Obtaining a Preliminary Attachment Order During Setting Aside Proceedings

Under the International Arbitration Law (the “IAL”), a party to an arbitration agreement can apply to Turkish courts to obtain a preliminary attachment order before or during arbitration proceedings. If the creditor obtains such an order, they can request that the debtor’s assets be attached by Turkish execution offices, pending an enforceable award. However, obtaining a preliminary attachment order after the arbitral award is rendered may be problematic.

The Execution and Bankruptcy Law (the “EBL”) governs the conditions as well as the procedure to obtain a preliminary attachment order. If the creditor’s claim is due, the creditor is required to prove prima facie that the claim is due, and the debtor failed to perform their obligation. If the creditor’s claim is not yet due, the creditor is required to prove prima facie that, among others, there is a risk of the debtor hiding or disposing of their assets. On top of that, if the creditor obtains a preliminary attachment order before filing a lawsuit or initiating execution proceedings, they must file a lawsuit or initiate execution proceedings as a “supplementary action”, within seven days after the execution of the preliminary attachment order. If the creditor fails to take this “supplementary action”, the preliminary attachment order automatically becomes void. These conditions apply to any preliminary attachment order, but the “supplementary action” requirement is a more complex issue if a preliminary attachment order is requested after an arbitral award is rendered.

Unfortunately, obtaining a favorable arbitral award from the arbitral tribunal may not always be sufficient for an award creditor to collect their receivables. If an arbitral award is rendered under the IAL, the award debtor can challenge the arbitral award before Courts of Appeal by way of a set-aside lawsuit. In a set-aside lawsuit, Courts of Appeal do not review the merits of the dispute, but they consider whether any of the grounds for setting aside, listed exhaustively in the IAL, is present. More importantly, a set-aside lawsuit filed by the award debtor suspends the execution of the arbitral award. Taking into account the time setting aside proceedings would take before the Court of Appeal and then the Cassation Court, an award debtor can delay execution of an arbitral award for several years, even if there is no ground for setting aside at all. This may, in practice, mean that the award debtor has several years to hide or dispose of their assets in Turkey if the award creditor does not obtain a preliminary attachment order. This makes preliminary attachment orders particularly important for the award creditors.

However, in practice, Turkish courts may tend to refuse preliminary attachment requests, pending the outcome of setting aside proceedings. More importantly, even if an award creditor succeeds in obtaining a preliminary attachment order, neither the IAL nor the EBL provides for how this award creditor can take the required “supplementary action”. This is problematic considering that the dispute has already been resolved by the arbitral tribunal. Under normal circumstances, the award creditor would have initiated execution proceedings as “supplementary action” to execute the award, but a set-aside lawsuit by the award debtor prevents the award creditor from doing so until a final decision is rendered in the set-aside lawsuit. In other words, a set-aside lawsuit by the award debtor may both delay execution of the arbitral award and prevent the award creditor from taking the required “supplementary action”, hence from having a preliminary attachment order in place.

This brings up the question of what the award creditor can do in order to prevent the award debtor from hiding or disposing of their assets during setting aside proceedings and eventually rendering the arbitral award futile. The first option may be to obtain a preliminary attachment order before or during the arbitration proceedings, as provided for under the IAL. The IAL states that a party can obtain a preliminary attachment order from Turkish courts before or during arbitration proceedings. This party can argue that this order remains in force until the arbitral award becomes enforceable, i.e., until the set-aside lawsuit is finally dismissed. In this scenario, the award creditor may not be required to take any further “supplementary action”.

An alternative option may be to initiate execution proceedings, before initiating arbitration proceedings. Under Turkish law, an arbitration agreement does not prevent the parties from initiating execution proceedings. However, if the debtor party objects to the claims raised in the execution proceedings, the proceedings are stayed, and the creditor party must initiate arbitration proceedings to challenge the debtor party’s objection and to proceed with execution proceedings. If the creditor party succeeds in the arbitration and the award is rendered in their favor, they may then obtain a preliminary attachment order from the court. The question is then whether the execution proceedings the creditor party had initiated in the first place would serve as a “supplementary action”, which would allow the order to remain in force pending the outcome of setting aside proceedings. The 12th Civil Chamber of the Court of Appeal of Istanbul responded to that question affirmatively in a 2018 decision.[1]

In the said case, the creditor party first initiated execution proceedings before the execution office. The debtor party objected to the claims raised in the execution proceedings and consequently, the execution proceedings were stayed. The creditor party then initiated arbitration proceedings under the IAL to challenge the debtor party’s objection. The arbitral tribunal partly accepted the creditor party’s claims and partly cancelled the debtor party’s objection, which allowed the creditor party to proceed with execution proceedings initiated in the first place. The debtor party (award debtor at that point) then filed a set-aside lawsuit against the arbitral award, which again prevented the creditor party (award creditor at that point) from proceeding with execution proceedings. The creditor party then applied to the court to obtain a preliminary attachment order, which the first instance court granted. The award debtor appealed against the first instance court’s order, arguing that, among others, the award creditor did not take any “supplementary action” after having obtained the order. The Court of Appeal held that the award creditor was not required to take any further “supplementary action”, considering that the execution proceedings initiated by the award creditor but then stayed upon the award debtor’s objection, would fulfil the “supplementary action” requirement.

Execution of arbitral awards rendered under the IAL may be challenging for the award creditor. First, set-aside proceedings may delay execution through execution offices. On top of that, it may be difficult for an award creditor to obtain a preliminary attachment order after the award is rendered. Even if they are able to obtain such an order, they may not be able to comply with the “supplementary action” requirement and the preliminary attachment order may therefore become void. To address these challenges, it may be advisable for creditors to obtain preliminary attachment orders before or during arbitration proceedings. Alternatively, they may start their collection efforts with execution proceedings, which may later serve as the “supplementary action” for the preliminary attachment order to be obtained after the award is rendered. If an award creditor fails to address these risks at the start of the dispute resolution efforts and fails to obtain a preliminary attachment order, the award debtor may use setting aside proceedings as a tool to hide or dispose of their assets, rendering the award creditor’s efforts and the favorable arbitral award futile.

[1] Decision of the 12th Civil Chamber of the Court of Appeal of Istanbul dated 11 July 2018 and numbered 2018/1069 E. and 2018/909 K.