Regulations Within the Scope of the Law on Movable Pledge for Commercial Transactions

The regulations that are set out below which will determine the application of the Law on Movable Pledges for Commercial Transactions (“Law”) numbered 6750 have entered into force on 1.1.2017 after their publication in the Official Gazette dated 31.12.2016 and numbered 29935:

1. Regulation on the Establishment of Right of Pledge and Exercise of Rights After Default (“Regulation on Right of Pledge”),
2. Regulation on the Valuation of Movables within Commercial Transactions (“Regulation on Valuation”),
3. Regulation on the Pledged Movable Registry (“Regulation on Registry”).

Our explanations regarding these regulations are set out below:

I. Regulation on Right of Pledge

Regulation on Right of Pledge regulates right of pledge, pledge agreement, pledge systems and exercising the rights after default.

Right of pledge, pledge agreement and pledge systems

As per the Law, right of pledge is established via registration of the pledge agreement to the registry. Article 5 of the Regulation on Right of Pledge defines the establishment of this right and the phases of establishment is as follows:

1. The existence of a current or prospective debt that may be secured via a pledge,
2. The existence of a will to establish a limited real right without the necessity to transfer of actual possession with the aim of securing the payment of a current or prospective right or its execution,
3. Drafting and signing the pledge agreement,
4. Registration of the pledge agreement to the registry.

Pursuant to the Regulation on Right of Pledge, the pledge agreement may be drafted electronically or written. The electronically drafted pledge agreement shall be signed by electronic signature, the written agreement shall be signed before the registry officer or a notary public shall approve the signatures of the parties.

Regarding the signing of the agreement, the Article 18 of the Regulation eliminates application uncertainties that may occur due to the Article 5 of the Law on Electronic Signature numbered 5070 which prohibits signing security contracts via electronic signature. As pursuant to the Article 18, claims on breach of Article 5 of the Law on Electronic Signature cannot be bring forward for pledge agreements that are signed via electronic signature.

The mandatory information that should be within the pledge agreement such as the information on the pledge creditor or pledge debtor, the subject of the agreement which the pledge is for, pledge system which is determined during the establishment of the pledge, are set out within Article 9 of the Regulation on Right of Pledge. On the other hand, the pledge agreement cannot include provisions which prohibit sub or posterior pledge of the pledged movable or which restrict the pledgor’s power of disposition on the pledged movable.

In terms of pledging the receivables, it is set out within Article 16 of the Regulation that pledge agreements which states that all prospective receivables are pledged without any limitation on business or subject shall be invalid.

As per Article 21 of the Regulation on Right of Pledge, the right of pledge shall be valid for the defined period if it is set out within the pledge agreement. As for the grounds of termination of right of pledge, they are determined as expiration of the defined period, termination of the receivable, cancellation of the pledge or complete extinction of the pledged movable.

The Law enables establishing more than one pledge on the same movable and states that priority will be determined as per the moment of establishment or the ranking of the degrees if a degree is specified. The Regulation on Right of Pledge regulates the pledge systems in detail accordingly. Pursuant to this, a pledge may be established on a movable via a progression or fixed ranking system.  The parties will be deemed to have chosen the progression system if there is no provision in relation to this within the pledge agreement.

The Article 25 of the Regulation on Right of Pledge regulates the progression system. Within this system the moment of registration will be taken into account and the creditors will be ranked starting from the first moment of registration. The priority ranking will be determined in accordance with the moment of registration. All of the movable will constitute a security for the right of pledge with priority. Within the progression system, the subsequent pledge creditor(s) will move to the empty rank respectively upon the cancellation of pledge by the former pledge creditor.

The fixed ranking system is set out within the Article 26 of the Regulation on Right of Pledge. The parties may establish a pledge with fixed ranking system if the value of the movable is graded as par value by the pledgor. Within this system the priority will be determined in accordance with grade and ranking of the right of pledge. Pledge may be established within the second or subsequent ranking provided that the grade, rank and par value of the subsequent ones are specified during registration.

Unlike the progression system, cancellation of one of the pledges with different rankings do not give to the subsequent pledge creditor an immediate right to move to the empty rank. If this right is granted to the pledge creditor via pledge agreement this matter should be registered to the registry.

If the possessor of the movable acts in way that may devalue the pledged movable, the relevant parties may request prohibition of such acts from the court where the pledged movable is located as per the Regulation on Right of Pledge. If the pledged movable is devalued, the pledgee may request from the pledgor to provide another security or restitution of the pledged movable.

Creditors’ rights after default

The Law provides the pledgee a right to request the transfer of ownership if the conditions exist. Pursuant to the Law and the Regulation on Right of Pledge, in case of default the pledge creditor may request the transfer of ownership of the movable in accordance with the Article 24 of the Execution and Bankruptcy Code[1] after completion of the procedure within this Regulation.

Upon the default, the transfer of the ownership of the pledged movable may be requested via an execution request. The following persons are authorised to make this request:

• If the progression system is determined, the first pledge creditor as per the moment of registration or their authorised representatives,
• If the fixed ranking system is determined, the pledge creditor with the highest grade and ranking or their authorised representative.

The transfer of ownership of the pledged movable may be claimed from the enforcement office where the movable is located or where the pledge creditor’s residence is. This request may be submitted orally, in written or via electronic medium. The execution request should include the appraisal/valuation report which is issued as per the Regulation on Valuation. Detailed information will be provided about this regulation below.

