How Can Company Receivables Be Secured? Cheques, Promissory Notes, Mortgages, Pledges, Suretyships and Bank Guarantees
To enhance the recoverability of company receivables, various forms of security may be used, including cheques, promissory notes, mortgages, pledges over movable assets, avals, suretyships and bank guarantees. As these instruments differ in their legal nature, requirements for creation and the rights they confer on the creditor, the appropriate security structure should be determined in light of the characteristics of the underlying commercial relationship.
The mere fact that a receivable arising from a commercial relationship is documented by contract does not, in itself, guarantee its recovery. Particularly in deferred-payment sales, the supply of goods or services, lending transactions, current account relationships and continuing commercial relationships, the debtor's financial distress, reduction of its assets or the prior acquisition of security by other creditors may significantly affect the prospects of recovery.
Accordingly, in high-value or deferred-payment transactions, consideration should be given not only to the amount and maturity of the debt, but also to the legal instruments by which the receivable will be secured, preferably at the stage when the commercial relationship is established.
Cheques, promissory notes, mortgages, pledges over movable assets, avals, suretyships and bank guarantees do not perform the same legal function. Cheques and promissory notes, as negotiable instruments, provide access to specific enforcement and recourse mechanisms; mortgages and pledges over movable assets, when duly created, establish security in rem over specified assets; an aval creates additional liability under negotiable instruments law; and a suretyship gives rise, subject to the applicable legal requirements, to the personal liability of the surety. A bank guarantee constitutes a separate security instrument under which the bank's payment obligation arises upon satisfaction of the conditions specified in the guarantee. Depending on the characteristics of the particular commercial relationship, one or more of these forms of security may be used together.
1. Does a Cheque Secure a Commercial Receivable?
A cheque is widely used in commercial practice as a payment and collection instrument. However, unlike a mortgage or pledge, a cheque does not constitute security in rem.
Under the Turkish Commercial Code, a cheque is regulated as a negotiable instrument. Whereas a promissory note contains an undertaking by the maker to pay a specified amount, a cheque contains an unconditional order directing the drawee bank to pay a specified amount.
Pursuant to Article 780 et seq. of the Turkish Commercial Code, a cheque must contain the mandatory elements prescribed by law.
A Cheque Is Not Security in Rem
Delivery of a cheque to the creditor does not create a pledge or other security right in favour of the creditor over the drawer's immovable property, vehicles, machinery or other assets.
Accordingly, a cheque does not earmark any particular asset for satisfaction of the receivable. Nevertheless, a cheque that complies with the statutory requirements and is presented within the applicable time limit enables the holder to benefit from the special enforcement and recourse mechanisms applicable to negotiable instruments.
The legal and economic protection afforded by a cheque therefore depends not merely on the issuance of the cheque, but also on the drawer's ability to pay, the status of the cheque account, the proper issuance of the cheque and compliance with the applicable statutory time limits.
Post-Dated Cheques
Under Article 795 of the Turkish Commercial Code, a cheque is payable on demand, and any provision to the contrary is deemed unwritten.
However, Provisional Article 3/5 of Cheque Law No. 5941 currently provides a temporary exception to this general rule. Under the legislation presently in force, until 31 December 2028, presentation of a cheque to the drawee bank for payment before the issue date stated on the cheque is invalid.
Unless this period is extended again, the general rule under Article 795 of the Turkish Commercial Code, pursuant to which a cheque is payable on demand, will apply thereafter.
Accordingly, for post-dated cheques that function in practice as deferred-payment instruments, both the issue date stated on the cheque and the applicable presentation period must be carefully monitored.
Why Is the Presentation Period Important for a Cheque?
Under Article 796 of the Turkish Commercial Code, a cheque must be presented to the drawee within ten days if it is payable at the place where it was issued, and within one month if it is payable at a different place.
Where a cheque is issued in a country other than the country in which it is payable, the presentation period is one month if the place of issue and the place of payment are on the same continent, and three months if they are on different continents. For this purpose, cheques issued in a European country and payable in a country bordering the Mediterranean, and vice versa, are deemed to have been issued and made payable on the same continent. These periods begin on the day following the issue date stated on the cheque.
Accordingly, the decisive factor is not whether one of the parties is foreign, but rather the place where the cheque was issued and the place where it is payable.
Presentation of the cheque to the bank within the prescribed period is essential for preserving rights of recourse arising under negotiable instruments law.
Under Article 808 of the Turkish Commercial Code, where a cheque has been presented in due time and non-payment has been established in the manner prescribed by law, the holder may exercise rights of recourse against the endorsers, the drawer and other parties liable on the cheque. If the cheque is not presented within the applicable period, the holder loses the rights of recourse arising under negotiable instruments law against the parties liable on the cheque, including the drawer.
This does not mean that the underlying receivable for which the cheque was issued automatically ceases to exist. Where there is an underlying legal relationship between the holder and the drawer, such as a sale, service agreement, loan or another contractual relationship, any claim arising from that relationship must be assessed in accordance with its own legal requirements.
Where rights under negotiable instruments law have been lost due to limitation periods or failure to complete the required formalities, a claim based on unjust enrichment under the Turkish Commercial Code may also arise, provided that the relevant conditions are satisfied.
What Happens if a Cheque Is Dishonoured Due to Insufficient Funds?
Where a cheque is presented to the bank within the applicable period by reference to the issue date stated on the cheque and there are insufficient funds, in whole or in part, the statutory notation of non-payment due to insufficient funds may be made, provided that the applicable legal requirements are satisfied.
