The limited liability company (limited şirket) is one of the capital companies provided for by the Turkish Commercial Code (TTK), and its most fundamental feature is that the partners are not liable for the company’s debts with their personal assets. This “corporate veil” is a protection established for the secure functioning of commercial life. However, where taxes and other public receivables are concerned, an important exception to this rule has been laid down in order to secure the public creditor. At the centre of this exception is Article 35 of the Law No. 6183 on the Procedure for the Collection of Public Receivables (“AATUHK”).
In this article we examine under what conditions, to what extent and by what procedure the shareholders of a limited company can be held liable for its tax debts; the difference in liability between an ordinary shareholder and the legal representative (manager); the position of former partners in the event of a share transfer; and the legal remedies available to a shareholder against enforcement.
General Rule: Partners Are Not Personally Liable
The fundamental principle of a limited company is that the company itself is liable for its debts. The partners’ liability is limited to paying the share capital they have subscribed and fulfilling any additional payment and ancillary performance obligations provided for in the articles of association. It is one of the basic principles of company law that partners cannot be held liable with their personal assets for the company’s debts.
The exception to this rule, in respect of taxes and similar public receivables, was introduced by Article 35 of the AATUHK. This exception does not apply to the company’s private-law debts; it arises only for receivables of a public nature.
The Exception: AATUHK Article 35 — Liability of the Shareholder
Article 35 of Law No. 6183 reads as follows:
“Partners of limited companies are directly liable, in proportion to their capital shares, for public receivables that cannot be collected from the company in whole or in part, or that it is understood cannot be collected, and are subject to enforcement in accordance with the provisions of this Law.”
The main consequences of this provision are as follows:
1. The Company Is the Principal Debtor; the Shareholder Is a Secondary Debtor
For enforcement to be directed at the shareholder, the public receivable must first be uncollectable from the company as a legal entity, or it must be understood that it cannot be collected. The company is liable first; the partners are tax debtors of an accessory (secondary) nature. The liability is directed at the partner who held a share in the company during the period to which the public receivable relates.
2. Liability Is Proportional to the Shareholding
The shareholder is not liable for the entire debt, but only in proportion to the capital share he holds. For example, a partner holding a 20 percent share in the company’s capital is liable with his personal assets for only 20 percent of the uncollectable public receivable. This liability is not limited to the amount of capital the partner contributed to the company; it is calculated on the amount corresponding to the shareholding ratio, depending on the size of the debt.
3. Liability Is Several, Not Joint and Several
Since the statutory text limits each partner’s liability to his own shareholding ratio, the liability of limited company partners is several in nature; as a rule, it is not joint and several. In other words, each partner is separately liable only for the portion corresponding to his own shareholding. However, in the two cases separately regulated in the second and third paragraphs of AATUHK Article 35 — a share transfer, and where the shareholders differ at the time the public receivable arose and the time it became payable — joint and several liability arises between the transferor and transferee or the relevant shareholders (discussed separately in Section VI below).
The Difference Between an Ordinary Shareholder and the Legal Representative (Manager)
The most critical distinction to be made at this point is that liability changes according to the partner’s capacity:
| Capacity | Extent of Liability | Legal Basis |
|---|---|---|
| Shareholder only (not a manager) | In proportion to the capital share | AATUHK Article 35 |
| Legal representative / manager | Collected from personal assets under the provisions of this Law | AATUHK Article 35 bis (mükerrer 35), VUK Article 10 |
If a person is only a partner of the company, his liability is proportional to his shareholding. However, if the same person also holds the capacity of legal representative (manager), then, as regards the public receivable that cannot be collected from the company, AATUHK Article 35 bis and Article 10 of the Tax Procedure Law (VUK) come into play; these provisions do not limit the legal representative’s liability to the shareholding ratio but cover all of his personal assets.
The liability of legal representatives is regulated within the framework of Article 10 of the Tax Procedure Law (VUK) and AATUHK Article 35 bis. While the legal representative (manager) may be held liable for the company’s tax debt without any limitation to the shareholding ratio, the liability of ordinary shareholders who have no managerial capacity is limited to their shareholding ratio.
