Creditor Protection and Liquidator's Responsibility During Company Liquidation

Creditor Protection During Company Liquidation and the Liquidator's Questions

1. Introduction: The Critical Importance of the Liquidation Process for Creditors

When companies cease operations, it is often more than just a "commercial decision"; it involves a complex legal process where the interests of creditors, shareholders, and employees clash . Especially for joint-stock and limited liability companies, liquidation represents a "last chance to collect debts" for creditors, making it vital that this process is conducted transparently, predictably, and in accordance with regulations

The Turkish Commercial Code ("TCC") places special emphasis on protecting creditors when regulating the liquidation process; to this end, it includes strict rules regarding the institution of the liquidator , the procedure for calling creditors , and the distribution of assets . Liquidators, in turn, perform the following duties during this process:

Converting company assets into cash,
Collecting receivables, paying debts,
Distributing the increased assets to the partners,
Fulfilling announcement and notification obligations

They are key figures and are directly responsible for the illegal actions.

2. The Concept of Liquidation and its Legal Framework

2.1. What is Liquidation?

Liquidation is the process by which a company's assets are converted into cash, debts are paid, and the remaining amount is distributed to shareholders after a decision to dissolve the company . Upon completion of liquidation, the company's legal entity completely ceases to exist and it is removed from the commercial registry.

The main reasons for the liquidation are:

The expiration of the period stipulated in the articles of association,
Dissolution by general assembly resolution,
Termination by court order (for justifiable reasons, lack of personnel, etc.),
Other grounds for termination stipulated by law,
Bankruptcy.

While the provisions of the Enforcement and Bankruptcy Law are primarily applied in liquidation through bankruptcy proceedings , the provisions of the Turkish Commercial Code (TTK) mainly come into play in normal (self-contained) liquidations .

2.2. Fundamental Foundations of the Legislation

The main regulations regarding company liquidation are:

The Turkish Commercial Code contains provisions regarding termination and liquidation of joint-stock companies
Parallel regulations for limited companies,
Obligations related to liquidation in tax legislation (liquidation declarations, tax audits),
In terms of labor law, employee claims,
Enforcement and Bankruptcy Law: Enforcement proceedings and related limitations.

The article will focus on the provisions of the Turkish Commercial Code regarding the protection of creditors during liquidation and the legal responsibility of the liquidator .

3. Initiating the Liquidation Process: Registration, Publication, and Use of the Phrases "In Liquidation"

3.1. Liquidation Decision and Registration

The liquidation process, as a rule, is:

the general assembly decides on dissolution and liquidation
or
The occurrence of the legal/court-ordered reason for termination

It begins with this. Registration of this decision in the trade registry and its publication in the Turkish Trade Registry Gazette is mandatory.

3.2. Adding the Phrase "In Liquidation" to the Title

From the moment a company enters liquidation, "in liquidation" . For example:

“XYZ Inc.” → “XYZ Inc. in Liquidation”

This statement is of vital importance to third parties and creditors, as it conveys the message that the company's primary objective is no longer profit-making, but liquidation . Furthermore, the liquidator's actions on behalf of the company must be carried out under this title.

4. Liquidator: Appointment, Legal Status and Duties

4.1. Appointment of the Liquidator

During the liquidation process, the authority to represent and manage the company generally to the liquidators . Liquidators are:

It may be stipulated in the articles of association,
They can be appointed by a general assembly decision
They may be appointed by the court when necessary.

In some cases, it is possible for the current board members to continue in their roles as liquidators. However, even in this case, their course of action and responsibilities are more focused on "liquidation" than "management."

4.2. Legal Status of the Liquidator

The liquidator is the person who has a power of attorney/organic relationship with the company and represents the company for the purpose of liquidation. Within the Turkish Commercial Code system, liquidators have the following responsibilities:

To the company,
To the shareholders,
To the creditors,

They are held responsible for their own negligent conduct.

4.3. Basic Duties and Responsibilities

The main duties of the liquidator can be summarized as follows:

of the company in liquidation .
To complete the company's ongoing business in a manner that is in the company's best interest
To collect company receivables, to pay debts,
If necessary, sell company assets, convert them into cash,
To summon creditors by announcement and those known directly by letter,
Preparing the liquidation balance sheet
To distribute the increased assets to the partners in accordance with the legislation and the provisions of the articles of association
To conduct all these processes in a transparent, documented, and verifiable manner.