A cheque dishonoured due to insufficient funds does not give rise solely to consequences under private law and enforcement law. Cheque Law No. 5941 also provides for a specific sanctions regime in relation to cheques for which sufficient funds are unavailable.
Under Article 5 of the Cheque Law, where the statutory conditions are satisfied and the holder files a complaint, the person responsible may be sentenced to a judicial fine and may also be prohibited from issuing cheques and opening cheque accounts.
The right to file a complaint is subject to statutory time limits. Pursuant to Article 347 of the Enforcement and Bankruptcy Law, a complaint must be filed within three months from the date on which the act is discovered and, in any event, within one year from the date on which the act was committed.
Accordingly, in cases involving cheques dishonoured due to insufficient funds, the complaint and payment regime under the Cheque Law must be followed in addition to enforcement proceedings based on the negotiable instrument.
Under Article 6 of the Cheque Law, where the amount of the cheque is paid in full together with the statutory ancillary amounts, or where the complaint is withdrawn, the criminal proceedings may be discontinued or, depending on the stage of the proceedings, a final conviction may be vacated together with all its consequences.
QR Code and Other Checks Before Accepting a Cheque
In high-value commercial transactions, merely taking physical delivery of a cheque does not constitute adequate risk control.
The mandatory elements of the cheque, the authority of the drawer or of the person signing on behalf of a company, the signature, the issue date and any QR-code information that may lawfully be accessed should be verified.
Through the QR-code system, information that is legally accessible regarding the cheque account holder's previous cheque payment performance may be reviewed. Such information does not guarantee that the cheque will be honoured in the future, but it enables the creditor to assess the debtor's cheque payment history before accepting the instrument.
The Drawee Bank's Statutory Payment Obligation per Cheque Leaf
Cheque Law No. 5941 separately provides that, where a cheque is wholly or partially uncovered, the drawee bank is required to make payment up to a specified amount per cheque leaf.
As this amount is periodically revised, the amount in force on the date of presentation of the relevant cheque must be taken into account.
2. Does a Promissory Note Secure a Receivable?
A promissory note, commonly referred to in Turkish practice as a "senet", is one of the instruments frequently used to secure commercial receivables.
Under Article 776 of the Turkish Commercial Code, a promissory note must contain the statutory particulars, including the expression "promissory note" or "note payable to order", an unconditional promise to pay a specified amount, the place of payment, the payee, the date and place of issue, and the maker's signature. Although maturity is one of the particulars that may be stated in a promissory note, the absence of a maturity date does not render the note invalid; under Article 777 of the Turkish Commercial Code, such a note is deemed payable on demand. The Code also contains supplementary rules in relation to certain other omissions.
A Promissory Note Is Not Security in Rem
Taking a promissory note does not create a pledge or other security right in favour of the creditor over the debtor's immovable property, machinery, vehicles or other assets.
Accordingly, a promissory note may strengthen the creditor's legal enforcement and recovery position, but it does not guarantee recovery by earmarking a particular asset for satisfaction of the debt.
The debtor may subsequently reduce its assets, or other creditors may obtain attachments or security rights over those assets.
One of the principal advantages of a promissory note is that, where the statutory conditions are satisfied, the creditor may initiate the special enforcement procedure by way of attachment applicable to negotiable instruments.
Protest in Respect of a Promissory Note
Whether a protest is required depends on the party against whom recourse is to be exercised.
The maker of a promissory note is liable in the same manner as the acceptor of a bill of exchange and is the principal debtor under the note. A protest for non-payment is not required in order to pursue the maker.
By contrast, in order to preserve rights of recourse under negotiable instruments law against parties liable by way of recourse, such as endorsers and their avalists, a protest for non-payment must be drawn up within the statutory period. As Article 714/3 of the Turkish Commercial Code applies to promissory notes by virtue of Article 778, in the case of notes payable on a specified date, at a specified period after the date of issue, or at a specified period after sight, the protest for non-payment must be made within the two business days following the payment date. For notes payable on demand, the protest must be made within the period during which the note may be presented for payment.
Failure to make the protest within the prescribed period results in the loss of rights of recourse under negotiable instruments law against parties liable by way of recourse, such as endorsers and their avalists.
Accordingly, general statements such as "a protest is never required for a promissory note" or "every promissory note must necessarily be protested" are inaccurate.
Can a Promissory Note Be Taken Together with a Mortgage or Pledge?
Yes. The same receivable may both be incorporated into a promissory note and secured by a mortgage or pledge.
However, there is an important restriction at the enforcement stage.
Pursuant to the Decision of the Grand General Assembly for the Unification of Judgments of the Court of Cassation dated 20 January 2023, No. E.2021/2, K.2023/1, where the same receivable is both secured by a pledge or mortgage and incorporated into a negotiable instrument, proceedings for the realisation of the security and special attachment proceedings based on the negotiable instrument may not be pursued simultaneously against the same debtor. Commencing the second proceeding subject to a reservation that there shall be no double recovery does not alter this conclusion. The creditor must choose between the available enforcement routes.
Accordingly, it is possible to take both a promissory note and a mortgage, but this does not mean that two separate enforcement proceedings may be pursued simultaneously against the same debtor in respect of the same receivable.
3. Obtaining an Aval for a Cheque or Promissory Note
Payment of a cheque or promissory note may also be secured by an aval.
With respect to promissory notes, Articles 700 to 702 of the Turkish Commercial Code on aval apply by virtue of Article 778/3. In relation to cheques, aval is expressly regulated under Article 794, while Article 818/1-g provides that Articles 701 and 702 concerning the form and effects of aval also apply to cheques.
