Turkey: The new Movable Pledge Regime – a closer look

1. Background: The ability to establish pledges over the movable property of debtors or, as the case may be, of any other obligors providing security for such debtor, has always been possible under Turkish law. Before the enactment of the new Movable Pledges Law (the “MP Law”), the Commercial Enterprise Pledge Law (abolished) (the “CEP Law”) provided an exemption from the requirement to deliver possession of the relevant movable asset in question, but it included certain practical setbacks (as further described below) which ultimately led to a significant decrease in the number of deals where the security package also included a commercial enterprise pledge over, inter alia, the debtor’s movables. Below you will find a brief explanation of the MP Law and the ancillary applicable legislation, along with practical notes that may prove useful when dealing with similar scenarios in Turkey.
2. Points to Note:

1. Parties Pledgee: The applicable legislation defines “Pledgee” as “…the creditor and its successors who have the right to use the powers ascribed to them under the MP Law and the general provisions, including without limitation the power to take ownership of the pledged asset, to assign its receivable to asset management companies operating under the Banking Law No. 5411 or any other third party at its discretion, who has the right to audit, value or liquidate the pledged asset in accordance with the general provisions…” The pledgee might be a credit institution (kredi kurumu), a merchant (tacir) or an artisan (esnaf). “Credit institutions” are defined as “…banks and credit institutions operating on the basis of the Banking Law, financial institutions and public and private entities engaged in loan and suretyship activities on the basis of the Law on Financial Leasing, Factoring and Financing Companies…” Pledgor: The pledgor is defined as “…the debtor or a third party establishing a pledge over its movable assets as a security for the performance of an existing or future obligation…” The pledgor might be a merchant (tacir), artisan (esnaf), agricultural laborer (çiftçi), producer organization (üretici örgütü) or a freelancer (serbest meslek erbabı).

Bona fide third party protection:

The MP Law introduces a highly anticipated protection scheme for the pledgees, once the pledge agreement is duly registered with TARES.

By way of brief explanation, the scope of protection available under the CEP Law is limited to the trade registry zone (e.g. Istanbul) where the “commercial enterprise pledge” has been registered. Therefore, any bona fide third party in a registry zone other than the one at which the pledge agreement is registered would benefit from such bona fide status, and would be able to take ownership of the pledges asset, free of any security interest.

The MP Law, however, dictates that the security interest registered over the relevant asset will not be affected by any dealings of the pledgor with a third party, and such third party will not be able to benefit from a bona fide acquisition or any other sort of disposal of the pledged asset.

Ranking:

The system under the CEP Law dictated that the priority in which multiple security interests are established over the commercial enterprise would be determined on the basis of the time at which the relevant interest was registered. In other words, if there are competing security interests, then the interest which was registered with the trade registry at a prior date, would have priority over any security interests established subsequently.

Similar to the practice with respect to immovable pledges (i.e. mortgages), the MP Law further introduces a ranking system for the registration of multiple security interests, enabling the pledger to establish multiple pledges with different rankings, which have no significance with, regards the date of establishment.

However, the MP Law further dictates that, if there is no reference in the multiple relevant pledge agreements to the ranking of the security interests, the timing of registration will become relevant and the priority of these security interests will be determined accordingly.