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June 29, 2022

De Facto Organs Of The Legal Entities And The Consequences Of Their Actions

Dispute Resolution, Transportation Law
Reading Time: 5 minutes

The capacity of act can be explained as the legal capacity to acquire rights and debts, that embodies tortious liability and the capacity to sue. While the capacity to act for real person is tied to the conditions such as having mental competence, majority and interdiction, the capacity to act of legal entities is given to the legal entities’ organs that stipulated by the law or by their article of organization. This difference in the capacity to act between real person and legal entity creates different results for wrongful actions and legal acts. In this article we will discuss, the capacity to act of legal entities and the different consequences of their wrongful actions and legal acts.  

  • THE ORGANS OF THE LEGAL ENTITIES

Due to the fact that legal entities do not have their own will, unlike real persons, the formation and declaration of will of legal entities occur through their organs.

This matter is stated in Turkish Civil Code Article 49 as “Legal entities are regarded to have the capacity to act whenever they get organized under the prevailing laws and as set out in incorporation documents.” With the decision-making authority given to the persons forming the legal entity’s formal organ, the formal organ acts on behalf of the legal entity in legal relations and declares the will of the legal entity to the third parties. As a consequence, formal organs put the legal entity under obligations by using a representative authority arose from the law or the article of organization of the legal entity.

De facto organs are defined in settled case-law and doctrine as; person and/or persons that perform the legal organ function without being elected or appointed as the formal organ. For instance, in joint-stock companies, it is possible to describe the person/persons, except the formal organs, who fulfill the duties of the board of directors as de facto organs. However, we are of the opinion that, unlike the formal organs, the de facto organs do not always have the power of representation arisen from the law or the article of organization. It is important whether the organs have the power to representation as to whether the legal entity can be held responsible for the legal acts and wrongful acts carried out by the organs.

  • REPRESENTATIVE AUTHORITY IN LEGAL ACTS PERFORMED BY THE ORGANS AND THE EFFECT OF THE LEGAL ACTS

Turkish Civil Code Article 50; 

“The will of a legal entity is expressed through its organs. The organs may put the legal entity under obligation by legal transactions and all other acts. The organs of legal entity are also individually responsible from their defaults.”

With this article, the legislative states that the legal entity is responsible for legal actions and all other acts carried out by the organ with the capacity to act. We are of the opinion by broad interpretation of the expression “legal transactions and all other acts” in Article 50 provision as wrongful acts and legal acts, it can be stated that legal entity should be responsible for the wrongful acts of the organs with representative authority as well as the legal acts.

The fact that the legal entity can be responsible for the legal actions taken by its organs is the result of the use of the representative authority by the organs. The main rule can be explained as that the legal acts of the representative organ are binding for the legal entity, but the legal acts carried out by the non-representative organs do not bind the legal entity. The provisions of the Turkish Civil Code attribute the authority to take legal action with third parties on behalf of legal entities, to the board of directors of the associations, and to the governing body in foundations. Unless there is a written rule such as a regulation, statute, law, etc., the legal transactions made by organs other than these stated organs shall not bind the legal entity due to the lack of authority to represent.

  • THE CONSEQUENCES OF THE DE FACTO ORGANS’ LEGAL ACTS AND WRONGFUL ACTIONS 

We are of the opinion that the legal acts of the organ that put the legal entity under responsibility are a result of a representation power attached to the title of the organ and that the de facto organ should not put the legal entity under responsibility in terms of legal actions, since it does not have a representation power arising from the law or the founding document. Due to the fact that the de facto organ does not have the authority to represent the legal entity, the unauthorized representation specified in the provisions of Article 46 of the Turkish Code of Obligations arises in the legal transactions the unauthorized organ carries out with third parties.

Due to the absence of a valid representation, in accordance with the provisions of unauthorized representation, the legislative established some conditions for the transactions made with unauthorized representation to be binding for the parties. These conditions are briefly; (i) the representative gives approval to the legal transaction afterwards, (ii) the representative has an external representation authority that is notified to third parties and causes trust in third parties. In the absence of these exceptions, since there is an unauthorized representation in terms of legal actions, the legal actions made by the de facto organ is non-binding for the legal entity. 

However, the effect of the unlawful acts of the de facto organ for the legal entity should be evaluated differently. Contrary to legal actions made by de facto organ, since there is no need to have any authority of representation for wrongful actions to have consequences, the doctrine has concluded that the legal entity is responsible for the wrongful actions of person/persons acting as a de facto organ in order to protect third parties from possible harm.

Although the de facto organ is not an authorized organ specified within the scope of the law or the article of organization of the legal entity, it is considered as an organ by third parties due to the fact that it plays a role in the formation and disclosure of the will of the legal entity to third parties. Due to this reasonable assessment, the legal entity is responsible for the compensation of the third party’s damage caused by wrongful acts of the de facto organ.

The wrongful actions of the de facto organ have been evaluated as the organ’s misconduct. In this regard, Article 50.3. of the Turkish Civil Code provisions stated that the faulty behavior of the de facto organ regarding this matter is within the scope of its personal responsibility. For this reason, we are of the opinion that if the damage caused by the wrong actions of the organ is compensated by the legal entity, the legal entity may have the right to recourse to the organ.

  • CONCLUSION

The exercise of legal entities’ capacity to act through their organs causes the debate on how binding the legal acts and the result of wrongful actions will be for the legal entities. In addition to the formal organs established by the law or the establishment documents of the legal entity, the person who is not appointed or elected as an organ but simply acts as one is defined as the de facto body. However, unlike the formal organ, since there is an unauthorized representation on the basis of the legal acts carried out on behalf of the legal entity by the de facto body it brings an exception to the rule that legal acts and other actions taken by the organs are binding for the legal entity.

While the doctrine is of the opinion that the de facto organ’s legal acts with the third parties are not binding due to the fact that de facto organ does not have the representative authority, it also states that the legal entity should be liable for the wrongful acts of the de facto organ, due to the fact that it causes confidence in third parties that the organ is acting as a part of the legal entity, although it does not have the authority to represent.

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