Where the Capital Markets Board of Türkiye (CMB / SPK) decides to liquidate an investment fund, the inability to satisfy participation-share holders’ redemption (refund) requests on time gives rise to serious legal disputes in practice. When the fund’s cash position and portfolio liquidity are insufficient to meet accumulated redemption requests promptly, investors are left asking “when, and in what order, will my money be paid?” This article sets out the legal framework for this process, the priority of refund instructions within liquidation, and the legal remedies available to investors.
The Fund’s Assets as a Separate Estate and the Liquidation Process
Under Law No. 6362 on Capital Markets (the “Capital Markets Law”) and the Communiqué on Principles Regarding Investment Funds (III-52.1), an investment fund’s assets constitute a separate estate, independent from the assets of both the founding portfolio management company and the custodian institution. Once a decision to liquidate a fund is made, the assets in the fund’s portfolio are converted into cash and distributed to participation-share holders in proportion to their shares. Liquidation procedures are carried out through the fund’s custodian bank.
In practice, redemption instructions given before the liquidation decision but not yet executed raise a particular question: should such instructions be treated as a pre-existing “fund debt,” independent of the liquidation, or should they be satisfied like ordinary liquidation claims, pro rata to shareholding?
The Two-Tier Priority Split: Prioritized Fund Debts and Claims Awaiting Liquidation
In certain investment funds recently ordered into liquidation by the CMB, the Board has divided investors into two groups in the bulletins governing the liquidation principles:
- Instructions given before the cut-off time but not executed: Redemption instructions given before a specified date and time, but not fulfilled by the fund in time, are classified as a “fund debt” independent of the liquidation; such amounts are envisaged to be paid on a priority basis from the proceeds of asset sales held at the custodian bank.
- Instructions given after the cut-off time: Redemption instructions given after that date are instead included in the ordinary liquidation process and, like other participation-share holders, are distributed pro rata from the fund’s liquidated assets.
The logic behind this distinction is to separate a claim that arose before the liquidation decision and whose performance was delayed from the common loss that arises with liquidation and must be shared among all investors. That said, matters such as which amounts qualify as a “fund debt” under which calculation basis, how payment order is determined where multiple instructions compete, and the method to be followed where the fund’s cash is insufficient to satisfy all first-tier claims are not always addressed with the same clarity in Board regulations.
Does Failure to Execute a Refund Instruction Constitute Default?
Although the failure to execute a redemption instruction on time conceptually evokes the institution of default (temerrüt) under the law of obligations (Turkish Code of Obligations, “TCO,” art. 117), the two concepts must be distinguished. A fund’s failure to satisfy a redemption instruction on time due to insufficient liquidity does not, by itself, amount to a culpable act or breach of contract by the portfolio management company. In other words, the finding that “payment could not be made” does not on its own give rise to a claim for damages against the company; the liquidity problem and a management-related breach are two independent matters.
The liquidity problem arises from the fund’s assets being insufficient to meet redemption requests on time and must be resolved under the liquidation provisions. A management-related breach, on the other hand, concerns whether the portfolio management company acted contrary to the duty of care and loyalty arising from the agency (vekâlet) relationship in managing the fund, and this can form the subject of a separate damages claim.
The Portfolio Management Company’s Duty of Care and Loyalty
The relationship between a portfolio management company and an investor is, in legal terms, governed by the provisions on agency (vekâlet) contracts under Law No. 6098, the Turkish Code of Obligations (TCO). Under TCO art. 506, an agent is obliged to carry out the undertaken work and services with loyalty and care, having regard to the principal’s legitimate interests; in determining this standard of care, the conduct expected of a prudent agent undertaking work and services in a similar field is taken as the benchmark.
