Law On Pledge On Movable Properties In Commercial Operations

Summary: The novation brought by the Law on Pledge on Movable Properties in Commercial Operations are explained in this article.

  1. Entry into Force and Application

The Law No. 6750 on Pledge on Movable Properties in Commercial Operations (the “Law No. 6750”), published in the Official Gazette dated 28.10.2016 and numbered 29871, will enter into force on January 1, 2017. By the Law No. 6750, the Law on Commercial Enterprise Pledge dated 21.07.1971 and numbered 1447 was abolished. According to the transitional provisions in the Law No. 6750, it will not apply to lawsuits and proceedings being handled at the date of entry into force of the Law No. 6750; and the provisions of the legislation applicable at that time will continue to apply to the right of pledge established on commercial enterprises or craftsman businesses before the effective date of the Law No. 6750. The provisions of Turkish Civil Code No. 4721 regarding pledges on movable property shall apply, where no provisions are stipulated on an issue in the Law No. 6750.

  1. PurposeIt is stated that the purpose of the Law No. 6750 is to extend the exercise of the right of pledge on movables without their delivery as a security, to expand the scope of such pledgeable movable properties, to ensure the explicitness of pledges on movables, and to facilitate financing through alternative methods in converting the pledge into cash. In this respect, the elimination of the competition disadvantages of SMEs against the large-scale businesses and the provision of ease in financing has been particularly aimed.

III.      Scope

Movable properties on which a right of pledge may be established are listed in the Law No. 6750 as follows:

  • Receivables,
  • Trees yielding perennial products,
  • Rights subject to intellectual and industrial property,
  • Raw materials,
  • Animals,
  • All kinds of incomes and revenues
  • All kinds of permits which are not stipulated to be recorded in any other register and which do not serve as an administrative permit,
  • Rental incomes,
  • Tenancy rights,
  • Movable installations of the enterprise such as machinery and fittings, vehicles, equipment, tools, construction equipment and all kinds of electronic devices like electronic communication devices,
  • Consumables,
  • Stocks,
  • Agricultural products,
  • Trade name and/or enterprise name,
  • Commercial enterprise or craftsman enterprise,
  • Commercial license plates or commercial vehicle lines,
  • Commercial projects,
  • Wagons,
  • Out of those specified in this paragraph, movable properties, rights and shared property rights in the possession of the third persons.

The right of pledge may be established on existing or future movable properties of commercial enterprises or on proceeds from those properties. In case pledge is established on the entire commercial enterprise, all kinds of properties allocated for the activities of such enterprise will be deemed as pledged at the time of establishment of the pledge.

Thus, in contradistinction to the limited scope of pledge in the abolished Law on Commercial Enterprise Pledge, the possibility of establishing a pledge on all kinds of movable properties and receivables of a commercial enterprise and thus obtaining funds has been introduced.

IV.      Parties to the Pledge Contract

A pledge contract may be concluded:

  1. between a credit agency and real persons and legal entities that are tradesmen, craftsmen, farmers, producer organizations or self-employed persons, or
  2. directly between tradesmen and/or craftsmen in order to create an atmosphere enabling tradesmen and/or craftsmen to provide mutual support to each other.
  3. Content of a Pledge Contract

As per provisions of the Law No. 6750, a pledge contract must include information concerning the parties, the subject of debt, the amount of debt or the amount constituting the security of the pledge, the currency and the maximum amount of the pledge and also the pledged property and its distinctive characteristics (such as serial no, brand, year of production, HS Code, PRODTR etc.).

In a pledge contract, provisions restricting the pledgor’s power of disposition on the pledged movable property or provisions making the pledge subject to further pledge by the pledgee or subordinate pledge are invalid.

  1. RegistrationIn order to establish the right of pledge and make it binding towards the third parties, the concluded pledge contract should be registered in the Register of Pledged Movables to be created in compliance with provisions of the applicable legislation. In case of transfer of the pledged movable or the debt, the pledgor is liable to register such transfer. Issuance of the pledge contract and procedures performed in the Register are exempt from taxes, duties, charges.

VII.     Degree System and Priority

The Register of Pledged Movables will be kept by the Ministry of Customs and Trade and records therein will be public. The security provided with a pledge is limited to the registered amount and degree of the pledge.

Creditors’ priority of receivables on the same movable property shall be determined in accordance with the degree system. In case more than one right of pledge is established on the same movable property without any degree, the priority will be determined in accordance with the time of establishing the pledge. Provisions of Articles 871 to 876 of Turkish Civil Code, which are not in contradiction to the Law No. 6750, will apply mutatis mutandis to pledge degrees, relationship between degrees, encashment of the pledge and distribution of the sales proceeds.

VIII.   Rights and Obligations of the Parties of a Pledge Contract

Possessor of the pledged movable is liable to take the necessary measures to protect the value of the movable and, in case of the possessor’s failure to fulfil this liability, the pledgee may apply to the court and request authorization to take the measures. In cases where any delay would be critical, the pledgee may take the necessary measures without applying to the court. Possible consequences of this amendment in practice are an issue of concern.

The pledgor is liable to compensate the damages incurred by the pledgee due to dispositions that decrease the value of the pledged movable properties.

Before establishing the right of pledge, parties may have the subject movable valued by means of an expert report to be obtained by a civil court of first instance serving in the area where the pledgor resides. Objections may be raised against valuation reports. The valuation report drawn upon objection is final whereas a new valuation may not be requested within two years as from the date of the report.

  1. Default and Discharge of Claim

In case the pledgor defaults, the pledgee may request the transfer of the ownership of the pledged movable as per Article 24 of the Enforcement and Bankruptcy Law No. 2004 or may transfer the claim to asset management companies or, for properties which are not subject to transfer of possession, may exercise rental and royalty right. If the creditor cannot collect the due debt by means of these methods, then may initiate proceedings against the debtor in accordance with the general provisions.

If the claim is discharged, the pledgee will apply for the deregistration of the pledge within three business days. In case of the pledgee’s failure to fulfil this obligation, an administrative fine of 1/10 of the secured debt amount will be imposed. Furthermore, if the pledgee fails to make an application for deregistration of the pledge in due time, the debtor who has paid the debt and documented such payment may request deregistration of the pledge.

X.        Sanction

The Law No. 6750 also includes regulations aiming to protect the pledgee’s claim. Accordingly, in case the pledgor or the transferee who takes over the pledged movable (i) uses the pledged property in contradiction to the Law No. 6750, (ii) does not discharge the debt and transfer the ownership of the pledged movable, (iii) demolishes or disposes of the pledged property with the intention of causing damages to the pledgee, (iv) fails to register the transfer of the pledged property and the transfer of claim in the Register, or (v) acts in a way to mislead the Register, an administrative fine, not exceeding half of the secured debt amount may be imposed on the pledgor.

The Law No. 6750 also stipulates that those, who are continuously engaged in lending money by holding pledges on movable properties, may be punished within the scope of usury under Article 241 of Turkish Penal Code.

The information given in this note are aimed only at providing information, and does not serve as a legal opinion under any circumstances.