Piercing the corporate veil allows a creditor to pursue the claim against the persons behind the veil, by exceptionally disregarding the general rule that a legal entity’s rights and obligations are separate and independent from other legal or natural persons.
Established case law and doctrine emphasize that this theory is a narrowly interpreted exception to the principles of limited liability and separate assets. Therefore, it should be approached with caution and applied only when specific conditions are met.
In this framework, the main basis of the institution is the principle of good faith and the prohibition of abuse of rights, as also stated in Supreme Court decisions and legal doctrine. It is used to prevent circumvention of the law where a debtor hides behind a legal entity to avoid debt or to obtain an outcome prohibited by law, thereby causing damage to the creditor.
“Turkish Civil Code Article 2 – Everyone must act in accordance with the rules of good faith when exercising their rights and performing their obligations. The legal order does not protect the manifest abuse of a right.”
What Are the Types of Piercing the Corporate Veil?
In practice, piercing the corporate veil is considered under three main forms:
- Direct piercing: Because of the company’s debt, the claim is pursued against the natural persons behind the veil (such as shareholders or directors) or, depending on the needs of the specific case, other legal entities.
- Reverse piercing: Because of the personal debt of a shareholder or director, the company’s assets are pursued directly.
- Cross piercing: A chain of liability is established from a subsidiary to the controlling shareholder and then again to another affiliated company (Supreme Court General Assembly, File No. 2020/94, Decision No. 2020/358, Date: 09.06.2020).
What Are the Required Conditions and Principles for Piercing the Corporate Veil?
- Exceptional nature and narrow interpretation: Since piercing the veil neutralizes limited liability and the separation principle, it is applied only in exceptional and limited situations after a careful assessment.
- Strong link between the legal entity and the person behind the veil: Facts such as the same shareholders, kinship, similar business fields, or the same/similar management may indicate an organic link, but they do not, by themselves, require piercing the veil. The organic link becomes meaningful only when supported by other concrete facts.
- Proof of intent to cause damage with concrete evidence: In judicial practice, courts require proof, beyond an organic link, that the company was misused to conceal assets from the creditor and to cause loss. The burden of proof is, as a rule, on the claimant creditor, and it is stated that the claim may be rejected if the creditor cannot support the allegation with strong evidence (Istanbul 3rd Commercial Court of First Instance, File No. 2021/424, Decision No. 2024/1034, Date: 26.12.2024).
- Secondary (last resort) nature: Piercing the veil is described as a last resort. The creditor must first pursue the principal debtor company. Only if the debt cannot be collected, the enforcement becomes fruitless, or it is clearly understood that collection is impossible, should the creditor proceed against the persons behind the veil. If collection from the principal debtor is possible, the veil is not pierced.
- This approach is also clearly expressed in the dissenting opinion of the Supreme Court 23rd Civil Chamber’s decision dated 23.12.2015; it states that the court should examine, as a preliminary issue, whether collection from the principal debtor is possible (File No. 2014/10384, Decision No. 2015/8391, Date: 23.12.2015 – dissent).
- No other effective remedy: The institution should come into play only in exceptional cases where the damage arising from misuse of the legal entity cannot be remedied by relying on another legal basis for liability.
What Kind of Evidence Creates an Impression of Bad Faith?
Bank transactions and accounting records showing that the separation between company assets and the assets of shareholders or directors is violated are considered among the strongest evidence. Examples include: transfers from company accounts to personal accounts without a commercial reason; not reducing debts while cash is leaving the company; and transferring company money to related persons, such as family members.
Facts such as selling company vehicles without recording the proceeds, transferring un‑invoiced sales proceeds to a director’s account, and other unusual commercial transactions may be used to prove intent.
Likewise, continuing operations without sufficient capital, with the intention to harm creditors, is also among the facts taken into account when assessing misuse of the company (Supreme Court General Assembly, File No. 2020/94, Decision No. 2020/358, Date: 09.06.2020).
To identify these facts, documents such as financial statements, commercial books, annual activity reports, general assembly/board resolutions, and audit reports are extremely important.
In addition, facts such as using the same commercial books for different companies, keeping joint accounts, managing them from a single center, or keeping a company’s books at another company may show that the separation principle has been removed in practice. On the other hand, only similarities such as common shareholders/representatives, kinship, or appearing under the same roof are not considered sufficient unless supported by bad faith transactions.
What Should We Pay Attention to When Filing a Lawsuit for Piercing the Corporate Veil?
Type of lawsuit and claims: Where veil piercing is invoked for collection, the claimant is essentially bringing a claim for payment of a debt. If accepted, the court will render a collection judgment.
Therefore, instead of filing a purely declaratory claim, the claimant should clearly request a judgment ordering payment of the debt. (Istanbul Regional Court of Justice, 43rd Civil Chamber, File No. 2024/337, Decision No. 2024/1288, Date: 19.09.2024).
Prior pursuit against the principal debtor and unsuccessful enforcement: The statement of claim should clearly explain that the creditor first tried to collect from the principal debtor, that enforcement efforts were unsuccessful, or that it is plainly clear collection is not possible. Otherwise, the court may dismiss the case on the ground that the creditor did not first pursue available remedies.
In this regard, the dissenting opinion in the Supreme Court 23rd Civil Chamber’s decision dated 23.12.2015 states that the court should treat the possibility of collection from the principal debtor as a preliminary issue and that no judgment should be rendered by piercing the veil if collection from the principal debtor is possible (File No. 2014/10384, Decision No. 2015/8391, Date: 23.12.2015 – dissent).
Concrete evidence of bad faith: The case should not be built only on the existence of an organic link; it should be supported with concrete, verifiable facts showing misuse and intent to cause damage. Therefore, in practice, evidence such as bank records, accounting documents, commercial books, financial statements, board/general assembly resolutions, and audit reports is extremely important.
In conclusion, piercing the corporate veil is an exceptional route that limits the principles of limited liability and separate assets, and it must be interpreted narrowly. According to established case law, an organic link alone is not sufficient; it is necessary to prove, with concrete and verifiable evidence, misuse and the intent to harm the creditor. In this context, mixing of assets and accounts, stripping the company’s assets, off-book transactions, and financial traces stand out as strong evidence.
In addition, due to the secondary nature principle, the veil cannot be pierced while collection from the principal debtor is possible; the creditor must first pursue the principal debtor and concretely show that collection is not possible. Ultimately, a decision to pierce the veil in practice depends on demonstrating together: the exceptional nature, the intent and misuse, and the impossibility of collecting from the principal debtor.