ABSTRACT
“Assumption of Debt” or “Debt Assumption” is a legal transaction regulated under Turkish Law of Obligations, which leads the third person assuming the debt to be the new obligor through an agreement made between the obligee and the debt undertaker, by releasing the principal obligor. The most significant result of this transaction is, the altering of the passive subject of the debt, discharging the possibility of the obligee to appeal to the principal obligor and the obligor, who has assumed the debt, being the only liable for the payment of the debt. The mentioned legal concept, which releases the liability of the principal obligor and enables the debt to be transferred to the debt undertaker, is not accepted by all of the judicial systems. The concept of debt assumption is considered under different terms and conditions in Turkish, German, Swiss and Austrian judicial systems and the regulations regarding the debt assumption are set forth under the related codes of the countries. In addition to this, under the English and French judicial systems, the altering of the passive subject of the debt via legal transaction is not recognized; instead, the same result is obtained via novation. There are substantial differences between debt assumption and novation with regard to their terms and conditions. In addition, due to the fact that it is possible for the foreign sourced financing, which will be used in investments to be carried out within the framework of Built-Operate-Transfer model, to be assumed by the Treasury or the administration under certain conditions and since the debt assumption agreements, regarding the loan provided within the scope of these investments, are signed between the administration, appointed company and credit institutions; the concept of debt assumption has become crucial constantly under Turkish Law.
1. INTRODUCTION
Under the contractual relationships, there are two concepts regarding the alteration of the roles of obligee and obligor via legal transaction. The first of them is, the “assignment of receivable” which enables the claim which arises from a contractual relationship to be assigned to a third party, without seeking the consent of the obligor in principle, and a third party to gain the role of the new oblige. The second one is the “assumption of debt”, the alteration of the obligor side, which is the subject matter of our article. It is recognized that the claims are one of the components of the assets and can be assigned to someone else separately via legal transaction. Suchlike, debts arising from a contract can be transferred. from the liabilities of the principal obligor to the liabilities of the new obligor via legal transaction. Thus, the concept of assumption of debt is regulated under Turkish Law1.
Besides, it is set forth under the Built-Operate-Transfer Law that, in the projects which are intended to be carried out through the built-operate-transfer model, regulations regarding the assumption of the foreign sourced financing used by appointed companies by the administration can be made2. The procedures and principles regarding the debt assumption of foreign sourced financing that will be used in the investments which are intended to be carried out in accordance with the provisions of Built-Operate-Transfer Law, are set forth under The Regulation on Debt Assumption that will be Realized by the Treasury3 (“Regulation on Debt Assumption”). The regulations set forth under the Built-Operate-Transfer Law, Law on the Regulation of Public Finance and Debt Management (“Law Numbered 4749”) and Regulation on Debt Assumption ceased the debt assumption to be a concept regarding private law only and necessitated the concept of debt assumption to be examined in terms of regulation regarding administrative law.
In line with the explanations above, in first place, the legal characteristic of debt assumption will be analyzed; the differences from the similar legal concepts will be demonstrated and lastly, the characteristics and legal basis of the debt assumption agreements which the Treasury and the administration is a party of will be clarified.
2. CHARACTERISTICS, TERMS AND RESULTS OF DEBT ASSUMPTION
2.1. Concept of Debt Assumption
Debt assumption is a legal concept whereby the principal obligor releases and the undertaker becomes the new obligor through an agreement made between the undertaker and the obligee4. The most significant characteristic of debt assumption is the release of the former obligor and liability of the new obligor for the whole debt. In addition to this, under the debt assumption, contractual relationship is not subject to the assignment, the debt is only assigned to the new obligor along with the ancillary obligations5.
Thereupon, the results of being a party to the agreement which constitutes the legal basis of the debt is transferred to the debt undertaker and these results have affect for the parties of the contractual relationship as well. Therefore, in the event that the new obligor does not perform his obligations after the assumption of debt, the obligee can only claim for the rights concerning the performance of the assumed debt, and cannot put a claim against the undertaker, besides these rights.
For instance, since the right to terminate is related to the contractual relationship, this right shall be exercised against the other party of the agreement. In a tenancy relation, in the event the obligation to pay the rent for just one month is undertaken by the new obligor and the obligation to pay the rent for the related month is not performed by the undertaker; provided that the conditions are met, the obligee may exercise his right to terminate the contract against the tenant; not against the undertaker of the rental payment of the related month. Due to the fact that the debt assumption does not make an alteration in terms of parties of the agreement and results in the transfer of the debt to the undertaker, this concept is shown as the opposite concept of assignment of receivables6.
