• Assignment of Receivables as Security
  • November 18, 2015
  • Law Firm: Erdem Erdem Law Office - Istanbul Office
  • Introduction

    The assignment of receivables, which constitutes an important security method under the obligations law, is regulated under Articles 183 to 190 of the Turkish Code of Obligations, No: 6098 (“Code”). The Code does not specifically define assignment of receivables. Pursuant to Art. 183 of the Code, the assignor assigns its receivables arising from an obligation under a contract to a third party without the necessity of the consent of the debtor. We will hereby briefly explain the voluntary assignment of receivables under Turkish law and banking practice.

    Assignment of Receivables

    Legal Nature, Scope

    The receivables right is assigned to the assignee under the assignment of receivables[1]. The assignment of receivables is a way of disposal; therefore, the assignor should have the rights arising from these receivables[2]. For example, an assignment of receivables over an asset having attachments or injunctive relief is invalid since there is no power of disposition over it.

    The assignment of receivables is subject to the validity of the main agreement, and this is commonly accepted by the scholars[3]. In other words, if the transaction between the assignor and assignee is invalid, then the assignment of receivables that is based on the main agreement, shall be invalid, as well.

    The assignment of receivables that is used as security under banking practices, and is generally enforced if the party fails to duly fulfill its obligations (in the event of default). If the assignment of receivables is contingent upon the occurrence of an event, then the relevant receivables shall be paid to the assignor after the occurrence of such condition or event.

    Form of the Assignment of Receivables Agreement

    Pursuant to Art. 184 of the Code, the assignment of receivables agreement shall be made in writing. An assignment of receivables agreement that is not executed shall be void. The express intention, declaration, and signature of the assignor are the key points, and the intention of the assignee is neither required, nor necessary, for the assignment of receivables agreement to be valid[4]. In practice, the assignment of receivables agreement is mutually executed by the assignee and the assignor. Moreover, in transactions where a bank is the assignee, the bank will generally prefer and require the execution of the assignment of receivables agreements to be notarized, by stating that this method strengthens the proof mechanism, and determines the time for such an assignment. Thus, the debtor is notified by the notary public.

    The terms and conditions regarding the assigned receivables are set forth under the assignment of receivables agreement; the assigned receivables shall be determined as specifically set forth under the agreement.

    Effects and Consequences

    The subject of the assignment of receivables also includes affiliated rights (Art. 189 of the Code). Interest accrued on the assigned receivables shall also be deemed to have been assigned. However, the parties may mutually determine to omit the accrued interest within the scope of the assignment of receivables[5].

    The right of filing a law suit and enforcement rights arising from the assigned receivables shall also be assigned to the assignee. Compensation claims and penalty claims, as well as securities, such as pledges and suretyships, arising from the assigned receivables, are also to be transferred with the assigned receivables.[6] The right of selection is one of the transferred rights that are aligned with the assigned receivables to the benefit of the assignee. The assignor shall deliver all documents evidencing the assignment of receivables and other information in order to request and claim the assigned receivables to the assignee (Art. 190 of the Code).

    The consent of the debtor is not required to validate the assignment of receivables (Art. 183 of the Code). The assignment of receivables agreement is executed between the assignor and the assignee without the consent of the debtor that is attached to the subject assigned receivables. However, the debtor, who has no knowledge of the assignment (has not been notified of the assignment of receivables agreement), shall be released of its obligations when he makes a bona fide payment to the assignor (Art. 186 of the Code). According to banking practices, the assignor is requested to notify the debtor of the execution of the assignment of receivables agreement. This requirement is generally regulated under the assignment of receivables agreement, and it is usually deemed that the assignment of receivables agreement is duly perfected when the notification is made to the debtor. Moreover, in practice (mostly in the cases where the banks’ are the assignee) confirmation by the debtor to receive such a notification with regard to the assignment of receivables agreement is requested. Some debtors may submit confirmation with no questions raised; however, the confirmation process may be troubled, and may not be smoothly effected. Upon the notice of assignment, the payment obligation of the debtor is to the assignee[7].

    The debtor may raise defenses against the assignor to the assignee at the time of notice of the assignment of receivables (Art. 188 of the Code). Such defenses may include a plea (e.g. non-payment plea) and objection rights[8].

    Conclusion

    The assignment of receivables is one of the most important and commonly used security methods, and will be continued to be applied in banking practices. Two key points are that the assignment of receivables agreement shall be executed in writing, and the debtor is to be notified with regard to the assignment. The assignee generally requests a letter from the debtor confirming that the assignment of receivables agreement is in place, and that he is aware of the assignment.



    [1] Prof. Dr. Fikret Eren, 6098 sayili Türk Borçlar Kanununa Göre Hazirlanmis Borçlar Hukuku Genel Hükümler, 14. Baski, Yetkin Yayinlari, Ankara, 2012, p. 1224.

    [2] Eren, p. 1228.

    [3] Pls see Prof. Dr. Kemal Oǧuzman/ Prof. Dr. M. Turgut Öz, Borçlar Hukuku Genel Hükümler Cilt-2 for an opposite opinion, 9. Basi, Vedat Kitapçilik, Istanbul, 2012, s.534.

    [4] Eren, p. 1233.

    [5] Oǧuzman/Öz, p. 549.

    [6] Eren, p. 1239-1240.

    [7] Oǧuzman/Öz, p. 552.

    [8] Eren, p. 1241.