An aval is a form of security specific to negotiable instruments law which guarantees payment of all or part of the amount of the instrument. The avalist is liable in the same manner as the person for whom the aval is given. As a rule, the avalist's undertaking remains valid even where the liability secured by the aval is invalid for a reason other than a defect of form.
For example, where a shareholder or third party gives an aval on a promissory note issued by a company, the creditor may, where the applicable conditions are satisfied, pursue not only the company but also the avalist on the basis of liability under negotiable instruments law.
Aval and Suretyship Are Not the Same
Aval and suretyship are distinct legal institutions.
Pursuant to the Decision of the Grand General Assembly for the Unification of Judgments of the Court of Cassation dated 20 April 2018, No. E.2017/4, K.2018/5, Article 584 of the Turkish Code of Obligations concerning spousal consent in suretyships does not apply to avals.
Accordingly, an aval is an important security instrument in commercial transactions because it creates additional liability under negotiable instruments law on a valid cheque or promissory note and is not subject to the spousal-consent regime applicable to suretyships.
This does not, however, mean that an aval is always more appropriate than a suretyship. The type of security should be determined by taking into account the nature of the debt, the structure of the negotiable instrument, the assets of the person providing the security and the potential enforcement strategy.
4. Why Does a Mortgage Provide a Different Form of Security?
A mortgage is security in rem created over immovable property.
Under Article 881 of the Turkish Civil Code, not only an existing receivable but also a receivable that has not yet arisen but is certain or likely to arise may be secured by mortgage. The mortgaged property need not necessarily belong to the debtor; property belonging to a third party may also be mortgaged to secure the debt.
For example, a shareholder of the debtor company may grant a mortgage in favour of the creditor over immovable property owned by that shareholder as security for the company's debt.
Stating in a Contract That "The Property Is Security" Does Not Create a Mortgage
This is one of the most important practical points.
Merely inserting a provision in a contract stating:
"The debtor's immovable property constitutes security for this debt."
does not, by itself, create a mortgage.
Under Article 856 of the Turkish Civil Code, a mortgage is created by registration in the land registry, and the mortgage agreement must be executed in the prescribed official form in order to be valid.
Accordingly:
"an undertaking to grant a mortgage" and "the actual creation of a mortgage" are not the same thing.
Particularly in high-value transactions, it is safer for the creditor, where possible, to complete the mortgage formalities before or simultaneously with the delivery of goods, funds or credit.
The parties may agree in the contract that a mortgage or other security must be created by a specified date and may, subject to the nature of the contract and mandatory provisions of law, provide that failure to create the security within that period constitutes an event of default or causes the relevant debt to become due and payable. Such a contractual provision, however, does not itself replace the mortgage.
Mortgage Securing a Fixed Amount and Maximum-Amount Mortgage
Where the amount of the receivable is fixed, a mortgage may be created to secure that specific receivable.
Where the amount of the receivable is not yet fixed or may vary over time, a maximum amount up to which the immovable property will provide security may be specified. Article 851 of the Turkish Civil Code regulates this distinction.
A maximum-amount mortgage may be particularly relevant in current account relationships, continuing supply arrangements or other ongoing commercial relationships.
Why Does the Ranking of a Mortgage Matter?
More than one mortgage may be registered over the same immovable property.
Under Article 870 of the Turkish Civil Code, the security provided by a mortgage is limited to the rank specified upon registration, and mortgages may also be created in second or subsequent ranks.
Accordingly, before accepting a mortgage, it is not sufficient merely to consider the value of the property. In particular, the following should be examined:
• the owner of the property;
• its current economic value;
• existing mortgages;
• attachments and other encumbrances;
• the rank of the proposed mortgage; and
• the amount and scope of the mortgage security.
Where property that appears to be valuable is already subject to substantial prior mortgages or other encumbrances, the practical recovery value of a newly created mortgage may be significantly reduced.
Family Home Status Must Also Be Considered
Where immovable property owned by an individual is to be mortgaged as security for a company debt, it must also be determined whether the property qualifies as the family home.
Article 194 of the Turkish Civil Code establishes a specific spousal-consent regime in relation to restrictions on rights over the family home. Accordingly, where security is to be taken over property belonging to a shareholder or another third party, the creditor should not limit its review to the identity of the registered owner and the existing land registry encumbrances.
Does the Mortgage Cease to Exist if the Property Is Sold?
As a rule, no.
Under Article 888 of the Turkish Civil Code, transfer of mortgaged property does not, unless otherwise agreed, alter the debtor's liability or the security.
This is one of the principal features of security in rem: provided that the relevant conditions are satisfied, transfer of ownership does not automatically extinguish the mortgage.
Can the Contract Provide That "If the Debt Is Not Paid, the Property Becomes the Creditor's"?
Not in the case of a conventional mortgage over immovable property.
Under Article 873 of the Turkish Civil Code, a contractual provision stipulating that ownership of the mortgaged property will pass directly to the creditor upon non-payment of the debt is invalid. As a rule, the creditor obtains satisfaction from the proceeds of sale of the mortgaged property.
Accordingly, inserting a provision stating:
"If the debt is not paid, ownership of the property shall pass to the creditor."
does not replace a valid mortgage or the applicable compulsory enforcement mechanism.
The possibility of transfer of ownership following default under Law No. 6750 on Pledges over Movable Property in Commercial Transactions, discussed below, is a separate statutory mechanism and should not be confused with a conventional mortgage over immovable property.
5. How Are Pledges over Movable Assets and Commercial Enterprises Created?
Where machinery, equipment, inventory, trade receivables or other movable assets are to be used as security instead of immovable property, a pledge over movable assets may be considered.
