Ercüment Erdem Att. Alper Uzun

The Code on Movable Pledges and Its Innovations

November 2016

The Code on Pledges of Movables in Commercial Transactions No. 6750 (“Code”) published in the Official Gazette dated October 28th, 2016 and numbered 29871 will enter into force on January 1st, 2017. The preamble of the Code states that along with globalization, the role of Small and Medium Sized Enterprises (“SMEs”) in the world economy rises each day, that SMEs are significant elements of the economic and social development, that the Code is prepared in order to ease the access of SMEs to financial sources, in order to improve their competitive power with large enterprises, and to contribute to the development of the world economy.

The Code regulates the alternative elements that could be used as a guarantee by the enterprises, while easing access to financial sources. The future assets that are planned to be obtained by the enterprises, in addition to the acquisitions of movables, are included as assets that may be pledged. It is aimed to provide publicity, and to track the pledge of movables within “the Moveable Pledge Registry.” Also, a more efficient mechanism is provided in the foreclosure of the pledge.

The Law on Commercial Enterprise Pledge No. 1447 will be revoked by the entry into force of the Code.

The Purpose and the Scope

The Code aims to facilitate and increase the use of pledges on movable assets as collateral, to widen the scope of movables that are subject to the pledge, to provide publicity, and to ease the access to financial sources by offering alternative foreclosure means.

The Code will be applied on the pledged transactions that are formed in order to constitute collaterals on debt, as well as on moveable assets that are secured under the Code. However, it will not be applied on pledge agreements in the capital markets and derivative financial instruments, in addition to the pledges on bank deposits. Similarly, movable assets that are registered with the Land Registry are not covered by the Code.

The Code defines the right of a pledge as follows: “A limited real right independent from the type of the moveable pledge, the situation of the pledger or the pledgee, the quality of the debt that was guaranteed by the pledge or naming of it as a pledge right by the parties; in order to guarantee redemption or fulfillment of a debt, including the right to claim of the transferee during the transfer of the claim without a transfer of possession.”

The Code states that the pledge agreement shall be registered and either executed by the signatories in front of a notary public, or in a notarial form, or electronically via registered electronic signatures of the signatories. Also, the Code enables the pledge agreements to be concluded among credit institutions and merchants, craftsmen, farmers, producer organizations, natural and legal persons who are freelancers, and between merchants and/or craftsmen.

The movables that are registered with the Land Registry, financial agreements on capital market instruments and derivatives, and pledges on bank deposits are not covered by the Code.

The Regulations and Amendments Introduced by the Code

The major renovation introduced by the Code is, to enable the establishment of pledges on movables without delivery, and establishment of it as a total pledge of a commercial enterprise. In other words, the Code enables the establishment of pledges on movables that are registered to the Movables Registry, without their delivery.

As of the entry into force of the Code, to provide publicity and pursuance on movable pledges, and for its application on third parties, the Registry on Pledges of Movables (“Registry”) for pledged movables will be established by the Ministry of Customs and Trade, and all transactions to be made with the Registry will be on-line. Thereby, the Registry will enable third parties to be informed on the situation of the pledges of an enterprise or a merchant. The provisions on moveable pledges that are obliged to be registered to other registries are undisclosed. It is ruled that within scope of the Code, these moveable assets cannot be pledged through registration with the Registry.

Article 4 of the Code regulates the manner in which to execute the right of pledges. Accordingly, the right of a pledge is executed by registration of the pledge agreement with the Registry. The Code clearly states that the pledge right will be enured to the third parties upon the registration with the Registry.

As it is listed in the Code, the pledge right can be established on assets, trees that provide perennial yield, intellectual property rights, feedstock, animals, any kind of acquisition and revenues, rental incomes, tenancy rights, consumable materials, stocks, agricultural products, tradenames or business names, commercial transactions or craftsman transactions, commercial plates and commercial lines, commercial projects, movable enterprise plants, such as carriages, machines and rigs, vehicles, equipment, work tools, and etc., and any licenses and warranties which are not registered to any other registry and cannot be assumed as administrative permit. The Code enables enterprises to establish pledges on various assets, including present and future assets. Moreover, within the scope of the Code, it is possible to establish a second pledge on a pledged asset. Therefore, the Code introduces a ranking system between the pledges. The guarantee established by the pledge shall be limited to the stated amount and its rank in the registry. If a rank is defined on an asset, the rank order shall be respected. If plural pledges are established without any rank order, the priority will be given to pre-established pledges.

The Code enables the parties of the pledge agreement, to have the movable be valued prior to the pledge proceeding. This regulation states that the required qualifications of real and legal persons to service on valuation will be determined with a directive to be prepared by the Ministry of Customs and Trade.

The Rights and Liabilities of the Parties

The Code introduces various rights and liabilities of the parties of the pledge agreement. Accordingly, the possessor of the moveable asset is liable to take necessary precautions to protect the value of the movable. If the possessor acts in a way so as to reduce the value of the product, the pledgee can apply to the Court and request prohibition of such actions. The pledgee is enabled to examine the moveable subject to the pledge. The pledger is obliged to compensate the loss of pledgee if the value of the moveable is reduced. Other rights and liabilities not contrary to the Code can be determined in the agreement.

In the event of non-performance of the payment of the debt secured under the Code, three alternatives of foreclosure of the pledge are possible (i) transfer of the movable’s ownership to the first degree pledgees by applying to the Execution Office, (ii) transfer of the receivables to an asset management company; and (iii) exercise of the right to lease or license the properties that cannot be subject to a transfer of possession. If the debt cannot be collected by the stated methods, an execution proceeding under general rules can be exercised.

The Code provides sanctions to be applied on parties in some cases. For example, the pledgee shall apply for de-registration of the pledge from the registry within three (3) business days upon the payment of the receivable. If the pledgee fails to do that, an administrative fine of 1/10 of the receivable shall be paid to the creditor.

Additionally, if the pledger or the transferee of the movable pledge do not use the moveable pledge in line with the Code, do not transfer the ownership of the pledge even though they do not pay the debt, ruin or demolish the pledged moveable with the purpose of hurting the pledgee, do not register the transfer of the moveable to the Registry, or attempt to deceive the Registry, an administrative fine of up to one-half of the debt upon the complaint of pledgee will be levied on the pledger or transferee.

Conclusion

The Code is regulated with the intention to provide the establishment of a pledge on the assets of SMEs, and to contribute to these enterprises’ financial needs. It aims to extend the usage of the right on the pledge of movables, and to provide an environment of trust for that. For the Registry to be established following to the entry into force of the Code, it is expected to provide publicity for the pledges of moveable assets and enure on third parties. The Code will enter into force on January 1st, 2017, but will not take effect on ongoing litigation and execution proceedings.