and holding the assets separate, it would be possible for the creditors of the corporate body to recourse to individual assets of the members by waiving to apply only the principle of substantial breach and setting aside the rule where “the liabilities of the members are limited to the share which has been committed by them”.
In case of holding liability by lifting the veil of incorporation, the liability of a corporate body or members due to a credit depends on a law or a covenant. Since the liabilities of the members that come out by lifting the veil of incorporation arise from the relation of the corporate body itself with the third party, this liability is based on the membership relation, not on a legal transaction between the member and the third party.
5.2. In Terms of the Corporate Body
As a rule, the member shall not recover credits or rights from the assets of the corporate body. The case of holding the corporate body liable by lifting the veil of incorporation is the place where it is possible for the members to recourse directly to the assets of the corporate body for its personal credits due to frauds against the law. The case where a credit of member binds the corporate body as a result of "holding liable by lifting the veil" and "assimilating by lifting the veil" should be separate from each other. While the recourse to the assets of the corporate body due to the credit of a member is possible in the case of holding liable; in the case of assimilating, it is asserted that the credit of a member should also bind the corporate body; a claim for compensation should be filed primarily against the original debtor in order to protect both the continuity of partnership goals and the credits of partnership.
5.3. In Terms of Co-partners
The intended meaning of co-partnership is that the veil of incorporation formed jointly between the main partnership and the small partnerships connected to it. In this case, first the main partnership is enabled by lifting the veil of incorporation due to the circumstances regarding to the small partnership and then it would be possible to reach another small partnership.
It is possible to give an example in the field of labour law implementation within the Turkish law3. One of the small partnerships within a holding, active in the field of tourism, runs a touristic hotel where a labour contract is applicable. A penal clause in case of firing personnel without abiding by the rules of the contract. However, it has been stated that the penal clause would be null in case of a shutdown and the hotelkeeper has fired its personnel making use of this provision however the same hotel has started to be operated by the small business connected to the same main partnership one (1) month later. In this case, it has been concluded that this has been realized in order to defraud the terms of the labour contract and the defence stating that the new employer is a different corporate body would not be endorsed. Thus, the veil of the incorporation which is the first employer has been lifted, in other words the main partnership has been analysed without considering whether there is a different employer, and therefore both small partnerships have been assimilated by lifting the veil between the main partnership and the small partnership with the position of a new employer.
6. Nature of holding Liable by Lifting the Veil of Incorporation
6.1. Primarily the Liability of Corporate Body
Since it is an exceptional case to hold the shareholders liable before the creditors of the partnership by lifting the veil of incorporation within the scope of the principle of limited liability, it is necessary to refer primarily to the corporate body regarding the credits of partnership. For instance, in order to refer to the liability of the partners due to the blending of the assets of the shareholders indiscernibly and/or deficiency of equity capital, the creditors should be in a situation where they cannot assure their credits from the assets of the partnership.
6.2. Primarily Other Liabilities
In case of a presence of more than one reason that enables a reference to personal liabilities of the members of corporate body, special liabilities would have priority before others (liabilities which are general or which are not specified in the law). Similarly, it is necessary to give priority to the other liabilities which are not regulated in the law but enables holding partners liable without lifting the veil of incorporation as in the holding liable by lifting the veil of incorporation. For instance, this would be the case in holding the shareholders liable due to defect liability. In lifting the veil of incorporation, it would be possible to refer to it only when it is impossible to reach the same results with other liabilities.
The most relevant example for the private liability cases lies within the Law on Procedures of Collection of Public Receivables (“Law No.6183”). In accordance with the Article 3 of Law No. 6183; “shareholders of a limited company would be directly liable for the public receivables impossible to be collected in proportion of their capital shares and be subjected to the enforcement in accordance with the provisions of this law”. Another example is the provision which has been regulated under Article 211 of Turkish Commercial Code and allows the reference to the personal liability of the shareholders due to company debts in collective partnerships. Additionally, there are some regulations regarding the reference to members and bodies alongside the corporate body within Banking Law No. 5411 and the Article 1344 with the title “Other competences regarding the collection of credits of the fund” can be given as an example.
7. Examples of Decisions of Court of Appeals Regarding Lifting the Veil of Incorporation
As it is explained above, with exception to some exceptional provisions in our legislation, there are not any clear regulations on lifting the veil of incorporation. On the other hand, when the current decisions of the Court of Appeals are analysed, it is indicated seen that the theory of lifting the veil of incorporation is explicitly mentioned.
i. Decision of 19th Civil Chamber of Court of Appeals, Numbered 2005/8774 E. and 2006/5232 K., dated 15.05.2006
The decision of the 4th Commercial Court of First Instance of Izmir numbered 2002/843 E. and 2005/64 K., dated 17.02.2005 where the aforementioned issue has been concluded by an explicit mentioning of the theory of lifting the veil of incorporation and the conclusion of the 19th Civil Chamber of the Court of Appeals regarding this decision is very important because of it being one of the first decisions in this direction.
