New Law on Moveable Pledge for Commercial Transactions and its Application

Law on Moveable Pledge for Commercial Transactions numbered 6750 (the “NewLaw”), has been published in the Official Gazette on 28October 2016 and has entered into force on 1 January 2017. The New Law aims to spread the use of establishment of moveable pledge over movable assets by giving security without requiring the transfer of possession and expand the scope of this pledge, ensure public availability for moveable pledges by establishing the Moveable Pledge Registry (the “Registry”) and provide alternative methods for liquidation of the pledges. With the enactment of the New Law, Commercial Enterprise Pledge Law numbered 1447 (“CEP Law”) has been revoked. On 31 December 2016, three regulations aiming to regulate the application of the New Law have been published in the Official Gazette numbered 29935. Such regulations are: Regulation on Moveable Pledge Registry (“Registry Regulation”), Regulation on Valuation of Moveable Assets in Commercial Transactions (“Valuation Regulation”) and Regulation on Establishment of Pledge for Commercial Transactions and Application of Rights after Default (“Default Regulation”) (together “Regulations”).The New Law and the Regulations will not be applicable to the continuing proceedings and the commercial enterprise pledges established prior to 1 January 2017.

Significant changes brought with the New Law and Regulations are as follows:

Scope of the Pledge

In the CEP Law, pledges could be established on commercial enterprises, commercial names, machines, tools, motor vehicles and intellectual property rights. The scope of the list has been expanded with the New Law. Pursuant to the New Law, pledges can also be established on future assets and commercial enterprises and third parties can pledge their assets in the name of others without delivering them. As opposed to the CEP Law, in the New Law, it is not possible to create a pledge over the whole commercial enterprise if the value of the movable assets which are pledged are sufficient to cover the total debt.

The list of assets which can be subject to pledge are as follows:

  • receivables,
  • perennial trees,
  • intellectual and industrial property rights,
  • raw materials,
  • any income and revenues,
  • any license and permits whose registration is not required,
  • rental incomes,
  • tenancy rights,
  • machine and fixings,
  • machines, equipment, tools, construction equipment, movable equipment of the enterprise such as all kinds of electronic devices including electronic communication devices,
  • consumable materials,
  • stocks,
  • agricultural products,
  • animals
  • trade names and/or business names,
  • commercial enterprise or industrial enterprise,
  • commercial plate and lines,
  • commercial projects,
  • wagons,
  • movable assets, rights and joint ownership listed above which are in possession of third parties. and

Establishment of Pledge Agreement

InCEP Law, pledge agreements could only be signed and prepared before a notary public. The New Law expanded the scope of execution and allowed pledge agreements to be prepared by the parties and then be certified by notary publics or the relevant Registry officials. In addition to this, pledge agreements can also be signed electronically by means of e-signatures.

The pledge agreement will remain in force during the period determined in the pledge agreement. The lapse of time will not be in effect for the claims after the pledge agreement is registered with the Registry.

With the New Law, pledge agreements can be established not only between credit institutions and commercial enterprises but also between credit institutions and merchants, traders, farmers, production institutions, self-employed real persons or legal entities and between traders or merchants.

According to New Law, the execution of pledge agreements and transactions conducted before the Registry are exempt from taxes, charges, and fees.

Moveable Pledge Registry and TARES

With the New Law, the Ministry of Customs and Trade establishes the Registry, which aims to create public availability for pledges and ensure their validity against third persons. In CEP Law, the priority of the pledge claimants would be determined in accordance with the date of the establishment of the pledge. However, the New Law creates a degree system which allows the establishment of pledges for different degrees, each having priority over the lower degrees,meaning that a lower degree can only make claims after the higher degrees are satisfied.

Moveable Pledge Registry System (TARES) is established with the Registry Regulation which allows all kinds of pledge related transactions to be conducted online with e-signature.

At the date of the distribution of this note, TARES is active and receiving online applications for the registration of pledges.

Transfer of Pledges

Unless decided otherwise, the transfer of ownership or possession of the pledged asset does not affect the responsibility of the debtor.

In case the ownership is transferred and the new owner undertakes the debt, the pledgee must notify the former owner that it reserves the right to apply to the former debtor in writing within a year. Otherwise, the former owner will be released from its debt.

Enforcement of Pledges

In accordance with the New Law, the pledgee may apply to the following methods for its claims if the pledgor is in default: (i) demanding the transfer of ownership to itself, (ii) transferring the assets to an asset management company or (iii) using license and leasing rights on assets which can be owned without possession. If the pledgor fails to collect its claims via these methods, then the general provisions of the Enforcement and Bankruptcy Law would be applicable.

To transfer the ownership of the asset to itself, the pledgee must apply to the enforcement office. In this case, the enforcement office will prepare a ranking list indicating the priority scale and amounts of all claimants in accordance with the degrees established before the Registry and serve this document on all claimants. Each claimant can object to the content of the list within 7 days as of the service of the notice of ranking list. In case there is no objection against the ranking list and the objection or complaint is rejected, the enforcement office will inform the pledge right owners and if the pledgor is a third party other than the debtor, send a payment order to this third party.

The objection to the payment order will be carried out according to the general enforcement proceeding. In case that there is no objection to the payment order and the judgment regarding the cancellation or lifting of the objection is submitted to the enforcement office, the enforcement officer will, by serving an enforcement order, demand the delivery of the asset within 7 days.

To transfer the ownership of the asset to itself, the pledgee must apply to the execution office. In this case, the execution office will prepare a priority scale for all claimants in accordance with the degrees established before the Registry and deliver this document to all claimants. If the claimants do not object to this document, they will not be able to object later. Following this an order of payment will be delivered to the debtor and if the debtor fails to object or satisfy the demands in the given time, the pledged asset will be transferred.

If the possessor of a pledged asset acts in a way which damages the value of the asset, interested parties may apply to court in order to preclude such situation.

Valuation of Movables

In accordance with the Valuation Regulation, if the parties fail to decide upon a value for the asset, the parties may apply to the pledgee’s local court of first instance, where the pledge is established, to determine the value of the asset. If the pledged asset is processed, altered or combined with another asset or if the debtor is in default, only the pledgee may request the valuation.

Valuation is conducted by experts, who will be chosen by the court from the expert list published in TARES. The parties may object to the valuation of experts in three business days and the court will appoint a new expert. The second valuation is final and a new valuation cannot be requested for two years.

Current Position

At the date of the distribution of this note, TARES is active and both the notaries and TARES are processing with applications for the registration of pledges under the new Law.  Since the entry into force of the Law remains very new, the enforcement of the pledges under the new Law remains yet to be tested.