Where persons between whom there is an uninterrupted business relationship attempt to collect every receivable separately, they are obliged to deal with an unnecessary number of payment and set-off transactions. The current account is a means of payment that removes these repetitions and provides ease of transaction in commercial life. The parties agree that their mutual debts and receivables are to be gathered in a single account; when the agreement comes to an end and the account is closed, payment is made to whichever party the balance favours. Another function of the institution is that it provides security: one party’s receivable is in practice secured by the other party’s debt.
The principles of the current account are regulated in Articles 89 to 99 of the Turkish Commercial Code No. 6102. Below we examine the formation, scope and grounds of termination of the agreement within the framework of those provisions.
The Concept of the Current Account
The statutory definition is found in Article 89(1) of the Turkish Commercial Code No. 6102:
Turkish Commercial Code No. 6102, Art. 89(1)
"An agreement under which two persons mutually waive the claiming, one by one and separately, of the receivables arising from any legal cause or relationship, convert those receivables item by item into credit and debit entries, and may claim the surplus amount arising after the account has been closed"
Parties to the Agreement
The Turkish Commercial Code No. 6102 has not introduced any special provision on the parties to a current account agreement. Accordingly, the agreement may be concluded between natural persons and equally between legal persons. It need not be drawn up between merchants; two legal subjects who do not hold the capacity of merchant may also conclude such an agreement with one another. Since a relationship established between persons who are not merchants will be deemed a commercial transaction under Article 3 of the Turkish Commercial Code No. 6102, the provisions applied to commercial transactions are valid here too.
The practical consequence of this point should not be overlooked. In a dispute arising from a current account, parties who are not merchants encounter not only the provisions governing the current account (Arts. 87-99 of the Turkish Commercial Code No. 6102) but also the consequences flowing from the transaction being deemed commercial. Since the institution is regulated in the Commercial Code, disputes arising from this agreement bear the character of commercial actions irrespective of whether the parties are merchants.
Since the credit facility agreements of banks mostly also contain a current account provision, current account relationships in which one of the parties is a bank are frequently encountered in practice. Current accounts operated at banks, by allowing the set-off of debts and receivables between the bank and the customer and the carrying out of transactions by cheque, reduce the movement of cash and thereby facilitate payment. Nevertheless, whether bank current accounts are to be regarded as current account agreements within the meaning of Article 89 of the Turkish Commercial Code No. 6102 is a matter of debate.
Form of the Agreement
A current account agreement comes into being through the mutual declarations of intention of the parties corresponding with one another.
Turkish Commercial Code No. 6102, Art. 89(2)
"This agreement shall not be valid unless it is made in writing."
The requirement of writing here is a condition of validity; it is not a condition of proof. As a consequence, in a dispute concerning a current account the judge is obliged to investigate of their own motion whether a written agreement exists between the parties.
As regards the effect of defects of intention on the agreement, our article entitled Invalidity of a Contract on Grounds of Defective Intention may be examined.
Receivables That May Be Entered into the Account
The Act has preferred the route of determining not which receivables are to enter the current account but which may not.
Turkish Commercial Code No. 6102, Art. 93
"Receivables that cannot be set off, and receivables arising from money and goods delivered to be spent for a particular purpose or to be held separately ready to order, may not be entered into the current account."
Turkish Commercial Code No. 6102, Art. 90(1)(b)
"Where a receivable that arose before the conclusion of the current account agreement is recorded in the current account with the consent of the parties, that receivable shall not be deemed novated unless otherwise agreed."
Under this provision, receivables that arose before the formation of the agreement are, as a rule, not transferred into the account. The parties may, however, agree between themselves that a receivable that arose before the agreement may also be entered into the account. Apart from this, the commission fee and expenses referred to in Article 92 of the Turkish Commercial Code No. 6102 may be claimed at any time without being recorded in the account.
Turkish Commercial Code No. 6102, Art. 92
"The existence of a current account agreement between the parties shall not constitute an obstacle to the claiming of the fee and of all kinds of expenses arising from a commission agreement."
Save for the situations listed, the parties may freely make their own arrangements as to which receivables are to be left outside the account.
In practice, monetary receivables are mostly recorded in the account; there is, however, no impediment to receivables other than money being entered into it as well. As a rule, receivables that are due and payable are transferred into the account, because only those that are due and payable can be the subject of performance and set-off. Conditional receivables may also be written into the account; but the condition must have been fulfilled at the moment the account is closed. If the condition has not yet been fulfilled at the time of closing, the receivable concerned is removed from the account.
Commercial paper capable of being collected may likewise be entered into the account. Where the sum on the instrument cannot be collected, its entry is deleted from the account.
Term of the Agreement and the Account Period
Two distinct periods are in question in a current account: the term of the agreement and the account period. The term of the agreement is the longer; a single term of agreement contains more than one account period. The account period denotes the span of time that elapses between two closing dates. In other words, it is the period during which the parties record their debts and receivables in the account and mutually waive claiming them separately.
The agreement may be formed for a fixed or an indefinite term. Those of fixed term come to an end upon the expiry of the period provided for, while those in which no term is stated come to an end upon one of the parties giving notice of termination.
The Position of the Balance at the End of an Account Period
A current account relationship contains more than one account period, and the parties may agree the length of the period as they wish. At the end of each period the account is closed and the difference between the debit and credit items is determined. It cannot, however, be said that at this stage it has been definitively established who is the creditor and who the debtor.
