Effects of Law on Pledges Over Movable Assets in Commercial Transactions
ADMD Law Office
Lara Leman Türkay
I) LEGISLATION
The Law on Pledges Over Movable Property in Commercial Transactions No. 6750 (“Law No. 6750”) has been published in the Official Gazette No. 29871 dated October 28, 2016 and entered into force on January 1, 2017. Law No. 6750 has abolished the Law on the Commercial Enterprise Pledges No. 1447 (“Law No. 1447”). According to the temporary article in the transitional provisions section, the Law No. 6750 is not applied to the continuing proceedings being handled when it has entered into force. It is not applicable for commercial enterprise or craftsman business pledges established before the effective date of the Law No. 6750 either. The lawsuits and proceedings expressions in the transitional provisions section has been changed as proceedings after the Constitutional Court’s annulment decision no 2019/27 finding lawsuits expression contradictory to Article 2 and 38 of Constitution. The Law No. 1447 is applied to commercial enterprise pledges that have established prior to January 1, 2017. Turkish Civil Law No. 4721 (“Law No. 4721”) provisions are applied if there is no applicable provision in Law No. 6750 and in its three regulations named Regulation on Valuation of Movable Assets in Commercial Transactions, Regulations on Establishment of Pledge for Commercial Transactions and Application of Rights after Default, Regulations on Movable Pledge Registry. Movable phase was amended as immovable with the Article 33 Law No. 7099, dated February 15, 2018. It refers to immovable properties because Law No. 6750 accepts that registration is required, and the Law No. 4721 regulates the registration only for immovable properties.
II) THE PARTIES
According to Law No. 6750, a pledge agreement could only be established between credit institutions and traders, craftsmen, farmers, producer organizations and self-employed individuals and legal entities, as well as between trades people and/or craftsmen. As it is detailed in the Regulations on Establishment of Pledge for Commercial Transactions and Application of Rights After Default, pledge agreement can only be concluded between a pledger who can only be a merchant, tradesman, farmer, producer organization, self-employed professionals and a creditor specified as credit institutions, merchants and tradesmen.
The scope of the parties that can sign the pledge agreement has expanded as compared to abolished Law No. 1447. It is debated that shall a person possess the requisite qualifications only at the beginning of the agreement or these qualifications are expected after the conclusion of the contract. Civil Chamber of Court of Appeal for the 11th Circuit’ decision states that Law No. 1447 article 2/1 brought a restriction and definition exclusively for pledge agreement’s establishment phase, the opposite vote letter insisted upon continuity of the qualifications after the pledge agreement. According to Law No. 6750, pledger is obliged to register transfer of the pledged movable and claim to the record.
III) SCOPE AND PURPOSE
Law No. 6750 aims to expand the use right of pledge on movable assets without transfer possession of the assets as a security, to extend the scope of movable assets subject to right of pledge, to provide explicitness in pledge over movable assets and to facilitate financing by offering alternative ways for converting the pledge into cash. Impractical usage of pledge on movables due to delivery in Law No. 4721 necessitated the new regulation related to right of pledge without delivery. General preamble of Law No. 6750 emphasizes the important role of small and medium size of enterprises. According to preamble, the draft law was prepared to facilitate SMEs’ access to finance, increase their competitiveness and thus contribute to the balanced and stable growth of our country’s economy.
Law No. 6750 defines the right of pledge as a limited real right established on the movable asset without need to transfer possession in order to guarantee the payment or performance of a debt and states the specific number of movable assets which can be subject to right of pledge without delivery.
The right of pledge can be established on one or more of the movables listed in sub paragraph a-p of the first paragraph of the fifth article. In spite of this, Regulations on Establishment of Pledge for Commercial Transactions and Application of Rights After Default has restricted the right of pledge without a legal basis by saying that if the amount of debt is certain, the pledge can only be established on maximum one fifth of the debt in addition to the entire amount of the debt.
This situation creates the risk of invalidity if the creditor establishes pledge over the whole enterprise rather than the sufficient amount of movable assets which can cover the receivable of the creditor at the establishment of the pledge right. Therefore, instead of commercial enterprise pledge, creditor shall create pledge on each movable separately as much as possible.
Although Law No. 6750 states that existing and future receivables arising from any contract may be subject to pledge, this should not violate the principle of certainty and should be limited with a specific subject. If a pledge is established on the entire business enterprise or tradesman enterprise, any asset allocated to the operation of the enterprise at the time of establishment of the pledge is deemed as pledged movable.
