A Brief Look into Turkish Promissory Note System
The aim of this article is to provide an insight on the Turkish negotiable instrument system and promissory notes in particular. The article outlines the important facts regarding the promissory notes.
I. General information with regards to the promissory notes
Promissory notes are one of the three main negotiable instruments by which the issuer promises to pay a determined amount of money to the beneficiary, on a determined date. The payment of the promissory notes cannot be bounded to any conditions or terms.
As per article 776 of the Turkish Commercial Code numbered 6102 (“TCC”) a valid promissory note must include the following elements;
a) The expression “promissory note” must be included within the text or if it is written in a language other than Turkish, the equivalent of “promissory note” in that foreign language should be included within the text of the promissory note
b) An undertaking of a promise for “unconditional” and “absolute” payment of a definite sum of money
c) The due date
d) The place of payment
e) The name of the beneficiary of payment
f) The place and the date that the promissory note was issued
g) The signature of the issuer
The statutory and optional contents of a promissory note are as follows;
a) Expression "promissory note”
b) An undertaking of an “unconditional” and “absolute” payment of a definite sum of money
c) The name of the beneficiary
d) Issuance date and the signature of the issuer
a) As per article 777 of TCC if the place of issuance is not indicated on the promissory note, then the promissory note is deemed to be issued at the place written next to the name of the issuer
b) In accordance with article 777 of TCC if there is no lucidity on the promissory note, then the place that the promissory note was drawn up will be deemed as the place of payment and the residential address of the issuer
c) The non-existence of a due date does not invalidate the promissory note. However, pursuant to article 777 of TCC a promissory note without a due date is considered to be payable upon presentation.
If the statutory elements of a promissory note are not indicated on text of the promissory note, then the promissory note will not be deemed as a negotiable instrument. Such fact affects the enforcement proceedings in a negative way if the creditor wishes to exercise his right to commence an enforcement procedure against the debtor. In such case the creditor cannot be able to benefit from the advantages that envisaged for the enforcement proceeding of negotiable instruments (i.e. the debtor's objection to the enforcem ent proceeding does not suspend the proceeding. Therefore, the creditor will be able sequestrate the properties of the creditor without facing a long and arduous court proceeding. However, the creditor is obliged to wait the verdict of the court in order to commence the sales proceedings)
Moreover, as per article 45 and 167 of the Enforcement and Bankruptcy Law numbered 2004 and dated 09.06.1932, a creditor who possesses a negotiable instrument, may also exercise his right to commence an enforcement proceeding despite being secured his receivable with a pledge.
II. Discretional records that may be inserted into the text of a promissory note
a. Record of “value received in cash/good”
Such record indicates the main relationship between the issuer and the beneficiary and proves that the issuer acquired a good or money from the beneficiary. The said record set forth that the promissory note is not issued without value or given as an accommodation note. However, despite such record, the debtor can still claim that the promissory note is given as an accommodation note. In such case, the debtor is obliged to prove his claim.
b. Maturity record
A maturity record is one of the most widely used records on the promissory notes. In order to deem a maturity record as valid, a separate agreement must be executed by and between the issuer and the beneficiary.
c. Interest record
Pursuant to article 675 of TCC, an interest record can inserted upon text of a promissory note to be paid upon presentation. Therefore, the debtor will be obliged to pay the interest amount in case that he does not fulfill its obligation against the creditor. The ratio of the interest should be expressly stated upon the text of the promissory note. Otherwise such interest record will be deemed as invalid.
d. Other records
Records such as surety, competent court and enforcement office, governing law may be included within text of the promissory note. However, in order to deem a promissory note as a surety bond there are two conditions (i) the expression of “surety” must be indicated on the content of the promissory note (ii) such surety must be cited in a separate agreement executed by and between the issuer and the beneficiary. Otherwise, the promissory notes are not deemed as surety bonds.
e. Non-endorsable record
If a debtor inserts a non-endorsable record on the text of the promissory note, the promissory note will become a registered note. Pursuant to article 681 of TCC and as per article 183 of the Code of Obligations, a promissory note bearing such record can be assigned to third parties only by transfer of claim. It shall be noted that if such record is inserted by an endorser, a promissory note bearing such record can still be endorsed to third parties. However, pursuant to article 685 of TCC, the endorser of such promissory note cannot be held liable against to other endorsers.
Even though a promissory note bears such record on its text, its quality as negotiable instruments will not be affected. In accordance with the 12th Court of Appeals verdict numbered 2006/7431 E. and 2006/10310 K. and dated 9.5.2006, a promissory note bearing such record will be deemed as a negotiable instrument and will be able to be enforced via enforcement procedure for negotiable instrument.