Under the general regime of the Turkish Civil Code, unless otherwise provided by law, a pledge over movable property is created by transferring possession of the movable asset to the creditor. Article 939 provides, as a general rule, that no pledge arises where the movable remains exclusively under the factual control of the pledgor.
For commercial enterprises, however, physically transferring machinery, inventory or other business assets to the creditor would often make continued business operations impossible.
For this reason, Law No. 6750 on Pledges over Movable Property in Commercial Transactions permits non-possessory pledges to be created over certain categories of movable assets.
Commercial Movable Pledges through TARES
For parties and assets falling within the scope of Law No. 6750, receivables, machinery and equipment, inventory, raw materials, intellectual and industrial property rights, rental income and other movable assets and rights specified by law may be provided as security. Commercial enterprises and tradesmen's enterprises are also expressly listed among the assets that may be pledged.
A non-possessory pledge over movable property may be created by registering the pledge agreement prescribed by law with the Movable Pledge Registry (TARES).
Accordingly, not only specific machinery, inventory or receivables of an enterprise, but also, where the statutory conditions are satisfied, the commercial enterprise or tradesman's enterprise as a whole may be pledged.
Under Article 5/2 of Law No. 6750, where a pledge is created over a commercial enterprise or tradesman's enterprise as a whole, the assets allocated to the enterprise's operations at the time the pledge is created are deemed pledged within the scope prescribed by law. However, where other movable assets listed in the Law are sufficient to secure the debt, the enterprise as a whole may not be pledged.
Pledging the entire commercial enterprise and separately pledging specific movable assets belonging to the enterprise are not legally identical arrangements. The scope of the pledge agreement and the registry entry must be determined accordingly.
Here too, a simple contractual provision stating:
"The debtor's machinery constitutes security for the debt."
does not replace the security right in rem required by law.
Can Transfer of Ownership Be Requested Upon Default?
Law No. 6750 provides a special remedy that differs from the general principles of pledge law.
Under Article 14/1-a of the Law, where the debt is not performed when due, a first-ranking creditor may, subject to the statutory conditions, request the enforcement office to transfer ownership of the pledged movable asset to the creditor. Where the determined value of the pledged asset exceeds the amount of the receivable, the Law also contains specific provisions governing liability in respect of the difference.
However, this does not mean that:
"If it is written into the contract, ownership of the asset automatically passes to the creditor upon non-payment."
Rather, this is a specific post-default statutory remedy that requires satisfaction of the conditions prescribed by law and operation of the relevant enforcement mechanism.
A commercial movable pledge may therefore provide strong security, but the value of the pledged asset, prior pledges, ranking and registry status should be examined before the transaction is entered into.
6. To What Extent Does a Suretyship Provide Security?
A suretyship does not create a security right in rem over a specific asset. Instead, the surety becomes personally liable, within the scope prescribed by law and the suretyship agreement, for the consequences of the principal debtor's failure to perform the debt.
The economic value of a suretyship therefore depends to a substantial extent on the surety's financial capacity and assets.
Where the debtor company itself has a weak financial position, obtaining a suretyship from a person with no meaningful assets may create additional security on paper but may fail to produce the expected result in terms of actual recovery.
Formal Requirements for Suretyship
Suretyships are subject to strict formal requirements.
Under Article 583 of the Turkish Code of Obligations, a suretyship agreement must be made in writing and must state the maximum amount for which the surety is liable and the date of the suretyship. The surety must write the maximum amount of liability and the date of the suretyship in his or her own handwriting. In the case of a joint and several suretyship, the surety must also state in his or her own handwriting that he or she assumes liability as a joint and several surety, or use wording to the same effect.
Failure to comply with these formal requirements directly affects the validity of the suretyship agreement.
Presumption of Joint and Several Liability in Commercial Debts
Article 7 of the Turkish Commercial Code must also be taken into account in relation to company receivables.
Under Article 7/1, where several persons jointly incur an obligation arising from a commercial transaction, joint and several liability applies unless otherwise provided by law or agreed by the parties. The second paragraph extends this presumption, in relation to suretyships for commercial debts, to the relationship between the principal debtor and the surety or sureties.
Nevertheless, the commercial nature of the debt does not eliminate the requirements concerning the maximum amount, the date of the suretyship or other validity requirements. Article 7 of the Turkish Commercial Code and the mandatory provisions of the Turkish Code of Obligations governing suretyship must therefore be considered together.
The conditions under Article 586 of the Turkish Code of Obligations are also relevant when recourse is sought against a joint and several surety. The Code requires, among other matters, that the debtor be in default and that a notice remain ineffective, or that the debtor be manifestly insolvent, and also provides particular limitations in relation to possessory pledges over movable assets and pledges over receivables.
Spousal Consent in Suretyships
Under Article 584 of the Turkish Code of Obligations, as a general rule, a married person requires the written consent of his or her spouse in order to enter into a suretyship.
There are, however, important exceptions in the corporate and commercial context. Spousal consent is not required for suretyships given in connection with the business or company by the owner of a commercial enterprise registered with the trade registry or by a shareholder or director of a commercial company. The law also provides exemptions for certain other commercial and professional suretyships.
Accordingly, when obtaining a suretyship from a company shareholder, neither of the following generalisations is accurate:
"Spousal consent is always required because the surety is married."
or, conversely:
"Spousal consent is never required because the debt is commercial."
Whether the particular suretyship falls within one of the exceptions under Article 584 must be assessed separately.