An important practical note: in the collection of a limited company’s tax debt, the law does not prescribe any mandatory order of priority between the legal representative and the ordinary shareholder. The company as a legal entity is liable first; once there is no possibility of collection from the legal entity, the creditor administration may proceed against the persons concerned on the relevant legal basis (Article 35 or Article 35 bis).
Enforcement Procedure: Not Ordinary Execution, but the Public Receivable Collection Procedure
Tax debts are not enforced under the Enforcement and Bankruptcy Law (İİK), but under the public receivable collection procedure of Law No. 6183. The process works as follows:
- Service of a payment order. Under AATUHK Article 55, a “payment order” (ödeme emri) is served on those who fail to pay a public receivable when due, requiring them to pay their debt or declare their assets within 15 days.
- Service on the shareholder. Once it is understood that collection from the company is not possible, a payment order is served on the partners (and/or the legal representative). At this stage, the partner acquires the status of “public debtor” within the meaning of AATUHK Article 3.
- Attachment and e-attachment. For a debt not paid in time after service of the payment order, attachment may be applied to the debtor’s assets that are legally subject to attachment (such as bank accounts, real estate and vehicles). Today, e-attachment (e-haciz) of bank accounts is widespread.
If a shareholder on whom a payment order has been served does not put forward a defence within the statutory period, the debt becomes final and attachment proceedings follow. Monitoring time limits is therefore vitally important.
The Shareholder’s Rights and Legal Remedies
Time Limit for Challenging the Payment Order (Action for Annulment): 15 Days
Under AATUHK Article 58, a person on whom a payment order has been served may file an action for annulment of the payment order before the tax court within 15 days of service, on the grounds that he has no such debt, that he has partly paid it, or that it is time-barred. This period was increased from 7 days to 15 days by Article 9 of Law No. 7061 dated 28/11/2017, effective from 1/1/2018, and it is a peremptory (hak düşürücü) time limit; that is, the court takes it into account of its own motion (ex officio). If the time limit is missed, the possibilities of defence against the payment order are significantly narrowed; any subsequent legal remedies must be assessed separately according to the particulars of the specific file.
Note: For payment orders sent via e-Notification (e-Tebligat), service is deemed to have been effected at the end of the fifth day following the date on which the notification reached the electronic address; the 15-day period for filing an action is calculated from this date of service.
Defences the Shareholder May Raise
In an action for annulment of a payment order, the shareholder may raise, in particular, the following points:
- The possibility of collection from the company. Proceeding directly against the shareholder when the debt could be collected from the company’s assets is unlawful. If it is established that the company has collectable assets, enforcement against the shareholder is not justified.
- A claim exceeding the shareholding ratio. The amount imposed on the shareholder must not exceed his capital share ratio. If the entire debt is demanded from the shareholder and that shareholder is not the legal representative, this is also a ground for annulment.
- Mismatch of periods. The debt must relate to the period during which the shareholder was a partner. A person who was not a shareholder of the company during the period to which the taxation relates cannot be held liable for that period’s debt.
- Limitation. Limitation rules also apply to public receivables; no enforcement may be carried out for a time-barred receivable.
- Absence of indebtedness. Claims that the debt has been paid, written off, or assessed unjustly/erroneously.
Share Transfers and the Position of Former Partners
The second and third paragraphs of AATUHK Article 35 regulate liability in cases of share transfer and changes in shareholding:
“Where a partner transfers his capital share in the company, the transferor and the transferee shall be held jointly and severally liable, in accordance with the first paragraph, for payment of the public receivables relating to the period before the transfer. Where the shareholders at the time the public receivable arose and at the time it became payable are different persons, those persons shall be held jointly and severally liable, in accordance with the first paragraph, for payment of the public receivable.”
In other words, a former partner who has transferred his shares cannot escape liability — in proportion to his shareholding and jointly and severally with the transferee — for public debts relating to the period before the transfer date. This means that those who transfer shares cannot fully escape pre-transfer debts, and it shows how important it is to check the debt position carefully before transferring company shares.
