In an effort to improve collateralisation options and facilitate the access of small and medium-sized businesses to financing, Parliament recently adopted a new law introducing significant changes to pledges over movable assets. The Law on Pledges Over Movable Assets in Commercial Transactions was published on October 28 2016 and entered into force on January 1 2017, revoking the former regime under the Law on Commercial Enterprise Pledges.
Under the previous law, the scope of a pledge agreement principally covered all movables within the commercial enterprise. Conversely, although it is still possible to pledge an entire commercial enterprise, the new law allows establishing a pledge over any of the movable assets listed therein, such as:
- IP rights;
- agricultural products;
- raw materials;
- licence plates; and
- train wagons.
However, if the value of movable assets is sufficient to satisfy the underlying debt, the new law prohibits establishing a pledge over the entire commercial enterprise. Aside from the existing movables, the new law also allows the establishment of a pledge over prospective movables, the proceeds of these prospective movables and future receivables.
Parties to pledge agreement
The new law expands the scope of who can be party to a pledge agreement. Turkish banks, financial leasing and factoring companies and public institutions authorised for lending activities are entitled to enter into a pledge agreement with merchants, tradesmen, farmers, manufacturer unions, self- employed individuals and legal entities. More importantly, and unlike the previous law, the new law allows for 'merchants' (defined as individuals and legal entities that carry out commercial operations) and tradesmen to enter into a pledge agreement.
Perfection of pledge
The method of perfecting a pledge over movable assets is one of the most significant changes that will encourage financing transactions. Aside from a commercial enterprise pledge and other movables which had to be recorded in special registries, under the previous law the perfection of a pledge over movables required a transfer of possession to the pledgee. Thus, the movable asset pledge was a less popular collateralisation option. Under the new law, it will be sufficient for the perfection of the pledge to record the pledge in the Movable Assets Registry without transferring the asset to the pledgee, and the pledge will then be enforceable against third parties. The registry will be responsible for keeping a publicly available record of pledges over movable assets, except for those with their own registries (eg, vehicles and trademarks).
The parties to a pledge agreement must execute the agreement in writing (before the registry or with signatures approved by a notary) or in electronic form (with secure electronic signatures) and register the agreement before the registry. Transactions carried out before the registry will be exempt from taxes or other charges.
Rights and obligations of parties
Under the new law, the parties to a pledge agreement can request valuation of the movable asset before the registration of the pledge, but this valuation is mandatory following the occurrence of an event of default.
The possessor of the pledged asset must take the necessary measures to preserve its value. If the possessor takes any action that would decrease the asset's value, the creditor can ask the courts to prohibit such action. The court may authorise the creditor to take the necessary actions that will preserve the value of the movable, or the creditor may directly take these actions without authorisation if it is a matter of urgency. If the pledged asset or the underlying debt is transferred, the new law requires the pledgor to notify the registry.
In the event of a default, as an exception to lex commissoria preventing the transfer of ownership of the movable asset, the new law allows the first-degree pledgee to demand the transfer of ownership of the pledged asset from the execution offices. However, if the value of the pledged asset is higher than the underlying debt, the first-degree pledgee and the pledgor will be liable against the pledgees at subsequent ranks for the surplus between the underlying debt and the value of the movable. Further, the pledgee can also transfer its receivables to an asset management company with the same ranking as the transferring pledgee. As for the movable assets not transferred to the pledgee, if the pledgor defaults on the underlying debt, the pledgee can use licensing or leasing rights over the movable asset.
Further, if the pledgor satisfies the secured obligation, the new law requires the pledgee to apply to the registry within three business days to deregister the pledge. If the pledgee does not comply with this requirement, it will be subject to an administrative fine equal to 10% of the secured obligation.
The new law is expected to facilitate the access of companies to financing by introducing easier procedures for establishing a pledge over movable assets, such as through registration instead of transferring possession.
The new law is not applicable to established pledges and lawsuits commenced before it entered into force on January 1 2017.
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.