Ten-Year Limit for Suretyships Given by Individuals
Under Article 598 of the Turkish Code of Obligations, every suretyship given by an individual, as a rule, automatically terminates ten years after the date on which the suretyship agreement was concluded. The Code also contains specific rules governing extension and renewal.
This point should not be overlooked, particularly in long-term lending, current account and continuing commercial relationships.
7. To What Extent Does a Bank Guarantee Provide Security?
In high-value commercial relationships, a bank guarantee may constitute a strong form of security.
However, the legal effect of a bank guarantee may vary depending on its wording, term, payment conditions, the risk it secures and whether it is payable on first demand. It should therefore not be assumed that all bank guarantees are based on a standard form.
Where the risk defined in the guarantee occurs and the conditions for calling the guarantee are satisfied, the bank assumes an obligation to pay up to the amount stated in the guarantee.
Accordingly, it is not sufficient merely to state that "a bank guarantee has been obtained". The wording of the guarantee should be reviewed before the transaction is entered into.
In particular, the following should be clearly determined:
• the risk secured;
• the maximum amount;
• the term;
• the deadline for making a demand;
• the form of the demand;
• whether payment is to be made on first demand;
• the documents required to be presented for payment; and
• the conditions governing expiry and return of the guarantee.
Why Is a First-Demand Clause Important?
Where a bank guarantee contains a first-demand payment clause, the independence of the bank's payment obligation from the underlying contract is more strongly expressed.
However, the legal character of a bank guarantee is determined not merely by its title but by the guarantee as a whole.
Accordingly, particular attention should be paid to whether the guarantee contains wording such as "on first demand" or "without the need to issue a protest, obtain a judgment or obtain the debtor's consent", and to the conditions to which a demand for payment is subject.
8. Is a Guarantee Agreement Different from a Suretyship?
Yes. A guarantee agreement and a suretyship are distinct legal institutions. Depending on the structure of the agreement, the guarantor's obligation may constitute a personal security obligation independent of the underlying debt.
However, the title of an agreement does not, in itself, determine its legal character.
Under Article 603 of the Turkish Code of Obligations, the provisions governing the form of suretyship, capacity to act as surety and spousal consent also apply to contracts entered into by individuals for the purpose of providing personal security under another name.
Accordingly, it should not be assumed that the mandatory protective provisions governing suretyship can always be circumvented merely by describing a personal security arrangement as a "guarantee", "security", "guarantorship" or by using another title. The true legal nature of the relationship is determined by the substance of the obligations undertaken by the parties.
9. Is a Stand-Alone "Security Protocol" Sufficient?
In most cases, it is not sufficient to create security in rem.
For example, a contract stating:
"The debtor's immovable property and machinery constitute security for this receivable."
does not, by itself, create a mortgage over the immovable property or a pledge over movable property under Law No. 6750.
The official-form, registration, registry or possession requirements prescribed by law must also be satisfied.
Nevertheless, a security protocol is not without legal function. The parties may, for example, regulate:
• which forms of security are to be provided;
• which debts are secured;
• the date by which the security must be created;
• the amount secured;
• any obligation to provide additional security if the value of the existing security decreases;
• the consequences of failure to create the security; and
• how the security will be released or returned once the debt has been discharged.
The contractual obligation to provide security must, however, be distinguished from the actual creation of security in rem.
10. Can Multiple Forms of Security Be Used Together?
As a rule, yes.
For example, in a high-value commercial transaction, the following structure may be considered:
Principal agreement + cheque or promissory note + mortgage or pledge over movable assets + aval or suretyship + bank guarantee
Each instrument serves a different function:
INSTRUMENT PRINCIPAL LEGAL FUNCTION
Cheque Serves as a payment instrument and negotiable instrument subject to specific enforcement and recourse rules
Promissory Note Incorporates an unconditional promise to pay into a negotiable instrument and provides access to a special enforcement procedure
Aval Creates additional liability under negotiable instruments law in respect of a cheque or promissory note
Mortgage Creates security in rem over specified immovable property
Pledge over Movable Assets Creates security in rem over specified movable property or rights
Pledge over a Commercial Enterprise Creates security in rem over a commercial or tradesman's enterprise, subject to the statutory requirements
Suretyship Creates the personal liability of the surety within the scope prescribed by law and contract
Bank Guarantee Creates the bank's payment obligation upon satisfaction of the conditions stated in the guarantee
Obtaining multiple forms of security does not mean that the same receivable may be recovered more than once.
Furthermore, under the above-mentioned Decision of the Grand General Assembly for the Unification of Judgments of the Court of Cassation dated 20 January 2023, where the same receivable is both secured by a pledge or mortgage and incorporated into a negotiable instrument, enforcement by way of realisation of the security and special attachment proceedings based on the negotiable instrument may not be pursued simultaneously against the same debtor.
11. What Other Security, Recovery and Risk Management Instruments May Be Used?
Depending on the particular commercial relationship, other legal instruments may also be considered.
Assignment of Receivables
In certain transactions, assignment to the creditor of receivables owed to the debtor company by third parties may form part of the security structure.
Under Article 183 of the Turkish Code of Obligations, unless prohibited by law, contract or the nature of the transaction, a receivable may be assigned to a third party without the debtor's consent. Under Article 184, an assignment must be made in writing in order to be valid.
Where an assignment is made for security purposes, the agreement should clearly specify which receivable secures which debt and how the assigned receivable will be reassigned once the security relationship comes to an end.
Pledge over Receivables
Under Article 954 of the Turkish Civil Code, transferable receivables and other rights may be pledged.