Practical Recommendations
- Start monitoring the time limit as soon as a payment order is served. If the 15-day peremptory period from the date of service is missed, the avenues of defence, including the right to bring an action, are closed.
- Check whether the debt period and the partnership period overlap. The shareholder must have been a partner of the company (and, if applicable, its legal representative) during the period to which the taxation relates.
- Clarify the distinction in capacity. Is the person only a shareholder, or also a manager (legal representative)? This distinction determines whether liability is proportional to the shareholding or extends to the entire debt.
- Investigate the possibility of collection from the company’s assets. Proceeding directly against the shareholder while the company has collectable assets is unlawful; this can be made the subject of litigation.
- Enquire into the debt position before a share transfer. Acquired shares may bring with them debts relating to the pre-transfer period; the tax position before the transfer should always be investigated.
- Seek professional advice from a lawyer on tax matters for an opinion specific to your file. This article sets out the general legal framework; the outcome may vary according to the particulars of each specific case.
Conclusion
The liability of a limited company shareholder for tax debts is an important exception to the protection afforded by the company’s legal personality. AATUHK Article 35 holds the shareholder liable within the limits of his shareholding ratio where the public receivable cannot be collected from the company, while Article 35 bis and VUK Article 10 make legal representatives liable without any limitation to the shareholding ratio. The shareholder’s most critical right is the possibility of filing an action for annulment of the payment order before the tax court within 15 days of service; since this period is peremptory, it must be monitored carefully. For an assessment specific to your file, it is advisable to seek professional legal advice from a lawyer.
Frequently Asked Questions
When is a limited company partner held personally liable for the company’s tax debt?
A partner’s personal liability arises only where the public receivable cannot be collected, in whole or in part, from the company as a legal entity, or where it is understood that it cannot be collected. The company is the first and principal debtor; recourse to the shareholder may be had, once there is no possibility of collection from the company’s assets, under AATUHK Article 35 and limited to the ratio of the capital share.
What is the difference between the liability of a shareholder and that of the legal representative (manager)?
A partner who is only a shareholder is liable for the public receivable only in proportion to his capital share (AATUHK Article 35). If the same person is the company’s legal representative (manager), he is held liable with all of his personal assets under AATUHK Article 35 bis and VUK Article 10; no limitation to the shareholding ratio applies here.
Within what time limit and where can an action be brought against a payment order?
Under AATUHK Article 58, an action for annulment of the payment order may be filed before the tax court within 15 days of service of the payment order. This period is peremptory and was increased from 7 to 15 days by Law No. 7061 with effect from 1/1/2018; if the time limit is missed, the possibilities of defence, including the right to bring an action, are largely lost.
Is a former partner who transferred his shares liable for pre-transfer tax debts?
Yes. Under the second paragraph of AATUHK Article 35, persons transferring and acquiring a share are held liable together (jointly and severally), in proportion to the shareholding, for payment of public receivables relating to the period before the transfer date. For this reason, it is very important to check the company’s tax position before a share transfer.
Can attachment be applied directly to the shareholder while the company has assets to pay?
No, this is procedurally improper. The AATUHK system requires collection first from the company as a legal entity; enforcement directly against the shareholder while the company has attachable assets sufficient to cover the public receivable is unlawful, and this point may be raised as a defence in an action for annulment of the payment order.
Can enforcement be brought against a shareholder for a time-barred tax debt?
No. Collection limitation rules also apply to public receivables, and enforcement cannot be initiated against the shareholder or the legal representative for a time-barred receivable. Limitation is one of the defences that may be raised under AATUHK Article 58 in an action for annulment of a payment order.
This article has been prepared for general information purposes and does not constitute a legal opinion specific to any particular case. If a payment order concerning your company has been served, it is advisable to consult a lawyer without delay so as not to miss the time limit.
Legal Notice: This text has been prepared for general information purposes only and does not constitute legal advice. sophoshukuk.com makes no referral, guarantee or promise of outcome. Each case must be assessed on its own particular circumstances; for your specific dispute, please obtain professional advice from a lawyer.