Commercial Enterprise Pledge and Legal Consequences

Commercial Enterprise Pledge and Legal Consequences. The Law No. 6750 on Movable Property Pledges in Commercial Transactions, one of the most important steps taken towards the modernization of the collateral system in Turkish law, abandoned the principle of ‘pledge conditional on delivery’ which restricted businesses’ access to financing, and allowed movable assets to be used as collateral without being separated from commercial life. Unlike the narrow scope and strict formal requirements of the repealed Law No. 1447, the new regulation broadened the range of creditors, eliminated the obligation to pledge the entire ‘Commercial Enterprise’, introduced the possibility of asset-based individual pledges, and reinforced legal security through transparency provided by the Register of Movable Property Pledges (TARES). This article examines the ‘non-possessory pledge’ system introduced by Law No. 6750, the process from the establishment of the pledge agreement to its conversion into cash, the exceptional rights granted to the creditor in the face of the lex commissoria prohibition, such as the transfer of ownership, and the functioning of the ranking system, within the framework of current legislation and Supreme Court precedents, and analyzes the effects of the application on commercial life and its legal consequences.

1. Introduction and Historical Background

The functionality of an economic system is directly dependent on businesses having effective, rapid, and low-cost access to financing sources. Especially in developing markets where equity accumulation is insufficient, the use of external resources (credit) is of vital importance. The functioning of the credit mechanism is directly proportional to the reliability and liquidity of the collateral offered to the creditor (lender). For many years in Turkish law, the movable pledge was strictly bound to the “delivery requirement” (transfer of possession) principle of the Turkish Civil Code (TMK). Under TMK Art. 939, the requirement to transfer the possession of the pledged good to the creditor in order to establish a movable pledge created a situation contrary to the ordinary course of commercial life. For a manufacturing business to deliver a machine on the production line or the stock in its warehouse to the bank in order to use a loan means stopping the operations of that business. This paradox forced the law to develop “non-possessory pledge” models.

In response to this need, the Commercial Enterprise Pledge Law No. 1447, which first entered into force in 1971, allowed businesses to pledge their movable assets without transferring possession. However, Law No. 1447 eventually fell behind the dynamism of commercial life due to reasons such as limiting the pledgee status only to banks and certain credit institutions, the pledge being established with a “block pledge” (entire enterprise) logic, and the disorganized nature of the registry system. The Law on Movable Pledge in Commercial Transactions No. 6750 (TİTRK), which was accepted in 2016 and entered into force on 01.01.2017, undertook a radical paradigm shift in this area, bringing collateral law to a modern, flexible, and “asset-based” structure.

This report examines in depth the transition process from the abrogated Law No. 1447 to Law No. 6750, the structural reforms introduced by the new law, the establishment of the pledge agreement, the Pledged Movable Registry (TARES) system, the degree and ranking systems, and most importantly, the new foreclosure methods introduced in the face of the lex commissoria prohibition, within the framework of legislation and Supreme Court (Yargıtay) precedents.

2. Legislative Changes and Evolution of the System

2.1. Structural Problems of the Abrogated Law No. 1447

Although the abrogated Law No. 1447 partially met the needs of its period, it was criticized for its strict formal requirements and limitations on parties. Under the Law, those who could be pledgees were determined by the numerus clausus (limited number) principle; only banks, cooperatives, and similar credit institutions could hold this title. This prevented the use of movable pledges as security in deferred goods sales between merchants (seller credit) or in situations where the real sector financed each other. Furthermore, Law No. 1447 tended to treat the concept of “commercial enterprise” as a whole. A merchant wishing to pledge only a specific machine of the enterprise was often forced to include the “trade name” and “enterprise name” in the pledge as well. This led to the value of the collateral excessively exceeding the debt amount and the creditworthiness of the enterprise being mortgaged to a single creditor.

2.2. Innovations Introduced by Law No. 6750

Law No. 6750 focused on the concept of “movable asset pledge” rather than “enterprise pledge”. The Law implemented the following fundamental changes to facilitate access to finance:

1. Expansion of Freedom of Parties: Not only banks but also merchants and tradesmen can now be pledgees in transactions among themselves.
2. Diversification of Pledge Subject: Instead of the entire enterprise, pledges can be established on individual assets (stock, machinery, intellectual property rights, etc.).
3. Central Registry (TARES): Instead of local trade registries, a Turkey-wide accessible electronic registry system has been established.
4. Alternatives in Foreclosure: In addition to classic execution proceedings, paths such as transfer of ownership and transfer to asset management companies have been opened.

