1. Introduction
Among the security instruments that have become indispensable elements of commercial life, letters of credit stand out due to their widespread use. However, letters of credit have not been directly and comprehensively regulated under the legislation. The lack of explicit legal provisions addressing letters of credit has given rise to various legal debates and differences in practices of market actors, particularly concerning the seizure, assignment, and changes in the addressee of these receivables.
This article will evaluate the seizure of receivables arising from letters of credit issued by banks within the framework of the fundamental principles of enforcement law and relevant legislation. In this context, it will address by whom, under what circumstances, and through which procedures such claims can be asserted. Furthermore, other significant issues encountered in practice, such as the assignment of receivables arising from letters of credit and changes in the addressee, will be examined in detail. Legislative ambiguities, doctrinal debates, and banking practices related to these matters will also be analyzed.
2. Seizure of Receivables Arising from Letters of Credit
2.1. Attachability of Receivables Arising from Letters of Credit
Since letters of credit do not legally qualify as securities, they cannot be seized directly. However, it is possible for creditors of the addressee of a letter of credit to seize the receivables arising from the letter of credit; or receivables that may arise in the future based on a legal ground existing at the time of the seizure.
When a letter of credit is issued by the bank and delivered to the addressee, no receivable right arises for the addressee since the risk has not yet materialized. However, upon the materialization of the risk, a receivable right will arise in favor of the addressee, which can then be acquired by the attaching creditors. In cases where the risk does not materialize at all, the letter of credit will become terminated, rendering the seizure proceedings initiated by the addressee's creditors ineffective, and no payment will be made to the creditors.
2.2. Procedure to Be Followed in the Seizure of Receivables Arising from Letters of Credit
The procedure to be followed in the seizure of receivables arising from letters of credit is based on Articles 89 and 120 of the Enforcement and Bankruptcy Law No. 2004 ("EBL"). In this process, upon the seizure request made by the creditors of the addressee, the enforcement office sends a first attachment notice to the bank issuing the letter of credit, pursuant to Article 89 of the EBL. If the bank receiving this notice confirms that the risk has not yet materialized, it records the seizure on the letter of credit. Following the materialization of the risk and the addressee's payment request, the bank pays the relevant amount to the enforcement office. However, there may be cases where the addressee does not make a payment request despite the materialization of the risk. In such situations, two different methods can be followed under Article 120 of the EBL.
As the first method, under the first paragraph of Article 120, titled "Assignment of Receivables in Lieu of Payment," the receivable arising from the letter of credit may be assigned to one of the seizing creditors with the consent of all participating creditors. In this case, the authority to collect the receivable passes to the assignor creditor. Once the assignor creditor proves the materialization of the risk and requests payment, making the bank liable to pay the amount subject to the letter of credit to the enforcement office.
As the second method, under the second paragraph of Article 120, the seizing creditor may undertake the collection of the receivable. Based on an authorization certificate obtained from the enforcement office regarding this undertaking, the seizing creditor can apply to the bank, prove the materialization of the risk, and request payment of the amount arising from the letter of credit to the enforcement office.
3. Assignment of Receivables Arising from Letters of Credit
3.1. Assignability of Receivables Arising from Letters of Credit
Although the assignment of receivables arising from letters of credit is not specifically regulated under local laws, it is not a prohibited transaction either. Therefore, it is accepted that the assignment of receivables arising from letters of credit is possible and will be subject to the provisions governing the assignment of receivables set forth in Article 183 and subsequent articles of the Turkish Code of Obligations No. 6098 ("TCO").
In general, receivables that have arisen or are contingent upon a condition can be assigned to third parties. Receivables arising from letters of credit are also conditional receivables, as their realization depends on the materialization of the risk that the principal debtor fails to fulfill its obligation. Accordingly, if the beneficiary of a letter of credit fails to fulfill its primary obligation, the receivable arising from the letter of credit will be realized, and the assignee will benefit from this receivable. However, if the beneficiary fulfills its primary obligation, the condition will be deemed unfulfilled, no receivable will arise from the letter of credit, and the assignment of the receivable will become ineffective.
3.2. Materialization of the Risk/Fulfillment of the Condition
When the risk is materialized or the condition is fulfilled, the receivable secured by the letter of credit becomes a collectible receivable right. In this case, the assigned letter of credit can be monetized. However, there are doctrinal debates regarding whether the authority to request the collection of the collectible receivable secured by the letter of credit belongs to the addressee of the letter of credit or the third party to whom the receivable has been assigned.
Some scholars argue that the authority to request collection does not belong to the third party to whom the receivable has been assigned but rather to the addressee of the letter of credit. According to those, the assignee has no control over the collection of the receivable. Therefore, it remains uncertain whether the addressee will request collection from the bank, leading to practical challenges in enforcement.
Other scholars argue that with the assignment of the receivable arising from the letter of credit, the authority to collect is also transferred. Consequently, the third party who proves the assignment of the receivable to the bank can proceed with the collection. In our opinion, the authority to collect is a right attached to the receivable rather than to the agreement itself. Therefore, the mere transfer of the receivable directly grants the authority to collect to the assignee. For this reason, the assignee can apply to the bank and request collection.
To avoid this doctrinal debate and the practical inconsistencies it creates, it is advisable to consider changing the addressee of the letter of credit simultaneously with the assignment of the receivable arising from it. By doing so, uncertainties regarding the authority to collect can be eliminated, thereby providing assurance to those who acquire the receivables arising from the letter of credit in practice.
4. Change of Addressee in Letters of Credit
Letters of credit are legally considered as guarantee agreements. Upon the issuance of a letter of credit, a guarantee agreement is established between the addressee and the bank in accordance with the conditions outlined in the letter. When a change in the addressee of the letter of credit is in question, the nature of the letter of credit as a guarantee agreement necessitates the consent of the bank, the current addressee, and the new addressee. This principle is emphasized in the decision of the 11th Civil Chamber of the Court of Cassation dated April 21, 1992 (Case No. 90/7824, Decision No. 92/5567): "Although the assignment of the receivable is possible without the bank's consent once the conditions for the realization of the letter of credit have been met, the transfer of the debt relationship secured by the letter is only possible with the express consent of the bank assuming responsibility for the debtor's act."
However, if the relevant letter of credit includes a clause stating "transferable unilaterally," the consent of the bank will not be required.
Another important point to consider in addressee changes is that the receivable underlying the letter of credit relationship must also be assigned to the new addressee along with the change. Otherwise, if the new addressee does not hold any receivable against the beneficiary of the letter of credit, the bank will reject the collection request.
5. Conclusion
The seizure, assignment, and changes of addressee concerning receivables arising from bank letters of credit are not specifically regulated in legislation but are subject to general provisions under the TCO and the EBL. As detailed in this article, these issues bring significant legal uncertainties, doctrinal debates, and differences in practices of market actors.
In this regard, it is evident that the legal framework must be accurately applied, and solutions must be developed to address the challenges encountered in the effective management of legal processes related to the seizure, assignment, and changes of addressee concerning receivables arising from bank letters of credit.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
