On October 28, 2016, Turkey’s law on Pledges of Movable Property in Commercial Transactions, number 6750 was published in the Official Gazette. The law will enter into force starting on January 1, 2017. This law repeals the Law on Commercial Enterprise Pledges No. 1447 dated July 21, 1971 and introduces significant changes to the present Turkish law on pledges of movable property.

Reasons for the new law

The principal aim of the new law is to expand the use of pledges of movable property in financing and give all business enterprises easier access to financing. Since Turkish financial institutions insist on pledges of immovable property before granting loans to companies, the changes under the new law are expected to prove beneficial particularly for small and medium sized enterprises whose corporate assets consist mostly of movable property. Under the new law, pledges on movable property will be given more clarity with regard to applicability and transparency.

Scope of the pledge

Under current law, commercial enterprise pledges can be established only over the commercial title and trade name of a company, the existing machinery and vehicles allocated for company use at the time of registration of the pledge, and intellectual property rights. The new law will allow for pledges to be established to secure a debt over any movable assets listed in article 5 (i.e. pledged deposits, financial agreements relating to capital market instruments and derivative instruments, and movable assets registered with the Turkish land register). It will be possible to establish pledges not only over the commercial title and trade name of a company, movable company equipment (including machinery, vehicles and electronic devices etc.) and intellectual property rights, but also over other movable assets such as receivables, revenue, rental income, tenancy rights, stocks and commercial projects. The new law also allows pledges to be established not only over existing assets, but also over a company’s prospective movable property, the proceeds obtained from a company’s existing or prospective movable property, and existing or prospective receivables arising from all types of agreements.

Parties to a pledge agreement

While at present, a commercial enterprise pledge agreement may be executed between financial institutions or institutions and cooperatives engaged in credit sales, and business enterprise owners, the new law will make it possible for pledge agreements to be executed not only between financial institutions and tradesmen, craftsmen, farmers and self-employed, but also between tradesmen and/or craftsmen.

Registry for pledges

Currently, commercial enterprise pledges, which can only be executed in written form, are registered with the relevant Turkish trade registry or the Turkish merchants and craftsmen registry and are deemed to have been established upon registration. Under the new law, pledges on movable property will be registered in an independent Pledged Movables Property Register, which will be established on an online environment. The new law's system is expected to make transactions easier and provide more transparency and visibility as well as increase the means for establishing pledges on movables.

No transfer of possession

At present, establishing a pledge over an asset requires the pledgor (i.e. the asset’s owner) to transfer possession of the asset to the pledgee, which significantly limits the owner’s rights to make dispositions over the asset. This denies the pledgor any possibility for continuing to reap benefits from the pledged asset and use the fruits of the asset to amortize the underlying debt.

The new law completely eliminates this situation and allows for pledges of movable property to be established without the need to transfer possession from the pledgor to the pledgee.

Creditors’ rights

Under the current regime, creditors’ rights are prioritized in accordance with the time of registration of the relevant pledge. The new law stipulates that the security provided by the pledge will be limited to the amount and priority of the pledge as stated in the pledge agreement. It will still be possible to establish more than one pledge over a previously pledged movable asset, and if this is done without indication of the priority of the pledge, creditors’ rights will be determined according to the time of registration. All restrictions under the pledge agreement on the pledgor’s power to make dispositions over the pledged assets will be deemed invalid. 

Creditors’ approval for transfer of pledged property

Currently, company owners are required to obtain the approval of their creditors if they wish to transfer their businesses or the pledged company assets. Otherwise, they can be subject to imprisonment and payment of administrative monetary fines upon request of the claimants. Under the new law, company owners will have no obligation to obtain the approval of creditors in order to transfer their businesses or pledged company assets, but pledgors will be obliged to register any transfer of pledged assets and assignment of receivables with the Registry.

Cancellation of the pledge

The new law provides that a fine can be assessed against a pledgee if the pledgee does not apply to the Registry for cancellation of the pledge within three business days after the date on which its secured claim ceases to exist. If the pledgee does not apply for cancellation on time, the debtor can submit evidence showing that it paid the debt and apply to the Registry for cancellation of the pledge.

Tax and fees

The new law specifically stipulates that the transactions carried out before the Registry upon execution of the pledge agreement will be exempt from tax and charges.

Dr. Gökce Uzar Schüller, Attorney at Law
Munich and Istanbul