Table 1: Comparative Analysis of Law No. 1447 and Law No. 6750

3. Establishment and Validity Conditions of the Pledge Agreement

The right of pledge arises with a pledge agreement concluded between the parties and the registration of this agreement in the Pledged Movable Registry (TARES). This process is based on the principle of “constitutive registration”. Even if the agreement is made, the pledge right does not gain the force of a right in rem and cannot be asserted against third parties without registration.

3.1. Parties

Article 3 of the Law details the parties to the pledge agreement. Pledgor must be a merchant, tradesman, farmer, producer organization, or self-employed person. The addition of “self-employed person” (lawyer, doctor, architect, etc.) here aims to ensure access to finance for the service sector as well. The pledgee can be credit institutions, as well as merchants and tradesmen. This regulation is revolutionary in supply chain finance; for instance, a merchant supplying raw materials can establish a pledge right on that raw material until the price of the goods sold is paid.

3.2. Formal Requirements: Written Form and Electronic Signature

The legislator has determined two main methods for the validity of the pledge agreement:

1. Arrangement in Electronic Environment: The agreement can be arranged via the TARES system with a secure electronic signature. This method is preferred as it eliminates notary costs and speeds up the process.
2. Arrangement in Written Environment: When the agreement is arranged physically, the signatures of the parties must be approved by a notary or signed in the presence of a registry official. The strict notary requirement of the abrogated law period has been relaxed, and transaction costs have been reduced by granting signature approval authority to the registry official as well.

3.3. Assets Subject to Pledge and the Principle of Specificity

In the pledge agreement, it is mandatory to list the pledged assets with their distinctive features. This is a requirement of the “specificity” principle in property law. According to Art. 5 of Law No. 6750, the assets that can be pledged are:

• Receivables (existing and future),
• Perennial fruit-bearing trees,
• Intellectual and industrial property rights (trademark, patent, design, etc.),
• Raw materials and stocks,
• Animals,
• All kinds of earnings and revenues,
• Tenancy rights,
• Machinery and equipment, vehicles (construction machinery, vehicles with commercial plates),
• Consumable materials,
• Agricultural products,
• Trade name and/or enterprise name,
• Commercial enterprise or tradesman enterprise (as a block),
• Commercial plates and lines.

A critical point here is that, unlike the abrogated law, it is not mandatory to include the enterprise name and title in the pledge. Parties may pledge only a specific machinery park and exclude the title from the pledge if they wish.

Production Process and Component Part: The Law stipulates that if raw materials used in the production process are pledged, the pledge continues on the final product resulting from production. This provision eliminates the concern that the pledge will be lost upon processing the pledged raw material and ensures uninterrupted security of the production cycle (working capital cycle). Furthermore, component parts (mütemmim cüz) and accessories (teferruat) of the pledged asset, as well as natural products and legal proceeds (interest, rent, etc.), are included in the scope of the pledge.

Registration in Legal Books in Industrial Enterprises: As a special regulation for industrial enterprises, a list of assets subject to pledge may need to be recorded in the legal books of the enterprise. This is an additional mechanism that strengthens publicity, especially in enterprises registered in the industrial registry. It is stated in the doctrine that failure to renew the registration in the legal books every year will not invalidate the pledge, but may lead to results such as the acceleration of the debt.

4. Pledged Movable Registry (TARES) and Ensuring Publicity

The most important institutional innovation of Law No. 6750 is the Pledged Movable Registry (TARES) established under the Ministry of Customs and Trade.

4.1. Functioning and Legal Effect of TARES

TARES is an electronic and central registry where the pledge right is registered and is open to the examination of third parties. The primary function of the registry is to ensure publicity. Similar to the principles of the TMK regarding the land registry, registrations made in TARES also create a presumption of “being known” for third parties. According to Art. 8 of the Law and the relevant Regulation, registry records are public; therefore, a merchant’s claim of “I did not know it was pledged” is generally not entertained in the face of registry records.

However, the public nature of the registry is balanced with the protection of personal data. Whether those who wish to make an inquiry have a specific interest or can only access certain data sets (whether there is a pledge or not) is regulated by regulations. Transactions such as registration of the pledge agreement, deregistration, change of degree, and transfer of pledged receivables are recorded in the registry with a date and time-stamp.