In this decision, it is stated that “Although legally different corporate bodies exist, there is consubstantiality between two defendant companies due to affiliate company relation within the frame of "theory of lifting the veil". The only defence of the defender, Ege A.Ş. is that they are different corporate bodies and thus the other defender is liable for all the credit. This defence is an abuse of right under Article 2 of CC. As it is stated above, it is the common representative of both companies who signed the agreement, received the good and who has issued the letter of credit for one container regarding the plaintiff. Shareholders of two companies are composed of the same persons on this date. The concept of different corporate bodies cannot be discussed pro forma. The conflict between the parties has to be assessed within the framework of good faith and equity. The efforts of the defender, Ege A.Ş., to smear the other company with a different corporate body should not be accepted. Therefore, it has been concluded that both companies are liable for all the credit conjointly.”
ii. Decision of 22nd Civil Chamber of Court of Appeals Numbered 2012/22684 E. and 2013/10887 K., dated 14.05.2013
In this decision, it is stated that “Legal liabilities of the defenders should be considered especially in the light of concepts of "lifting the veil of incorporation" and "organic bond". Assets of the corporate body is separate from the natural persons who formed it. It could be possible to refer to the liability of natural persons by lifting the veil of incorporation. “Organic bond” is a legal way that allows you to realize the enforcement on the companies that the main company is legally connected in the monitoring process of credits towards the corporate body. The relation between defenders and their liabilities in terms of workmanship receivables as a result of this relation have not been cleared up sufficiently.”
iii. Decisions of 23rd Civil Chamber of Court of Ap peals Numbered 2012/3083 E., 2012/4296 K., dated 19.06.2012 and numbered 2013/6314 K., dated 11.10.2013
In these decisions, it is stated that “The aim of the theory of lifting the veil of incorporation is to prevent avoiding legal liability by the misuse of the principle of separation of the corporate body and to secure justice. It is possible to hold the person behind the veil liable by rejecting the defence of a different corporate body concept in the cases where the principle of separation of the corporate body is misused with the theory of lifting the veil. In other words, with the theory of lifting the veil, it is possible to hold the corporate body or the minor shareholders of main partnerships liable for the credits of corporate body and the credits of members.”
As it can be understood from the decisions made by the Court of Appeals given above, the Court of Appeals both makes it possible to refer to the liabilities of the person behind the veil by lifting the veil of incorporation, and also reverses the trial decision with the reason of insufficient inspection without lifting the veil of incorporation.
8. Conclusion
In a partnership with a corporate body, it is possible for persons to make some transactions by hiding behind the veil of incorporation as a result of adoption of the principle of limited liability. As it stated in this article, the American court decisions enacted the fact that the abuse of this right which damages the creditor shall not be accepted; the theory of lifting the veil of incorporation has risen. The American courts5 in the beginning of the 19th century have concluded that the judge could lift this veil in order to ascertain the hidden real powers hiding behind the veil of incorporation. Afterwards, the theory of lifting the veil of incorporation has been developed in common and civil law and it has been possible to hold the members of the corporate body, who have been abusing the corporate body by hiding behind it, liable.
In Turkish law, doctrines and decisions of the Court of Appeals foresees that it is possible to lift the veil of incorporation with the "Good Faith" provision of Article 2 of CC and it would be possible to lift the veil of incorporation and refer to the liabilities of the persons who form or administrate the corporate body in case there are not any other regulations to be applied for the corporeal issues. As it is stated in this article, both the Article 2 of CC and the theory of lifting the veil of incorporation that we encounter with miscellaneous legal arrangements allow the reference to the liabilities of the persons who have liabilities due to any law, contract or any other reasons by also being used for lifting the veils of chain incorporations. On the other hand, in case the implementation of Article 2 of CC damages the corporate bodies, it should be implemented in a limited and exceptional manner.
FOOTNOTE
1 Mustafa Dural/ Tufan Öğüz, Türk Özel Hukuku Cilt II Kişiler Hukuku, İstanbul, Ekim 2014, Filiz Yayınevi, p.203;Veliye Yanlı, Tüzel Kişilik Perdesinin Kaldırılması, İstanbul, Nisan 2000, Beta Basın Yayım, p.1.
2 Dural/Öğüz, p.203, Yanlı, Tüzel Kişilik Perdesinin Kaldırılması, p.1.
3 Doç. Dr. Ömer Ekmekçi, İstanbul Barosu Çalışma Hukuku Komisyonu Bülteni, C.1, Number 2, p.7,14.
4 In accordance with the aforementioned provision; for the collection of credits of the banks assigned to Saving Deposit Insurance Fund ("Fund"), regardless of being a debtor, it allows for the takeover of participating nature except dividend from all or half of the shares owned by the partners of companies that obtains money, estates or rights on behalf of them or himself/ herself, administration and control of the banks assigned to the Fund, its shares, corporate bodies that are controlling shareholders, the companies where controlling shareholders of natural persons and corporate bodies are controlling shareholders, and by the Fund.
5 United States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247, 255 – E.D.Wis.1905.
