Turkey: Reforms To The Law On Pledges Of Movable Property: Business Enterprises In Turkey Expected To Enjoy Easier Access To Finance Sources

In recent years, Turkey has witnessed the enactment of various legislative instruments aimed at preventing the global economic crisis affecting the stability of the Turkish economy and contributing toward its consistent growth. The Draft Law on Pledges of Movable Property in Commercial Transactions (the "Draft Law") is the most recent piece of legislation prepared with this purpose in mind.

The Draft Law was submitted to the Presidency of the Grand National Assembly of Turkey (the "Parliament") on 9 August 2016, and is expected to come into force on 1 January 2017. With its enactment, the Law on Commercial Enterprise Pledges No. 1447 (the "Current Law") will be abrogated, and significant changes will be introduced to the present Turkish legal arrangement on pledges of movable property.

The principal aim of the Draft Law is to popularise the use of pledges of movable property in financing, thus allowing all business enterprises easier access to sources of finance. However, given that banks typically insist on being provided with pledges of immovable property before granting loans to companies, the changes which are contemplated by the Draft Law are expected to prove beneficial particularly for small and medium sized enterprises (SMEs) whose corporate assets are mainly comprised of movable property.

This article will focus on the major amendments planned to be introduced by the Draft Law as compared to the Current Law.

No Transfer of Possession

At present, establishing a pledge over an asset requires the pledgor (i.e. the asset's owner) to transfer the possession of the asset to the pledgee, which significantly limits the owner's rights of disposition over the asset. This arrangement denies the pledgor any possibility to continue reaping benefits from the asset in question, which might ultimately contribute toward payment of the pledgee's debt.

The Draft Law will remove the above-explained requirement altogether and allow for pledges of movable property to be established without the need to transfer its possession from the pledgor to the pledgee.

Scope of the Pledge

Pursuant to the Current Law, commercial enterprise pledges can be established only over the commercial title and trade name of a company, the existing machinery and vehicles allocated for company use at the time of registration of the pledge, and intellectual property rights. The latter two can be excluded from the scope of the pledge by the parties, but the commercial title and trade name of a company cannot.

In contrast, the Draft Law will allow for pledges to be established – as part of transactions entered into in order to secure a debt – over any one or all of those movable assets listed within article 5 thereunder (save for pledged deposits, financial agreements relating to capital market instruments and derivative instruments, and movable assets registered with the Turkish land register). Hence, it will be possible to establish pledges not only over the commercial title and trade name of a company, movable company equipment (including machinery, vehicles and electronic devices etc.) and intellectual property rights, but also over other movable assets such as receivables, revenue, rental income, tenancy rights, stocks and commercial projects.

Moreover, the Draft Law will allow for pledges to be established not only over existing assets, but also over a company's prospective movable property, the proceeds obtained from a company's existing or prospective movable property, and existing or prospective receivables arising from all types of agreements. In this context, prospective movable property is defined as those assets listed under article 5 of the Draft Law which do not exist or are not yet owned by the pledgor at the time of execution of the pledge agreement.

Registry for Pledges of Movable Property

Currently, commercial enterprise pledges – which may be executed only in written form – are registered with and deemed established at the moment of their registration with the relevant Turkish trade registry or the Turkish merchants and craftsmen registry.

This system will be altered by the Draft Law, which stipulates that a registry will be set up specifically for pledges of movable property (the "Registry"). The underlining rationale for this is to ensure public accessibility to and transparency regarding information on pledges of movable property, thus accommodating a different procedure for the establishment and registration of a pledge of movable property, its effectiveness against third parties and determination of the priority level of creditors' rights.

After enactment of the Draft Law, parties will be obliged to register pledges of movable property – which may be executed either electronically or in written form – with the Registry. In order to complete registration, the parties must either sign the pledge agreement before a Registry official, or have their signatures approved by a notary public. Accordingly, pledges of movable property will be deemed established at the time of registration of the pledge agreement with the Registry.

