Our legal system provides, under article 939/1 of the Turkish Civil Code that pledges over movable properties may be established by transfer of actual possession of the movables. Pledges over certain goods whose transfer lacks any benefit to the creditor may be established without transfer. Pursuant to article 940/2 of the Turkish Civil Code, the movable properties who are required by law to be registered to their relevant registries may be pledged, without transfer of possession of such property, by means of annotation of pledge to the relevant registry, for the purposes of guaranteeing the receivables of real persons or legal entities.
Procedure of Liquidation of Pledged Property
Enforcement proceeding by means of liquidation of a pledge may be made through enforcement proceedings based on a court decision or enforcement proceedings without a court decision (for the purposes of this article, a court decision shall hereinafter be referred to as a "judgment").
If the enforcement proceeding relies on a judgment or on a document specified under article 38 of Enforcement and Bankruptcy Code ("EBC") among documents which serves as a judgment for the purposes of that article (i.e. compromises made before a court, acceptances and notarial deed issued ex officio including acknowledgement of a pecuniary debt, suretyship of appeal with the sureties of execution office), the liquidation of pledge shall be made through enforcement proceedings based on a judgment.
Enforcement proceedings based on a judgment and enforcement proceedings without a judgment by means of liquidation of a pledge materially resemble the general seizure proceedings. However, in the existence of a pledge, the creditor is satisfied through the liquidation of the current pledges instead of seizure phase.
In the event a pledge has been established, the most important issue to pay attention to is the "obligation of primary application to the pledge". Pursuant to article 45 of the EBC "Even if the debtor of a receivable guaranteed by a pledge, is a person who is subject to bankruptcy, the creditor may only proceed by liquidation of the pledged movable. However, if the amount of the pledged movable does not suffice for the payment of the debt, the creditor may proceed to bankruptcy or seizure for his remaining receivable". Therefore, general seizure proceedings cannot be initiated prior to applying to liquidation of a pledge.
In the event of enforcement proceeding by means of liquidation of the pledge, the pledged property shall be specified in the request of proceeding. If the pledged property belongs to a third person, the proceeding will be executed against both the debtor and the third person (the owner). After the initiation of an enforcement proceeding, an execution order will be sent to the debtor. If the debtor does not pay his debt within 7 days or doesn't submit a decision on the stay of execution proceedings with respect to such execution order, the pledged property will be sold.
Stay of execution may be required only if the relevant debt has prescribed, is paid or if an extension for the payment of such debt is granted. The debtor may prove the payment of the debt or the extension granted for the payment of debt only through the documents prepared by official authorities.
For the enforcement proceedings without a judgment by means of liquidation of pledged movables, a payment order will be issued instead of an execution order. Unlike enforcement proceedings based on a judgment, the debtor may either pay his debts within 15 days or may object to the enforcement proceedings within 7 days. In the event of an objection to the enforcement proceedings, such objection should be removed or cancelled on order to finalize the execution proceedings. The judgment of a court shall be necessary under both circumstances. Once the objection is removed as a result of such court proceedings, the liquidation of the pledge shall continue.
As seen, the difference between the enforcement proceedings
based on a judgment and the enforcement proceedings without a
judgment concerns the finalization of the execution proceedings.
The remaining procedures are similar for both of the enforcement
The bailiff may procure the valuation of the property immediately after receiving the execution request, without waiting the finalization of the enforcement proceedings. Nevertheless, although the bailiff may ex officio initiate the preparations for sale, the sale may not be realized without a request for sale.
The Sales Process
The creditor is required to request the sale within 6 months as from the notification of the payment or execution order to the debtor. In the event that a request of sale is not made within such 6 month period, the enforcement proceedings by means of liquidation of pledged movables shall be discontinued. The time period which elapses until the finalization of the decision to remove or cancel an objection shall not be taken into account for the calculation of such 6 month period foreseen for the request of sale. The creditor shall pay the expenses of sale in advance within this period of time as well.
After the request of sale is made, sale of the movable properties by auction takes place. However, sale by means of bargaining procedure may be accepted for some exceptional cases (Article 119 of the EBC).
If there are more than one creditor, after the sale of the pledged property, distribution of the consideration shall be proceeded with. If turnover of the pledged property is not sufficient for the payment of the receivables for which such pledges were established, the bailiff shall prepare a chart of rank and share, and carry out with the distribution accordingly with such chart.
Document Certifying the Insufficiency of the Pledge
The sale of a pledged property may not fully compensate the receivable. In such an event, the creditor shall be provided with a "document certifying the insufficiency of the debt" certifying that the pledged property is insufficient to cover the receivable. If, after the request to sell the property and during the execution proceedings, it is apparent that the pledged property shall not be sufficient to cover the receivables, a provisory document certifying the insufficiency of the pledge shall be provided for the uncovered amount.
With the provisory document certifying the insufficiency of the pledge, the creditor may procure the sale of properties of the debtor other than the pledged property through seizure. However, a final document certifying the insufficiency of the pledge is necessary to be provided, instead of a provisory document, in order for such properties to be sold. Unless the creditor provides sufficient evidence that the consideration gained through the sale of the pledged property is not sufficient to cover his receivable, the creditor shall not be provided with a final document certifying the insufficiency of the pledge, and thus the seizure and sale of other properties of the debtor may not be requested. Only when it is finally determined that the receivable is not covered will the creditor be provided with a final document certifying the insufficiency of the pledge.
The final document certifying the insufficiency of the pledge bears certain advantages. With the possession of this document, the creditor may prove to have fulfilled the obligation of primary application to the pledged property, and the creditor therefore may proceed with the general seizure or bankruptcy proceedings. Additionally, in the event the creditor proceeds with a general seizure proceedings within one year, he can directly request seizure without the issuance of a payment or execution order. However, if the general seizure proceedings are initiated after the lapse of the one year period, a payment order or an execution order should be issued.
In addition to such advantages, the final document certifying the insufficiency of the pledge also bears the characteristics of an acknowledgement of a debt in the sense of Art. 69 of the EBC. Therefore, after the lapse of the one year period, if the enforcement proceeding without a judgement is initiated and the debtor objects to the payment order issued, the removal of such objection may be requested by the provision of this final document certifying the insufficiency of the pledge.
It is necessary to state that the final document certifying the insufficiency of the pledge does not constitute a "certificate of insolvency". The final document certifying the insufficiency of the pledge only states that the debt was not covered with the pledged, whereas the certificate of insolvency states that the entire property of the debtor is not sufficient to cover the debt. For this reason, the final document certifying the insufficiency of the pledge does not bear the advantages of the certificate of insolvency.
The procedure of the liquidation of the pledged movables materially coincides with the general seizure proceedings. However, certain differences arising due to the presence of a pledge, for instance the obligation of primary application to the pledged property, are important. The absence of a seizure phase in the procedure for the liquidation of the pledged movables stands out as the most material difference. Nevertheless, the process of sale of the pledged property and the distribution of the considerations are widely similar with the general seizure proceedings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.