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The Turkish Commercial Code ("TCC") introduces numerous provisions imposing prohibitions and limitations aimed at protecting the company's assets, its shareholders, and the company's creditors. Considering the content of these provisions and the legal principles on which they are based, the objective is to provide the independence of the company's legal personality and to prevent board members from using corporate resources for their own benefit or that of their relatives. In this bulletin, the regulatory content of TCC Article 395 and the legal principles underlying this provision will first be examined, followed by an assessment of the addressees and scope of the prohibition, as well as the legal and criminal consequences of non-compliance. Subsequently, how 395 should be interpreted in the context of a group of companies and the problems that arise in practice will be examined. The final section will present an evaluation of the current regulation together with practical recommendations for practitioners.
i. Transaction and Borrowing Prohibitions Applicable to Board Members (TCC Art. 395/I–II)
The first paragraph of Article 395 of the TCC prohibits board members from entering into transactions with the company on their own behalf or on behalf of another person without obtaining authorization from the general assembly. If this provision is violated, the company may assert the nullity of the relevant transaction. The prohibition on board members from conducting transactions with the company, regulated by the first paragraph of the article, prevents board members from conducting any kind of transaction with the company on their own behalf or as representatives of a third party, whether or not it is related to the company's business field.
The second paragraph of Article 395 of the TCC prohibits certain persons from borrowing from the company and prohibits the company from providing guarantees or securities in their favor. The second paragraph of the article regulates that non-shareholder board members and their relatives, listed in Article 393 of the TCC, cannot incur cash debts to the company, and that the company cannot provide surety, guarantee, security, assume liability or take over the debts of these individuals. The purpose of this prohibition is expressly stated in the reasoning of the provision as the principle of protecting the company's capital (assets), and it is further emphasized that this rule serves as a complement to Article 358 of the TCC.
ii. Borrowing Restriction Applicable to Shareholders (TCC Art. 358)
Pursuant to Article 358 of the TCC, shareholders may not borrow from the company unless they have fully performed their capital subscription obligations and unless the company's freely distributable reserves and profits are sufficient to cover past years' losses. In the reasoning of the provision, the legislator notes that the purpose of this rule is to confine the adverse effects of shareholder borrowing within a limited and structured framework.
iii. Personal Scope of the Borrowing Prohibition
Unlike Article 358, the second paragraph of Article 395 of the TCC prohibits non-shareholder board members and the non-shareholder relatives of board members listed in Article 393 from obtaining cash loans from the company. In addition to the prohibition on cash borrowing, the company is also prohibited from acting as surety, providing guarantees or securities, assuming liabilities, or taking over the debts of the persons covered by this prohibition.
The subjects listed in Article 393 of the borrowing prohibition regulated in the second paragraph of Article 395 are the board member's grandfathers, grandmothers, grandparents, mother and father (blood relatives up to the third degree), children, grandchildren and great-grandchildren (blood relatives up to the third degree), the spouse's relatives by affinity (in-laws) up to the third degree (ascending line), siblings and children of siblings (blood relatives up to the third degree).
Although, as a rule, members of the board of directors of a joint-stock company are natural persons, Article 359 of the TCC also allows legal entities to serve as board members. Accordingly, there is no doubt that a board may consist of both natural and legal persons. However, the provision does not specify whether the natural person who exercises the voting rights on behalf of a legal-entity board member falls within the scope of the prohibition. At least with respect to the criminal sanctions discussed below, such individuals should not be considered within the scope of the provision.
Another issue is the situation in which the marital union of a board member ends due to divorce. The divorced spouse is no longer covered by the second paragraph, and therefore there is no prohibition preventing such person from borrowing from the company. However, since affinity by the marriage continues even after the dissolution of the marriage pursuant to Article 18(2) of the Turkish Civil Code, the relatives by affinity up to and including the third degree—arising from the board member's former spouse—remain within the scope of the prohibition.
iv. Transactions Falling Within the Scope of the Prohibition
Pursuant to Article 395 of the TCC, the company may not provide suretyships, guarantees, or securities in favor of persons falling within the scope of the prohibition; nor may it assume liabilities on their behalf or take over their debts. Within the scope of the borrowing prohibition under the TCC, the company is prohibited from acting as surety for the loans of such persons, issuing guarantees, or creating pledges over its assets to secure their debts.
Subject to the reservation of Article 202, the debts arising from suretyships or guarantees provided by companies within a corporate group to one another, as well as debts arising from transactions permitted under the Banking Law—as stated in the fourth paragraph of TCC Article 395—constitute exceptions to the borrowing prohibition under the TCC. However, it must be emphasized that the exception relating to corporate groups is limited by Article 202 of the TCC, which generally prohibits a parent company from exercising its control in a manner that causes the subsidiary to incur losses.
v. Consequences and Sanctions for Breach of the Prohibition
In cases of breach of the borrowing prohibition, the company's creditors may directly pursue the board members or their relatives who have borrowed from the company in violation of the rule. Board members who have borrowed in breach of the prohibition are not held unlimitedly liable for the company's debts; rather, their liability is limited to the amount they owe to the company in respect of the claim being enforced. Accordingly, creditors of the company may initiate direct enforcement proceedings against the board members who have borrowed from the company in violation of the prohibition and may recover their claims from such board members.
