The promissory note is a type of negotiable instrument that carries an undertaking to pay a given sum and that the Turkish Commercial Code makes subject to strict formal conditions. Serving both a payment and a credit function in commercial life, this document is called a note in everyday language. The issuing party undertakes to make payment on the date determined and delivers the document to the creditor. The creditor may hold the note until maturity and also has the possibility of transferring it to third parties unless otherwise agreed.
The note does not, however, always leave the holder’s possession by his will. In cases such as theft or loss, the risk arises of the document falling into the hands of others; the destruction of the note for various reasons is also regarded as its leaving the holder’s possession against his will. Where presentation of the note, or establishment of the right written on it, becomes impossible for reasons of this kind, this is termed loss of the instrument.
The legislator has provided a number of legal avenues for the protection of the lawful holder in the event of loss. Foremost among these is the action for the annulment of a note. In this action, the person describing himself as the lawful holder proves that the note has been lost and seeks its annulment. If the court is persuaded as to the loss, it orders the annulment of the note. Following the annulment decision, the holder may assert his claim without relying on the note, or may request that a new note be issued on condition that he bears the costs.
What Is a Promissory Note?
Before the route of annulment can be taken, there must first be a note bearing the qualities required by the Turkish Commercial Code. The mandatory elements are governed by Art. 776 of the Turkish Commercial Code:
Art. 776 of the Turkish Commercial Code
“The text of the instrument must contain the word ‘promissory note’ or ‘note payable to order’, or, if the instrument is written in another language, the equivalent of that word in that language; an unconditional promise to pay a given sum; the maturity; the place of payment; the name of the person to whom or to whose order payment is to be made; the date and place of issue; and the signature of the issuer.”
It is essential that these elements appear directly in the note or that they be capable of determination with the aid of the supplementary provisions of the Turkish Commercial Code. Documents that do not bear those elements and cannot be established by means of the supplementary rules either cannot form the subject of an action for annulment.
For detail on the subject, the note titled Mandatory Elements Required in a Promissory Note may be consulted.
In Which Cases Is a Note Lost?
The bringing of the action depends on the note having been lost. Situations in which presentation of the document has become impossible for reasons such as its being stolen, lost, torn or burnt are accepted as loss.
That said, in order to speak of loss it is not required that the note have left the holder’s possession entirely or have been destroyed. To give an example, since the writing on the note becoming illegible as a result of getting wet would make it impossible to determine the right contained in the document, the conclusion in that case too is that the note has been lost.
Seeking a Prohibition on Payment Against the Debtor
The document leaving the holder’s possession against his will brings with it the danger that third parties who obtain it will take advantage of it. Indeed, persons who find or steal a lost or stolen note may present the document to the debtor and ask that payment be made to them. In order to forestall this possibility, an order prohibiting the debtor from making payment may be sought. The court may assess the assertion of loss and order that the debtor be restrained from payment. This decision, which is in the nature of an interim injunction, is termed a prohibition on payment.
It should be noted that a prohibition on payment cannot be sought where the note has been destroyed. For the purpose of this measure is to eliminate the risk of the sum being paid to an unauthorised person; if the note has disappeared, its presentation to the debtor, and therefore the making of payment, is in any event impossible.
For the prohibition to be applied, a request must be made to the commercial court of first instance of the place of payment or of the holder’s place of residence. In the absence of such a request, it is inconceivable that the court should order a prohibition on payment of its own motion. The request may be raised together with the action for annulment and may also be made before the action. Once the prohibition decision has been given, the debtor cannot make payment even if the note is presented to him. A debtor who wishes to be released from his debt may, for his part, request permission to deposit from the court. The court may permit the payment to be deposited when maturity arrives; in that case the place of deposit must also be indicated. By payment made to the place of deposit, the debtor is deemed released from his debt.
If the identity of the person holding the note is known, the lawful holder is granted a suitable period in which to bring an action for restitution. If no action is brought within that period, the court lifts the prohibition on payment. If, by contrast, the person who obtained the note is not known, the route of the action for annulment may be taken.
Who May Bring the Action for the Annulment of a Note?
In the event of loss, the lawful holder may bring an action for annulment before the commercial court of first instance. The claimant must also submit to the court convincing evidence establishing that the note has been lost.
The matter that gives rise to debate at this point is whether the drawer who issued the note has the possibility of bringing the action. The approach of the Court of Cassation is not to accord the drawer such an entitlement; indeed, actions for annulment brought on the application of the drawer are dismissed in practice.
