Liability and Limits of Partners for Limited Liability Company Debts

 

Abstract: While the legal entity is responsible for all assets due to the debts of limited liability companies, the debts of the partners against the company are limited.  In limited liability companies, the principle is adopted that partners are not responsible for company debts, except for public receivables. Subsidiary payment and ancillary obligations may also be imposed by agreement in the articles of incorporation. If a partner pays the debt on behalf of the company, it becomes a creditor against the company. 

Key Words:  Limited liability company debts, limited liability partner’s debt, partner’s liability for limited liability company debts, public receivables, partner’s payment on behalf of the company

Introduction:

In accordance with the Commercial Law No. 6102, the liability and limits of limited liability companies and their partners for company debts are clearly defined. Limited liability companies and their partners are in a protected position because they have limited liability for debts. However, additional obligations and side effects may be decided by the articles of incorporation. The exception to the limited liability of the partner is public debts. It is liable to a secondary degree for common public debt. The main considerations that we will address in this article are the debts and responsibilities of the limited liability company and the partner, the partner’s obligation to put capital, the partner’s responsibility for public debts, the partner’s position as a creditor against the company by paying on behalf of the company.

1. Liability of Limited Liability Company for Debts

A limited liability company is only responsible with its assets for its debts. This is the main reason why a limited liability company is called limitedly liable for its debts.

Article 602 of the Turkish Commercial Code was drafted as; “The company is responsible only with its assets due to its debts and obligations.”. The Code clearly regulated this restricted responsibility of limited liability companies.

In the justification of the article, it is stated that the concepts of debt and liability are available for wide interpretation. In accordance with this article, the liability limit of the limited liability company has been strictly drawn.

2. Limited Liability Partner’s Debts

Limited liability company partners are obliged to pay only the principal capital shares they have promised. In other words, the partner’s principal debt to the company is to pay the capital which is promised to the company. Capital commitment payable of partners to the company cannot be removed by a decision taken by one of the company’s bodies. But the debt mentioned here is the debt of the partners to the company, it should not be considered as a liability to the company’s creditors.

Article 573/2 of the Turkish Commercial Code reads as; “Partners are not responsible for company debts, they are only obliged to pay the principal capital shares they promise and to fulfill the subsidiary payment and ancillary obligations provided in the articles of incorporation.”

Article 128/1 of the Turkish Commercial Code; “Each partner owes the company the capital he undertakes to invest in the articles of incorporation, which has been duly drafted and signed.’’

The amount of capital paid by the partner of a limited liability company cannot be refunded to him. The only exception to this situation is the reduction of the principal capital.

Article 601/1 of the Turkish Commercial Code; “Except for the reduction of the principal capital, the amount of the principal capital share cannot be refunded to the partners, nor can the partners be released from this debt.’’

Partners can discharge the debt of investing capital only to the company. Partnership creditors do not have the right to apply to shareholders for the debt of investing outstanding equity. That’s natural, too. Because shareholders are only under debt of the legal entity of a limited partnership. In other words, the debt relationship arises between the partners and the legal entity of a limited partnership. For this reason, partnership creditors cannot apply to partners to collect their receivables that rises from the partnership and ask them for unpaid parts of their capital debts. Directors who are in the position of the administrative and representative body of the limited partnership are authorized to request the debt of outstanding cash equity from the partners.

The company may ask and sue each partner to fulfill the debt of investing capital, as well as seek compensation for damages incurred due to delay in performing. A warning is required for a request for compensation. If the capital that is not executed on time is money, the default interest is also paid from the moment of registration of the company, unless there is a provision to the contrary in the articles of association. In practice, one of the most common issues arises about the payment of unpaid share capital after the company is established. The capital debt that the partner must pay when the company is established causes a dispute even after the share transfer.

2.1. Liability of Limited Liability Company Partner Arising from Public Receivables

In limited liability companies, an exception has been introduced in terms of public receivables, although the rule is that the partner is only responsible for capital debt. According to the law on the collection procedure of public receivables, the company partner is directly responsible for public receivables that cannot be collected in whole or partly from the partnership at the share percentage of capital. In terms of the partner, this liability is supplementary. Primary liability belongs to a limited liability company. 

Article 35 – (amended: 22/7/1998 – 4369/ art. 21.) Limited liability company partners are directly responsible for the amount of capital shares that cannot be collected or understood that cannot be collected from the company in whole or partly and are subject to follow-up in accordance with the provisions of this law.

According to the law above-mentioned, the concept of public receivable has been kept very wide. Therefore, not only tax debts should be understood in terms of public receivables. Institutions that can apply to a limited liability company for public receivables should also be widely interpreted. State, provincial private administrations, and municipalities will be able to apply to limited liability company partners for the public receivables. 

The concept of Public Receivable is stated as the debts within articles 1 and 2 of the law. Looking at these regulations, the concept of public receivables covers not only tax receivables, but also duties, fees, tax penalties, fines, premium receivables, and their follow-up expenses, especially belonging to the state and other public institutions (in the meantime Social Security Institution, see also: Social Security and General Health Insurance Law, No:5510, art. 88/XVI). Therefore, due to the public debts of a limited partnership of this nature, it is possible to apply to the partners of this limited partnership if legal requirement is met.

First, the company will be contacted for collection of public receivables, and if it cannot be collected from the company, the partner will be contacted. The basic condition of applying to a partner is that applying to a limited liability company for the debt and that it cannot be charged from the company. In the doctrine, it is stated that this non-collection situation must be determined by a proof of insolvency or certificate of insolvency.