Another substantial feature of debt assumption is the requirement of the consent of the obligee for the realization of debt assumption. In assignment of receivables, the consent of the obligor is not required. A receivable can be assigned to a third party by the obligee provided that the legal position of the obligor is not aggravated. However, in the debt assumption, where the external assumption and internal assumption are interpreted together, the obligee is deemed as the active subject of the transaction along with the principal obligor and the undertaker and the assumption of debt cannot be performed without the consent of the obligee. The underlying reason is that the nature and the solvency of the obligor is important for the obligee and the purpose of preventing the obligee to face with an obligor whom he has not accepted in advance.
The present debts or the debts which are likely to arise in the future constitute the subject matter of debt assumption. Whilst a present and valid debt (including the debts which have arisen but have not become due and payable) can be transferred in any case; a debt which is likely to arise in the future can be transferred provided that it is determined or determinable and will arise validly. According to Kahraman, determinability measure shall be interpreted as at least from which legal relationship the debt will arise is determined7.
2.2. Debt Assumption Agreement
2.2.1. Internal Assumption Agreement
Assuming the debt via legal transaction is not always mandatory under Turkish Law, besides it is realized via two complementary agreements. The first of these is the internal assumption regulated under article 195 of TCO. According to this provision, the third party to undertake the debt makes an internal assumption agreement with the principal obligor and enters into obligation of releasing the obligor from its debt. Herein, the third party has an undertaking of “release from debt” against the principal obligor. According to the provision of law, as the agreement with the principal obligor, the third party shall perform his obligation in person or enable the obligor to release from its debt by undertaking the obligation through the consent of the obligee8. Internal assumption agreement only consists of an undertaking of release from debt, in other words, an obligatory transaction and the principal obligor does not release from its debt through this agreement.
Herewith, the participation of obligee in the transaction is not sought. In what manner shall the third party perform its obligation shall be determined through the agreement between the parties and the nature of the work. This undertaking can be fulfilled by enabling the discharge of principal obligor by the obligee, releasing the debt in terms of principal obligor through novation and performing to the obligee directly as the third party. However, in the mentioned cases, the debt is not assumed in real terms. As explained above9, the realization of assumption of debt means the release of the principal obligor from debt and transition of the debt along with the ancillary obligations to the new obligor and in order to do so, an external assumption agreement shall be made between the undertaker of debt and the obligee.
2.2.2. External Assumption Agreement
According to the provisions of TCO, replacement of the obligor and releasing from debt is realized through an agreement made between the undertaker of the debt and the obligee10. At this stage, consent of the obligee for the transaction comes into question. Although the external assumption agreement is considered as the continuation of the internal assumption agreement, it is not mandatory for the assumption to be recognized in this manner. It is possible for the undertaker and the obligee to make an external assumption agreement directly without an internal assumption agreement which is made between the principal obligor and the undertaker. In order to do so, the consent of the principal obligor is not required. The undertaker takes place of the principal obligor through the external assumption agreement, however in the event that this transaction is recognized without an internal assumption agreement made between them, the principal obligor is subject to unjust enrichment towards the undertaker. Through the external assumption agreement made between the obligee and the new obligor, the debt constituting the subject matter of the agreement is transferred to the undertaker from the principal obligor along with the whole ancillary obligations. In principle, the assumption of debt does not create a difference in the status of debt; it just leads the alteration of the obligor. By means of the external assumption agreement;
• Although the obligor is altered, all ancillary rights of obligee remain except the ones related to the nature of the principal obligor.
• Unless otherwise demonstrated in the external assumption agreement, all pleas, except the exclusive ones for the principal obligors’ nature, are transferred to the new obligor.
• The liability of the pledger, who has pledged for the guarantee of the debt, and the surety shall continue only if they have given written consent to the assumption of the debt11.
In addition to this, in the event that the external assumption agreement becomes void due to any reason, the former debt maintains along with the ancillary obligations without prejudice to the rights of the third parties acting in good faith12.
2.2.3. Interpretation of Parties’ Intentions Regarding the Assumption Agreements
According to the fundamental principle under the TCO, while determining the types of the agreements and interpreting the contents, the real and mutual intentions of the parties are taken as basis regardless the statements they used13. While interpreting the intentions of the parties, good faith and rule of confidence are used according to the article 2 of Turkish Civil Code (“TCC”). The most crucial fact regarding the assumption agreements is, the “intention of the undertaker towards releasing the principal obligor from debt”. Under both internal assumption agreements and external assumption agreements, the intention towards releasing the principal obligor from debt and transference of the debt to the undertaker shall be understood clearly and doubtlessly.
