Bond Aval
What is Aval in a Promissory Note?
A promissory note is one of the most frequently used negotiable instruments in commercial life. In practice, the creditor may not want to rely solely on the issuer's ability to pay. In this case, adding an extra guarantee to the promissory note becomes necessary. An avalis a special negotiable instrument that guarantees the full or partial payment of the debt stated in the promissory note.
In simple terms, aval can be defined as "personal guarantee specific to a negotiable instrument." However, aval differs from classical suretyship. While suretyship is evaluated within the framework of general provisions in the Turkish Code of Obligations, aval is regulated as a special institution specific to negotiable instruments in the Turkish Commercial Code. The provisions regarding aval for bills of exchange in the Turkish Commercial Code also apply to promissory notes. According to Article 778 of the Turkish Commercial Code, the provisions of Articles 700 to 702 regarding aval are also valid for promissory notes.
Therefore, the person providing the guarantee on a promissory note should not be viewed merely as an "auxiliary" or "secondary" debtor. The guarantor assumes a strong and direct responsibility to the creditor in the event of non-payment of the negotiable instrument.
Legal Nature of Aval
Aval is a security mechanism that increases the negotiability of a promissory note and the confidence of the creditor. By providing an aval on a promissory note, the creditor has the right to claim not only from the issuer of the note but also from the guarantor.
The most important characteristic of an aval an independent undertaking specific to negotiable instruments law . The person providing the aval secures the debt of the person for whom they are providing the aval, but also assumes additional negotiable instrument liability through their own signature. According to Article 702 of the Turkish Commercial Code, the person providing the aval is liable in the same way as the person for whom they have undertaken the undertaking. Furthermore, even if the debt guaranteed is invalid for reasons other than formal deficiencies, the aval's undertaking generally remains valid.
In this respect, an aval (guarantee) can have more serious consequences than a suretyship. This is because, while in a suretyship some personal defenses of the debtor can be raised by the guarantor, in an aval the abstract nature and security of the negotiable instrument are paramount.
How to Provide an Aval (Guarantee) on a Promissory Note?
For an endorsement on a promissory note to be valid, certain formal requirements must be met. The endorsement must be written on the promissory note or an annex attached to it. The endorsement is usually expressed with a phrase such as "for endorsement," "my endorsement," "I have given an endorsement as a guarantor," or similar, and is signed by the person giving the endorsement. According to Article 701 of the Turkish Commercial Code, the endorsement is written on the promissory note or annex; it is expressed with a phrase such as "for endorsement" or another equivalent phrase, and is signed by the person giving the endorsement.
The most common form of endorsement is the signature of the guarantor on the front of the promissory note. However, it is important to note that not every signature on the front of the promissory note has the same legal effect. The signature of the issuer is already affixed in their capacity as the primary debtor. Apart from this, signatures affixed on the front of the note can, as a rule, be considered as endorsements of guarantee.
It must be clearly stated in whose favor the guarantee is given. For example, a statement such as "This guarantee is in favor of the issuer" clarifies whose debt the guarantee secures. If it is not specified for whom the guarantee is given, it is considered to be given in favor of the person who issued the promissory note. Article 778/4 of the Turkish Commercial Code explicitly regulates this matter with regard to promissory notes.
Who can provide a guarantee (Aval) on a promissory note?
In the case of a promissory note, the guarantee (aval) can be given by a third party or by one of the persons whose signature appears on the note. According to Article 700 of the Turkish Commercial Code, the payment of the amount can be fully or partially secured by means of aval, and this security can be given by a third party or by one of the persons whose signature appears on the note.
For example, a company's promissory note can be guaranteed by a company partner, company official, a third party, or another commercial company. In the case of legal entities, the signatory's authority to represent the company is also crucial for the validity of the guarantee. If the guarantee is given on behalf of the company, it must be examined whether the signatory is authorized to subject the company to such a negotiable instrument commitment.
What is the responsibility of the person providing the guarantee?
The responsibility of the guarantor on a promissory note is quite heavy. The guarantor is equally liable as the person for whom they are guaranteeing. In other words, if the guarantee is given in favor of the drawer, the guarantor assumes the same payment responsibility as the drawer of the promissory note.
This responsibility is not merely a moral or incidental guarantee. The guarantor can be directly pursued for the debt arising from the negotiable instrument. According to Article 724 of the Turkish Commercial Code, the persons who draw up, accept, endorse, or guarantee a bill of exchange are jointly and severally liable to the holder; the holder may seek recourse against one, several, or all of them, regardless of the order in which they are held liable. This provision also applies to promissory notes under Article 778 of the Turkish Commercial Code.
Therefore, the creditor is not obligated to first pursue the principal debtor when a promissory note is not paid. If the conditions are met, enforcement proceedings can be initiated directly against the guarantor through the attachment method specific to negotiable instruments.
