• Movable Pledge Agreements in Commercial Transactions
  • August 15, 2017
  • The secondary legislation is introduced through publication in the Official Gazette dated 31 December 2016 and numbered 29935 (3rd Repeating) and entered into force on 1 January 2017 based on the Law on Movable Pledge in Commercial Transactions ("Law") numbered 6750 published in the Official Gazette dated 28 October 2016 and numbered 29871, and entered into force on 1 January 2017. With the innovations1 introduced to the existing regulations regarding movable pledge, it is aim to create an alternative method, particularly for small and medium-sized enterprises, to use movable pledges as security while obtaining financing. The implementation of movable pledges in commercial transactions has gradually increased with the enactment of the Law and the secondary legislation, which lead to formalization of movable pledge practices. In this sense, the content and the validity of movable pledge agreements ("Movable Pledge Agreements") have become significant.
    Applicable Regulation and Movable Pledge
    The secondary legislation consists of the Regulation on Establishment of Movable Pledges in Commercial Transactions and Exercising the Rights in the event of Default ("Implementation Regulation"), the Regulation on Appraisal of Movable Assets in Commercial Transactions ("Appraisal Regulation"), and the Regulation on Movable Pledges Registry. The Law and Implementation Regulation regulates, among other things, the content and the procedures and principles of Movable Pledge Agreements, in detail. The Law further stipulates that the provisions of Article 939 and the following articles of the respective section related to movable pledges of Turkish Civil Code No. 4721 are applicable in the cases that are not regulated under the movable pledges regulation. With the enactment of the Law, the Law on Commercial Enterprise Pledge numbered 1447 ("Repealed Law") and the respective regulations have been repealed. However, the Repealed Law will continue to be applied for commercial enterprise pledges that have been established during the term of the Repealed Law.
    Under the Implementation Regulation, movable pledges are defined as "regardless of the type of the movable asset, the situation of the pledgee or the pledgor, the quality of the debt secured with the pledge or entitlement of the transaction as a pledge by its parties, a restricted right in rem established on movable assets, including the rights of the transferee, set forth under Article 189 of the Code of Obligations numbered 6098 regarding the transfer of receivables, with an aim to secure the repayment of a debt or performance of an obligation without the requirement to transfer the possession of the movable asset." A similar definition is further stated under the Law. In order for the establishment of movable pledges, the Law requires, among others, execution of a pledge agreement. Pursuant to the Implementation Regulation, a valid movable pledge would be established with the performance of four elements. The initial element is the existence of a receivable or a future receivable to be secured, and the other element is stated to be the presence of the intent of the parties to establish movable pledges. Such elements are the general requirements under Turkish law; therefore, even though such elements would not be stated under the Implementation Regulation, their presence would be required by law. The third element is preparation and execution of a pledge agreement and, finally, the last requirement is registration of the pledge agreement with the Movable Pledges Registry. With the registration of a pledge agreement, a movable pledge would be established.
    Movable Pledge Agreement
    Form
    A Movable Pledge Agreement is defined under the Law and the Implementation Regulation as "The agreement to be signed between the pledgor and the creditor in order to create a pledge." The respective pledge agreement must be prepared in writing or in electronic form. The agreements prepared in written form must be executed before the Movable Pledges Registry, or the signature of the parties must be notarized. The electronic form pledge agreements must be signed using electronic signatures. It is a validity requirement to clearly state the intent of the parties within the pledge agreements.
    Parties
    The pledgee under the Repealed Law was limited to the credit institutions, persons who engage in sales on credit, and cooperatives with the intent to match the merchants or tradesmen who undertake the debt with trustworthy people to avoid any problematic situation. On the other hand, the pledgee to be the party to the movable pledge is determined broadly under the Law, and merchants and tradesmen are entitled to enter into movable pledges with each other2. It is set out under the Implementation Regulation that the pledgee is to be determined among credit institutions, merchants or tradesmen; whereas the pledgor is to be from amongst merchants, tradesmen, farmers, producer organizations, and natural and legal persons who are freelancers. The Law and the Implementation Regulation further stipulates that a valid movable pledge cannot be concluded with any other party who is not stated under the legislation.
