What is Endorsement on a Bond?
A promissory note is a type of negotiable instrument frequently used in commercial life to secure debt and credit relationships. One of the most important features of a promissory note is that it can be easily transferred under certain conditions. This transfer process endorsement .
Endorsement of a promissory noteis the transfer of the right to claim arising from the note to another person through a written statement on the note and delivery of the note. In other words, the person who has the right on the promissory note can transfer their right arising from this note to another person by endorsing the note.
According to the Turkish Commercial Code, the provisions regarding the endorsement of bills of exchange also apply to promissory notes, provided that they do not conflict with the nature of the promissory note. Article 778 of the Turkish Commercial Code stipulates that Articles 681 to 690 of the Turkish Commercial Code, which concern the endorsement of bills of exchange, are also applicable to promissory notes.
Therefore, endorsement on a promissory note is not merely a "transfer" of ownership; it is also a significant negotiable instrument transaction that can create liability for the endorser.
How to Generate Revenue?
Endorsement on a promissory note is written on the back of the note or on a paper attached to the note called an "allonge," and signed by the person endorsing it. The person endorsing the note is called the endorser, and the person receiving the note the holder .
For an endorsement to be valid, it must, as a rule, be written on the promissory note or an addendum and signed by the endorser. The endorsement may clearly state to whom the note is transferred, or it may only contain the endorser's signature. An endorsement consisting only of a signature a blank endorsement . According to Article 683 of the Turkish Commercial Code, the endorsement must be written on the promissory note or an addendum and signed by the endorser; it is not mandatory to indicate the person in whose favor the endorsement is made.
For example, writing "Pay to Ahmet Yılmaz" on the back of a promissory note and signing it constitutes a full endorsement. In contrast, merely signing the back of the note results in a blank endorsement.
What are the formal requirements for endorsement?
Endorsement of a promissory note is subject to strict formal rules. Therefore, the wording used, the signature, the delivery of the note, and the chain of endorsements must be carefully considered during the endorsement process.
One of the most important conditions for an endorsement unconditional . An endorsement cannot be subject to any conditions. For example, clauses such as "I transfer the endorsement if the debt is paid" or "the endorsement is valid if this contract is fulfilled" render the endorsement conditional under commercial law. According to Article 682 of the Turkish Commercial Code, an endorsement must be unconditional; any conditions attached to the endorsement are considered null and void. According to the same article, a partial endorsement is also invalid.
Therefore, it is not possible to endorse only a portion of the promissory note's value. A promissory note, by virtue of being a negotiable instrument, is transferable in its entirety. However, it is possible for the parties to make separate agreements based on the underlying relationship; but these agreements do not always negate the consequences of the instrument under negotiable instrument law.
What are the types of endorsements on a promissory note?
Endorsement of a promissory note can be done in different ways. The most common types of endorsement encountered in practice are as follows:
1. Total Turnover
In a full endorsement, it is clearly stated to whom the promissory note is transferred. For example, if the phrase "Pay to Ali Demir" is written and signed by the endorser, it constitutes a full endorsement. In this case, the rights arising from the note pass to the person whose name is written.
2. White Turnover
In a blank endorsement, it is not stated to whom the promissory note is transferred; most often only the endorser's signature is present. A blank endorsement makes the transfer of a promissory note practical. However, this convenience can create certain risks in terms of determining who has handled the note.
According to Article 684 of the Turkish Commercial Code, all rights arising from a promissory note are transferred upon endorsement or transfer of possession; in the case of a blank endorsement, the holder may fill in the endorsement in their own name, re-endorse the promissory note, or give the note to another person without filling in the endorsement.
3. Collection Endorsement
A collection endorsement is made for the purpose of collection, rather than completely transferring ownership of the promissory note. In this case, the person who acquires the note acts to collect the amount of the note. In practice, collection endorsements made to banks can be seen within this scope.
4. Endorsement of Pledge
An endorsement is the transfer of a promissory note as security for a debt. The purpose here is not the complete transfer of the right arising from the note, but rather securing a debt.