Under Article 955, a pledge agreement over receivables, whether or not incorporated into an instrument, must be made in writing; where the receivable is represented by an instrument, delivery of that instrument is also required.
Retention of Title
In sales of movable property, particularly where the purchase price is payable on a deferred or instalment basis, retention of title by the seller until full payment may be considered where the applicable conditions are satisfied.
Under Article 764 of the Turkish Civil Code, a retention-of-title clause becomes valid when an agreement executed in official form is registered in the special registry maintained by the notary at the transferee's place of residence.
Accordingly, merely inserting a provision in an ordinary contract stating that "title to the goods shall remain with the seller until payment has been made in full" does not satisfy the statutory formal and registration requirements.
Notarial Deed Containing an Acknowledgment of a Monetary Debt
This is not, in itself, a form of security, but it may be important from an enforcement perspective.
Under Article 38 of the Enforcement and Bankruptcy Law, notarial deeds drawn up by the notary in the prescribed official form and containing an acknowledgment of a monetary debt are subject to the provisions governing enforcement of judgments.
Two matters must therefore be distinguished:
• a document on which only the signature has been notarised; and
• a notarial deed drawn up in the prescribed official form and containing an acknowledgment of a monetary debt.
They do not produce the same legal consequences.
Likewise, signing a cheque or promissory note before a notary does not automatically convert that negotiable instrument into a document having the effect of a judgment within the meaning of Article 38 of the Enforcement and Bankruptcy Law.
Debt and Balance Reconciliation
During the course of a commercial relationship, it is important for the parties to confirm their respective debt and receivable balances in writing at regular intervals, both for evidentiary purposes and for the effective management of the recovery process.
This is particularly relevant in long-term supply relationships involving goods or services, open-account arrangements, commercial transactions involving numerous invoices and payments, and current account relationships in the legal sense. Clarifying, before a dispute arises, the receivable items, payments made, set-offs applied, other account movements between the parties and the outstanding balance helps reduce potential evidentiary difficulties at a later stage.
Depending on the characteristics of the particular relationship, a reconciliation statement prepared for this purpose may expressly set out:
• the date of the reconciliation;
• the details of the parties;
• the period covered by the reconciliation;
• the relevant agreements, invoices and other receivable items;
• payments made and set-offs applied;
• the outstanding debt balance;
• any payment plan; and
• the matters agreed by the parties in relation to interest and other ancillary claims.
However, not every reconciliation document produces the same legal effect. It must be assessed, in light of the particular circumstances, whether the document has been signed by the debtor or an authorised representative, whether the existence and amount of the debt have been expressly acknowledged, which period and transactions it covers, and whether it contains any reservation. A document prepared merely for the purpose of comparing accounting records does not have the same legal effect as a reconciliation document or acknowledgment of debt in which a specific debt is expressly admitted.
It should also be borne in mind that not every open-account relationship referred to in commercial practice as a "current account" constitutes a current account agreement in the technical legal sense governed by Article 89 et seq. of the Turkish Commercial Code. In a current account relationship within the meaning of the Turkish Commercial Code, Article 94 provides for a specific legal consequence: if the party receiving the statement showing the balance determined at the end of the account period does not object within one month of receipt by one of the methods prescribed by law, that party is deemed to have accepted the balance. This special rule should not, however, be assumed to apply automatically to ordinary open-account relationships or to every form of balance reconciliation; it must first be determined whether the legal relationship between the parties genuinely constitutes a current account relationship within the meaning of the Turkish Commercial Code.
Where the content of the reconciliation amounts, in the circumstances of the case, to an acknowledgment of debt, it may also have consequences for limitation periods. Under Article 154 of the Turkish Code of Obligations, acknowledgment of the debt by the debtor is one of the events that interrupts the limitation period. Following interruption, a new limitation period begins to run; where the debt has been acknowledged by a written instrument within the meaning of Article 156 of the Turkish Code of Obligations, the new period is ten years. However, not every account or balance reconciliation should automatically be treated as an acknowledgment of debt or as an acknowledgment by written instrument; the content and form of the document and the parties' intentions must be assessed separately.
A reconciliation document that expressly confirms the debt and has been duly executed by an authorised person is also relevant, depending on the circumstances, to the prima facie showing required in an application for a precautionary attachment. Nevertheless, the evidentiary value of the reconciliation document must in each case be assessed together with its contents and the other available evidence.
A debt or balance reconciliation does not, by itself, create a mortgage or pledge over the debtor's assets, does not replace a suretyship or aval, and, if executed in ordinary written form, does not automatically provide access to enforcement proceedings based on a judgment. Nevertheless, clarifying the existence, amount and basis of the receivable in writing at an early stage is important both for evidentiary purposes and for the preparation of any subsequent security, precautionary attachment and recovery strategy.
Precautionary Attachment
A precautionary attachment is not a form of security such as a mortgage, pledge, suretyship or bank guarantee obtained at the time the contract is concluded. It is a form of provisional legal protection designed to preserve the future enforceability of a monetary claim through compulsory enforcement. It allows the debtor's assets, receivables and other rights held by the debtor or by third parties to be provisionally attached before the stage of final attachment is reached.
Under Article 257 of the Enforcement and Bankruptcy Law, as a rule, a creditor holding a due and payable monetary claim that is not secured by a pledge may request a precautionary attachment over the debtor's movable and immovable assets, receivables and other rights held by the debtor or by third parties. In respect of due and payable monetary claims, the creditor is not additionally required to show that the debtor is dissipating assets, preparing to abscond or that a similar specific risk exists.
