Enforcement proceedings are foremost among the most effective instruments available to a person unable to recover a debt. Not every file in which the power of enforcement is exercised is backed by a genuine claim, however. Proceedings pursued on the basis of a debt that never arose, or that has long since been extinguished, shake the commercial standing of the person against whom they are directed and also undermine the idea of legal certainty. The legislature has not remained indifferent to this picture and has provided a special sanction protecting the debtor against a creditor who diverts the right of enforcement from its purpose: bad-faith compensation.
The basis of the provision, Art. 67(2) of the Enforcement and Bankruptcy Act No. 2004, provides that where the unlawfulness of the proceedings and the creditor’s bad faith emerge at the conclusion of the trial, compensation of not less than twenty per cent of the claim shall be awarded in the debtor’s favour. The function of the institution is not confined to punishment; it has the character of a balancing element that gives practical effect to the rule of good faith in enforcement law.
The boundaries of its application have largely been drawn by the courts, and whether bad faith is present has been examined separately in each file and on the basis of concrete facts. In this briefing note we assess, in turn, the concept of unlawful enforcement, the conditions required for the compensation, the basis of calculation, the typical patterns reflected in the case law and the problems of proof encountered in practice.
What Is Bad-Faith Compensation?
Definition and Function of the Concept
Bad-faith compensation is compensation of a special character, awarded in favour of the person against whom enforcement is directed where the court establishes that the creditor who commenced the proceedings, relying on a claim that does not exist or that has lost its effect, acted in bad faith.
The moment at which the institution comes into play is the moment at which the power of enforcement is used for a purpose other than its own. The undue enforcement pressure borne by the debtor is relieved in this way; at the same time a deterrent function is served, so that comparable uses are not repeated.
Put differently, the provision aims both at redress for an inappropriate threat of enforcement and at forestalling conduct of that kind.
Statutory Basis (Art. 67 et seq. of the Enforcement and Bankruptcy Act)
The principal provision on which the institution rests is Article 67 of the Enforcement and Bankruptcy Act No. 2004, which governs the setting aside of an objection, together with the provisions that follow it. Under that provision, where the proceedings prove to be unlawful, the judge additionally considers whether the creditor acted in bad faith in commencing them. If bad faith is established, compensation is awarded in the debtor’s favour.
Alongside this special provision, the rule of good faith in the Code of Civil Procedure No. 6100 and the general provisions prohibiting abuse of right also enter into the assessment in a complementary manner. Those principles are significant in that they mark out the limits of the duty to act honestly in the field of enforcement and of the use of the power of enforcement in accordance with its purpose.
Conditions for an Award of Compensation
The compensation is a consequence attached to the creditor’s embarking on unlawful and bad-faith proceedings. Whether it may be awarded, by contrast, depends on the conditions required by the legislation being present together. Those conditions are examined individually below.
The Proceedings Must Be Pursued Without a Judgment
The compensation arises in proceedings that do not rest on a court decision or on a document having the quality of a judgment, that is to say, in proceedings pursued without a judgment. Since there is no provision permitting such compensation in proceedings based on a judgment, bad-faith compensation cannot be claimed in that type of proceedings.
The principal situations in which the institution may find application are the following:
- Proceedings for rent arrears that do not include a claim for eviction or delivery
- The general attachment route, the most frequently used form of enforcement without a judgment
- Proceedings based on a negotiable instrument in which the creditor is in bad faith or at gross fault
By contrast, such compensation cannot be awarded in proceedings based on a judgment. In proceedings specific to negotiable instruments the position is limited: it is required either that the debtor’s objection has been upheld by the enforcement court on substantive grounds (Art. 169/a of the Enforcement and Bankruptcy Act No. 2004) or that the bad faith or gross fault of the creditor who put the instrument into enforcement has been established (Art. 170 of the Enforcement and Bankruptcy Act No. 2004).
The objection dimension of the subject is addressed separately under the heading Objection to Enforcement Proceedings Without a Judgment and Its Legal Consequences.
The Debtor’s Objection and the Creditor’s Action
Where the debtor who has been served with the payment order notifies an objection within the statutory period, the proceedings are stayed automatically. The creditor’s ability to take the process forward depends on having that objection set aside, and for that purpose recourse to an action is obligatory.