The amount determined at the end of the account periods while the agreement continues is the interim balance, whereas the amount determined upon the termination of the agreement is the final balance. The interim balance is carried over into the following period as a credit item and its collection cannot be demanded; only the final balance may be made the subject of a demand for payment.
Where the account period cannot be determined by the agreement or by the rules of commercial custom and practice, the last day of each calendar year is accepted as the day on which the account is closed. Accordingly, the length of the period is, for the first year, one year or shorter counted from the day the agreement was formed, and one year for the following years.
Under Article 8(2) and Article 96(1) of the Turkish Commercial Code No. 6102, a period of at least three months must have elapsed before compound interest may be applied to the receivables recorded in the account and to the balance. The Court of Cassation has likewise decided that account periods may not be agreed at less than three months, with the aim of preventing the debtor’s position from being aggravated by the application of compound interest at intervals shorter than three months. For the interest dimension, our article entitled Interest in Commercial Transactions may be consulted.
How the Agreement Operates
A current account relationship proceeds in three stages: first the receivables are entered into the account, then those receivables are set off, and finally the balance is determined and accepted.
Entry into the Account
By the agreement, the parties accept that they will mutually write their receivables into the account. The most important consequence of that entry is the following: receivables written into the account can no longer be claimed or sued upon separately, and no limitation period runs in respect of those receivables.
Set-Off
By the agreement, the parties accept that the receivables entered into the account will be set off at the end of the period. In a current account there is no need for a separate declaration for set-off; upon the ending of the account period, set-off takes place automatically by deducting the receivables and debts from one another. Within that scope, the receivables entered into the account are extinguished to the extent of the lesser amount. As a result, the whole of the receivables of the party in the position of debtor is extinguished.
Determination and Acceptance of the Balance
Although the moment at which and the manner in which the balance is to be determined are regulated in the Act, which party is to do so is not shown. According to the prevailing view, the balance is determined by the party keeping the account and is notified to the other party. Which party is to keep the account may be agreed in the contract; in bank current accounts the account is kept by the bank.
At the end of the periods, the balance is determined as a result of the mutual set-off of the receivables. Whether that determination can produce legal effect depends on its acceptance. Although the agreement itself is subject to written form, no condition of validity as to form is required for the declaration of acceptance of the balance. For that reason the acceptance may be made in writing or orally, and may equally take place tacitly.
Turkish Commercial Code No. 6102, Art. 94
"In accordance with the agreement or commercial usage, at the end of specified account periods the account for the period shall be closed and the difference between the credit and debit items shall be determined.
(2) Where there is no agreement or commercial usage as to the account period, the last day of each calendar year shall be deemed to have been accepted by the parties as the day on which the account is closed. A party that receives the statement showing the surplus amount determined shall be deemed to have accepted the balance if it has not objected, within one month from the date of receipt, through a notary public, by registered letter, by telegram or by a writing containing a secure electronic signature."
Under the provision, a party that takes delivery of the statement showing the balance is deemed to have accepted the balance if it does not object within one month, counted from the day of receipt, through a notary public, by registered letter, by telegram or by a writing bearing a secure electronic signature.
Termination of the Agreement
The circumstances in which a current account agreement comes to an end are shown in the Act. As regards fixed-term agreements, the grounds of termination are as follows:
- A decision being given for the bankruptcy of one of the parties (Turkish Commercial Code No. 6102, Art. 98(1)(c))
- The expiry of the term agreed in the contract (Turkish Commercial Code No. 6102, Art. 98(1)(a))
- Where one of the parties dies or is placed under restriction during the term, the termination of the agreement by either party, by their legal representatives or by their successors, on condition that ten days’ prior notice is given; in that event payment of the balance is deferred to the end of the account period (Turkish Commercial Code No. 6102, Art. 99)
In agreements of indefinite term, the relationship ends upon notice of termination by one of the parties. That right must, however, be exercised within the framework of the rules of good faith.
Limitation in the Current Account
Turkish Commercial Code No. 6102, Art. 101
"Actions relating to the liquidation of the current account, to the surplus amount accepted or determined by a court decision, to interest receivables, to errors and mistakes in the account, to items that ought to be kept outside the current account or that have been entered into the current account without justification, or to repeated entries, shall become time-barred upon the expiry of five years from the termination of the current account agreement."
Under the provision, even where the receivables recorded in the account are in themselves subject to a longer or a shorter limitation period, the balance receivable determined at the end of the account period or of the agreement becomes time-barred, independently of those periods, in five years.
Independent Legal’s Assessment
Although the current account is a useful instrument that lightens the transaction burden in continuing commercial relationships, it may produce unexpected results where the text of the agreement is prepared carelessly. The problems most frequently encountered in practice are the disregarding of the requirement of writing, the account period never being agreed, and the statement of balance not being served in due form. In particular, allowing the one-month period for objection to pass in silence may result in even disputed items being deemed to have been accepted.
We recommend that the following headings be observed when the relationship is being formed and conducted:
- Drawing up the agreement in writing and obtaining the signatures of the parties in full
- Determining the account period expressly in the agreement and observing the three-month lower limit
- Settling in the text whether receivables that arose before the agreement are to be transferred into the account
- Determining which party is to keep the account and how the statement of balance is to be served
- Placing the one-month period for objection to the statement in the calendar and monitoring it
- Taking the five-year limitation period running from the termination of the agreement as the basis in planning any action
Independent Legal provides advisory services and conducts litigation in relation to the preparation of current account agreements, the resolution of balance disputes and the conduct of debt recovery actions founded upon them.