    Content
    As per the Law and the Implementation Regulation, it is mandatory to state under a Movable Pledge Agreement that the parties of the agreement (pledgee, pledgor or third party) and details of the parties, the subject of the underlying agreement of the pledge, i.e., the subject of the debt, the amount of the debt, and the secured obligations if the secured amount is definite; otherwise, the amount to be secured by the pledge, the currency of the payment, and the maximum amount of the pledge, distinctive features of the movable assets and, finally, the party undertaken to pay the expenses arising from the registration of the pledge from the Movable Pledge Registry. In the absence of any of the aforementioned information under the agreement, the registrar will refuse to register the agreement.
    In cases where the maximum amount of the pledge cannot be determined, the Repealed Law prohibits the amount of the secured debt in foreign currency; however, the Law enables the parties to state whether the amount is in Turkish Liras or in foreign currency.
    The Law further prohibits the parties from inserting negative pledge clauses into Movable Pledge Agreements. As such, the provisions under Movable Pledge Agreements regarding the restrictions of the disposition right of the pledgor over the pledged movable asset, or the restrictions on the ability of the pledgor to pledge the movable asset to others, would be void. The purpose of the legislator in making available the pledged movable for further securities is to ensure the continuity of the production of the asset and service of the pledgor.
    The movable pledge would also cover the integral parts of the pledged movable asset. However, the parties must agree whether the pledge will cover the existing or future accessories of the pledged movable asset or not. The parties must further agree, under the Movable Pledge Agreement, the amount of proceeds of the movable asset that is subject to the pledge.
    The ranking of the creditors is to be determined by a degree system or order of priority depending on the preference of the parties. The parties may instruct the registrar at the time of the registration to move forward with degree system, which will allow the subsequent pledgees to benefit from an escalation clause within the Movable Pledge Agreement. Pursuant to the Implementation Regulation, the nominal value of the respective degree, the degree and the order of the pledgee, must be stated in the Movable Pledge Agreement. If such a right is granted in a separate agreement, then the validity of such agreement would be dependent on its registration with the Movable Pledge Registry.
    As per the agreement between the parties, an appraisal of the movable assets may be conducted according to the Appraisal Regulation in order to determine the value of the movable assets that are subject to pledge prior to the establishment of the pledge. If such an appraisal is conducted, the amount determined must be written under the Movable Pledge Agreement.
    The Law abolishes the lex commissoria prohibition that prevents the pledgee from automatically gaining title to the pledged asset due to an enforcement event triggered under the agreement. As per the Law, upon non-performance of the debt, the pledgee has the right to request the transfer of the ownership of the movable asset to herself/himself. If it is the intention of the parties to grant the pledgee with such a right, then this should be included in the Movable Pledge Agreement. With this provision, the Law increases the bankability of the security in financing. On the other hand, the Law does not protect the movable asset, but enables the persons, who would desire so, to avail himself/herself of this opportunity3.
    Finally, the Law stipulates that the parties must state their rights and obligations under the Movable Pledge Agreement. Whether or not stated under the Movable Pledge Agreement, the possessor is required to take the measures to protect the value of the movable asset and, therefore, is liable for the disposals that would decrease the value of the movable asset. Additionally, the pledgee has right to monitor the pledged movable. Such provisions must also be written under the Movable Pledge Agreement.
    Conclusion
    The implementation of movable pledges in commercial transactions has gradually increased with the enactment of the Law and the secondary legislation, and the content and validity of the Movable Pledge Agreement, which is one of the elements required for the establishment of movable pledges, has become more significant. The form and the content of Movable Pledge Agreements is regulated both under the Law and the Implementation Regulation. Accordingly, Movable Pledge Agreements must be validity executed before a notary public, or in electronic platform. A validity requirement for Movable Pledge Agreements is its registration with the Movable Pledge Registry. With respect to the content of the agreement, among other general provisions, the Law abolishes the lex commissoria prohibition in order to increase financing, and further avoids adding negative pledge clauses to ensure the continuity of the production of the asset and service of the pledgor.
    1 Please see the previous Newsletter article on innovations and regulations introduced with the Law: The Code on Movable Pledges and Its Innovations, http://www.erdem-erdem.av.tr/publications/newsletter/the-code-on-movable-pledges-and-its-innovations/; Alper Uzun (accessed on: 20 July 2017).
    2 Başak Sit İmamoğlu, Reseach on Movable Pledges in Commercial Transactions, 2017, Ankara, p. 11.
    3 Ibid, 41.