Who is responsible for an endorsed promissory note?
One of the most confusing issues regarding promissory notes is who is liable for the endorsed note. First, it's important to note that the person who receives the note does not automatically become liable simply by receiving it. The person who receives the note acquires the status of holder. However, if this person subsequently endorses the note themselves, they can then become liable to subsequent holders as an endorser.
As a rule, the following persons may be held liable for an endorsed promissory note:
Issuer: The person who issues the promissory note is the principal debtor who promises to pay the amount of the note. According to Article 779 of the Turkish Commercial Code, the person who issues the promissory note is liable in the same way as the person who accepts the note.
Endorsers: As a rule, those who endorse a promissory note are liable to subsequent holders for the non-payment of the note. According to Article 685 of the Turkish Commercial Code, unless otherwise stipulated, the endorser is liable for the non-acceptance and non-payment of the instrument; liability for non-payment is particularly important in the case of promissory notes.
Guarantors: If a promissory note bears a guarantee, the guarantor is liable to the same degree as the party for whom the guarantee is given.
Unauthorized signatories: If a person signs a promissory note or endorsement on behalf of another without authorization, they may be held personally liable under commercial law. Article 678 of the Turkish Commercial Code stipulates that a person signing as an unauthorized representative is personally liable for the bill of exchange; this provision also applies to promissory notes.
Therefore, liability for an endorsed promissory note does not rest solely with the person who issued it. Endorsers and guarantors whose signatures appear on the note may also be held liable to the holder if the conditions are met.
What is the liability of the endorser?
The endorser is the person who endorses the promissory note. By transferring the note, the endorser not only assigns the right to claim the debt but also, as a rule, assumes liability in the event of non-payment of the note.
This liability is specific to negotiable instruments law. If a promissory note is not paid on its due date, the authorized holder may, if the conditions are met, pursue the endorser. The holder is not obligated to pursue only the drawer; they may pursue the endorsers, guarantors, and the drawer in the chain of endorsements.
According to Article 724 of the Turkish Commercial Code, the persons who issue, 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 these persons, regardless of their order of liability. This provision also applies to promissory notes, as per Article 778 of the Turkish Commercial Code.
Therefore, the person endorsing the promissory note cannot always escape liability by saying, "I am not indebted, I have only transferred the note." As a rule, the endorsement transaction creates bill of exchange liability for the endorser.
Will the person who acquires the bond be held liable?
The person who acquires the promissory note, i.e., the holder, is not liable simply for possessing the note. The holder is the person entitled to demand the amount of the note. However, if the holder subsequently endorses this note to another person, from that moment onwards they also become an endorser and may assume liability to subsequent holders.
For example:
Ali issued a promissory note in favor of Mehmet. Mehmet endorsed this note to Ayşe, who then endorsed it to Can. In this case, if Can is the authorized holder, he can demand payment of the note from Ali, Mehmet, Ayşe, and any guarantors. However, if Ayşe had only received the note and never endorsed it, she would not be liable for payment simply by virtue of being the holder.
Why is the Chain of Sales Important?
The chain of endorsements is the legal link showing who the promissory note passed from and to. For the holder of the promissory note to be considered an authorized holder, the endorsements must be interconnected and regular. Even if the last endorsement is a blank endorsement, if the holder's right is evident from the successive and interconnected endorsements, the person is considered an authorized holder. Article 686 of the Turkish Commercial Code explicitly regulates this matter.
If there is a break in the chain of endorsements, it becomes questionable whether the person holding the promissory note is the authorized holder. Especially in enforcement proceedings specific to negotiable instruments, debtors may argue that the creditor is not the authorized holder.
In practice, it is also important that the first endorsement on the promissory note belongs to the payee. This is because the payee is the first rightful owner to whom the payment should be made. If the note passes to subsequent parties without the payee's endorsement, the integrity of the endorsement chain may be questioned.
Can Ciranta be absolved of responsibility?
While the endorser's liability is the rule, in some cases that liability may be limited or eliminated.
