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The Regulations implementing the recent Movable Pledge Law (“Movable Pledge Law” or “Law“), namely the Regulation on the Perfection and Enforcement of Movable Pledge in Commercial Transactions, the Regulation on the Movable Pledge Registry, and the Regulation on the Valuation of Movable Assets in Commercial Transactions (collectively, the “Regulations“), have been issued and become effective as from January 1, 2017. As stated in our previous client alert, the Law was not clear on certain aspects, which were expected to be clarified in the Regulations.
What the Regulations Bring
I. Regulation on the Perfection and Enforcement of Movable Pledge in Commercial Transactions
Regulation on the Perfection and Enforcement of Movable Pledge in Commercial Transactions (“Perfection and Enforcement Regulation“) envisages four stages for perfection of a movable pledge. Accordingly, in order to duly establish a movable pledge, following stages must be satisfied: (i) existence of an actual or contingent securable debt, (ii) intention of perfecting a pledge over a movable asset in order to secure an actual or contingent debt without the need of transferring its physical possession; (iii) preparation and execution of a pledge agreement; and (iv) registration of the plegde agreement with the registry. Furthermore, a comprehensive list of information that must be included in the movable pledge agreement has been envisaged. Presence of such information will be examined ex-officio by the registry officials.
The currency type of the secured amount has also been listed among the information that must be included in the pledge agreement. Therefore, the Perfection and Enforcement Regulation confirms our understanding, which was explained in our previous client alert, that the secured amount is no longer required to be stated exclusively in Turkish Lira under the movable pledge agreement.
A cap has been introduced with regards to the value of the movable pledge. Accordingly, value of the movable pledge cannot exceed 120% of the liquidated obligations.
The scope of the limitation brought by the Law regarding perfection of commercial enterprise pledge has been clarified. Accordingly, in the event one or more of the movable asset(s) allocated for the use of the commercial enterprise can secure more than 120% of the liquidated obligations, a pledge over all assets of the commercial enterprise cannot be established.
Scope of the commercial enterprise pledge has been controversially extended as the immovable assets allocated for the use of the commercial enterprise have also been included within the scope of the commercial enterprise pledge along with the movable assets. Nevertheless, it is argued that this provision is contrary to the law[1] and therefore might be faced with unenforceability claims.
The statute of limitation for the secured obligations will cease upon registariton of the pledge agreement with the registry.
Details with regards to protection measures have been laid down in order to mitigate the risks that may arise as a result of perfection of pledges over movable assets without transferring their physical possession. Accordingly, related parties can claim their relevant expenses, which are in relation to protection of the pledged movable, from the proprietor. These expenses shall automatically be secured with a first ranking pledge over the movable asset without the need for further registration with the registry. If the value of the pledged movable has been deteriorated or there is such a risk, the pledgee will be able to claim from the debtor a further security for its receivable or reinstatement of the movable. If deterioration of the pledged movable cannot be attributed to its physical possessor, claims of the pledgee will be limited with the compensation amount obtained by the physical possessor and the physical possessor will not have a personal liability for these expenses. Compulsory expenses which have been made by the pledgee for protecting the pledged movable and pledgee’s receivables stemming from the payment of the pledged movable’s insurance premiums will also be secured by a pledge on an equal basis with its secured receivable without the need for further registration with the registry.
Transfer of the pledged movable’s ownership or physical possession to a third party will not affect the liability of the debtor and status of the pledge unless otherwise agreed. Furthermore, in the event the new proprietor of the pledged movable undertakes the secured debt, the creditor has been given the right to recourse to the previous debtor for the secured obligations provided that it sends a written notice to the previous debtor within one year. Pledgor and the transferee or their authorized agents shall request the registration of the transfer of pledged movable’s ownership with the registry.
Some important details with regards to foreclosure procedure of movable pledges have been revealed. Accordingly, upon completing the procedures set out under the Perfection and Enforcement Regulation, the creditor shall be able to claim the transfer of the pledged movable’s ownership in accordance with Article 24(3) of the Law No. 2004 on Enforcement and Bankruptcy (“EBL“). Nevertheless, in the event the pledge agreement is recognized under a document which qualifies as a court order, Article 24 of the EBL will be applied by way of analogy. In order to claim the transfer of the pledged movable’s ownership, the pledgee has to submit a request either orally, in writing or electronically to the enforcement office located at the place of the pledged movable or the pledgee within seven days following debtor’s default. The enforcement office will prepare a priority scale upon pledgee’s request regarding transfer of the pledged movable’s ownerhip by taking into consideration the movable asset’s value designated under the valuation/expert report. A copy of the scale shall be notified to each of the interested parties. In the event no objection has been made against the priority scale within seven days following its notification, or upon rejection of the objections, a payment order will be sent to the debtor and to the propriator of the pledged movable if the owner of the pledged movable is not the debtor. Notwithstanding Article 150/ı of the EBL, if the pledgor fails to object to the payment order within seven days following its notification or its objection is rejected, an enforcement order will be sent to the debtor and the owner of the pledged movable (if the owner of the pledged movable is not the debtor), in which the transfer of the pledged movable’s ownership within seven days following its notification will be ordered. Articles 148 and 150/d of the EBL shall be applied by way of analogy for the objections against the payment orders. Nevertheless, in the event the objection is solely regarding the pledge right, ownership of the pledged movable cannot be transferred to the pledgee until such objection is concluded. It is important to note that pledgee will not be able to initiate an enforcement proceeding in accordance with the general provisions set out under the EBL unless it fails to collect its receivable through the procedure envisaged under the Law and the Perfection and Enforcement Regulation.
