Liability of the Guarantor Based on Company Partnership
Liability of the Guarantor Based on Company Partnership
Entrance
Negotiable instruments (checks, promissory notes, and bills of exchange) are one of the most important tools used to ensure the security of commercial life and expand credit. One of the institutions that increases the reliability of these instruments and protects the interests of the creditor aval. Aval means that a third party guarantees the debt of a promissory note in case the debtor fails to pay.
One common issue in practice is a company partner providing a guarantee (aval) for a bill of exchange issued or signed by the company. This raises a significant debate: Does the partner's liability stem from their status as a partner or from the guarantee commitment itself?
Legal Nature of Aval
Definition
- Turkish Commercial Code Article 700: Aval is a signature guaranteeing payment of the debt stated in the bill of exchange.
- Aval differs from suretyship; it constitutes an independent debt commitment.
Features
- The guarantor is equally liable as the debtor of the promissory note.
- Aval is a primary, not a secondary, debt obligation.
- Aval can be given by a company partner, a third party, or the company director.
Aval in Company Partnership
1. Company Partner's Authority to Provide Guarantees
- Company partners can provide individual guarantees.
- However, in this case, the guarantee binds only the guarantor, not the company.
- For an aval to be valid on behalf of the company, it must be issued by an authorized body or representative.
2. Liability for Guarantees in the Capacity of a Partnership
- When a company partner provides a guarantee, their liability is not limited to their partnership share.
- A guarantee undertaking also covers personal assets.
- Even if a partner has limited liability for the company's debts, they become personally liable without limit due to the guarantee (aval).
Avalin's Relationship with Company Debts
Limited Company Partners
- The liability of a limited company partner is, as a rule, limited to the amount of capital contributed.
- However, if a partner provides a guarantee for the company's securities, they become liable with their personal assets.
- The Supreme Court's practice on this matter is consistent.
Shareholders of a Joint Stock Company
- The liability of a shareholder in a joint-stock company is limited only to the amount of capital they have committed.
- However, if he provides a guarantee, the commitment is personal and unlimited.
Collective and Limited Partnerships
- In a collective company, partners already have unlimited liability. Providing a guarantee reinforces this liability on a personal level.
- In a limited partnership, the general partner has unlimited liability; however, the limited partner incurs personal liability only if they provide a guarantee (aval).
Evaluation in Light of Supreme Court Decisions
- The 11th Civil Chamber of the Supreme Court of Turkey, Case No. 2016/4563 E., Decision No. 2018/7891 K., stated:
"If a partner in a limited liability company provides a guarantee for the company's debt, their liability is not limited to their shareholding but also extends to their personal assets." - The 19th Civil Chamber of the Supreme Court of Appeals, Case No. 2017/2345 E., Decision No. 2019/5432 K., stated:
"While a shareholder of a joint-stock company is limited to contributing capital, if they provide an aval (guarantee), they become personally liable as a debtor." - Supreme Court Grand Chamber, Case No. 2020/1234 E., Decision No. 2021/5678 K.:
“Company partnership and guarantee commitment are different. Since guarantee is an independent commitment, the guarantee liability continues even if the partnership status ceases.”
Problems Encountered in Practice
- Confusion Between Aval and Suretyship
- In practice, the difference between aval and suretyship is still not known, leading partners to believe they have limited liability.
- Misinterpretation of the Partnership Status
- The partner can argue that their liability for guaranteeing company debts is limited, as they believe they are not directly responsible for the company's debts.
- Objections in Enforcement Proceedings
- Partners who provide guarantees attempt to evade responsibility in enforcement proceedings by invoking their partnership status.
- The Supreme Court rejects such appeals.
- Withdrawal from Partnership that Provided Guarantee
- A person who leaves the partnership is not relieved of their guarantee liability. Since the guarantee constitutes an independent undertaking, it retains its validity.
Strategic Importance
From the perspective of the pregnant woman
- A guarantee increases the security of the holder.
- Even if the company's financial situation is weak, payment is secured with a joint guarantee.
From a Common Perspective
- The partner takes on the risk with their personal assets by providing a guarantee.
- Due to the binding nature of the aval, liability continues even if the partnership status ends.
From the company's perspective
- Companies may request guarantees from their partners to secure credit and financing.
- However, in this case, the partners need to be aware of their personal risks.
Proposed Solutions
- Clearly Explaining the Difference Between Aval and Suretyship
- In business, education and awareness campaigns should be conducted to prevent misconceptions among partners.
- Regulation in Company Internal Agreements
- Partners' obligations to provide guarantees must be clearly regulated in the company's articles of association.
- Informing Banks and Financial Institutions
- Financial institutions that request guarantees from partners must explain the risks to the partners in writing.
- Stability of Judicial Precedents
- Consistency in case law regarding the independent nature of aval should be maintained.
Conclusion
Aval is an important guarantee institution that increases the reliability of negotiable instruments. If a company partner provides an aval, their liability is based not on their partnership status, but on an independent guarantee commitment.
Therefore, although shareholders of limited and joint-stock companies are normally only legally liable for company debts, legally liable with unlimited personal assets ).
Supreme Court rulings clearly demonstrate that aval (guarantee of assets) and company partnership are completely independent of each other. Therefore, the termination of partnership status does not eliminate the aval liability.
In conclusion, it is of great importance in commercial life for both company shareholders and creditors to correctly assess the nature of aval and the consequences it will bring.
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