Decision of the General Assembly of Civil Chambers of the Court of Cassation Regarding the Request for the Lifting the Corporate Veil Can Only Be Asserted by Third Parties Who Have Suffered Damages

Dispute Subject to the Decision

The dispute arises from a loan agreement signed by the plaintiff as a guarantor. Upon the failure of the limited liability company to fulfill its payment obligation, the debt was paid by the guarantor. The plaintiff claimed that the loan agreement was signed by the limited liability company, but the loan was utilized by the sister joint stock company, that although the legal entities of the two companies are different, they are sister companies, that there is an organic bond between them, that the defendant joint stock company will be revealed to be among the principal debtors by piercing the corporate veil, and that both companies are jointly and severally liable for the debt arising from the collusive transactions they made, and claimed that both companies are jointly and severally liable for the debt arising from the collusive transactions they made, and exercised the right of recourse pursuant to Article 596 of the Turkish Code of Obligation and initiated enforcement proceedings against both companies, and filed a lawsuit for annulment of the objection upon the suspension of the enforcement proceedings due to objection. During the period when the loan was utilized, the plaintiff was also a shareholder and a member of the board of directors of the defendant joint stock company.

Evaluation by the Court of First Instance and the Court of Cassation

The court of first instance, examining the dispute, stated that the same persons were on the board of directors of the defendant joint stock and limited liability companies, and that these persons had joint or individual signatory powers in the defendant companies at the time the loan agreement was signed, the Court of Cassation and the doctrine generally accepted that this partial identity in the shareholding and management structure would be sufficient for the existence of an organic link, that this issue does not necessarily indicate that the defendant companies are absolutely identical in the organic sense, but points to this fact, and that the existence of an organic link or the phenomenon of commingling of assets, which is the essential condition that requires the corporate veil to be lifted, has occurred in the subject case.

The Court of Cassation, examining the dispute upon appeal, reversed the decision of the court of first instance on the grounds that the joint stock company shown as the defendant had nothing to do with the loan debt, that there was no organic connection between them and the limited liability company, and that the theory of piercing the corporate veil could not be applied in the subject case.

Evaluation by the Court of Cassation General Assembly

Upon the resistance of the court of first instance to the reversal decision of the Court of Cassation, the dispute was examined by the CCGA.

The CCGA emphasized that the theory of piercing the corporate veil should be used prudently only in exceptional and limited cases, and stated that this theory may be applied only in cases where the legal entity hides behind the concept of legal personality and violates the rule of honesty, where third parties are harmed by abusing the right granted to it, and where it is not possible to rely on another legal reason in order to decide on the liability of the legal entity causing the damage.

The decision emphasized that in order to lift the corporate veil between the sister companies, the complex chain of relationships between the parent company, the sister company and the shareholders must be clearly revealed, and that these companies, which appear as two different legal entities, are actually identical, and must have been established as two different legal entities in bad faith in order to evade creditors or to avoid liability.

Stating that the concept of organic bond has a broader meaning than the piercing of the corporate veil, the CCGA stated that the existence of an organic bond alone does not require the piercing of the corporate veil and that even if an organic bond is detected between the companies, in order to pierce the corporate veil and to claim the receivable from the person behind the veil, it must be proved with concrete data that malicious transactions have been carried out with the sole purpose of evading the creditor and damaging them. According to the CCGA, the fact that the shareholders of the companies are related is not sufficient for the acceptance of an organic bond between the companies or for the lifting of the corporate veil, nor is the fact that the companies operate in the same field sufficient for an organic bond.

The decision also emphasized that the person making the request must be a third party in order to lift the corporate veil. In this respect, it was stated that third parties should have the perception that they are doing business with a single company in an economic integrity, and as a result of this perception, by creating the appearance of having a strong structure while trading, the processes of sinking one of the companies into debt or eviscerating it and shifting the business area to the other will be considered as a typical abuse of right.

Considering the said principles, the CCGA determined that the above-mentioned elements did not occur for the defendant companies in the subject dispute and also emphasized once again that in order to apply the theory of piercing the corporate veil, the third party must be the one who claims to have suffered damage. In the subject case, considering that the plaintiff was a member of the board of directors and a shareholder of the defendant joint stock company at the time of the signing of the loan agreement, the CCGA ruled that the plaintiff was not in the position of a third party and was in a position to know the matters they claimed, and therefore could not make a claim based on the theory of piercing the corporate veil.

Conclusion

The decision, which sets out the criteria for the theory of piercing the veil of legal personality, is noteworthy for its assessment that this theory can only be asserted by third parties.