The criminal consequence of violating the borrowing prohibition is regulated in paragraph five of Article 562 of the TCC. Under this provision, those who breach the second paragraph of Article 395 of the TCC are punished with a judicial fine of no less than three hundred days. This criminal sanction applies both to the non-shareholder board members and the non-shareholder relatives of board members who borrow from the company in violation of the prohibition, and—by virtue of the phrase "those who violate these provisions" in paragraph five of Article 562—to the managers who grant such unlawful loans.
vi. Assessment within the Context of Corporate Groups
Pursuant to Article 395(3) of the TCC and Article 202, which is connected to the borrowing prohibition, companies within a corporate group may not extend cash loans to one another—even if one of the companies serves as a member of the other's board of directors. However, they may provide suretyships or issue guarantees in each other's favor.
Pursuant to the third paragraph of Article 395—which constitutes an exception to the prohibition on borrowing from the company—companies within a corporate group may provide suretyships or guarantees to one another. Since the legislator has limited the exception to companies within the same group, a group company extending a loan to a capital company outside the group does not fall within the scope of the third paragraph. In such a case, depending on the circumstances, Article 358 or the first or second paragraph of Article 395 will apply.
The legislator has introduced the requirements set out in Article 202— which functions as a complement to the third paragraph—in order to ensure that borrowing transactions among companies within a corporate group do not result in the infringement of the interests of the company's stakeholder groups. Accordingly, for companies within a corporate group to borrow from one another in a legally compliant manner, the following conditions must be met:
- The existence of a corporate group within the meaning of the Turkish Commercial Code,
- The absence of any loss suffered by the subsidiary as a result of the parent company's unlawful exercise of control,
- Either the loss having been compensated or the subsidiary being granted a right to claim compensation, and
- The borrowing between group companies being limited solely to the provision of suretyships or guarantees.
The absence of any of these conditions results in an unlawful borrowing, which—as will be examined in detail below—gives rise to certain sanctions both with respect to the borrowing transaction itself and the parties providing or receiving the loan.
The proper application of the provision in the third paragraph of Article 395 is only possible within the context of a corporate group that exists and operates in a legally compliant manner. Accordingly, the existence of the group and the presence of a parent company or controlling enterprise at its top constitute the first step.
Another requirement is that the subsidiary must not have suffered a loss as a result of the parent company's unlawful use of control. Even if the subsidiary has incurred a loss, the parent company is obliged to offset for the loss resulting from its unlawful use of control by the end of the financial period in which the loss occurred.
Although "dominance" is not defined in the Turkish Commercial Code, legal presumptions are regulated in the first and second paragraphs of Article 195 of the Turkish Commercial Code. Accordingly, a company is considered a parent company if it holds the majority of voting rights in another company; can secure a majority in the management body through the company's articles of association; alone or together with other shareholders can form a voting majority under the articles of association; or otherwise maintains the company under its control. The other company or companies are considered subsidiaries. Moreover, holding a majority of shares or a sufficient number of shares to use management control is also regarded as a presumption of control. Based on these presumptions, control can be defined as a company's power to influence management decisions.
The situations in which the dominant company uses its dominance unlawfully are listed, but not limited to, in subparagraph "a" of the first paragraph of Article 202 of the TCC. Accordingly, the controlling company may not direct the subsidiary to carry out legal transactions such as transfers of business, assets, funds, personnel, receivables, or debts; to reduce or transfer its profits; to restrict its assets with real or personal rights; to assume liabilities such as suretyship, guarantees, or avals; to make payments; to refrain from renewing its facilities without a justified reason, or to restrict or stop its investments—thus adversely affecting its efficiency or operations—or to refrain from taking measures that would promote its development. If the loss arising in the subsidiary as a result of the controlling company's unlawful use of its control is offseted by the end of the financial year in which the loss occurred, paragraph 3 of Article 395 also becomes applicable.
Pursuant to paragraph 3 of Article 395, companies within a corporate group may incur debts to one another in a lawful manner only if such indebtedness is undertaken through suretyship or guarantee instruments. In other words, companies may not conclude a loan-for-consumption agreement with an object consisting of goods; they may not establish pledges over movable or immovable assets or receivables, or over the commercial enterprise of the merchant within the group; they may not assume each other's credit debts or participate in such credit debts, and they may only enter into suretyship and guarantee agreements with one another.
vii. Consequences and Sanctions of Borrowing in Contradiction with the Prohibition on Borrowing to the Company in Group Companies
If the controlling company unlawfully exercises its control within the corporate group and, as a result, the subsidiary suffers damage, or, even where the conditions mentioned above have been fulfilled, if a debt instrument other than suretyship or guarantee is used, the transaction shall be regarded as an unlawful indebtedness within the meaning of Article 395 paragraph 3.