Case law has given concrete shape to this standard in the context of portfolio management. In practice, it has been emphasized that a portfolio manager is expected to exercise not ordinary care but the care expected of a professional, expert manager; at the same time, on the grounds that “a win-win strategy cannot always be built in the capital markets” and that “a portfolio is just as likely to make a loss as a profit,” it has been accepted that the mere occurrence of a loss is not sufficient to establish liability for damages. In its decision dated 23.03.2022, Case No. 2020/2384, Decision No. 2022/2316, the 11th Civil Chamber of the Court of Cassation (Yargıtay) held that acting without a duly executed portfolio management agreement, a failure to exercise professional diligence and care, and a failure to provide adequate information and transparency constituted fault; conversely, it also held that where the investor had failed to fulfil its own obligation to conduct adequate research before making an investment decision, this could amount to contributory negligence.
Accordingly, for an investor who has not received a refund during liquidation to bring a successful damages claim against the portfolio management company, it is not sufficient that payment was merely delayed; a concrete act or omission by the company in breach of its duty of care and loyalty must be demonstrated.
The Custodian Institution’s (Bank’s) Liability
The bank that holds the fund’s assets in custody and carries out the liquidation procedures is likewise considered a party to an agency relationship in respect of the custody and transaction-execution services it undertakes. Case law has recognized that banks, as institutions established under special legislation and granted certain privileges, are subject to a “heightened duty of care” and may be held liable even for slight negligence. On this basis, whether the custodian bank has properly carried out its procedures during liquidation, correctly maintained reconciliation records, and processed instructions in the correct order may likewise be subject to a separate review of liability.
Uncertainty Over the Scope of the Investor Compensation Center
The provisions of the Capital Markets Law on the Investor Compensation Center (“ICC” / YTM) essentially cover the failure of investment firms to perform their obligations under arts. 82-84. Whether a loss arising from a fund’s own assets falls within this scope is not clear from the wording of the legislation, and this uncertainty will persist for as long as the CMB has not issued a current compensation decision on the matter. Investors should therefore monitor the Board’s eventual determination on this point before proceeding on the assumption that recourse to the ICC will be available.
Legal Remedies Available to Investors
For an investor who has not received their refund during the liquidation process, the following points stand out:
- Preserving records: Keeping all records relating to the date and time the redemption instruction was given, the channel used (online banking, call center, etc.), and the status of the instruction is decisive in proving whether the instruction falls within the “fund debt” priority tier.
- Reviewing reconciliation lists: Comparing the reconciliation lists published by the custodian bank and the portfolio management company against one’s own records strengthens the evidentiary position in any future dispute.
- Right of action against the portfolio management company and the custodian: Where it can be shown that the company acted contrary to its duty of care and loyalty under TCO art. 506, a damages claim based on agency liability may be brought. Such a claim requires distinguishing whether the loss stems from the liquidity problem or from a management-related breach.
- The distribution channel’s duty to inform: Whether the bank or intermediary institution that sold the fund’s units adequately informed the investor about the fund’s risk and liquidity profile is a separate matter for assessment.
- The limits of liability claims against the administration: In full-remedy actions brought on the grounds that the CMB neglected its supervisory and oversight duties, courts have generally dismissed such claims on the basis that there is no adequate causal link between the administration’s conduct and the investor’s loss, and that no provision in the legislation requires investment losses to be compensated from public funds. For this reason, a damages claim against the administration rests on considerably weaker legal ground than one against the portfolio management company.
Conclusion
The division of redemption instructions in funds under liquidation into a “fund debt” tier and an “ordinary liquidation claim” tier is an understandable approach for protecting claims that arose before the liquidation decision, but there remains a lack of full clarity in practice regarding the calculation basis and payment order. Two distinct questions are decisive for the investor: where the money “stands” — that is, how liquidation will proceed under the fund’s separate-estate regime — and from whom the loss “may be claimed” — that is, whether the portfolio management company and the custodian acted contrary to the duty of care and loyalty arising from their agency relationship. Distinguishing between these two questions is essential both to correctly understanding the liquidation process and to bringing any eventual damages claim on the right legal footing.
This article is for general informational purposes only; for legal matters specific to your situation, please consult a lawyer.