Faced with stayed proceedings, the creditor has two options:
- Action for annulment of the objection: Even without a written document to hand, the creditor may bring this action by proving the existence of the claim under the general provisions.
- Action for removal of the objection: This is open to a creditor holding a written document of the kind enumerated in Arts. 68 and 68/a of the Enforcement and Bankruptcy Act No. 2004 — a signed invoice or contract, for example — and has the feature of being concluded more quickly.
Both routes require a trial. In that trial the burden of establishing that the claim genuinely exists lies with the creditor.
Unlawfulness of the Proceedings and the Creditor’s Bad Faith
For the compensation to be available, the trial must produce an outcome in the debtor’s favour, that is to say, the unlawfulness of the proceedings and the creditor’s bad faith must be established by the court. Taking the date of the proceedings as the reference point, the proceedings are said to be unlawful where the claim never arose, has been extinguished, or its existence could not be proved by the creditor.
Unlawfulness is not, however, sufficient on its own; it must also be shown that the creditor acted in bad faith in embarking on the proceedings. Bad faith is taken to be present in the case of a creditor who knew, or was in a position to know, that the debt relied on did not in fact exist or had ceased to exist.
This assessment is left largely to the judge’s discretion. The court weighs together the evidence submitted to the file, the parties’ explanations and the manner in which the proceedings were commenced; the amount of the debt, the nature of the proceedings and the creditor’s general line of conduct form part of that assessment. In the end the judge awards compensation according to their considered conviction.
A Request by the Debtor Must Be Made
The court cannot take up this compensation of its own motion. The debtor is required to set out the request expressly in the statement of defence. In the absence of a request, the court cannot make an order to that effect even where all the conditions are satisfied.
Calculation of the Compensation
The amount of the compensation is assessed by the court, subject to its not falling below 20% of the principal claim. That rate is a lower threshold; having regard to the features of the file, the judge may also award a higher sum.
The basis of calculation is the principal claim stated in the enforcement request or in the action. Accrued interest and other ancillary claims are not taken into account. For that reason a high rate of interest does not directly increase the amount of the compensation.
To put it concretely: in a file where the amount subject to enforcement is TRY 100,000, if a request has been made by the debtor the court may order the creditor to pay compensation of at least TRY 20,000.
Assessment of Bad Faith in the Case Law
The boundaries of the institution have largely been determined by the decisions of the higher courts. The approach prominent in the case law is that bad faith must be shown by concrete facts rather than by abstract assertions. Not every set of proceedings found to be unlawful is automatically treated as being in bad faith; it is required that the creditor acted in the knowledge that the debt did not exist, or in clear breach of the rule of good faith.
The typical patterns accepted in the decisions as indicating bad faith may be summarised as follows:
- Embarking on enforcement solely for the purpose of applying pressure, although no debt relationship whatsoever exists between the parties
- Founding the proceedings on a document known to be forged or invalid
- Commencing fresh proceedings for the same claim although the claim has been recovered in its entirety
The decisions set out below show how bad faith has been given concrete form, particularly in banking and finance practice.
Istanbul Regional Court of Appeal, 12th Civil Chamber, Case No. 2023/518, Decision No. 2023/405 (16.03.2023)
"The bank, which is under an obligation to act as a prudent merchant, must be taken to have been aware of the signature that ought to have been affixed in its presence. Accordingly, since the bank’s bad faith is apparent from the fact that enforcement proceedings were brought on the basis of a signature that did not accord with the truth, bad-faith compensation must be awarded against the bank. (…) it was ordered that the bad-faith compensation calculated at the rate of 20% over the surety limit of TRY 850,000 be recovered from the claimant."
The criterion adopted in the decision is clear: the failure of the bank, which is under a duty to act as a prudent merchant, to ensure that the signature was affixed in its presence was made the basis of bad faith.