The right of pledge may be established on the existing and future assets which are not in the possession of enterprise, and on the returns of these assets. Trade title and/or business name subjected to pledge contradicts with the provision “Trade title cannot be transferred to another person apart from the business” of the Turkish Commercial Law No. 6102. While the repealed Law No. 1447 stipulates pledge of the commercial enterprise with its elements specified in the law, the Law No. 6750 provides an additional opportunity for non-delivery pledge on each movable. The right of pledge on movables includes component part of the asset.
IV) REQUIRED FORM AND REGISTRATION
In order to create the right of pledge and effectiveness against third parties, parties shall conclude a pledge agreement in electronic or written form and register the pledge contract in the register of pledged movables.
If the pledge agreement is issued in the electronic platform, it is required to approve it with a secure electronic signature, if it is arranged in a written form, the parties shall sign the agreement in the presence of the registry officer or their signatures shall be notarized.
The abolished Law No. 1447 also stipulated the registration of the pledge agreement to the relevant trade registry but according to Law No. 6750, the registration must be made to the register of pledged movables for commercial enterprises named TARES. Registration to TARES arises the right of pledge, binds the third parties, ensures publicity of the records and determines the creditors’ priority rights.
Although the records are open to the public, the Law No. 6750 ensures the acquisition of possession with the provision “the good will of the third person is preserved if it is not known or expected to know the right of pledge on the movable”. Thus, it is not accepted that the open records are known by everyone differently from the land registry. There is no regulation in the law about the people who are obliged to examine the register of pledged movables according to honesty principle. Another point where the register of pledged movables for the commercial enterprises differing from the land registry is that while the land registry is based on opening separate pages for each real estate, TARES informs the inquirer whether the movables in his/her possession are pledged or not.
V) DEGREE SYSTEM AND PRIORITY
If more than one right of pledge is established on a movable, the order between them is determined by fixed degree or acceleration degree system. Law No. 6750 enables to specify one of the two systems.
If the parties do not choose a specific system, it is deemed that the pledge contract is established according to acceleration system. In case presence of more than one right of pledge, if the degree is specified, creditor’s priority right is determined by the order of degree, if the degree is not specified; priority right is determined by the moment of pledge’s establishment.
Regulations on Establishment of Pledge for Commercial Transactions and Application of Rights after Default granting the right to progress to the released degree necessitates receiving consent of the creditors who are in the previous order in the acceleration system but does not entails consent in the fixed degree system. The right to step into the empty degree is open to debate for acceleration system because if the degree releases, following pledges progress in sequence and the degree does not remain empty. The Law No. 6750 has brought different regulations from the Law No. 4721 in terms of degree system.
VI) CONVERTING THE PLEDGE INTO CASH
In the case that the debt cannot be performed within the term, the law allows creditor to demand the transfer of ownership of the pledged movable, transfer of receivables to an asset management company or use the rental and loyal rights for the movables which are not subject to transfer of possession.
Although the Law No. 6750 calls default, it is not necessary for the borrower to fall into default; inability of discharging of the debt at the maturity date is adequate. While creditor may request converting the pledge into cash in Law No. 1447, additionally the Law No. 6750 enables creditor to request transfer of the ownership of the pledged movable as an exemption of Lex Commisoria (Owning Pledged Asset Ban) principle.
The underlying reason is that, it will take a long time and be costly to convert pledge into cash through the Execution and Bankruptcy Law No. 2004 and some goods must be converted into money without wasting time. Ownership of the movable can be taken over by creditor and transferred to third parties in a shorter time period with Law No. 6750.
The value of movable is determined by a real or legal person providing expertise service under the Civil Court of Peace in the pledger’s place of residence upon the application of creditor who demands the transfer of the possession. If the determined value is more than the total receivables of the first-degree creditor, first degree creditor and pledger are liable severally against the creditors of other degrees for difference. Despite pledger’s limited responsibility with the pledged movable, pledger is held severally responsible with the first-degree creditor by the lawmaker.
VII) SANCTIONS
According to Law No. 6750, if the following conditions are fulfilled, a judicial fine not exceeding half of the debt secured by the pledge is imposed against the pledger or transferee of the pledged movable, upon complaint of the pledge creditor who cannot partly or partially take her/his receivable:
a) Using the pledged movable on contrary to this law,
b) Not transferring the ownership in case of nonpayment of debt,
c) Demolishing and disposing the pledged movable with the intention of causing damage,
d) Not registering the transfer of pledged movable and receivable to the registry,
e) Acting fraudulently against the registry.