Facilitating feasible commodity finance in Turkey

Historically pledges over movable assets ( menkul rehni ) have long been perceived as an impractical method of taking security, as perfection required the transfer of physical possession ( zilyetlik ) of the pledged asset to the pledgee. Neither lenders nor borrowers accepted such transfers of possession as it was impractical for lenders to physically maintain assets and borrowers need to dispose of assets to continue their businesses.

The only exceptions to this requirement were (i) commercial enterprise pledges, which required pledging the entire commercial enterprise and (ii) pledges of assets the ownership of which is evidenced by registration onto a special registry (such as motor vehicles).

The Turkish collateralisation system has recently been modified in order to facilitate and diversify collateralisation options and enable small- and medium-sized businesses to swiftly secure financing. On 20 October 2016, the Turkish Parliament adopted Law No. 6750 on Pledge over Movable Assets in Commercial Transactions (the " Movable Pledge Law , which abolished Law No. 1447 on Commercial Enterprise Pledge and introduced a more user-friendly pledge over movable assets. The Movable Pledge Law will be effective as of 1 January 2017.

So what is changing?

Registry and Perfection

  • Transfer of physical possession is no longer necessary for perfection. The pledge is perfected upon registration into the Movable Assets Registry (the " Registry ").
  • The Registry will be maintained by the Ministry or an entity to be designated by it and the Registry will oversee the recording and tracking of pledges over movable assets, except for movable assets that have their own registries (e.g. the motor vehicles registry).
  • The Registry will make the register of pledges publicly available and therefore binding on third parties.
  • To establish a pledge over a movable asset, parties must execute a pledge agreement either in writing or in electronic form (signed with an electronically secured signature), and register the pledge agreement with the Registry.
  • Pledge agreements can be executed by and between Turkish financial institutions, public institutions that are authorised to lend or provide guarantees, and certain other individuals or legal entities (including certain overseas entities).
  • At the end of the security period the pledgee must apply to the Registry for the release of the pledge within three business days of the discharge of the secured obligations. If the pledgee fails to apply for the release of the pledge, it may be subject to an administrative fine equal to 10% of the secured obligations.
  • Execution of the pledge agreement and any transactions before the Registry, including perfection of the pledge, are exempt from any tax, charge, fee or other expenses.

Scope of pledge

  • Movable assets that can be pledged through registration with the Registry are exclusively listed under the Movable Pledge Law. The list is extensive and includes receivables, all types of proceeds and stock.
  • A movable pledge can be taken over contingent movable assets, such as future cash flows, receivables and assets to be accrued.
  • Following a default, the Movable Pledge Law introduces an exception to the Lex Commissoria, allowing for a first-degree pledgee to transfer ownership of the pledged asset to itself or an asset management company in certain conditions.

Conclusion

The changes brought about by the Movable Pledge Law offer a much easier and less cumbersome method for the perfection of pledges over movable assets. Businesses seeking financing can now utilise their movable assets more effectively as a source of collateral for their loans, which, in turn, will increase businesses’ ability to obtain financing for their operations. The expectation is that Turkey will see an increase in commodity financing.