This intention shall be sought in accordance with the rule of confidence. Only making a commitment that the debt will be “paid” by a third party does not demonstrate the intention towards releasing the principal obligor from debt. In the event that this intention is not indicated clearly and doubtlessly, pursuant to the principle regarding the interpretation in favor of obligor, it shall be stated that the undertaker does not release the principal obligor from debt; participates to the obligation as a new obligor along with the principal obligor as occasion requires or makes an ordinary commitment to pay14.
Besides, in one of its new dated decision15, Court of Appeals admitted that the acceptance and undertaking of a divorcee concerning the payment of the remaining installments of the credit of the other divorcee is an internal assumption of debt. According to the Court of Appeals, this provision set forth under the divorcement protocol is a debt assumption agreement whilst the principal obligor’s performance for the obligation does not release the undertaker from the liability. According to Kahraman, the “acceptance and undertaking of a third party towards the payment of principal obligor’s debt” cannot be interpreted as the existence of an undertaking of release from debt and internal assumption agreement. As it is seen, the doctrine and the Court of Appeals interpret the subject matter differently in terms of interpretation of assumption.
2.3. Legal Nature of Debt Assumption Regarding its Effects on Assets and Liabilities
Legal transactions are grouped as promissory transactions, dispositive transactions and acquisitive transactions in respect to their effects on assets and liabilities. Promissory transactions are the transactions which increase liabilities of the person that performs the transaction16. Dispositive transactions are the legal transactions, by having a direct effect on a right, transfer the right to another person or restrict the right, create encumbrances upon the right, amend or alter the right17. Acquisitive transactions, on the other hand, are the transactions that increase the assets of a person.
Whilst the type of transaction of debt assumption regarding the effects on assets and liabilities is discussed by the authors of German and Swiss doctrine, according to the prevailing argument in Turkish law, debt assumption is deemed as a dispositive transaction. Through the signing of the external assumption agreement, the debt is transferred to the new obligor from the principal obligor and thus, an alteration occurs in the rights of the obligee. Thereof, it is accepted that the debt assumption is a dispositive transaction18. The result of the acceptance this as a dispositive transaction is, the obligee is required to have power of disposition upon its receivable in order to realize the external assumption agreement.
3. DISTINGUISHING DEBT ASSUMPTION FROM THE SIMILAR LEGAL CONCEPTS
3.1. Novation (Novatio) Model and Debt Assumption
Novation is not explicitly defined under the Turkish Law; instead, its definition is made by the doctrine and precedents. Novation, according to the doctrine, is defined as the extinguishing the debt by substituting a new one for the former debt19. In novation, defined as one of the sources for extinguishing a debt and regulated in article 133 ff. articles of TCO, the former debt completely extinguishes and a new debt arises as the substitution of the former one.
The most significant result of this transaction is, in principle, the former debt completely extinguishes with all its ancillaries, pleas and securities. Novation model is being used under English, French law systems, in which debt assumption via the complete transfer of debt is not accepted, to transfer the debt from the principle obligor to another one20. As a result of transferring the debt from the principle obligor to a new one; considered as “party novation”, a new debt in the liabilities of the undertaker arises, and all ancillary rights, pleas and securities regarding the former debt extinguish.
3.2. Differences with Participation to an Obligation
In case that a third party, relying on an agreement signed with the obligee, becomes jointly liable from the debt together with the former obligor is defined as “participation to an obligation”21. Under the concept of participation to an obligation, the principal obligor remains as obligor and the participating person becomes jointly liable for the performance of the same obligation within the same terms and conditions that the principal obligor is subjected to. As it can be seen that principle obligor does not release from the obligation; obligee may both appeal the principle obligor and the participating person. As it has been stated above, obligee no longer has the right to appeal the principle obligor under the concept of debt assumption. The parties, subject to their discretion, may decide that the participating person shall be appealed in the first place for the performance of debt and, the principle obligor shall, be discharged by the obligee, for instance, in such case the participating person makes some of the partial payments for a debt to be paid with deferred payments. There would be a condition subsequent in terms of discharge subjected to the participated person’s will and such condition would be valid. It should be regarded that this kind of arrangement does not convert the mentioned concept into the debt assumption, it will still be considered as participation to an obligation.
4. DEBT ASSUMPTION AGREEMENTS SIGNED WITH THE TREASURY AND ADMINISTRATIONS
In article 11/A of Built-Operate-Transfer Law, it is regulated that, in agreements to be signed with appointed companies for the implementation of projects to be carried out within the framework of the built-operatetransfer model (i) it is possible to arrange provisions regarding the undertaking of loans by the administrations and (ii) the administrations are entitled to undertake the financial obligations; provided that there are provisions regarding take-over of the investment and service before the scheduled time by the relevant administration after the termination of the aforementioned agreement, and loan corresponding to investments and services have been performed until such time is obtained from abroad.