Gaziantep Regional Court of Appeal, 11th Civil Chamber, Case No. 2021/440, Decision No. 2022/1294 (14.09.2022)
"In the present case, the claimant, which as a finance company did not ensure that the signature on the loan agreement was affixed in its presence, was under an obligation to exercise the necessary care and diligence as to whether the signatures affixed to the agreement belonged to the person affixing them, and was also in a position to know whether the signature on the loan agreement belonged to the respondent. In these circumstances, since the surety signature on the agreement turned out not to belong to the respondent, the claimant must be held to have been in bad faith, and it was erroneous to dismiss the respondent’s claim for bad-faith compensation on the written grounds, when bad-faith compensation ought to have been awarded against the claimant."
The common denominator of both decisions is the standard of care expected of an institutional creditor. A finance institution that does not carry out a signature check is taken to have been in a position to know to whom the signature belonged, and bad faith is founded upon that finding.
Prominent Problems and Approaches in Practice
The Difficulty of Proving Bad Faith
The most demanding aspect of practice is that bad faith can most often be shown not directly but by circumstantial evidence.
A clear admission or document showing that the creditor acted knowingly and unlawfully is rarely found in the files. For that reason the courts are obliged to reach a conclusion by relying on the correspondence between the parties, payment records, witness statements or the files of actions heard previously.
Overcoming the difficulty depends on the preparation of evidence being conducted meticulously from the very first day of the proceedings. Preserving records of communications, obtaining without delay the documents showing that the debt has been paid or extinguished, and submitting them to the file within the applicable period are decisive. Since the burden of proof lies principally with the debtor, a failure to discharge that burden may leave even a request that is well founded in substance without result, on the ground that bad faith could not be established.
Protracted Proceedings and Pressure on the Debtor
In proceedings commenced in bad faith, the debtor remains under an inappropriate threat of enforcement for as long as the trial continues.
As the closure of the enforcement file, the award of compensation and the finality of the judgment are spread over time, the loss suffered by the debtor ceases to be merely financial; their commercial standing is damaged as well.
It is a frequently observed outcome in practice that banks and finance institutions construe such a record against the debtor and refrain from extending credit, even where the proceedings are subsequently found to have been unlawful. A person made the subject of wholly baseless proceedings thus in fact bears the loss of economic standing.
Recommendations on Managing the Process
Limiting the drawbacks listed above depends on the process being framed correctly from the outset. For the party against whom proceedings are directed as much as for the party commencing them, conducting the dispute with legal support experienced in this field plays a decisive role in establishing that a right has been abused.
In the final analysis, bad-faith compensation should not be read merely as an item of sanction. The institution is a balancing mechanism that marks the limits of the use of the right of enforcement for a purpose other than its own and that supports the idea of a fair trial. Aimed at preventing the creditor from abusing its power and at protecting the debtor from being faced with baseless proceedings, these provisions perform a critical function in the sustainability of the enforcement system and in striking a fair balance between the interests of the parties.
Independent Legal Assessment
Bad-faith compensation is a claim that in practice most often remains in the shadow of the trial for annulment of the objection. Yet for a debtor faced with baseless proceedings this claim means not merely a financial gain but also that the unlawfulness of the proceedings is recorded by a court judgment. Since an award of compensation depends on bad faith being separately established, the framing of the defence must be settled as early as the first pleading.
The fate of the claim depends largely on the quality of the preparation of evidence. A failure to place on the file in good time the documents showing that the debt has been extinguished or never arose creates a deficiency that is difficult to make good at later stages.
In framing a roadmap in a concrete file, the following matters should be given priority:
- Determining at the outset whether the proceedings are being pursued without a judgment or on the basis of a judgment
- Advancing the claim for compensation in the statement of defence clearly and with reasons
- Submitting to the file within the applicable period the correspondence, payment records and releases supporting bad faith
- Determining the amount claimed correctly, bearing in mind that the calculation will be made over the principal sum
- Assessing, in proceedings based on a negotiable instrument, the distinction between Art. 169/a and Art. 170 of the Enforcement and Bankruptcy Act No. 2004
- Reflecting in the file concrete data as to the loss of commercial standing
Independent Legal provides advisory services and conducts litigation throughout the whole of the process in disputes arising from enforcement and bankruptcy law, from the scrutiny of the proceedings through to the pursuit of claims for compensation.