Law on Movable Property Pledge in Commercial Transactions

As part of its efforts to support small-to-medium sized enterprises, the Turkish Parliament promulgated Law No. 6750 on “Movable Property Pledge in Commercial Transactions” (Ticari İşlemlerde Taşınır Rehin Kanunu) (“Law No. 6750”). Published in the Official Gazette on October 28, 2016, Law No. 6750, which entered into force on January 1, 2017, aims to facilitate financing transactions and the establishment of a security interest while ensuring that the business activities of the enterprise providing the security are not impaired. It improves the access of small-to-medium size enterprises to financing by changes in the legal regime applicable to movable property and commercial enterprise pledges. 

Three regulations issued by the Ministry of Customs and Trade (the “Ministry”) regarding (i) the establishment of a registry for pledged movables[1] (the “Registry Regulation”), (ii) valuation of pledged assets[2] (the “Valuation Regulation”), and (iii) establishment of the movable pledge and post-default rights of the pledgee[3] (the “Establishment Regulation”) were published in the Official Gazette on December 31, 2016 and constitute part of Law No. 6750’s secondary legislation. A further piece of legislation is expected to be published in early 2017.

The new regulatory regime for movable asset pledges allows borrowers, through registration with the newly established movable asset pledge registry, to pledge their movable assets, individually or in bulk, without transferring possession of the pledged property. This method of transfer constitutes one of the few exceptions[4] to the perfection requirement for movable asset pledges set forth under the Turkish Civil Code[5].

Because the movable asset pledge registry is a publicly available registry, anyone who acquires a right in rem over a movable asset does so subject to any pledge established prior to such acquisition. Registration of a pledge is a requirement for the pledge to take effect towards third parties.

Pursuant to a protocol executed by the Turkish Notary Association and the Ministry in December 2016 (“Protocol”), the movable asset pledge registry, an electronic database known as the Taşınır Rehin Sicil Sistemi or “TARES,” will be held and maintained by the Turkish Notary Association. Individuals and entities will be able to execute pledge agreements electronically over TARES. The electronic system, which was designed and implemented quickly, is still subject to changes based on the comments received from the relevant parties, such as banks, factoring companies and trade associations.

The table on the following page shows the main changes introduced under Law No. 6750 which annulled and replaced the Commercial Enterprise Pledge Law No 1447[6] (“Law No. 1447”).

There are several issues that still need to be clarified in the changed legislation. The unique feature of Law No. 1447 was that it defined the scope of assets to be pledged as a whole when the enterprise or business was pledged. Additionally, the pledge was perfected through registration before the trade registry which then sent notifications to the other registries to complete the perfection requirement for each individual type of asset. Law No. 6750, which abolished Law No. 1447, follows a similar procedure to create a universal security interest over a business or enterprise, with some changes. It defines, without referring to any specific type of asset or noting that any of the particular assets could be left out, the scope of an enterprise pledge as all assets allocated to the activities of the enterprise as of the date of the establishment of the pledge. While Law No. 6750 generally excludes assets that would need to be registered before other registries as part of perfection requirement of a pledge, when it comes to an enterprise pledge, it also stipulates that if an asset or pledge needs to be registered before another registry, such as the motor vehicle registry, the enterprise pledge will be notified to the other registries.

In addition to the foregoing, there are other outstanding questions regarding the interpretation and application of certain provisions of Law No. 6750 and the related regulations remaining to be answered by further legislation or practice. Among these are:

• The types of assets that must be registered with other registries are left outside of the scope of the Law No. 6750; however,  machinery and intellectual rights (which have separate registries) are listed in the scope of assets that may be pledged under the Law No. 6750.
• Tenancy rights are listed as a type of asset that may be subject to pledge. As they are listed in addition to lease receivables, it is not clear whether the pledge would cover only monetary rights (such as a right to compensation) or whether it would also apply over a right to use of the leased property.
• The Turkish Civil Code requires that notice be sent to prior pledgors when a subsequent pledge is to be established. Law No. 6750 provides for a registry that is publicly available but does not remove the notice requirement or provide for an automatic notice mechanism to be completed by the notary public. Therefore, it would seem that the requirement to deliver the notice of pledge to the prior pledgee remains in force.
• The scope, content and limits of the items listed under item (xix.) of “type of assets which may be pledged,” is not clear. It remains to be seen whether this will be interpreted as a catch-all provision for assets which can be pledged.
• It is not clear whether current commercial enterprise pledges will be handled under the new registry system outlined in Law No. 6750. It is envisaged that current pledges will also be recorded under the TARES, but that amendments made to existing pledges will be done before notaries and registered with the trade registries as before. 

[1] Regulation on the Registry of Pledged Movables, published in the Official Gazette dated December 31, 2016 and numbered 29935.

[2] Regulation on the Valuation of Movable Assets in Commercial Transactions, published in the Official Gazette dated December 31, 2016 and numbered 29935.

[3] Regulation on Establishment of Pledge in Commercial Transactions and Use of Post-Default Rights, published in the Official Gazette dated December 31, 2016 and numbered 29935.

[4] Other exceptions include pledge over assets that need to be registered with a registry (such as motor vehicles), commercial enterprise pledge (which, as discussed further above, is abolished with the Law No. 6750), and pledge over livestock and mineral resources.

[5] Turkish Civil Code No. 4721 published in the Official Gazette dated December 8, 2001 and numbered 24607.

[6] The Commercial Enterprise Pledge Law No. 1447 published in the Official Gazette dated July 28, 1971 and numbered 13909.

[7] While generally accepted by the legal scholars, transfer and assignment of future rights and assets is a contentious issue under Turkish law. The Law No. 6750, however, clarifies the issue for the pledge.