Commonly preferred in the Turkish financial market, a commercial enterprise pledge (the "CEP") constitutes an essential exception to the rule of the transfer of physical possession of the pledged movables to the pledgee set forth under the Turkish Civil Code1.
The CEP is a type of security that allows banks and financial institutions2 to create a pledge on all movable assets and certain intangible rights of a borrower without receiving the possession of the pledged asset, and with the possibility of the borrower continuing its business operations by using the pledged assets.
Legal Context and Scope of the CEP
Regulated under Commercial Enterprise Law No. 14473 (the "Law No. 1447"), the CEP may cover:
- The commercial title and name of the enterprise;
- Existing machinery, tools, equipment and transportation vehicles (with motors); and
- Intellectual property rights (e.g., patent rights, trademarks, models, licenses, etc.) of a commercial enterprise.
Only those rights stated under item (iii) above, may be left out of the scope of a CEP. Therefore, in principle, a CEP, including only some of the assets set out under item (i) and (ii) above, may not be established.
A commercial enterprise pledge does not include the immovable property on which the commercial enterprise is established. The immovable property, in order to be included in the security package, should be subjected to a mortgage agreement between the pledgor and the pledgee.
Establishment and Registration Procedure
In order to be valid and binding, a CEP agreement must be (i) executed before a notary public located around the commercial enterprise; and (ii) registered with the authorized trade registry where the commercial enterprise is established within ten (10) days following its execution before the relevant notary public. Following the registration of the CEP, the trade registry will then notify such to other relevant registries with respect to the assets included in the commercial enterprise pledge such as vehicles, trademarks4,5.
All existing machinery, tools, equipment and transportation vehicles owned by the enterprise and the intellectual property rights of the pledgor entering into the scope of the CEP must be clearly defined in the list attached to the CEP agreement, so that those pledged pieces of property can be easily separated and identified in the event of liquidation.
Different from mortgage agreements, the currency of the CEP must be denominated in Turkish Lira within the CEP agreement.
Priority among CEPs
The exception rule, non- transfer of physical possession of the pledged movable to the pledgee, applied to the CEPs allows owner of a commercial enterprise to establish several CEP's on the same commercial enterprise. However, different from the existing degree system of mortgages, the priority among the CEPs will be determined pursuant to their date of registration with the trade registry. In other words, a CEP with earlier establishment date will rank prior to a CEP registered at a later date.
Although the pledgor to the CEP is entitled to engage in any kind of transactions to carry out the daily operations of its commercial enterprise, it is required to seek the pledgee's consent in order to (i) create any encumbrance over the pledged assets; (ii) transfer or assign any of the pledged assets; (iii) change the location of the assets; or (iv) replace the pledged assets with other assets that require the list of assets to be updated by a notary.
Even though the CEP provides protection for the pledgee against any third party aware of the CEP established over the assets, this does not provide any protection vis-a-vis bona fide third party purchasers of the pledged property outside of the registry area of the pledgor.
Industrial Enterprise Pledge
An amendment was made to Law No. 1447 in 20036. Pursuant to such amendment, a new type of commercial enterprise pledge, the industrial enterprise pledge ("IEP") was introduced into the Turkish security practice, according to which the scope of the pledge may be limited to the existing machinery, tools, equipment and transportation vehicles (with motors) and/or intellectual property rights (e.g., patent rights, trademarks, models, licenses, etc.) of industrial enterprises. In addition to above, any equipment, tools and devices acquired via loans may also be subjected to the IEP7.
Besides the scope of the assets subject to the pledge, there are also minor differences with regard to CEPs and IEPs. Primarily, in order for an IEP to be established, the enterprise must be an industrial enterprise8.
In relation to the implementation of the IEP, there are some practical issues that must be taken into consideration. These issues, also discussed by the scholars, are as follows:
Is the Trade Name included in the IEP?
As mentioned above, the letter of Additional Article 2 of Law No. 1447 states that IEPs may be established over the existing machinery, tools, equipment and transportation vehicles (with motors) and/or intellectual property rights (e.g., patent rights, trademarks, models, licenses, etc.). However, the same provision does not specify whether the trade name of the industrial enterprise is de iure included in or if it can be excluded from the scope of the industrial enterprise pledge. Some scholars argue that since the additional article was only meant to provide an exception with respect to the establishment of the IEP over the assets to be included within the scope of the IEP, the trade name is de iure included within the scope of the pledge. We are of the opinion that the trade name of the enterprise is de iure included within the scope of the IEP.
Can IEPs be Established over Assets Acquired but not yet Delivered to the enterprise?
As stated above, additional Article 2 states that an IEP may be established over assets acquired by the loan, subject to the IEP. It is accepted in the practice that an IEP may be established over the assets that are acquired, but which are not yet delivered to the enterprise. To that end, certain scholars state that certain the relevant machinery, equipment, vehicles, tools and devices for which the loan has been provided for must be prequalified and determined within the IEP agreement. Certain scholars consider that in addition to the above, the relevant interim invoices should be annexed to the IEP agreement and if possible, the purchase price shall be directly paid to the seller by the financial institution.
Both CEPs and IEPs are commonly used in Turkish security practice. These pledges are expected to become more common in accordance with the necessities of small and medium-sized enterprises. In this respect, since IEP facilitate the establishment of a pledge over the assets of enterprises subject to a specific loan, it is likely to be utilized more in the years to come. Finally, an IEP is deemed as a more favorable security to be established for loans that are provided by both local and foreign financial institutions.
1 Published in the Official Gazette dated 8 December 2001 and numbered 24607.
2 An agreement for the establishment of a CEP may only be executed by and between the owners of the commercial enterprise, individuals or legal entities, and (i) credit institutions that are established as corporations, and which are a qualifying legal entity; and (ii) establishments that extend credit for sales that are either individuals or legal entities and corporations.
3 Published in the Official Gazette dated 28 July 1971 and numbered 13909.
4 Such registries include the relevant title deed registry, the Turkish Patent Institute (Türk Patent Enstitüsü), and the relevant Traffic Registration Directorates (Trafik Tescil Şube Müdürlükleri) located in the relevant province/district and the relevant transportation vehicle registries (nakil vasıtaları sicilleri).
5 All subsequent changes thereto must also be notified to, and registered with the relevant registries. Such update constitutes an amendment of the CEP agreement and, thus, subject to the same formal requirements as the CEP agreement, itself.
6 Law regarding the Amendment of Commercial Enterprise Law numbered 4952 published in the Official Gazette dated 29 July 2003 and numbered 25183.
7 The reasoning behind this new concept is to facilitate the draw of loans by small and medium-sized enterprises.
8 The definition of industrial enterprise must be taken into consideration whilst the implementation of Additional Article 2 of Law No. 1447 In this respect, an industrial enterprise is an enterprise which conducts manufacturing and production activities via amending the qualifications, composition, or the form of raw materials, semi-manufactured products, or products of any other materials or energy in a physical or chemical manner with the usage of machinery, equipment, trestles, devices or other vehicles. Industrial enterprises must be registered with the chamber of industry in the area they are located, and if there is no chamber of industry in their area, then this requirement defaults to the chamber of industry and commerce.