In the event that the special budgeted administrations perform debt assumption, the Council of Ministers is authorized to decide on the assumption of the financial obligations regarding foreign sourced financing by the relevant authority, and determine the scope, facts and payment conditions upon the request of the Ministry that the administration is associated with. Pursuant to the provisions of the same article, debt assumption shall be performed by the Treasury within the scope of article 8/A of the Law numbered 474922. As it is understood from this provision, debt assumptions which carried out by the Treasury or the relevant administrations are related to the assuming the debt of repaying the foreign sourced loans, provided to carry out the investments within the scope of built-operate-transfer model and the other investments set forth under the relevant regulations, by the Treasury or the relevant authority23. The most significant term regarding the debt assumptions to be carried out by the Treasury or the relevant administrations is that the foreign sourced loans utilized by the appointed company shall be used to perform the relevant investment. Otherwise, the loans shall not be subjected to debt assumption executed by the Treasury or the relevant authorities.
In line with the regulations mentioned above, Treasury guarantee model provided by the state in favor of appointed companies has gradually been abandoned and the debt assumption model has been implemented. As a result, debt assumption agreements between the Treasury or the relevant administrations, appointed company and credit institutions have been signing since then. It is not prohibited under any provision of law to choose another law as the governing law instead of Turkish law, for the relevant debt assumption agreements signed between the parties. Due to the fact that there is foreign element within these relationships, it is seen that, instead of Turkish law, another law is chosen as the governing law.
In such event, the debt assumption shall be performed according to the chosen law. To illustrate, in case that the debt assumption agreement is subjected to a law under which the assumption is based on the novation model (i.e. English law), it is not considered as a debt assumption under Turkish law regulated in articles 195 to 200 of TCO; transfer of debt to the Treasury or administration shall be performed by extinguishing the former debt along with arising a new debt.
5. CONCLUSION
Under Turkish Law, debt assumption is a dispositive transaction which leads the third person assuming the debt to be the new obligor through an agreement made between the obligee and the debt undertaker, by releasing the principal obligor. As a result of this transaction, the passive subject of the debt alters; and debt assumption is a different legal concept from the concepts such as novation, participation to an obligation, commitment of payment. This concept is not recognized under all legal systems. Debt assumption does not result in changing the parties of the contract; thus, with this respect, it differs from adhesion to an agreement. No transaction shall be considered as debt assumption under the Turkish law; in which the principal obligor remains as the passive subject of the debt. Therefore, within transactions, intention of the parties shall be sought in accordance with the rule of confidence in respect to releasing the principal obligor from debt; to refer the transaction as a debt assumption, the intention towards releasing the principal obligor from debt shall be understood clearly and doubtlessly.
Along with the explanations above, it should be pointed out that the Court of Appeals regarded “the commitment of payment” in favor of the other divorcee set out in the divorce protocol among a divorcing couple as a “debt assumption agreement” and have not mentioned the external assumption agreement to be made between the obligee and the undertaker of debt in regard to debt assumption concept at all. Although debt assumption concept have not been a significant concept in Turkish law so far, its significance is rising progressively as a result of preferring debt assumption model instead of the Treasury guarantee within major projects under the regulations made in Built-Operate-Transfer Law and the relevant legislation. Therefore, in our opinion, debt assumption will be examined in a more detailed way by the doctrine and precedents will be varied in future accordingly.
BIBLIOGRAPHY
“Kazancı İçtihat Bilgi Bankası”, 20.10.2015, http://www.kazanci.com/kho2/ibb/giris.htm.
Kahraman, Zafer; Karşılaştırmalı Hukukta Borcun Dış Üstlenilmesi. İstanbul: Vedat, 2013.
Eren, Fikret; Borçlar Hukuku Genel Hükümler. Ankara: Yetkin, 2012.
Oğuzman, M. Kemal ve Barlas, Nami; Medeni Hukuk. İstanbul: Vedat, 2013.
Oğuzman, M. Kemal ve Öz, Turgut; Borçlar Hukuku Genel Hükümler, Cilt 1-2, İstanbul: Vedat, 2013.
Kılıçoğlu, Ahmet M; Borçlar Hukuku Genel Hükümler. Ankara: Turhan, 2013. Koyuncuoğlu, Tennur; Türk İsviçre Hukukunda Borcun Yenilenmesi. İstanbul, 1977.
Turkish Code of Obligations numbered 6098, published in the Official Gazette dated 04 February 2011 and numbered 27836.
