Surety is one of the most common collaterals used by banks under Turkish Law. The new Turkish Code of Obligations (“New TCO”) which was enter into force in July 2012 and introduced radical changes on the surety. The changes follow those of Swiss Obligations’ Law after 1941 and concern the protection of surety.
The secondary character of the suretyship is upheld, except in cases in which the obligation is invalid due to juridical incapacity of the main debtor or due to error (vices of consent). When this happens, the surety is still liable according to the principles of the suretyship, provided that the surety knew about the defect when accepting the obligation (Art. 582, TCO).
Previously under the Code of Obligations with No. 818 (“TCO”), limits on surety provider’s liability were vague. The New TCO aims to provide new limits on the liability of the surety providers in order to protect their rights against beneficiaries, primarily banks.
FORM OF SURETY The first requirement under the New TCO is that the maximum amount that will be secured by the surety provider shall be indicated in the surety in its own handwriting. The surety has to write with his own handwriting and sign the extent of the liability.
The second requirement is that the surety date. The type of the surety (i.e. several) shall also be inserted into the surety and such again must be done in handwriting by the surety provider.
Spousal approval (§ 584) is a new validity requirement. In the event the surety provider is a real person, another requirement provided under the New TCO is the approval of surety provider’s spouse. Article 584 of the New TCO also clarifies that surety provider’s spouse’s approval must be given prior to the execution of the surety or at the time of execution the latest.
Pursuant to § 603, requirements for the validity of the suretyship also apply to all personal securities of a natural person (for example guarantee, assumption of debt).
Types of Surety Ordinary surety Several surety Joint surety
Ordinary Surety Article 585 of the New TCO regulates ordinary surety and provides for the same requirements as the TCO for recourse against the surety providers. Accordingly, creditors may only recourse directly to the surety provider (without having to first demand the payment of the debt from the primary obligor) under the below listed circumstances:
when proof of insolvency is obtained at the end of enforcement proceedings against the debtor; when the enforcement against the debtor in Turkey becomes impossible or considerably difficult; the debtor is bankrupt; or a composition period is granted to the debtor.
Several Surety The existing provisions of the TCO allow creditors to seek collection from either the primary obligor or surety provider in case of joint and several surety (Art.7, TCC). Although this main principle is preserved under the New TCO, in case of delay in performance, prior to pursuing surety provider or liquidating pledge on immovable the creditors are required to send a notification to the defaulting primary obligor. However, if it is obvious that primary obligor does not have the ability to pay, surety provider may be pursued directly.
Another new requirement sought under the New TCO is that if a claim of a creditor is secured by a movable pledge subject to delivery or by a pledge on receivables, then such creditor cannot have recourse to the surety provider prior to liquidating such pledge.
The exceptions to this principle will only apply if: there is a judgement stating that the debt cannot be collected through enforcement of the pledge; the debtor is bankrupt; or a composition period is granted to the debtor.
Joint Surety Joint Surety is a type of collateral where each surety provider undertakes to ensure the fulfilment of its own portion of the debt of the primary obligor and is responsible for fulfilment of the other surety providers’ undertakings in relation to the principal debt.
Limitation on Duration of the Surety Pursuant to Article 598 a surety will automatically expire by the end of ten years from the execution date of the surety. Nonetheless, an opportunity for an extension has also been stated under the New TCO provided that a notice of extension is served one year prior to the expiry date of the surety. In such case surety may be extended upon surety provider’s written acceptance. The period of extension may again only be a maximum of ten years.
RESCIND THE SURETY Article 599 of the New TCO further introduces a new provision aiming the protection of the surety provider. Accordingly, if a surety for future debts is provided and the primary obligor’s financial status is significantly disrupted after the execution of the surety or the primary obligor’s financial condition is much worse than the surety provider assumed in good faith; then the surety provider may rescind the surety with a written notice at any time prior the occurrence of the debt. However, in such case the surety provider will be liable to compensate the damages of the creditor.