III. Presentation of promissory notes for payment
As per article 703 of TCC there are four types of presentations for payment which are as follows;
1. Upon presentation
2. On a due date
3. On a specific day after presentation
4. On a specific day after being issued
However, in practice the two methods outlined herein below are commonly used. Please kindly find below the information regarding the said implementations;
a. Upon presentation
A promissory note can be issued “upon presentation” for payment. In such case a promissory note does not bear any due date and must be presented to the debtor within one year following the date that the promissory note was issued. If the promissory note is not presented within one year, as per article 730 of TCC, the creditor loses its right to collect its receivables from guarantors and endorsers. Moreover, the creditor will not be able to claim it’s below mentioned rights (regulated under article 725 of TCC);
• Default interest
• Notification and notice of protest expenses
• Commission (0,3% of the amount)
b. On a due date
A promissory note will become payable on the due date indicated in its text. The creditor must present the promissory note on its due date or within two business days following the due date.
If the creditor does not present the promissory note on its due date or within two business days following the due date, aforementioned loss of rights under III.a will occur.
c. Statute of Limitations
There is a period of three years for the statute of limitations as it has been stipulated under article 749 of TCC. According to such provision, the claims that can be raised by the creditor, against the issuer of a promissory note will be subject to three years of statute of limitations. However, the creditor will have right to claim its receivables by enforcement procedure for negotiable instruments within these three years. Additionally, in case that the promissory notes are issued as “upon presentation”, the period of statute of limitations will start from the last day of the presentation period.
IV. Notice of Protest and Notification
In case the debtor fails or rejects to make the payment; in accordance with article 714 of TCC the creditor must file a notice of protest to the debtor within two business days following the due date or within one year following the date that the promissory note was issued. If the creditor fails to file a notice of protest, the creditor will not be able to claim to collect its receivables from guarantors and endorsers. However, the creditor still retains its right to claim its receivables from the debtor.
A creditor will have right to claim the following upon filing a protest against the debtor;
• The amount indicated on the text of promissory note
• Interest (can be claimed only if its indicated within the text of promissory notes issued “upon presentation”)
• Default interest
• Notification and protest notice expenses
• Commission (0,3% of the amount)
Upon filing a protest the creditor will also have right to claim the above-mentioned from the guarantors or endorsers.
V. Enforcement procedure
General information on enforcement procedure for negotiable instruments is as follows;
a. Initiation of the procedure
An enforcement proceeding will be initiated by the creditor's application to the competent enforcement office.
After initiating the enforcement proceeding, as per article 168 of the Enforcement and Bankruptcy Law a payment order shall be sent to debtor ordering him to pay the debt including the interest amount and the related charges, within 10 days starting from date the debtor received the payment order.
b. Objection to the payment order
In case of an objection to the payment order by the debtor, a lawsuit shall be filed to the competent enforcement court within 5 days starting from the delivery date of the payment order. In such case, as per article 168/4-5 of the Enforcement and Bankruptcy Law the debtor may claim (i) denial of the signature (ii) non-existence of the debt. As mentioned above, the objection does not suspend the proceeding. However, if the court deems necessary, it may rule to a temporary suspension of the enforcement proceeding as a precautionary measure (article 170/2 of the Enforcement and Bankruptcy Law).
c. Proceedings before the enforcement court
(i) Objection to the signature
The debtor is required to file a claim before the competent enforcement court in order to object the signature. The court may rule that the signature on the promissory note does not belong to the debtor. In such case, as per article 170/3 of the Enforcement and Bankruptcy Law, the rule of the court ceases the enforcement proceeding and if the court deems that the creditor acted in bad faith or in gross negligence, as per. article 170/3, the creditor will be imposed to a penalty amounting to 10% of the disputed amount and a fine amounting no less than 20% of the sum mentioned on the promissory note.
However, as per article 170/3 the creditor still retains its right to file a lawsuit on the commercial court in order to claim its receivables basing on the general principles of law.
On the other hand if the signature on the promissory note actually belongs to the debtor, then the objection will be dismissed and a fine amounting to 20% of the sum mentioned on the promissory note and a penalty amounting to 10% of the disputed amount will be imposed to the debtor. Pursuant to 170/4 of the Enforcement and Bankruptcy Law, the debtor may file an action for restitution or declaratory action before the competent court. In such case the collection of such monetary fines will be postponed until the rule of the court.
(ii) Objection to the debt
The above-mentioned procedure under V.c.i will also be applicable in case of an objection to the debt.
(iii) Finalization of Verdict
The verdicts of the competent enforcement court do not constitute a finalized verdict unless the claim is procedural. Therefore, as the above mentioned objections are material, the defendant is entitled to file a claim before the commercial courts.
As with all payment instruments, promissory notes must be carefully used as their collectability is limited with the assets of the issuing company (if issued by a company) and in practice it is hard to find a company with sufficient assets covering the debt amount during the enforcement phase. Despite all these facts, promissory notes are highly used and circulated in Turkish commercial life. Their easily collectable nature and law granted advantages make them a strong payment instrument.
AUTHOR: Ömer Cem Selamoğlu
Copyright Orhan & Orhan Law Office
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.