Creditors' Rights

Under the current regime, creditors' rights are prioritised in accordance with the time of registration of the relevant pledge. In contrast, the Draft Law stipulates that the security provided by the pledge will be limited to the amount and priority of the pledge as stated on the pledge agreement. Hence, time of registration of pledges will be rendered mostly irrelevant in terms of determination of creditors' rights. That said, it will still be possible to establish more than one pledge over a previously pledged movable asset, and if this is done without indication of the priority of the pledge, creditors' rights will still need to be determined in accordance with the time of registration of the pledge.

Furthermore, provided that one of a number of separate pledges established over the same asset is cancelled, the creditor of the lower ranking pledge will step into the place of the creditor of the higher ranking pledge which ceases to exist. Payment to creditors of a lower ranking pledge will only be made after the debt owed to the creditors of the higher ranking pledges have been fully paid off.

In addition, all records found under the pledge agreement limiting the pledgor's dispositional powers over the pledged assets will be deemed invalid.

Creditors' Approval for Transfer of Pledged Property

Currently, company owners are required to obtain the approval of their creditors should they wish to transfer their businesses or the pledged company assets. Otherwise, they can be subject to imprisonment and payment of administrative monetary fines upon request of the claimants.

As per the Draft Law, company owners will have no obligation to obtain the approval of creditors in order to transfer their businesses or pledged company assets, but pledgors will be obliged to register any transfer of pledged assets and assignment of receivables with the Registry.

Effectiveness Against Third Parties

Since at present there is no specific registry reserved wholly for the registration of pledges of movable property, the resolution of disputes arising in connection with issues pertaining to the effectiveness of pledges against third parties tends to prove problematic. However, following establishment of the Registry after enactment of the Draft Law, pledges of movable property will only be effective against third parties as of their date of registration with the Registry.

Protection of Pledged Assets

Under both the Current Law and the Draft Law, certain parties are placed under an obligation to take those measures needed to preserve the value of pledged assets. At present, the responsible parties are the owners of companies, but after enactment of the Draft Law, these will become the possessors of pledged assets.

Moreover, under the Current Law, creditors become entitled to compensation in case of depreciation of the pledged assets due to acts of their possessors, provided that company owners do not provide them with supplemental security. But in the future, creditors will be entitled to inspect the pledged assets and take those measures needed to preserve their value themselves, or apply to the court requesting for prohibition of the possessors of pledged assets from carrying out those acts which lead to the depreciation of their value. Hence, claimants will be able to claim compensation of their damages in terms of their costs for taking the said measures.

Cancellation of the Pledge

Under the Current Law, where the pledgee's debt has been satisfied, the owner of a commercial enterprise is entitled to request for the pledgee to apply to the relevant registry for cancellation of the pledge. Failure to do so will not expose the pledgee to an administrative fine. Once the Draft Law is enacted, if the pledgee does not apply to the Registry for cancellation of the pledge within three business days as of the date on which its receivable ceases to exist, it will be levied an administrative monetary fine.

Alternate Routes to Foreclosure

For the time being, the only means for creditors to pursue their unsatisfied claims is by having the relevant pledged assets sold.

Under the Draft Law, creditors will also be entitled to (i) make a request from the execution offices to have the pledged asset transferred in their own names, (ii) transfer their receivables to asset management companies, or (iii) use leasing or licensing rights over assets whose possession does not have to be transferred, provided that the obligations stipulated thereunder are not performed in a timely manner.

If creditors cannot recover their unpaid receivables by the means outlined above, execution of the debt may be pursued via general Turkish execution and enforcement regulations.

Tax and Charges

The Draft Law specifically stipulates that the transactions carried out before the Registry upon execution of the pledge agreement will be exempt from tax and charges.

Parties to a Pledge Agreement

While at present, a commercial enterprise pledge agreement may be executed between credit institutions or institutions and cooperatives engaged in credit sales, and business enterprise owners, the Draft Law will make it possible for pledge agreements to be executed not only between facility institutions and merchants, craftsmen, farmers and freelancers, but also amongst tradesmen and/or craftsmen.


It is pointed inter alia that the Draft Law will only apply to those court cases, arbitration cases and execution proceedings commenced on or after its date of enforcement.


It is expected that pledges of movable property will be more commonly used as security in financing after the Draft Law enters in force. Overall, all of the above-mentioned changes are promising in terms of allowing all business enterprises and particularly SMEs easier access to finance.

Originally published 24 October 2016

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.

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