Where a monetary claim has not yet fallen due, a precautionary attachment may be requested only in the specific circumstances prescribed by law. These include cases where the debtor has no fixed place of residence, or where, with the intention of evading its obligations, the debtor conceals or removes assets, prepares to abscond or absconds, or engages in fraudulent transactions prejudicing the creditor's rights for that purpose. Where a precautionary attachment is imposed on one of these grounds, the claim becomes due and payable against the debtor to the extent provided by law.
A precautionary attachment order is issued by the court. Under Article 258 of the Enforcement and Bankruptcy Law, the creditor must submit evidence capable of satisfying the court as to the existence of the claim and, where applicable, the grounds for precautionary attachment. Given the nature of precautionary attachment proceedings, the applicable standard is not full proof but prima facie proof. Mere assertions are not sufficient; the evidence submitted must be capable of creating a sufficient degree of judicial conviction as to the existence of the claim and the other applicable requirements. The court has discretion as to whether to hear the parties before issuing its decision. For this reason, it is important to retain in an orderly manner documents supporting the claim, such as contracts, invoices, delivery documents, cheques, promissory notes, acknowledgments of debt, accounting records, reconciliation documents and correspondence between the parties.
As a rule, a creditor seeking a precautionary attachment must provide security to cover any losses that the debtor or third parties may suffer as a result of an unjustified attachment. No security is required where the claim is based on a judgment; where it is based on a document having the effect of a judgment, the court has discretion as to whether security should be required.
Obtaining a precautionary attachment order is not sufficient in itself. Under Article 261 of the Enforcement and Bankruptcy Law, the creditor must request enforcement of the order from the enforcement office within the territorial jurisdiction of the court that issued the order within ten days from the date of the order; otherwise, the precautionary attachment order automatically lapses.
Under Article 264 of the Enforcement and Bankruptcy Law, where the precautionary attachment has been enforced before the filing of a lawsuit or the commencement of enforcement proceedings, the creditor must commence enforcement proceedings or file a lawsuit within seven days from the enforcement of the attachment; if the attachment was carried out in the creditor's absence, the seven-day period runs from service of the attachment record on the creditor. If the debtor objects to the payment order in the enforcement proceedings, the creditor must, within seven days from service of the objection, apply to the enforcement court for removal of the objection or file an action before the competent court. If the enforcement court rejects the request for removal of the objection, the creditor must file an action within seven days from pronouncement or service of the rejection decision. Where the precautionary attachment has been imposed during an action for the receivable, or has been maintained by subsequently filing such an action, enforcement proceedings must be commenced within one month from service of the judgment on the merits. Failure to comply with these time limits results in the precautionary attachment becoming ineffective.
Accordingly, a precautionary attachment does not create security in rem such as a mortgage or pledge and does not guarantee that the receivable will ultimately be recovered. However, where the statutory conditions are satisfied, it provides an important form of legal protection by preserving the debtor's assets during the recovery process and reducing the risk that subsequent compulsory enforcement will become ineffective.
Trade Credit Insurance
Trade credit insurance is not security in rem or personal security in the same sense as a mortgage or suretyship. It is a risk management instrument through which payment risk may be managed by insurance.
It may be particularly relevant for businesses that make deferred-payment sales to a large number of customers, as it allows a specified portion of the commercial risks associated with debtors' financial distress or default to be insured.
The insurer's liability is determined in accordance with the terms of the policy, including:
• the overall insurance limit;
• the credit limit applicable to each debtor;
• the coverage percentage;
• deductibles;
• exclusions; and
• notification and reporting obligations.
Accordingly, the existence of trade credit insurance does not mean that all company receivables are unconditionally insured.
Factoring
Factoring is not a form of security in the conventional sense.
It operates through the assignment to a factoring company of receivables arising from the sale of goods or services and may provide financing, collection services and, depending on the structure of the agreement, assumption of credit risk.
Whether the transaction is with recourse or without recourse is one of the principal factors determining which party ultimately bears the economic risk if the receivable is not paid.
Cash Collateral and Blocked Accounts
Cash collateral, deposits or the blocking of funds held in a bank account may also form part of the security structure in commercial agreements.
In such cases, the legal nature of the funds, the account in which they will be held, the event upon which the creditor becomes entitled to recover them, any right of set-off, the conditions for releasing the block and repayment of the funds upon discharge of the debt should be expressly regulated.
Letters of Credit in International Trade
Letters of credit are an important instrument for managing payment risk, particularly in international trade.
A letter of credit is not a mortgage, pledge or suretyship in the conventional sense. It is a separate payment mechanism under which a bank makes payment upon presentation of documents complying with the terms of the credit.
Whether the letter of credit is confirmed or unconfirmed, the documentary requirements, applicable time limits and governing rules should be determined when the transaction is structured.
12. Can Security Granted at a Later Stage Be Subject to an Action for Avoidance?
Yes, where the statutory conditions are satisfied.
Under Article 279 of the Enforcement and Bankruptcy Law, pledges granted subsequently in respect of an existing debt for which the debtor had not previously undertaken to provide security may constitute transactions subject to avoidance where they were granted within the statutory one-year period and the other applicable conditions are satisfied.
Accordingly, where no security was agreed at the outset of the commercial relationship and a mortgage or pledge is subsequently obtained for an existing debt, that security may be less robust than security taken from the outset. Where the statutory conditions are met, other creditors may challenge such security through an action for avoidance.
For this reason, in high-value and deferred-payment transactions, security should preferably be agreed and created when the commercial relationship is established or simultaneously with the creation of the debt.
13. Different Rules Apply Where the Debtor Is a Consumer
The explanations above primarily concern commercial relationships and company receivables.
