THE LIABILITY OF LEGAL REPRESENTATIVES OF LIMITED LIABILITY COMPANIES AND JOINT STOCK COMPANIES ARISING FROM PUBLIC DEBTS
The liability of legal entities from public debts, and the determination of the scope of this liability are of great importance in practice, since it is possible that the public debts that cannot be collected from Joint Stock Companies (“JSC”) and Limited Liability Companies (“LLC”) may be collected from their legal representatives. This issue is analyzed in this newsletter, in light of the relevant provisions of the Tax Procedure Law numbered 213 and the Law on the Procedure of Collection of Public Debts numbered 6183.
Liability imposed by the Tax Procedure Law
The Article 10 of the Tax Procedure Law (“Law no. 213”) provides that:
- if legal persons are taxpayers or responsible for taxes, their tax liabilities must be fulfilled by their legal representatives,
- if the legal representatives fail to perform their duties the taxes and the additional debts relating thereto which cannot be fully or partially collected from the assets of the taxpayer or those legal persons responsible for the taxes are to be recovered from the assets of the legal representatives who failed to perform their duties,
- The legal representatives who pay these public debts may take recourse against the legal entity.
Liability imposed by the Law on the Procedure of Collection of Public Debts
Article 35 (bis) of the Law on the Procedure of Collection of Public Debts (“Law no. 6183”) provides that the public debts which cannot be fully or partially collected or which are determined to be uncollectible from the assets of the legal entities will be collected from the personal assets of their legal representatives.
Application of these provisions
According to the Article 10 of the Law no. 213, a payment order can be served to a legal representative only when the tax administration fails to collect its receivables from the assets of the company. In other words, all the remedies for collecting the debts from the company must be exhausted as per the Law no. 213. However, Article 35 (bis) of the Law no. 6183 gives the tax administration an opportunity to directly initiate execution proceedings against the legal representatives before proceeding legally against the Company in debt.
In fact, pursuant to the Article 35 (bis) of the Law no. 6183, an execution proceeding can be initiated against the legal representatives, in cases where the tax authority is convinced that such debts are not likely to be collected from the Company. This provision does not foresee to exhaust the remedies for collecting the debts from the company. Therefore, there is a room for the tax authority to use its discretion while evaluating each case and most of the times, tax authority pursue the legal representatives at the same time, along with the company, based on this provision.
Scopes of these provisions
Article 10 of the Law no. 213 solely refers to the tax and corresponding receivables such as duties, charges and fees that are accrued to the general budget and also the ones that belongs to the municipalities and the special provincial administrations, whereas the Article 35 (bis) of the Law no. 6183 has a broader scope of receivables and encompasses all kinds of public debts including the ones stated in the Article 10 of the Law no.213.
In this respect, it is very clear that the Law no. 6183 shall be applied to the collection of the public debts other than taxes. However, Law no. 6183 and Law no. 213 can both be applied to the collection of taxes and both of them impose different principles of liability on the legal representatives.
So, which one of the Laws shall be applied to the collection of the taxes?
As the Law no. 213 and Law no. 6183 stipulates two different and conflicting approaches regarding the liabilities of the legal representatives in case of tax liabilities, under its decision dated 19 March 2015 and numbered 2015/29, the Constitutional Court has ruled that for tax liabilities that fall within the scope of Article 10 of the Law no. 213, the Article 10 of this Law shall be applied instead of Article 35 (bis) Law no. 6183.
Pursuant to the abovementioned ruling of the Constitutional Court; tax authority shall not initiate execution proceedings against the legal representatives unless such tax debts cannot be collected from the company first.
Debts regarding the Social Security Premiums
As for the social security premiums which are also deemed as public debts, there is a difference; as per the Article 88 of the Law on Social Security and General Health Insurance Law numbered 5510, the liability of the legal representatives regarding the unpaid social security premium payments is joint and several. Therefore, the Social Security Institution may directly pursue the responsible legal representatives, without initiating execution proceedings against the legal entity first.
Our Firm remains at your disposal for any further clarifications you may require.