In the event that the secured obligation’s value is higher than the pledged movable’s value designated under the expert report, the pledgee can request transfer of the pledged movable’s ownership by setting off 90% of the pledged movable’s value against the secured obligation. The pledgee may initiate enforcement proceedings for the remaining receivables in accordance with the general provisions of the EBL. On the other hand, if the value of the secured obligation is less than the pledged asset’s value, the pledgee may request the transfer of the pledged movable’s ownership upon payment of the extra amount.
It has been envisaged that, provisions of the Turkish Civil Code with regards to immovable pledge will also be applicable by way of analogy where there is a gap in the Law or Perfection and Enforcement Regulation along with its provisions regarding movable pledge as also stated under the Law. Furthermore, provisions of the EBL regarding foreclosure of the mortgage will be applicable by way of analogy where there is a such gap.
II. Regulation on the Movable Pledge Registry
It has been envisaged that either the Ministry of Customs and Trade (“Ministry”) or an institution authorized by the Ministry will establish the movable pledge registry (“Registry”). Accordingly, the Ministry has executed a protocol[2] with the Union of Turkish Notaries (“Union“) and authorized the Union to establish the Registry. The Union established the electronic registry database[3] (“TARES”) which will enable the tracking and publicity of the movable pledges. Accordingly, notaries will be authorized to carry out the registration formalities and the Ministry will be responsible for supervising the Union. The Registry is currently operational. Details with regards to operation of the TARES will be regulated by a communiqué that will be published by the Ministry.
A comprehensive list of documentation and information has been provided in order to be submitted before Registry for perfection. Presence of these documentation and information will be examined ex-officio by the registry officials.
Pledge agreements and any amendments thereto shall be registered with the Registry. Upon registration, along with a registration certificate, an exclusive number will be allocated for each movable pledge and other proceedings in relation thereto will be carried out with this particular number. Pledges over movable assets such as ships, air crafts, work machines and motor vehicles, which are prescribed to be registered with other registries, will also be notified to the Registry.
Even though it was stated under the Law that execution of the pledge agreement and any transactions before Registry including perfection of the movable pledge will be exempt from taxes, duties, charges or valuable paper price, the Regulation on the Movable Pledge Registry cenvisages collection of fees for registration services at the Registry which will be determined by the Ministry.
Related parties successfully proving their interest will be entitled to request the records of the movable pledge either electronically or through the notaries.
A movable pledge will be released and removed from the Registry upon the request of (i) the pledgee within three working days following the payment of the secured debt; (ii) the pledgor by submitting a court order certifying the discharge of the debt; and (iii) the court. After a movable pledge is released and removed, the Registry will keep the records for twenty years.
III. Regulation on the Valuation of Movable Assets in Commercial Transactions
The debtor, pledgor and the pledgee and their authorized agents can request from the court for the valuation of the movable asset prior to perfection of the pledge in the event parties cannot reach a consensus on the value of the movable asset.
Parties can object to such valuation within three business days following its notification. However, valuation that will be made upon objection shall be final and binding. Parties cannot request re-valuation of the movable before two years following the latest valuation.
Conclusion
Even though the Regulations have brought some level of clarity with regards to implementation of the Movable Pledge Law, considerable amount of the concepts introduced thereunder still requires further clarification. Considering the profound nature of the novelties introduced under the Law, gray areas pertaining to application of these provisions are expected to be clarified in practice.
[1] Şit İmamoğlu, Başak, Ticari İşlemlerde Taşınır Rehni Kanunu Üzerine Bir İnceleme, Ankara, Ocak 2017, s. 34.
[2] http://portal.tnb.org.tr/Sayfalar/HaberDetay.aspx?rid=196&tnb=HaberlerListesi&csn=/
[3] Accessible at www.tares.org.tr
This information is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested persons. This should not be acted upon in any specific situation without appropriate legal advice. This information is protected by copyright and may not be reproduced or translated without the prior written permission of Ergün Avukatlık Bürosu (www.cergun.av.tr).