Kontokorrent — the Legal Form of a Revolving Credit Relationship
In business practice, revolving credit facilities often take the form of a kontokorrent — a current account between the parties: claims and payments originating from business connections enter the account and remain untouched until a defined moment. The Civil Code of Georgia gives this construction clear rules — from the closing of the account to the payment of the balance, from interest to security. On this page we explain these rules so that decisions connected with a kontokorrent are legally sound.
The Order of the Account and Its Closing
By the kontokorrent agreement the parties undertake to enter on the account claims and payments originating from business connections and to consider them inviolable until the closing of the account. The balance of the account becomes payable within the agreed term; if, at the closing, the party to whom the remainder of the sum belongs does not demand payment, the sum re-enters the kontokorrent. Upon closing, a balance claim arises which, for the purpose of performance, takes the place of the claim placed on the kontokorrent. The closing takes place once a year, unless otherwise provided — which means the parties may agree on more frequent closings. The law also permits cancellation of the kontokorrent and closing of the account at any time: a clear exit where the continuation of the relationship is in doubt.
Interest and Security
For payments provided for among the executed payments, interest must be paid at the statutory rate provided by law, unless the agreement provides otherwise — the question of the rate is thus resolved by the parties' agreement. As to security: where a claim entered in the kontokorrent has personal or in-kind security, the creditor may, even after the closing of the account, demand satisfaction from that security for the balance in its favour. This rule operates also where several debtors bear solidary liability — the guarantee works together with the kontokorrent construction and gives the creditor additional protection.
The Seizure by a Third Person's Creditor
Special attention belongs to the case where the creditor of one participant in the agreement attains the attachment of the balance sum — the laying of seizure. From that moment, the parts of the debt that arise after the attachment through new transactions are not counted toward that creditor; a transaction already executed on the basis of claims existing before the attachment is not considered a new transaction. The practical result: the moment of seizure delimits what enters the volume to be satisfied from the kontokorrent and what does not — which is why the date of the seizure is often the decisive detail of the case.
In practical terms, the kontokorrent construction gives the parties a two-sided benefit: the creditor accumulates claims on the account and converts them into a single balance at the moment of closing, while the debtor avoids individual satisfaction of each claim — everything is accounted in units of the account. At the same time, the principle of inviolability means that during the existence of the kontokorrent the enforcement of individual claims is suspended, and this circumstance must be taken directly into account when assessing the contract. Disputes most often concern the calculation of the balance, the starting point of interest and the effect of a seizure — and each of them depends on the completeness of documentary accounting.
Before concluding the kontokorrent agreement the parties should define such details as the circle of claims to be entered on the account, the closing date and the term of payment of the balance, the starting point of interest calculation and the currency — each of these items rests on the dispositive norms of the law and, absent agreement, is filled by the general statutory rule. From the general rule of closing once a year it follows that the parties must decide from the outset with which period they want the integration of the account: an annual cycle supports a long credit relationship, frequent closings support timely settlement. Properly drafted clauses pre-empt disputes from the outset; the kontokorrent is also a risk-management instrument — during the inviolability period the parties watch the state of the account and, when necessary, end the relationship by closing, which limits the spread of loss.
Frequently Asked Questions
Below — answers to the most frequent questions about the kontokorrent.
How is the account closed?
Once a year, unless otherwise provided; upon closing a balance claim arises which takes the place of the claim placed on the kontokorrent.
May the kontokorrent be cancelled?
Yes — where doubt exists, the kontokorrent may be cancelled and the account closed at any time.
At what rate is interest written?
At the statutory rate provided by law, unless the agreement provides otherwise.
How do guarantee and solidarity operate?
Satisfaction from personal or in-kind security is possible even after the closing of the account; the rule operates also in the case of solidary liability.
What happens when the balance is seized?
The parts of the debt arising after the seizure through new transactions are not counted toward that creditor; a transaction executed on pre-attachment claims is not considered new.
How We Help on Legal.ge
The specialists of Legal.ge will help you prepare and assess a kontokorrent agreement: we define the closing procedure and the fate of the balance, assess the operation of security and assist in disputed situations connected with seizure. Contact us — a properly structured account spares the parties conflict at a later stage.