The Law on Performing Certain Investments and Services within the Scope of Built-Operate-Transfer Model numbered 3996, published in the Official Gazette dated 13 June 1994 and numbered 21959.
The Law on the Regulation of Public Finance and Debt Management numbered 4749, published in the Official Gazette dated 09 April 2002 and numbered 24721.
The Regulation on Debt Assumption to be Realized by the Treasury published in the Official Gazette dated 19 April 2014 and numbered 28977.
FOOTNOTE
1 Debt assumption is regulated in the Fifth Section and the Second Sub-Section, between articles 195-200 of Turkish Code of Obligations (“TCO”) numbered 6098. In this article, unlike the concepts falling within the same section such as “Participation to an Obligation” (TCO article 201), “Debt Assumption by Transfer of Assets and Liabilities or Transfer of a Commercial Enterprise” (TCO article 202), “Transfer of an Agreement” (TCO article 205), only debt assumption by legal transaction, pursuant to article 195-200 of TCO, will be examined.
2 Built-Operate-Transfer Law article 11/A
3 Official Gazette Date: 19 April 2014, Number: 28977. The Regulation on Debt Assumption is based on article 8/A named “Debt Assumption” and article 16, paragraph 1 of the Law on the Regulation of Public Finance and Debt Management, numbered 4749.
4 Zafer Kahraman, Karşılaştırmalı Hukukta Borcun Dış Üstlenilmesi, (İstanbul: Vedat, 2013) 87; Yarg. 11. HD. E.1990/1284, K.1991/6044, T. 14.11.1991 (Kazancı İçtihat Bilgi Bankası)
5 Whilst debt expresses a single obligation which the obligee is entitled to demand from the obligor and the obligor is obliged to perform; the contractual relationship constitutes a whole with the primary obligations, subsidiary obligations and secondary (accessory) obligations. For instance, delivering the leased free from defects which arises from the lease contracts, obligation of bearing the expenses, all rights and obligations such as innovative rights, ancillary rights and the secondary obligations constituting the whole relationship is the contractual relationship. For further information, see also Fikret Eren, Borçlar Hukuku Genel Hükümler, (Ankara: Yetkin, 2012), 21 ff.
6 Fikret Eren, ibid, 1243
7 Zafer Kahraman, ibid, 104
8 TCO article 195
9 See also Section 2.1.
10 TCO article 196
11 Due to the fact that a security, in principle, is established after considering the individuality and solvency of a debtor, such regulation is made not to create another burden on the pledger or surety.
12 TCO article 200
13 TCO article 19
14 Zafer Kahraman, ibid, 119
15 Yarg. 11. HD. E.2014/1890, K.2014/3858, T. 25.02.2014 (Kazancı İçtihat Bilgi Bankası)
16 Fikret Eren, ibid, 171 ff.; M. Kemal Oğuzman and Nami Barlas, Medeni Hukuk, (İstanbul: Vedat, 2013), 179 ff.
17 Fikret Eren, ibid, 173 ff.; M. Kemal Oğuzman and Nami Barlas, ibid, 179 vd.
18 M. Kemal Oğuzman and Turgut Öz, Borçlar Hukuku Genel Hükümler, V. 2, (İstanbul: Vedat, 2013), 593; Zafer Kahraman, ibid, 95 ff. The author demonstrates the views in the doctrine regarding the effects to the assets and liabilities and the detailed evaluations and as a result, indicates that the “merits of the right of the obligee is changed”, besides the alteration of the individual to be appealed for the performance, the value and the attainability of the receivable are also affected and the former obligor is released from its obligation; stated that they are of the opinion that the relevant transaction gives rise to a dispositionary effect which affects the receivable.
19 M. Kemal Oğuzman and Turgut Öz, Borçlar Hukuku Genel Hükümler, V. 1, (İstanbul: Vedat, 2013), 549; Ahmet M. Kılıçoğlu, Borçlar Hukuku Genel Hükümler, (Ankara: Turhan, 2013), 838; For further information regarding novation of a debt, see also Tennur Koyuncuoğlu, Türk İsviçre Hukukunda Borcun Yenilenmesi, (İstanbul, 1977).
20 For this concept, “Debt assumption” term is used under English Law.
21 M. Kemal Oğuzman and Turgut Öz, Borçlar Hukuku Genel Hükümler, V. 1, (İstanbul: Vedat, 2013), 608; Ahmet M. Kılıçoğlu, ibid, 819
22 See also Section 1
23 In addition to Build-Operate-Transfer Law, detailed regulations regarding this matter are set forth under Debt Assumption Regulation and Law Numbered 4749.