4.2. The Issue of Protecting Good Faith

The weakest point of non-possessory pledge systems is the risk of the debtor selling the goods to third parties without authorization, as the possession of the pledged goods remains with the debtor. Under TMK Art. 988 and 939, the acquisition of a third party who acquires a right in rem in good faith from a possessor acting as an owner is protected. However, the publicity of TARES has an effect that eliminates this good faith. In doctrine and Supreme Court decisions, it is accepted that due to the public nature of the registry, third parties must show due diligence and examine the registry, and even if they have not examined it, the claim that they did not know the existence of the pledge cannot be protected. Conversely, it is stated that if the distinctive features (serial number, chassis number, etc.) of the goods are entered incorrectly or incompletely in the registry, the good faith of the third party may be protected.

5. Degree System and Priority Among Creditors

In cases where more than one creditor establishes a pledge right on the same movable, who will collect first is determined by the “degree system”. Law No. 6750 envisages a structure similar to the system in immovable pledge (mortgage) but more flexible.

5.1. Fixed Degree and Progression System

The Law and the Regulation on the Right of Pledge offer two options to the parties:

1. Fixed Degree System (Fixed Rank): Parties can explicitly state the degree of the pledge in the agreement (e.g., “1st Degree”, “2nd Degree”). In this system, when the debt in the 1st degree is paid and the pledge is deregistered, the pledge in the 2nd degree does not automatically rise to the 1st degree; its degree remains fixed. Progressing to the vacant degree (progressing to the free degree) is only possible if a “Contract for Progressing to Vacant Degree” is made separately between the parties and this is annotated in the registry.
2. Progression System: If the parties have not specified a degree in the agreement or have explicitly chosen the progression system, the pledge right is deemed to be established according to the “progression system”. In this system, priority is determined according to the moment of registration. When the pledge in front is removed, those behind automatically progress in order. Regulation Art. 25 stipulates that the progression system is the basis unless agreed otherwise.

5.2. List of Obligations and Objection to the Ranking Table

During the foreclosure phase of the pledged asset, the execution office prepares a “ranking table”. In this table, creditors are ranked according to their degrees in TARES records. Creditors may file a “lawsuit for objection to the ranking table” at the Civil Court of First Instance where the pledged asset is located or at their own place of residence within seven days from the notification of the ranking table. This lawsuit can be regarding the basis of the receivable or the rank. It is argued in the doctrine that the “list of obligations” based on TARES records has an effect of substituting the ranking table and accelerates the process.

6. Default and Legal Consequences: Prohibition of Lex Commissoria and New Exceptions

The most revolutionary and controversial aspect of Law No. 6750 is the rights granted to the creditor in case of the debtor’s default (failure to pay the debt). Under the Lex Commissoriaprohibition in our traditional law (TMK Art. 873 and 949), agreements stating that the ownership of the pledged property will pass to the creditor in case the debt is not paid are null and void. This prohibition aims to prevent the creditor from acquiring the debtor’s property, who is in a state of distress, below its value.

6.1. Alternative Rights Introduced by the Law

Articles 13 and 14 of the Law grant the creditor the following optional rights in case of default:

1. Requesting Transfer of Ownership: The creditor may request the transfer of ownership of the pledged property to themselves.
2. Transfer to Asset Management Companies: The creditor may transfer their receivable to asset management companies.
3. Leasing and Licensing: For assets not subject to transfer of possession (e.g., intellectual rights, licenses), the creditor may collect their receivable by using the right to lease or license.
4. Execution under General Provisions: The creditor may pursue execution through the foreclosure of the pledge under the Enforcement and Bankruptcy Law (İİK).

6.2. Transfer of Ownership and “Valuation” Assurance

Allowing the transfer of ownership by the Law can be interpreted as a breach of the Lex Commissoria prohibition. However, the legislator has made the “Valuation” mechanism mandatory to eliminate this risk. When the creditor requests the transfer of ownership;

• The value of the pledged asset is determined by experts appointed by the court or authorized institutions.
• If the determined value is higher than the debt amount, the creditor must pay the difference to other creditors for whom they are jointly and severally liable or to the pledgor.
• If the value is less than the debt, the creditor’s remaining receivable continues.

Since this mechanism prevents the debtor’s property from being disposed of below its value, it is accepted in the doctrine that it does not violate the interest protected by the Lex Commissoria prohibition, but rather is in the nature of “performance in lieu of fulfillment” (datio in solutum). It is not an “automatic” transfer of ownership, but a transfer “upon request and with valuation”. Therefore, writing “if the debt is not paid, the goods become mine” in the contract is still invalid; however, stating “if the debt is not paid, Article 14 of the Law shall apply” is valid.