Decision of the 11th Civil Chamber of the Court of Cassation dated 16.03.2015, File No. 2014/18823, Decision No. 2015/3610:
“Counsel for the claimant asserted that the promissory note of which his client was the drawer had been lost in transit and requested and brought an action for a decision annulling the promissory note. The court dismissed the action on the ground that, under Article 757 by reference of Article 818(s) of the Turkish Commercial Code, the right to bring an action for annulment on account of loss is accorded to the holder, and that the claimant was the drawer of the promissory note. …it was unanimously decided to dismiss all the grounds of appeal of the claimant’s counsel and to uphold the judgment, which was found to be in accordance with procedure and with the law.”
That the action may be brought only by the lawful holder does not necessarily require the claimant to be the holder of the right, that is, the creditor under the note. A person who has taken the note by an endorsement for collection may also bring the action. The decisive criterion is whether the position of holder of the note has been reached through an uninterrupted and regular chain of endorsements.
Decision of the 11th Civil Chamber of the Court of Cassation dated 11.12.2017, File No. 2016/8623, Decision No. 2017/7053:
“The action concerns a request for the annulment of a promissory note on account of loss, and the court dismissed the action on procedural grounds in the terms written, on the ground that the claimant was not the lawful holder. It appears from the content of the file, however, that the claimant bank took the promissory note whose annulment is sought by an endorsement for collection and holds the capacity of holder as agent. Since an endorsement for collection is a form, particular to negotiable instruments, in which the power of representation to collect the sum of the instrument and to carry out the transactions protecting the rights attached to it appears, the bank, in its position as holder as agent, has the right to request the return of the instrument held by a third person or to seek its annulment on account of loss. In that case, the court should have accepted that the claimant had standing to sue and should have given a decision by entering upon the merits of the matter; the dismissal of the action on procedural grounds in the terms written was not correct, and the decision had to be quashed.”
Publication of a Notice for the Production of the Note
Once the action has been brought, the court’s first task is to examine whether the note has genuinely been lost. If a positive conviction is reached as to the loss, a public notice is issued for the return of the note. In the notice, the person holding the document is called upon to return it and is warned that, should the return not take place, the note will be annulled.
The period to be granted for production of the note is not less than three months and not more than one year; within that range the discretion belongs to the court. In the case of notes that have fallen due, where less than three months remain before the expiry of the limitation period, it is also possible for the court to fix a shorter period. The period begins, for notes that have fallen due, on the day of the first notice, and for notes not yet due, on the date on which maturity falls. The notice is published three times in the Turkish Trade Registry Gazette; the court may, however, also order different methods of notice.
If, upon the notice, the note is delivered to the court, the lawful holder is given a period in which to bring an action for restitution. If the holder does not bring that action within the period granted, the note is returned to the person who delivered the document to the court and any prohibition on payment is brought to an end.
If the note is not submitted to the court within the period granted, a decision of annulment is given.
In connection with the subject, the note titled Return of Consumer Notes may also be examined.
The Annulment Decision and Its Consequences
With the court’s order of annulment, the loss of the note is proved. For this reason it is no longer possible to seek payment by presenting the lost note. By contrast, the person who brought the action may assert the right contained in the note without relying on the note. Requesting that a new note be issued, on condition that he bears the costs, is likewise an open possibility.
There is, however, a point to be underlined: for the right to be asserted without the note and for the issue of a new note to be requested, a decision must be obtained from the court. The fact that the note has been annulled does not mean that these entitlements may be exercised automatically.
In conclusion, where the note is lost in any manner, acting quickly and preventing possible losses of rights is of great importance.
Independent Legal Assessment
In note annulment files, the factor that determines the outcome is most often not the debate on the merits but timing. If a prohibition on payment has not been sought from the moment the loss became known, the possibility that the person who obtained the note will apply to the debtor and collect payment remains open in practice. For this reason, in practice it is preferred that the request for an injunction be raised before the action for annulment or, at the least, at the same time as the statement of claim.
The matters that stand out in structuring the process are the following:
- Documenting the claimant’s position within the chain of endorsements, having regard also to the possibility of an endorsement for collection
- Taking into account from the outset the settled approach that an action cannot be brought in the capacity of drawer
- Gathering, before the action is brought, the evidence establishing the loss (such as a courier record, an official report, a notification or witness testimony)
- Not confusing the request for a prohibition on payment with the cases in which the note has been destroyed altogether
- Calculating the commencement of the notice period separately according to whether the note has fallen due
- Not overlooking that, following the annulment decision, a separate decision must be obtained for the right to be asserted without the note or for a new note to be issued
Independent Legal provides advisory and litigation services throughout the whole process in disputes arising from negotiable instruments, from requests for a prohibition on payment to the conduct of actions for annulment.