Articles 202 and 395 of the Turkish Commercial Code (TTK) do not regulate the outcome of borrowing transactions resulting from unlawful borrowing among companies within a corporate group. The accepted view in the doctrine is that borrowing transactions contrary to the third paragraph of Article 395 constitute a violation of the "principle of capital protection" in subparagraph "b" of the first paragraph of Article 391, and therefore, the decision of the board of directors making the unlawful borrowing transaction will be subject to the sanction of nullity.
Article 202 of the Turkish Commercial Code provides that it constitutes an unlawful exercise of control when the controlling company compels the controlled company to assume liabilities such as providing surety, guarantees, or avals. Accordingly, the provision of security by a subsidiary company for the debt of the parent company or another group company without providing an equivalent benefit constitutes one of the situations in which the parent company uses its dominance unlawfully. In this context, the controlling company is obligated to compensate the subsidiary for any losses incurred by the subsidiary following an unlawful borrowing decision. In any liability lawsuit filed in this regard, the plaintiffs are primarily the subsidiary's shareholders, while the defendants are the controlling company and its board members.
The court may, instead of awarding damages, require the controlling company to purchase the shares of the shareholders who have brought the action. In addition to the exit right granted to shareholders, Article 202 of the TCC also provides that the court may "decide on another solution that is appropriate to the circumstances and acceptable.'' The judge may decide to dissolve the company for just cause, impose an obligation to distribute annual profits to the subsidiary, represent the plaintiff partner on the board of directors, change the meeting/decision quorum requirements in the articles of association, or return the values brought to the shareholder through capital reduction.
The right of the shareholders of the controlled company who have suffered loss as a result of the unlawful indebtedness to bring claims against the members of the board of directors of the controlled company pursuant to Articles 553 et seq. of the TCC remains reserved.
Although Article 562 of the Turkish Commercial Code provides for criminal liability in cases of borrowing in violation of Articles 358 and 395(2), it does not regulate the criminal liability of the members of the board of directors of the controlling company who extend credit within a corporate group in breach of Article 395(3). Therefore, pursuant to the principle of legality in criminal law, the members of the board of directors of the controlling company cannot be punished under Article 562. When the criminal liability of those members of the board of the controlling company who extend credit in violation of Article 395(3) and Article 202 of the Turkish Commercial Code is assessed under the Turkish Criminal Code, the only possible offences that may come into question are the offence of breach of trust (Art. 155 TCCr) and the offence of fraudulent bankruptcy (Art. 161 TCCr).
Since Article 562 of the Turkish Commercial Code and the relevant offence types under the Turkish Criminal Code constitute special offences, the borrowers cannot be perpetrators of these crimes. Likewise, in relation to the offences under the Turkish Criminal Code for which the lenders may be liable, the borrowers cannot qualify as co-perpetrators (Article 37/1 TCCr); however, depending on the circumstances of the case, they may be prosecuted as indirect perpetrators, instigators, or aiders and abettors.
viii. Conclusion and Recommendations
Article 395 of the Turkish Commercial Code materializes the principle of protecting corporate assets by preventing members of the board of directors and their relatives from misusing stock company resources; together with the borrowing restrictions imposed on shareholders, this prohibition safeguards the independence of the corporate entity and the security of creditors. The prohibition covers board members who are not shareholders and their non-shareholding relatives; although the status of natural persons casting votes on behalf of legal-entity board members remains uncertain, these individuals should be regarded as outside the scope of the prohibition pursuant to the principle of "no crime and no punishment without law." In the event of divorce, the former spouse falls outside the scope, whereas affinity up to and including the third degree continues—due to the continuation of in-law relationships—and thus remains subject to the prohibition.
In the context of a company group, Article 395(3) TCC limits intra-group borrowing exclusively to suretyship and guarantees, and together with Article 202 TCC, prevents the unlawful exercise of control by the parent company. Board resolutions concerning unlawful borrowings are deemed null and void (TCC Art. 391/1-b), and remedies such as damages, compulsory share purchase, the right of exit, or alternative solutions (dissolution, mandatory profit distribution, representation on the board, etc.) may arise. In terms of criminal sanctions, Article 562 TCC penalizes violations of Articles 395/2 and 358, but does not cover the managers of the parent company who extend intra-group borrowings; for these managers, Articles 155 (breach of trust) and 161 (fraudulent bankruptcy) of the Turkish Criminal Code may apply. Borrowers, however, cannot be perpetrators of such special offences, but may be held liable as instigators or aiders depending on the circumstances.
In conclusion, the parties subject to the prohibition must meticulously document the conditions of equalization and the right to claim within intra-group transactions, while creditors must identify their indirect damages at an early stage and pursue liability actions strategically. These provisions reinforce trust in commercial life and support sustainable corporate governance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