6.3. The Role of Asset Management Companies

The Law encourages the transfer of pledged receivables to asset management companies (AMC). If the receivable is transferred to an AMC, the AMC succeeds to the pledge order of the creditor and exercises the priority right. This regulation allows banks to clean their balance sheets (NPL – Non-Performing Loans problem) and allows pledged assets to be liquidated more professionally.

7. Supreme Court Decisions and Implementation Problems

Disputes arising during the implementation of the Law are shaped by Supreme Court precedents.

7.1. Conflict between Right of Retention and Pledge Right

According to the established precedents of the 12th Civil Chamber of the Supreme Court, the “right of retention” arising from the Turkish Code of Obligations and the Turkish Civil Code (e.g., the lessor’s right of retention on the movables of the lessee) is a type of pledge arising from the law. The Supreme Court has ruled that the holder of the right of retention can also pursue execution through “foreclosure of movable pledge” (Supreme Court 12th HD, 05.03.2009). In the event of a conflict between a pledge registered in TARES and a right of retention, the priority between the actual power of the right of retention arising from possession and the publicity of the registered pledge is resolved in lawsuits for objection to the ranking table during the foreclosure phase.

7.2. Claims of Ownership (Istihkak)

The presence of the pledged goods in the hands of a third party and this person claiming ownership (istihkak) is one of the most complex issues of enforcement law. The Supreme Court states that since there is no seizure phase in proceedings via foreclosure of pledge, claims of ownership must be examined “after the request for sale” and during the foreclosure phase (İİK Art. 150/g). As stated above, a third party’s claim of good faith despite the TARES record is generally not accepted due to the principle of publicity.

7.3. Requirement of Proceedings

For receivables secured by a pledge, the obligation of the creditor to primarily pursue “proceedings via foreclosure of pledge” (İİK Art. 45 – Obligation to Resort to Pledge) continues. Rights such as transfer of ownership introduced by TİTRK are alternatives to this obligation. If the creditor directly pursues execution without judgment, the proceedings may be canceled upon the complaint of the debtor.

8. Administrative and Penal Sanctions

The Law prescribes serious obligations and sanctions for the pledge parties, especially the pledgee, to ensure the security of the system.

8.1. Deregistration Obligation and Administrative Fine

The pledgee is obliged to apply for the deregistration of the pledge record from TARES within three business days from the termination of the receivable (payment of the debt). This is a critical period for ensuring the currency of the registry. An administrative fine at the rate of one-tenth (1/10) of the secured debt amount is applied to the pledgee who fails to fulfill this obligation. This is a very heavy sanction; for example, when a loan debt of 1 million TL is paid, if the bank does not deregister within 3 days, it may face a fine of 100,000 TL.

8.2. Liability of the Pledgor

The pledgor is obliged to avoid dispositions that reduce the value of the pledged asset. If the pledgor destroys the goods or engages in actions that reduce their value, they must compensate for the resulting damage. In addition, in the event of the transfer of the pledged asset, there is an obligation to register this transfer and the transfer of the receivable in the registry.

9. Evaluation

Law No. 6750 on Movable Pledge in Commercial Transactions represents a transformation that can be described as a “revolution” in Turkish collateral law. Breaking the narrow molds of the abrogated Law No. 1447, this regulation has offered a flexible, fast model with a strong technological infrastructure (TARES) that overlaps with the realities of commercial life.

The main findings and results of the report are as follows:

1. Democratization of Access to Finance: Opening the spectrum of pledgees to merchants and tradesmen has strengthened non-bank financing channels (supplier credits).
2. Balance between Property Rights and Security: By abandoning the strict application of the Lex Commissoria prohibition and allowing the transfer of ownership under the assurance of “valuation”, a modern balance has been established that protects creditor rights while preventing the exploitation of the debtor.
3. Registry Trust: TARES has increased transaction security by ensuring publicity. However, it is important for judicial decisions to stabilize regarding the protection of third parties’ good faith.
4. Implementation Discipline: Heavy administrative fines prescribed for failure to comply with the deregistration period force creditors (especially banks) to keep registry records up-to-date, which prevents the system from becoming “polluted”.

In conclusion, the capacity of businesses to transform their movable assets standing as “dead capital” into “working capital” has been maximized with this Law. Lawyers and market professionals preparing detailed asset lists (“principle of specificity”) especially during the contract preparation phase and correctly configuring the degree system will ensure full benefit from the advantages provided by the Law.