According to Article 685/2 of the Turkish Commercial Code, the endorser may prohibit the re-endorsement of the instrument. In this case, if the instrument is subsequently endorsed to other persons, the endorser who imposed the endorsement prohibition will not be liable to the subsequent holders of the instrument.
Furthermore, the endorser may attempt to limit their own liability through certain clauses. However, the legal consequences of clauses used in negotiable instruments must be evaluated with extreme care. This is because some clauses may be deemed invalid, while others may only be binding between specific individuals.
Therefore, using phrases such as "non-negotiable," "without liability," or "for collection of consideration" when endorsing a promissory note may lead to different results depending on the specific circumstances of the case.
What happens if an endorsed promissory note is not paid?
If a promissory note is not paid on its due date, the authorized holder may exercise their rights under commercial law. The holder may take action against the issuer, the guarantor, and the endorsers.
In this case, the holder can initiate enforcement proceedings through attachment specific to negotiable instruments, provided the conditions are met. Enforcement proceedings based on negotiable instruments are a faster method than general attachment, but can have more severe consequences for the debtor. The debtor may object to the signature, the debt, or the enforcement proceedings within limited time periods following the notification of the payment order.
Within the scope of the holder's right of recourse, not only the amount of the promissory note but also, if the conditions are met, interest, protest expenses, notification expenses, and other legal expenses can be claimed. Article 725 of the Turkish Commercial Code stipulates that the holder may request the amount of the promissory note, interest, protest and notification expenses, and other expenses through recourse.
The Difference Between Endorsement and Assignment of Receivables in a Promissory Note
The transfer of a promissory note by endorsement differs from the assignment of a receivable. Endorsement is a transfer method specific to negotiable instruments law and ensures the negotiability of the instrument. The assignment of a receivable, on the other hand, is a general transfer of receivables transaction subject to the provisions of the Turkish Code of Obligations.
If a promissory note contains the phrase "not payable to order" or a similar clause, it can only be transferred according to the provisions for assignment of receivables, not by endorsement. According to Article 681/2 of the Turkish Commercial Code, if the issuer has included the phrase "not payable to order" or a clause with the same meaning on the note, the note can only be transferred through assignment of receivables.
This distinction is important because while the abstract nature and security of the negotiable instrument are paramount in endorsement, in assignment of receivables, the debtor can raise certain personal defenses more broadly against the assignee.
What should be considered when endorsing a promissory note in practice?
When endorsing a promissory note, the first step is to examine whether the note qualifies as a negotiable instrument. If the note lacks the necessary elements, the endorsement may not produce the expected result under negotiable instrument law.
Secondly, the chain of endorsements must be checked. If there is no regular chain of endorsements starting from the payee and going up to the holder, it is questionable whether the person holding the instrument is the authorized holder.
Thirdly, it should be remembered that every signature on a promissory note may create liability in the future. Company officials, partners, or individuals with whom they have a business relationship should be aware that a signature they affix with the intention of "simply transferring" the right may create liability as an endorser.
Finally, it must be clearly stated whether the promissory note is being transferred for collection, pledge, or assignment purposes. If the terms used are unclear, serious legal disputes may arise between the parties in the future.
Conclusion
Endorsement of a promissory note is a fundamental transaction in commercial law that transfers the right arising from the note to another person. However, endorsement is not merely a transfer; it is a serious legal undertaking that can create liability for the endorser.
In the case of an endorsed promissory note, the drawer, guarantors, and endorsers may be jointly and severally liable to the holder if the conditions are met. The holder may pursue one, several, or all of the debtors without having to follow any order of priority. Conversely, a person who merely acquires the promissory note does not become liable for payment solely by virtue of being the holder, unless they also endorse the note.
Therefore, before endorsing a promissory note, its form, the chain of endorsements, the signatures, any guarantees, and any special expressions added to the endorsement should be carefully examined. Otherwise, an endorsement made for convenience in commercial life may lead to serious enforcement proceedings and financial liabilities in the future.
About Post Author