The liquidator must manage the liquidation process “in a way that no creditor suffers harm” and in the order of priority prescribed by law

5. Mechanisms for Protecting Creditors During the Liquidation Process

5.1. Obligation to Call and Announce to Creditors

After the registration and announcement of the commencement of liquidation, the liquidator invites the company's creditors to declare their claims. This invitation:

In the trade registry gazette,
If necessary, on the company's website
in the number and at the intervals prescribed by law

It needs to be done.

It is also important to notify known creditors by letter or other appropriate means to ensure they are informed of the liquidation process

The aim here is to ensure that all creditors declare their claims before the company's assets are distributed to the shareholders at the end of the liquidation process, thus preventing any loss of rights.

5.2. Distinction Between Known and Unknown Creditors

In practice, there are two groups of creditors:

Known creditors:
Individuals who can be identified from books, records, or contracts and who have an open creditor-debtor relationship with the company.
Unknown/unaware creditors:
Individuals who have a relationship with the company but have not reported their claims for various reasons, or who cannot be reached.

The liquidator actively informs known creditors, public notices , and can limit their liability by depositing certain amounts for claims that do not emerge even after the liquidation period ends.

5.3. Payment of Receivables and Order of Priority

In the distribution of company assets during the liquidation process:

Company debts and creditors,
If necessary, legally prioritized claims such as public debts and employee claims,
Lastly, the shareholders (partners) come in.

In other words, the liquidator's primary duty is not to distribute money to the company shareholders, but to fully and completely satisfy the creditors. Making any distribution to shareholders before fully paying the creditors is illegal and will render the liquidator liable.

5.4. Deposit for Unknown Creditors

For creditors who do not appear or come to collect their claims at the end of the liquidation process, the law the deposit of certain amounts with a notary, bank, or official institution . In this way, the liquidator fulfills their responsibility towards known creditors; the deposited amounts can then be claimed by the creditor when they subsequently appear.

6. The Liquidator's Responsibility: To Whom and Within What Scope?

The liquidator's responsibility is considered on three main levels:

Responsibility to the company,
Liability to shareholders,
Liability to creditors and third parties.

6.1. Violation of Law, Articles of Association, and Decisions

The liquidator is liable for any damages incurred if they act contrary to the law, the articles of association, or the liquidation decision. For example:

Failing to make a call to creditors or making an incomplete call,
Preparing a liquidation balance sheet that is contrary to the truth
Selling company assets for far less than their true value,
Favoring certain creditors,
Distributing the liquidation proceeds to the partners before paying the creditors,
Misuse of company assets for one's own benefit or the benefit of third parties.

Such actions can give rise to liability both in internal relations (with respect to the company and its partners) and in external relations (with respect to creditors and third parties).

6.2. Liability Based on Fault

The liquidator's liability is generally based on fault. That is to say:

Having intentionally or negligently breached his/her obligations,
The fact that damage has resulted from this breach,
There must be an appropriate causal link between the violation and the damage

is necessary.

The liquidator is expected to act not like an "ordinary trader/accountant," but a manager with a high duty of care and an obligation to foresee legal risks . This brings the criterion of a "prudent and diligent liquidator" to the forefront.

6.3. Direct Liability to Creditors

Under normal circumstances, the company's legal entity is responsible for its debts. However, in cases of serious breaches during the liquidation process, the direct liability of the liquidators to the creditors may also arise. For example:

If the liquidator has distributed the company's assets to the shareholders without notifying the creditors and without paying off all the debts,
If he transferred his assets at a price so low that it would harm his creditors,
If a creditor has not given any notice to a known creditor and has made it practically impossible for the debtor to collect the debt,

Creditors a compensation claim .

In internal relations, the company may seek recourse against the liquidator; similarly, creditors may, in some cases, directly claim compensation based on the liquidator's negligent conduct

6.4. Joint Responsibility of Multiple Liquidators

In practice, most companies appoint more than one liquidator; these liquidators serve jointly or with limited representation authority. When there is more than one liquidator:

Even if the division of labor between them is taken into account
Liability to creditors often becomes joint and several

Even if one liquidator causes damage through gross negligence, it will also be examined whether the other liquidator fulfilled their supervisory and oversight duties

7. Methods of Application and Protection for Creditors

Protecting creditors during the liquidation process is not limited solely to legal mechanisms. Creditors can actively pursue various legal avenues.

