INTRODUCTION
Pursuant to Article 533 of the Turkish Commercial Code No. 6102 (the “TCC”), the liquidation process in joint stock companies is subject to a sui generis legal regime that significantly restricts the powers of corporate bodies. Within this framework, the authority to represent the company and to carry out binding transactions is vested in the liquidators, while the management bodies may exercise only limited powers confined to acts that are necessary for the liquidation but, by their nature, cannot be performed by the liquidators.
However, in practice, it is observed that even after the commencement of the liquidation process, company signatories continue to execute various legal transactions. This situation raises the question of how the legal liability of the liquidators should be assessed with regard to such transactions.
This article examines the legal framework of the liquidation process in joint stock companies, the duties and powers of liquidators, and the legal liability of liquidators under Article 553 of the TCC in the face of unauthorized transactions carried out by company signatories during the liquidation process.
DUTIES AND POWERS OF LIQUIDATORS
The principal duties of liquidators in joint stock companies during the liquidation process are regulated under Articles 538 to 542 of the TCC. Accordingly, liquidators are responsible for completing the ongoing transactions of the company, safeguarding the company’s assets, converting assets into cash, preparing the initial inventory and balance sheet reflecting the company’s financial position, and settling the company’s debts.
Unless otherwise resolved by the general assembly, liquidators are authorized to sell the company’s assets. In addition, they are obliged to take all necessary measures for the protection of the company’s assets and rights with the care of a prudent manager, and to finalize the liquidation as promptly as possible.
The duties and powers of liquidators are designed to ensure that the company acts in accordance with the purpose of liquidation. In this context, liquidators do not act to continue the company’s commercial activities; rather, they act to terminate existing legal and financial relationships, liquidate the assets, and render the liquidation surplus ready for distribution.
However, these powers are subject to a defining limitation. Pursuant to Article 542/1(b) of the TCC, liquidators “may not engage in new transactions that are not required by the liquidation.” This provision clearly demonstrates that the powers of liquidators are not unlimited; on the contrary, they are confined to and proportionate with the purpose of liquidation.
Accordingly, the scope of authority of liquidators is, on the one hand, broad with respect to carrying out liquidation proceedings, and on the other hand, restricted in relation to transactions that may create new debts and obligations outside the purpose of liquidation.
LEGAL LIABILITY OF LIQUIDATORS
The legal liability of liquidators is assessed within the framework of Article 553 of the TCC, which regulates the liability of members of the board of directors, by virtue of the reference made in Article 546/2 of the TCC.
In this context, liquidators shall be held liable for damages incurred by the company, shareholders, and creditors if they breach their obligations arising from the TCC or the articles of association through their fault, or if they act in violation of the relevant provision under Article 541/4 of the TCC.
The liability of liquidators is fault-based, and for liability to arise, the following elements must be cumulatively present:
- an unlawful act,
- damage,
- a causal link, and
- fault.
As a consequence of the fault-based liability regime, liquidators cannot be held liable in cases where, despite exercising due care and diligence, they were unable to prevent the occurrence of damage. Conversely, where the duty of care and diligence required by the liquidation process is breached and such breach results in damage, the liability of the liquidator may arise.
Liquidators are under an obligation to conduct the liquidation process in compliance with the law and to protect the company’s assets. In cases where these obligations are violated, liability for the resulting damages may, depending on the circumstances of the specific case, be of a joint and several nature.
Since the liability of liquidators is based on fault, it is possible for them to be released from liability where they are not at fault. Indeed, Article 553/3 of the TCC provides an important safeguard for liquidators in this regard.
Accordingly, in order to hold a liquidator liable, both fault and a causal link must be established; liability cannot be imposed solely on the basis of an abstract duty of supervision.
On the other hand, situations where unauthorized transactions are carried out on behalf of the company despite it being in liquidation present particular characteristics. This issue will be examined separately below.
LEGAL FRAMEWORK OF THE LIQUIDATION PROCESS AND SCOPE OF AUTHORITY
Article 535 of the TCC, titled “Status of the Company’s Bodies,” provides that once a company enters into liquidation, the duties and powers of its corporate bodies are limited to “transactions that are necessary for the execution of the liquidation but, by their nature, cannot be performed by the liquidators.”
In other words, during liquidation, the primary authority to represent the company and to carry out binding transactions is vested in the liquidators.
During the liquidation process, the scope of authority of the company’s bodies is determined by the purpose of liquidation; transactions that do not serve the purposes of preserving the company’s assets, settling receivables and liabilities, and distributing the remaining value to the rightful beneficiaries, as a rule, fall outside the liquidation regime.
Within this framework, any transactions carried out on behalf of the company by authorized signatories that fall outside the purpose of liquidation or that should be performed by the liquidators generally constitute acts exceeding the scope of authority.
LIABILITY OF LIQUIDATORS IN CASES OF UNAUTHORIZED REPRESENTATION
Upon the commencement of liquidation, the authority to represent the company and to carry out binding transactions is, as a rule, vested in the liquidators. Accordingly, the authority of previously authorized signatories to execute transactions on behalf of the company is significantly limited.
Within this framework, transactions carried out on behalf of the company during the liquidation process by former signatories, in matters falling within the competence of the liquidators, generally constitute cases of unauthorized representation.
In cases of unauthorized representation:
- the transaction remains pending until it is ratified by the principal,
- if ratified, it becomes valid retroactively from the outset,
- if not ratified, the legal consequences arise for the person who carried out the transaction.
Transactions that are subsequently ratified—either expressly or implicitly—by the liquidator become valid from the outset, whereas, in the absence of ratification, the rights and obligations arising from such transactions, as a rule, are borne by the person who performed them.
The liability of the liquidator arising from such transactions is not direct, but is subject to a fault-based liability regime under Article 553 of the TCC.
In this context, liability requires the concurrent existence of:
- a breach of duty,
- fault, and
- a causal link.
Where the liquidator has duly fulfilled the requirements of registration and public announcement, has made the scope of authority publicly known to third parties, and has conducted the process in compliance with the law, it is, as a rule, not possible to hold the liquidator liable for unauthorized transactions carried out beyond their control.
Conversely, where the liquidator subsequently ratifies such transactions or engages in conduct indicating de facto approval, those transactions become binding on the company.
In this respect, it is particularly important whether the transaction is compatible with the purpose of liquidation. If transactions that are contrary to the purpose of liquidation, aimed at continuing the company’s business, or that create new risks are ratified, the liability of the liquidator may arise.
CONCLUSION
The liquidation process constitutes a specific legal regime aimed at the termination of a company’s activities. During this process, the scope of authority of the company’s bodies is narrowed, and the authority to represent the company is, as a rule, vested in the liquidators.
In a company undergoing liquidation, the liability of the liquidator depends on the cumulative assessment of:
- fault,
- damage, and
- causation.
As a rule, it is not possible to hold the liquidator liable for transactions carried out beyond their control. However, liability may arise where transactions contrary to the purpose of liquidation are ratified or where de facto approval is granted to such transactions.