If a limited liability company partner is applied due to public debts, it is not considered whether the partner is a manager. A partnership is sufficient to apply to the partner. 

We believe that it is important to share a decision of Court of Cassation for the issue is better understood within the explanations we have made regarding the responsibility of a limited liability company partner for public debts.

In a concrete case, although the court decided to accept the case on the basis that the plaintiff was not a company manager, it was erroneous to conclude the case without considering the fact that partners would be responsible for public receivables that cannot be collected from the limited liability company at the rate of the shares of their shares and whether a follow-up was made by the institution about the company, if follow-up was made whether it was inconclusive.
The job consists primarily of investigating and taking into consideration; whether the company has been followed up by the institution in relation to the receivables subject to dispute, whether the follow-up that has been made was inconclusive, if the follow-up has been made and has been inconclusive, taking into account the considerations that the partner of the Limited liability company will be responsible for the percentages of its shares and making a decision based on the result. (21. Chamber of Court of Cassations, Court Merits No. 2015/13459, Decision No. 2015/19295)

If the partner transfers the share of capital, the company’s liability for public debts will continue. It is arranged that the partner who inherits and transfers the share will be jointly liable. In terms of public receivables that may arise after the transfer of the share, only the inherited partner is responsible. 

Another important point to mention is that the cases where shareholders are different at the time of the birth of the public debt and time of payment. In such a case, transferee and transferor are jointly liable for the payment of the public receivables.

2.3 Subsidiary Payment and Ancillary Obligations of the Partner of a Limited Liability Company

As a rule, the partner’s debt is to pay only the capital he has promised to the company. However, limited liability company partners may also be liable for subsidiary payment, except for the principal capital amount under the articles of association. But the fulfillment of the subsidiary payment obligation is subject to the existence of certain conditions. These terms are:

a) The company’s principal capital and the amount of legal reserve funds cannot cover the loss of the company, 

b) It is not possible for the company to continue its business properly without these additional tools, 

c) The existence of another case defined in the articles of association that creates a need for equity.

As a result, the responsibility of a limited liability partner for additional payment is possible if this is clearly stipulated in the company’s articles of association and the conditions specified are met. If the conditions exist, the company directors are asked by the partners to fulfill subsidiary payments.

The purpose of the subsidiary payment obligation arranged in the article 603 of The Turkish Commercial Code was stated in the article’s justification as; “is that the partners help a company that is failing financially and has adverse balance with the subsidiary payments they will invest.”.

A subsidiary payment obligation can only be stipulated in the company contract as a certain amount based on the principal capital. This amount cannot exceed twice the nominal value of the principal capital.

In the articles of association, subsidiary act obligations that may contribute to the realization of the company’s business subject may also be introduced. Subsidiary acts are actions to do, undo, bear, let use, which can be loaded into some principal capital shares or share categories or are intended for all shares. Delivery of raw and/or processed products such as milk, beets, sugarcane, fruit; parking or storage space provided and used; delivery services such as transportation, and similar actions may be the subject of subsidiary acts.

3. A Partner Who Pays the Debt of a Limited Company is a Creditor Against the Company

The partner is not responsible to third parties for the company’s debts with his personal assets, except for public receivables.

Although the partners are not responsible for the company’s debts, they may have paid for the company’s debts. For example, a partner may have personally paid off the company’s electricity, water, or natural gas debt. In this case, the partner paying the company debt will become the creditor. 

If the partner has made such a payment on behalf of the company, he can only request it from the legal entity of the company. In other words, it is not possible to claim this receivable from other partners by asserting the personal responsibility of other partners.

The opinion in the doctrine which we agree with is that partnership creditors collect their receivables only by applying to the estate of the partnership. The concept of a partnership creditor should be widely understood. Not only third parties, but also, depending on the situation, for instance, partners who pay the debt of the partnership should also be evaluated within the concept of the partnership creditor. Therefore, the partners who pay the debt of the partnership should apply only to the limited partnership, not to other partners for these receivables. Even if the partnership is in liquidation, these principles remain valid.

The opinion of the doctrine, which we agree with, was supported by a decision of the Court of Cassation. “In limited liability companies, the principal debt of the partner consists of paying the capital it undertakes. Capital debt also refers to the debt charged against the partnership by the deed of partnership. As a rule, in Turkish law, partners are not responsible for the debts of a limited liability company. In relation to this situation, it was not right to establish a provision in writing and the decision had to be broken in the interest of the defendant partners; considering that the plaintiff partner paying on behalf of the company could only claim from the legal entity of the company, that the defendant partners did not have personal responsibilities due to the requested receivables.” (11. Chamber of Court of Cassations, Court Merits No. 2015/10450, Decision No. 2016/5193)

Conclusion:

The responsibility of the limited liability company and the partner is limitedly determined. As a rule, limited liability companies are obliged to pay their debts with assets, and the partner is obliged to pay the capital amount they have promised to the company. The exception to this limited liability of the partner occurs in the company’s public debts. If public institutions are unable to collect public receivables from the company, they have the right to apply to the partner who is responsible on second-degree in the presence of other conditions. Subsidiary payment and ancillary obligations may be imposed on the partner with the articles of association. However, there is no harm in the partner paying off the company’s debts. As a matter of fact, the partners that pays the debt becomes a creditor of the company and can only follow-up this payment against the company. The partner does not have the right to apply to other partners of the company due to this payment.

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