The enforcement office that received the execution request is required to prepare an order table which provides the order of priority and amount of the receivables of the pledge creditors pursuant to the Article 33 of the Regulation on Right of Pledge which sets out the right of priority. Pursuant to this Article, the right of pledge registered to the registry as per this Law and Regulation shall have priority over the pledges established on subsequent dates as per other laws.

A copy of the order table shall be served to the related parties. Any pledge creditor may object to this order table within seven days from the date of the receipt by filing a case at the competent court.

If no objection is submitted or the objection is rejected, the enforcement office shall inform the subsequent pledge creditors via a notification and shall also submit an order of payment to the debtor or the third party if the pledgor of the movable is a third party with possession of the movable. An objection can be made against this order as per the Execution and Bankruptcy Code. If no objection is submitted or is rejected, the enforcement office shall request the delivery of the pledged movable within seven days.

The pledge creditor may use his other rights pursuant to the Law. If the receivable cannot be collected as per this Law and Regulation, collection will be made pursuant to general provisions of the law.

Pledges established as per the Law numbered 1447

Pursuant to the provisional article 1 of the Regulation on Right of Pledge, this Law and Regulation shall not be applied to the commercial and merchant enterprise pledges established as per the repealed Law numbered 1447. Also the Law and the Regulation shall not be applied to pledges on the assets under Article 10,11 and 12 of the Regulation on Right of Pledge that were established prior to date of effectiveness of this Regulation.

II. Regulation on Valuation

Regulation on Valuation regulates procedures and principles for the valuation of the movables that are subject to a pledge, determination of the persons that may provide appraisal services and their assignment together with the fees of valuation services.

As stated above, pursuant to the Regulation on Right of Pledge, the appraisal/valuation report issued as per the Regulation on Valuation is also required to be submitted with the execution request. Also, the Enforcement Office uses this report as a basis for preparing the order table. Within this scope, the Regulation on Valuation is important for the creditors of pledged movables in terms of exercising their rights.

As per Article 5 of the Regulation on Valuation, valuation of the pledged movable may be requested from the competent court in the following circumstances:

1. By the pledgor, the person whom the pledge is provided on behalf of or the pledgee together with their authorised representatives prior to establishment of the pledge,
2. By the pledge creditor in case of processing the pledged asset, or its merging or mixing with another asset or after default of the debtor.

The valuation shall be undertaken by an expert which will be appointed from among the persons or institutions which are authorised as per the Regulation on Authorisation and Operation of Institutions Which Provide Valuation Services to the Banks. Together with this, the parties of the pledge agreement, may determine the value of the movables subject to the pledge without receiving a valuation service prior to establishment of the pledge.

An objection can be submitted within three business days against the valuation of the expert that was appointed by the competent court. The court’s determination upon the objection shall be final and binding. The litigation costs and fee for valuation arising from the request for valuation shall be paid equally by the parties.

III. Regulation on Registry

As per the Article 5 of the Regulation on Registry, the Pledged Movable Registry shall be incorporated for the following purposes:

1. Receiving the registration, amendment, cancellation, and assignment of the pledged movable or the right of pledge requests,
2. Registration of the requests defined above, recordkeeping and providing access to the registry records,
3. Fulfilling the other duties imposed by this Regulation.

In order to operate the registry services the Movable Pledge System (“TARES”) is also established, which will be compatible with the electronic signature and stamp duty procedures. The registry procedures shall be performed via TARES without any delay.

Pursuant to the Regulation on Registry, the registry records shall be kept in Turkish and notarised Turkish translation of the documents in foreign language are required to be given to the Registry.

The registry services include the registration of pledge agreements, their amendments and cancellation, assignment of right of pledge and the right to move to the empty rank to the Registry. The registration of the mandatory matters as per the Law should be effected to be able to assert these against the third parties.

The Article 23 of the Regulation on Registry sets out the required documents for the registration of pledge agreement, the assignment of pledged movable or right of pledge. Within this scope, the following documents and information should be submitted to the Registry for the registration of pledge agreement:

1. A copy of pledge agreement which is drafted and signed in accordance with the Law and the related regulations,
2. Descriptive information and documents regarding the movable that will be pledged,
3. The original documents showing the ID numbers of the parties of pledge agreement or their authorised representatives,
4. The original or notarized copy of the documents showing the authority of the representatives.

The Registry may request additional information or documents for the registration. A registry certificate shall be issued upon the completion of registration which will be given to the parties of the pledge agreement. The registration number, date and time of registration and a declaration of registration shall be within this certificate.

Pursuant to the Article 27 of the Regulation on Registration, the request for registration shall be rejected for the following purposes:

1. If the pledge agreement is not signed by one of the parties,
2. If the pledge agreement does not include one of the mandatory matters,
3. If the conditions required for the registration are not fulfilled,
4. If the documents or information required for registration are not provided,
5. If the matters that will be registered are not in compliance with the parties’ true statement or they are against public order,
6. If the progression system is accepted, requesting the registration of increasing the amount of security within the pledge agreement to the detriment of other creditors without approval.

You may contact us from info@engblaw.com for further details on the Law on Movable Pledges for Commercial Transactions and regulations.

[1] The Execution and Bankruptcy Code  dated 9/6/1932 numbered 2004.