New Law on Movable Pledge

The Law on Movable Pledge for Commercial Transactions (“Law”) was published in the Offical Gazette on 28.11.2016. The Law will repeal the current Commercial Enterprise Pledge Law numbered 1447 and be in effect as of 1 January 2017. Various revisions are introduced to the movable pledge are with the new Law. Together with this issues that may arise due to the application of the Law are expected to be resolved with the secondary legislation.

The purpose and scope of the law

The Law aims to extend the use of moveable pledge without delivery as a security, to widen the scope of the movables that are subject of this pledge, to ensure publicity of movable pledge and to facilitate access to financing by providing alternative methods for foreclosure of movable pledges.

As a rule of Turkish Civil Law a movable pledge shall only be valid through transfer of actual possession. However commercial enterprise pledge constitutes an exception to this principle in order to ease access to financing in the commercial life and due to the issues, that may arise as a result of the application of this rule.

Within the explained scope and pursuant to the defined purposes, the Law sets out the procedures and principles in relation to establishment of pledges on movables, movable pledge’s effect against the third parties, the Registry of Pledged Movables, determining the right to priority among the pledged creditors, the parties’ rights and obligations, the use of the right of pledge and other related matters.

The Law shall not be applied to pledge agreements which include financial agreements in relation to capital market instruments and derivatives together with pledged deposits. In addition the movables which are registered to the land register for any reason shall not be within the scope of the Law.

The right of pledge and pledge agreement

The right of pledge shall be established via registration of the pledge agreement to the Registry of Pledged Movables (“Registry”). Pursuant to the Law a pledge agreement may be concluded between credit institutions and merchants[1], tradesmen, farmers, producer organizations, real and legal persons that are self-employed and merchants and/or tradesmen.

The Law extends the scope of the institutions that can provide credit and therefore allows public or private institutions and organizations which provide credit and guarantee along with banks and financial organizations.

As per the Law the pledge agreement may be draw up electronically or written. The parties’ signature is required to be approved by public notaries or the agreement will be signed before the Registry officer for written contracts in order to register the pledge agreement to the Registry. For the pledge agreements that are issued electronically the agreement is required to be approved by secure e-signature.

The mandatory terms of the pledge agreement are also defined within the Law. Therefore the parties may freely define their rights and obligations provided that the terms of the pledge agreement is not breach of the Law.

The movables that can be pledged

The Law regulates alternative security elements that may be used for access to financing by widening the scope of the movables that can be pledged. The following movables are set forth as pledgeable by the Law:

• Receivables
• Trees which provide products for many years
• Rights that are subject of IP right
• Raw materials
• Animals
• All kinds of income and revenues
• All kinds of licenses and permits that are not administrative approvals and required to be registered to another registry,
• Lease incomes
• Tenancy right
• Machine and fixings, vehicle, equipment, tool, heavy equipment/vehicle(s), all kinds of movable business equipment such as electronics including electronic communication equipment
• Consumable material
• Stocks
• Agricultural products
• Trade and/or business name
• Commercial and/or merchant enterprise
• Commercial plate and commercial line
• Commercial project
• Railcar
• Among the above movables, rights and common ownerships rights that are in the possession of a third party.

Also it became possible to establish a right of pledge on prospective movables of enterprises or the incomes derived from these. The power of disposition on the pledged prospective movables may be exercised upon acquisition of their ownership.

On the other hand, pledge cannot be established on all of the enterprise if the movables do not offset the debts.

Possibility to establish more than one pledge

If a pledge is established on all of the commercial or merchant enterprise, all assets that are allocated to the enterprise’s operation on the time of the establishment of pledge shall be deemed pledged. If there are prior pledges on these assets, the pledge that is established and notified as per the Law shall be after the prior pledge.

The security provided by the pledge is limited with the amount and degree stated during the registration. The pledge may be established on the second degree or the following degree provided that the amount of the previous pledge is stated during the registration.

If more than one pledge is established on the same movable without indicating a degree, the priority shall be determined according to the time of establishment of the pledge. The ranking of the degrees will be the basis if the degree is determined.

The pledgee’s approval is not required for the assignment of the pledged movable as per the Law. However the pledgor is required to register the assignment of the pledged movable and claim to the Registry. Otherwise a monetary fine shall be imposed as detailed below. Also the pledgor shall be liable for indemnification if the value of the pledged movable is decreased to the detriment of the pledgee due to this reason.

The pledged movable registry

The Pledged Movable Registry if established by the Law in order to ensure publicity and follow up, to establish the right of pledge and its effects against the third parties, to determine the priority rights among creditors, to register the pledged movables and their assignment.

The establishment and operation of the Registry and terms and procedures for sharing information with registries established pursuant to other legislation shall be defined by a regulation issued by the Ministry.

Creditor’s rights in case of default

The rights of the creditors that can be used in case the liabilities are not performed when due are set out as follows:

• The creditor in the first degree may request the transfer of ownership of the pledged movable from the debt collection office pursuant to the Bankruptcy and Enforcement Law numbered 2004. In that case the debt office shall inform the Registry about the transfer. If the value of the pledged movable determined as per the Article 13 of the Law is more than the amount of the claim of the creditor in the first degree, the creditor in the first degree and the pledgor shall be jointly and severally liable to the creditors in other degrees from the difference between.
• The creditor may assign its claim to asset management companies as per the Law numbered 5411. In this case, asset management companies shall be in the degree of pledge of the creditor. The priority right shall be determined as per the Article 11 of the Law.
• For the assets that cannot be a subject of the transfer of ownership the tenancy and licensing rights may be used.

It should be emphasized that the transfer of ownership of the pledged movable is an exception to the general rule of lex commissaria under Turkish law which is set out within the Article 873of the Civil Law.

If the creditor cannot recover its claims by exercising the rights defined above the proceedings as per the general rules shall be used. The procedures and principles in relation to these will be defined by a regulation.

Sanctions

It is regulated within the Law that a judiciary fine will be implemented to the pledgor or the assignee of the pledged movable, which should not be more than the half of the amount of the debt that was secured, upon the pledge creditor’s request if the debt has not been paid fully or partially. Accordingly the pledgor or the assignee shall pay a judiciary fine under the following conditions;

• Using the pledged movable against the Law,
• Not transferring the ownership of the pledged movable when the debt has not been paid,
• Damaging or destroying the pledged movable with an intent to cause harm to the creditor,
• Not registering the assignment of the pledged movable or the claim,
• Committing acts for deceiving the Registry.

Tax, Duty Exemptions

The pledge agreement and the Registry proceedings are exempt from tax, duties and levies as per the Law.

Conclusion

The Regulation has not been published in the Official Gazette yet which would define the procedures and principles of various matters under the Law although the Law will come into effect in a short time. The Regulation is significant especially in terms of the application of the Registry.

With reference to transitional clauses, it is set forth within the Law that the provisions of it shall not be applied to lawsuit and debt enforcement claims already initiated prior to the date of effect. The provisions of the previous legislation shall also be applied to pledges established on commercial and merchant enterprises prior to the date of effect. Nevertheless, the Regulation is expected to include provisions in terms of the application of the Law to other movable registries such as Mining Registry, Animal Registry.

[1] As per Article 16 of the Code of Commerce corporations are deemed as merchants.