7.1. Enforcement Proceedings Against a Company in Liquidation

A company undergoing liquidation retains its status as a debtor. Therefore:

Creditors can also initiate enforcement proceedings against the company during the liquidation process
By requesting a precautionary attachment, you can reduce the risk of the liquidator disposing of your assets
The liquidator can pursue faster collection procedures in cases where they unequivocally accept the debt.

However, the liquidator is also obligated to protect the company's interests and the principle of equality ; they must avoid actions that would give priority to particular creditors.

7.2. Compensation Claim Against the Liquidator

If a creditor has suffered damages due to the negligent actions of the liquidator:

Compensation lawsuit against the liquidator .
If appropriate, a lawsuit against both the company and the liquidator

The opening of a new court may be considered. As a rule, the competent court the commercial court of first instance .

When proving damages, the creditor must:

Unjust payments made during the liquidation process,
The value of the assets was deliberately devalued,
He stated that he was not informed of the purge
The liquidation balance sheet is inaccurate

It must be presented with evidence.

7.3. Additional Liquidation and Reopening of Liquidation

Even if the company has been removed from the commercial registry, subsequently:

There are unliquidated assets,
The existence of unpaid receivables,
Serious legal violations occurred during the liquidation process

If this occurs, further liquidation (reopening of liquidation) may be necessary. In this case, the court may appoint new liquidators, review previous proceedings, and initiate a new liquidation process to compensate creditors for their losses.

8. Common Problems in Practice and Example Scenarios

8.1. Using the Liquidation Process Solely to Evade Tax/Audit Pressure

Some companies, while effectively continuing their commercial operations, attempt to evade oversight by formally deciding to liquidate or unnecessarily prolonging the liquidation process. This situation:

This prevents creditors from seeing the true state of the company
Misuse of the liquidation process

This is the reason. The liquidator cannot be complicit in such "ostensible liquidation" practices; otherwise, their responsibility will be severe.

8.2. Early and Unlawful Payment to Partners

Another common problem is that the liquidation process is not fully completed and creditors are not fully satisfied

Transfer of company real estate to partners,
Paying the cash in the till to the partners,
It is the upfront distribution of liquidation residues.

These actions are directly detrimental to creditors and therefore create a serious risk of liability for the liquidator.

8.3. Failure to Notify Known Creditors

The fact that no notification was given to a creditor, who is clearly visible in the books and is even still in dispute with the company, during the liquidation process; merely announcing "I have completed the liquidation" through a newspaper advertisement, constitutes a serious loss of rights for the creditor. In this case, the creditor can claim compensation based on the gross negligence of the liquidator

8.4. Conflict of Interest of the Liquidator

The liquidator also:

Company partner,
Payee,
Board member,
A person who owes money to the company

In such cases, the likelihood of a conflict of interest is high. If the liquidator prioritizes their own interests, the creditors' protection mechanism effectively collapses. Therefore, appointing an independent liquidator is an appropriate and often necessary solution in cases where there is a significant conflict of interest.

9. Conclusion and Evaluation: A Roadmap for Creditors and Liquidators

The company liquidation process is structured as a mechanism aimed at protecting creditors through strict formalities and liability provisions stipulated by the Turkish Commercial Code. Specifically:

Registration and announcement of the liquidation decision,
Adding the phrase "in liquidation" to the title,
Procedure for summoning creditors,
Known creditors should be informed individually
Preparing the liquidation balance sheet accurately,
No payments should be made to partners until the debts are fully paid
Deposit mechanism for unknown creditors,
Liability of liquidators for fault and due diligence

It forms the cornerstones that safeguard the interests of creditors.

From the perspective of the liquidators:

Transparency,
The principle of equal treatment among creditors,
Ensuring that all necessary documents and records are kept meticulously
Acting in accordance with the law and the articles of association at every stage,
Avoiding conflicts of interest

These are fundamental principles that both reduce legal liability and ensure the liquidation process is completed safely.

From the creditors' perspective :

Following liquidation announcements,
To report claims in a timely manner and in writing,
To resort to legal action if necessary
Not hesitating to file a liability lawsuit against the liquidator if they detect any illegality in the liquidation process
In cases of serious violations, considering additional legal remedies and criminal law avenues

These will be strategic steps to reduce the loss of rights.

In conclusion, protecting creditors and the liquidator's liability during company liquidationis not merely a theoretical problem, but an area with significant material consequences in practice. Therefore, conducting the liquidation process with expert legal advice will minimize serious risks for creditors, liquidators, and company shareholders alike.

law, company, company liquidation, corporate law, liquidation

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