Where the counterparty acts as a consumer, the mandatory provisions of Consumer Protection Law No. 6502 must also be taken into account.
Under Article 4/5 of the Consumer Protection Law, negotiable instruments issued in connection with consumer transactions may only be issued in registered form and separately for each instalment payment; instruments issued in breach of this rule are invalid against the consumer.
Under paragraph six of the same article, personal security obtained in respect of the consumer's obligations is deemed to constitute an ordinary suretyship regardless of the terminology used.
Accordingly, security structures commonly used for commercial company debts should not automatically be applied to consumer transactions.
14. What Checks Should Be Carried Out Before Security Is Taken?
It is not sufficient for security merely to have been validly created as a matter of law. It must also have genuine economic value from a recovery perspective.
Accordingly, particularly in high-value transactions, the following matters should be assessed in advance:
1. The legal basis, amount, maturity and conditions governing when the debt becomes due and payable should be clearly determined, and the payment schedule and interest provisions should also be expressly regulated.
2. The identity, representation authority and signing authority of the debtor and any third party providing security should be verified.
3. Where a cheque is to be accepted, its mandatory elements, issue date, signature and signing authority, presentation period and any accessible QR-code or risk information should be reviewed.
4. Where a promissory note is to be used, its mandatory elements and the capacities of the parties should be reviewed, and the need for protest should be separately considered in relation to recourse against parties liable by way of recourse.
5. Where a mortgage is to be obtained, the owner, value, existing mortgages, attachments, other encumbrances and the rank of the proposed mortgage should be investigated.
6. In the case of immovable property owned by an individual, its status as a family home should also be checked.
7. Where a pledge over movable assets or a commercial enterprise is to be taken, the pledged assets, scope of the enterprise, relevant registries and TARES records should be reviewed.
8. The actual financial capacity and assets of any surety, avalist or guarantor should be assessed in addition to his or her legal liability.
9. The amount, term, secured risk, first-demand nature and conditions for calling any bank guarantee should be reviewed.
10. The receivables covered by the security and the maximum secured amount should be clearly specified, and it should also be determined whether interest, enforcement costs and other ancillary claims fall within the scope of the security.
11. To the extent possible, creation of the security should not be postponed until after the goods, funds or credit have been provided.
12. The implications of security obtained at a later stage should be considered from the perspective of avoidance actions, concordat proceedings and bankruptcy.
13. Commercial transactions should be distinguished from consumer transactions.
14. Where multiple forms of security are obtained, the potential enforcement and recovery strategy should be considered when the transaction is first structured.
15. The timing for creation of the security and the manner in which it will be released or returned after discharge of the debt should be expressly regulated.
Which Form of Security Is More Reliable?
There is no single "best form of security" for every commercial relationship.
Where the debtor owns immovable property with sufficient value and an appropriate ranking position, a mortgage may be suitable. Where the business owns economically valuable movable assets or receivables, a pledge over movable assets may be considered. Where the statutory requirements are satisfied and the intention is to subject the enterprise as a whole to security, a pledge over the commercial enterprise may be appropriate.
Where the aim is to use a commercial payment instrument and benefit from rights specific to negotiable instruments law, a cheque may be used. Where the intention is to incorporate an unconditional promise to pay a specified sum into a negotiable instrument, a promissory note may be appropriate. Where additional liability of another person under negotiable instruments law is desired in respect of a cheque or promissory note, an aval may be obtained.
Where personal liability of a financially capable third party is intended, a suretyship or guarantee may be considered depending on its legal structure. In high-value corporate transactions, a properly drafted bank guarantee may be used where it is desirable to incorporate the bank's payment obligation into the security structure.
For businesses making deferred-payment sales to a large number of customers, risk management methods such as trade credit insurance and factoring may also be appropriate.
In high-value commercial relationships, the principal issue is often not the selection of a single form of security, but the creation of a legally valid security structure consisting of complementary instruments.
Conclusion
Protection of a commercial receivable begins not when enforcement proceedings are initiated following non-payment, but at the stage when the commercial relationship is established.
Once the debtor has entered into financial distress, obtaining effective security may become significantly more difficult or even impossible. In addition, certain forms of security obtained subsequently for an existing debt may, where the statutory conditions are satisfied, give rise to issues under avoidance and bankruptcy law.
Accordingly, when preparing contracts for deferred-payment and high-value transactions, consideration should be given not only to the amount of the debt and the payment date, but also to which instruments — including cheques, promissory notes, avals, mortgages, pledges over movable assets, pledges over commercial enterprises, suretyships, bank guarantees, guarantees and other security or risk management mechanisms — are to be used, in what order, for what amount and at what stage they are to be created.
The actual creation of security in compliance with the applicable statutory form, verification of its economic value and selection of the appropriate enforcement route at the recovery stage are of decisive importance in protecting company receivables.
The economic value of the secured assets and any existing encumbrances should also be verified, and the financial capacity of the persons providing security should be assessed. Statutory time limits applicable to negotiable instruments such as cheques and promissory notes must be observed, and where multiple forms of security are available, the enforcement routes to be used at the recovery stage should be planned when the transaction is first structured.
The key to protecting company receivables is not to obtain as many forms of security as possible, but to establish a security structure that is legally valid, economically effective and designed in conjunction with an appropriate recovery strategy.
This article has been prepared for general information purposes only. The type and content of any security, recovery or risk management instrument to be used in a particular commercial relationship should be assessed separately in light of the nature of the debt, the capacities of the parties, the assets available, the contractual structure, the characteristics of any negotiable instruments and the specific legislation applicable to the transaction.