Turkey: Recent Developments On Commodity Finance

Last Updated: 14 February 2017
Article by Esen Irtem, Fatoş Otçuoğlu and İpek Yüksel

Commodity finance in Turkish market was a long-standing concern of creditors due to the impracticable legislative ground on movable pledges. Until the announcement of the new Law No. 6750 on Movable Pledges (the "Movable Pledge Law") which has entered into force on 01.01.2017 by abolishing the Law No. 1447 on Commercial Enterprise Pledge, pledge over movables (taşınır rehni) could only be established through the transfer of possession (zilyetliğin devri) of the related movable to the pledgee. The only exceptions to this rule were (i) the registration of the pledge at the registry to the extent that the ownership of the relevant movable requires registration onto a special registry; such as vehicles and vessels, and (ii) commercial enterprise pledges. Although various methods within the past years were tried by creditors for the perfection of a clear pledge, none of these methods were completely qualified to circumvent the obstacles of law.

We have summarized below the main vehicles on movable pledge brought by the new Movable Pledge Law which are expected to facilitate practicable commodity finance in Turkey:

Movable Trade Registry and TARES

The new Movable Pledge Law and the Regulation on Movable Pledge Registry, published in the Official Gazette dated 31.12.2016 and numbered 29935 ("Regulation on Movable Pledge Registry"), bring a registry system through which the movable pledges shall be registered and be publicly available by setting forth the principles applicable to the establishment and activities of the movable trade registry ("Movable Trade Registry") and the movable trade registry system ("TARES"). 

Accordingly, as per the Regulation on Movable Pledge Registry, the pledge can be established, removed, amended and/or transferred either (i) in writing before  the officer of the Movable Trade Registry or notary republic in Turkey or (ii) electronically via the online TARES platform with the electronic signature of the contractual parties to the pledge agreement. All records of the relevant pledge can accordingly be accessed via TARES. It is worth noting that the pledge of the relevant movable shall be registered at the Movable Trade Registry provided that it is not subject to registration in another registry (e.g. motor vehicles registry).

Eligible Parties for the Movable Pledge

The Movable Pledge Law provides that the pledge agreements can be executed between (i) banks and credit institutions subject to the Banking Law No. 5411, financial leasing, factoring and financing companies or institutions authorized to lend and grant sureties; and merchants, tradesmen, farmers, producer organizations, self-employed real persons or legal entities; or, (ii) between merchants and/or tradesmen.

Although the Movable Pledge Law refers to the "financing companies or institutions authorized to lend and grant sureties" as eligible parties, it is yet unclear whether the foreign financial institutions without any branch offices in Turkey will be eligible to establish movable pledges in Turkey. At the current stage, it is practically impossible, under the online TARES platform, for a foreign financial institution or a foreign merchant/tradesman to be a party to the movable pledge agreements as the TARES system requires central registration system number (MERSIS No or tradesmen No) both from pledgees and pledgors which could only be obtained by Turkish entities/tradesmen.

Degree System

The movable pledge regime foresees a very similar system as the immovable pledges; especially in terms of the degree system. In this new regime it is possible to establish various degrees of pledge over a movable and the assurance is determined by the degree and amount registered before the Movable Pledge Registry for the pledge. However, if the parties fail to inform the Movable Pledge Registry with the degree of pledge, then the date of registry shall be taken into account. The pledge can also be registered in a way to enable the pledgee to upgrade to the vacant degrees. If the subsequent pledgees are granted with the right to upgrade to the vacant degrees; the subsequent pledgees shall not receive any payments unless the first ranking pledgee is satisfied in full.

Rights of the Pledgor in Default;  An Exception to Lex Commissoria

Default of the pledgee in secured obligations entitles the pledgor to (i) request the ownership of the movable asset within seven (7) days following the default of the pledgee, (ii) assign its receivables to an asset management company, or (iii) use lease and license rights of the pledged movable the possession of which cannot be transferred.

It should be highlighted that the right of requesting the transfer of ownership is an exception of Turkish law rules forbidding the security holder from requesting transfer of ownership of the asset (lex commissoria).

If the value of the asset is higher than the first degree pledgee's pledge amount, the pledgee and the pledgor shall be jointly liable against the other pledgees.

Before the establishment of the pledge, parties may request the valuation of the pledged movable prior to establishment of the pledge. Otherwise, the valuation would be made in the event of default when the pledge is foreclosed. Upon one party's objection to the valuation, the court may assign an expert authorized by Banking Regulatory and Supervisory Authority.

The parties may also seek for valuation of the pledged movable following a merger or involvement of the pledged movable with another asset.

Pledges established before the Movable Pledge Law

Commercial enterprise and tradesmen enterprise pledges established before the entry into force of the Movable Pledge Law shall continue to be subject to the provisions of the law which was in force at the establishment date of the pledge.

Conclusion

Although there are still unclear aspects in the abovementioned developments, we believe that the enactment of the Movable Pledge Law has provided a feasible ground for the increase of commodity finance in Turkey.

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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