For which debts is the guarantor responsible?
As a rule, the liability of the guarantor is limited to the extent of the bill of exchange for which they have provided the guarantee. If the guarantee is given for the entire amount of the bill, the guarantor is liable for the full amount. If the guarantee is given for only a specific amount, the liability is limited to that amount.
If a promissory note is not paid, the creditor may demand not only the principal amount but also, if the conditions are met, interest, collection costs, protest costs, and other ancillary claims arising from commercial law from the guarantor. Article 725 of the Turkish Commercial Code stipulates that the holder has the right to claim the amount of the note, post-maturity interest, protest and notification costs, and other expenses.
Therefore, the idea of "I'm just signing this as a formality" when signing an aval is extremely risky. The person providing the aval often becomes liable for the entire debt with their personal assets.
What is the difference between Aval and Suretyship?
In practice, guarantees and sureties are often confused in promissory notes. However, these two institutions are not the same in terms of their legal consequences.
A suretyship is a secondary form of security regulated in the Turkish Code of Obligations, attached to the principal debt. An endorsement (aval), on the other hand, is an independent commercial undertaking specific to a negotiable instrument, arising from a signature on the instrument. The liability of the endorser is similar to that of the person to whom the endorsement is given; however, due to the limited defense system of commercial law, the endorser may not always be able to raise the personal defenses belonging to the principal debtor.
Another important difference is the issue of spousal consent. In suretyship, spousal consent may, as a rule, be considered under the Turkish Code of Obligations. However, the Supreme Court's General Assembly for Unification of Jurisprudence, in its decision dated April 20, 2018, numbered 2017/4 E. and 2018/5 K., ruled that spousal consent is not required for aval. This decision emphasized that aval is a distinct undertaking specific to commercial law, different from suretyship.
Therefore, the defense that "my spouse did not consent, the guarantee is invalid" is generally not considered sufficient on its own.
What defenses can the guarantor raise?
The guarantor may raise certain defenses in a proceeding or lawsuit initiated against them. However, these defenses are limited due to the strict formal and abstract principles of commercial law.
The guarantor may rely, in particular, on the following points:
- The promissory note lacks the mandatory formal elements
- The signature was not his
- Where there is no authority to represent, or where the authority has been exceeded,
- The guarantee statement is not validly included on the promissory note or its annex
- Avalin is limited to a certain amount,
- Errors were found in the follow-up process regarding the duration, authority, interest rate, or amount of debt.
Conversely, in most cases, the guarantor cannot raise personal objections against the holder that are based on the underlying relationship between the guarantor and the creditor. According to Article 687 of the Turkish Commercial Code, the person against whom recourse is sought due to a negotiable instrument cannot raise defenses against the holder that are based on direct relationships existing between themselves and the drawer or previous holders; however, this situation may be evaluated differently if the holder knowingly acted to the detriment of the debtor when acquiring the instrument.
What happens if the guarantor makes the payment?
If the guarantor pays the amount of the bill of exchange, the payment does not become unrewarded. According to Article 702/3 of the Turkish Commercial Code, if the guarantor pays the amount of the bill of exchange, he/she acquires the rights arising from the bill of exchange against the person for whom he/she provided the guarantee and against those who are liable to him/her under the bill of exchange; this provision also applies to promissory notes.
In other words, the guarantor can exercise their right of recourse after making the payment to the creditor. For example, if a person who has guaranteed a promissory note on behalf of a company is forced to pay the amount of the note, they can claim the amount paid from the person for whom they provided the guarantee. However, for this right to be effectively exercised, it is important to keep the payment documents, the collection documents, and a copy of the promissory note.
The Practical Importance of Aval in Bonds
In commercial transactions, aval provides strong security for the creditor. Especially in promissory notes issued by companies, having a company partner or authorized representative provide an aval increases the creditor's ability to collect the debt. This is because if the debt is not paid, the creditor may not be limited to the company's assets; they may also resort to the personal assets of the individual who provided the aval.
For both the debtor and the guarantor, the signature on the guarantee must be evaluated with extreme care. A single signature on a promissory note can later lead to high-value bill of exchange proceedings, seizure of bank accounts, confiscation of movable and immovable property, and damage to commercial reputation.
Conclusion
In the case of a promissory note, an aval is a powerful guarantee institution that secures the payment of the negotiable instrument. In most cases, the person providing the aval assumes the same level of responsibility as the person for whom they are providing the aval and can be directly pursued by the creditor. Therefore, an aval should not be considered like an ordinary suretyship or a simple signature of witness.
Especially in commercial life, before guaranteeing a promissory note, the amount of the note, its maturity date, in whose favor the guarantee is given, whether the guarantee covers the entire debt or a specific portion, and the potential future legal risks the guarantor may face should be carefully examined. Otherwise, a signature given "just for security" could have serious financial and legal consequences for the guarantor.
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