The Law on Pledges over Movable Assets in Commercial Transactions numbered 6750 was published in the official gazette on 28 October 2016 and will come into force on 1 January 2017 (the "Law on Pledges over Movables"). With its enactment, the Commercial Enterprise Pledge Law dated 21 June 1971 and numbered 1447 (the "Commercial Enterprise Pledge Law") will be repealed but will remain applicable for commercial enterprise pledges which are already established before 1 January 2017.

The aim of the Law on Pledges over Movables is to ease the use of pledges as collateral and to allow small and medium sized enterprises to provide movable asset pledges to finance their businesses without the need to transfer possessions of such assets to the pledgee, to create public accessibility and transparency regarding movable pledges through a new registry to be established and to facilitate liquidation with alternative ways.

It should be noted that secondary legislation needs to be enacted by the Ministry of Customs and Trade and the Pledged Movables Registry must be established so as to implement the Law on Pledges over Movables, and we are not aware of any preparation with respect thereto as of the date of this Memorandum.

This Memorandum sets out the innovations introduced by the Law on Pledges over Movables, in general, compared to the Commercial Enterprise Pledge Law.

1. Scope of the Pledge

Under Turkish Law, in order to create a pledge over a movable asset, the pledgee must take physical possession of such assets. However, in the case of a commercial enterprise pledge, this requirement is not applicable. The commercial enterprise pledge may be established only over certain assets namely the business name, trade name, existing machinery and vehicles and intellectual property rights.

However, the Law on Pledges over Movables allows the pledgee to establish a pledge without the need to transfer possession of the asset to the pledgee over any or all of the following movables assets:

(i) receivables,

(ii) yielding perennial trees,

(iii) intellectual and industrial property rights,

(iv) raw materials, animals, any income and revenues,

(v) any license and permits whose registration is not required,

(vi) rental incomes,

(vii) tenancy rights,

(viii) machine and fixings,

(ix) vehicles, equipment, tools, construction equipment, movable equipment of the enterprise such as all kinds of electronic devices including electronic communication devices,

(x) consumable materials,

(xi) stocks,

(xii) agricultural products,

(xiii) trade names and/or business names,

(xiv) commercial enterprise or industrial enterprise,

(xv) commercial plate and commercial lines,

(xvi) commercial projects,

(xvii) carriages, and

(xviii) movable assets, rights and joint ownership listed above which are in possession of third parties.

Not only existing but also prospective movable assets and their proceeds and existing and prospective receivables of the pledgor fall within the scope of the Law on Pledges over Movables.  In addition, a third party can provide a pledge for the benefit of a borrower, without transferring possession of the movable asset to the pledgee.

2. Pledge Agreement and the Parties

Under the Commercial Enterprise Pledge Law, a commercial enterprise pledge agreement can only be executed between credit institutions or institutions engaged in credit sales and business enterprise owners.  However, the Law on Pledges over Movables enables a pledge agreement to be executed between (i) credit institutions and traders, craftsmen, farmers, producer organizations and self-employed individuals and legal entities, as well as between (ii) traders and/or craftsmen.

The Law on Pledges over Movables defines credit institutions as (i) banks and financial institutions operating under the Banking Law numbered 5411, (ii) financial institutions operating under the Financial Leasing, Factoring and the Financing Companies Law numbered 6361, and (iii) public or private entities providing loans and sureties.

As currently drafted, the Law on Pledges over Movables is unclear as to the categories of potential beneficiaries and this needs to be clarified prior to its enactment.

The Law on Pledges over Movables also significantly changes the form requirement of pledge agreements. Instead of the statutory notarized form requirement under the Commercial Enterprise Pledge Law, the Law on Pledges over Movables allows the pledge agreements to be;

(i) concluded on an electronic platform (by secure e-signatures),

(ii) concluded in written form by the parties and approved by a notary public, or

(iii) signed by the parties before a trade registry officer.

As also stipulated under the Commercial Enterprise Pledge Law, registration of the pledge agreement with the relevant trade registry is a validity requirement under the Law on Pledge over Movables.

3. Pledged Movables Registry

One of the major innovations introduced by the Law on Pledge over Movables is the Pledged Movables Registry. The Pledged Movables Registry establishes a right of pledge and effectiveness against third parties, determines priority rights amongst the creditors and ensure public accessibility regarding information on pledges of movable assets.

Under the current regime, priority between creditors is determined by the date of establishment of the pledge. The Law on Pledges over Movables introduces a degree system (in a similar way to the system used to establish mortgages over real properties). Thus, it aims to prevent disputes which may arise between creditors during the liquidation process.

If a pledge is established with an indication of the priority of the pledge, the degree system will determine the priority.   The pledgor may give rights to benefit from vacant higher degrees to the pledgee. In addition, payment to a lower-ranked creditor will only be made after the debt owed to a higher-ranked creditor has been fully paid off.

4. Transfer of Receivables

Under the current regime, a transfer of receivables is not required to be registered with any registry. However, the Law on Pledges over Movables regulates that a transfer of receivables must be registered with the Pledged Movables Registry by the pledgor.

5. Approval to transfer Pledged Movables

Under the Law on Pledge over Movables, a pledgor does not need to obtain approval of the pledgee to transfer a pledged movable asset or to establish another pledge over the same movable asset but the pledgor must register any such transfer with the Pledged Movables Registry.

6. Alternative methods to liquidate

The Law on Pledges over Movables allows a pledgee to:

(i) make a request to the execution office to transfer title to the pledged movable asset to the pledgee,

(ii) request the transfer of receivables to an asset management company, or

(iii) utilize leasing or licensing rights over movables assets whose possession is not subject to transfer.

If a creditor does not recover its receivables through any of the above-mentioned methods, the creditor may collect its receivables under general Turkish execution and enforcement regulations.