INTRODUCTION
In Turkish law, security relationships can be established in accordance with legal regulations and the needs of practice, on various subjects and mechanisms and in personam or in rem. While general provisions of the law of obligations provide provisions regarding suretyship and pledge relationships, specific security relationships that require special regulations due to their nature, such as commercial enterprise pledges or the use of dematerialized capital market instruments as collateral, are regulated by special laws.
Security agreements on capital market instruments are specifically addressed in the Capital Markets Law No. 6362 ("CML"), deviating from general collateral principles and being regulated separately in terms of the provisions they entail and the formal requirements they impose.
In this first part of our article series on the legal basis and implementation of security agreements regarding capital market instruments; existing security relationships in the Turkish legal system will be examined, and the reasons behind the establishment of Article 47 of the CML, together with the elements of the legislation that differ from general pledge principles, will be discussed.
A. COLLATERAL RELATIONSHIPS AND PLEDGE IN TURKISH LAW
Security agreements are divided into two groups depending on the basis determined as the security and the scope of the right granted to the grantee: in personam (personal security) and in rem (collateral). In this distinction, securities in personam provide the grantee the right to resort to the entire assets of the grantor for the collection of the debt, while securities in rem -or collaterals- provide the grantee with a right over a specific asset of the grantor and that can be asserted against everyone.
The form of securities in personam most commonly encountered in practice are suretyship and guarantee agreements, and these fundamentally differ from each other, in terms of whether the assumed responsibility is dependent on the continuity and validity of the principal debt or not, in case of the default of principal debtor.
On the other hand, a collateral can be determined as movable and immovable property, as well as a receivable or a transferable and monetizable independent right. Collateral agreements are concluded for the transfer of a right or property for security purposes or for the establishment of a pledge right over such right or property. The collateral relationship based on ownership can be established through the ownership retention mechanism stipulated by the Turkish Civil Code No. 4721 ("Civil Code") under limited circumstances and certain conditions, as well as through fiduciary transfer of ownership and irregular pledge methods shaped by practice and further developed through jurisprudence and doctrine.
In cases where the ownership is transferred for collateral purposes, the grantee (i.e. transferee) holds all the powers arising from the ownership right over the collateral property, but this power is restricted by the contractual obligation to use the property under certain conditions and to return it when the debt is paid.
Although these legal instruments offer relatively diverse options for establishing security relationships, the necessities of commercial life have led to the need for special regulations that deviate from the strict conditions and provisions inherent in general security relationships. An example of a special regulation in our legislation is the Law No. 6750 on Pledge of Movable Property in Commercial Transactions ("LPMCT").
As a matter of fact, according to the provisions of the Civil Code, the possession of the pledged property must leave the exclusive possession of the pledgor for the pledge right to be established. For instance, in the case where the subject of the pledge is equipment that is an element of commercial activities, under the Civil Code provisions, the pledge cannot be established unless the control over the equipment leaves the pledgor. However, since the pledgor cannot use the relevant equipment in this case, the ability to pay the debt secured by the pledge is significantly reduced, resulting in an outcome that conflicts with the function of the pledge guarantee.
In order to cover this shortfall in the practice, the LPMCT introduced a provision applicable for commercial transactions, allowing for the establishment of a non-possessory pledge over certain movable properties and rights with the requirement of registration in the registry. Moreover, as will be explained below, similar to the provisions of the CML concerning collateral relationships involving capital market instruments, the pledge relationships under the LPMCT are exempt from the lex commissoria prohibition that prevents the transfer of ownership of the pledged property directly to the creditor in case of default in the principal debt relationship.
B. LEGAL FRAMEWORK OF SECURITY AGREEMENTS REGARDING CAPITAL MARKET INSTRUMENTS
a. The Necessity of the CML Provisions
Pursuant to Article 13 of the CML, capital market instruments such as public company shares, fund participation shares, lease certificates, real estate certificates and government domestic debt instruments, as determined by the Capital Markets Board ("Board"), must be dematerialized at the Central Registry Agency (Merkezi Kayıt Kuruluşu A.Ş.).
While it is possible to establish a pledge over receivables in accordance with the provisions of the Civil Code, the need for specific pledge provisions has arisen for capital market instruments that lose their physical existence upon dematerialization. This is because the relevant provisions of the Civil Code differentiate based on whether the receivables are embodied in a deed or not, and they fall short in determining the applicable provisions and conditions for dematerialized rights and in foreseeing rules suitable for the nature of dematerialization.
To address this need and ensure alignment with the intensified efforts in the late 2000s to regulate international finance, provisions on collateral agreements on dematerialized capital market instruments were introduced under Article 47 of the CML.
b. Lex Commissoria Exception for Capital Market Instruments
Article 47 of the CML allows the creditor to satisfy their receivable by acquisition of the collateral or by sale of the collateral.
This exception to the lex commissoria prohibition stipulated in Article 949 of the Civil Code aims to protect the interests of the creditor within the swift pace of commercial life, similar to the provisions of the LPMCT that establish another exception in this regard. Indeed, considering the volatile nature of financial markets, it is not difficult to foresee that the value of the capital market instrument serving as collateral will fluctuate during the period lost in compulsory enforcement processes. Therefore, to protect the security function provided by the collateral relationship -and as an extension, the interests of the creditor- security agreements subject to capital market instruments are exempted from the lex commissoria prohibition.
C. CONCLUSION
With the dematerialization of capital markets instruments, the applicability of movable pledge rules to security agreements on capital market instruments has been questioned. The acceleration of international regulations on the subject and the insufficiency of the general pledge provisions regulated in our law in providing the speed and flexibility required by financial markets have necessitated the establishment of specific provisions for security agreements involving capital market instruments. In response to this need, Article 47 of the CML was established, aiming to contribute to the stable, reliable, and efficient functioning of the market by stipulating special provisions concerning security agreements on capital market instruments.
In the next part of our article series; the types and formal requirements of the security agreements on capital market instruments, and the provisions they incorporate on the collection of receivables will be examined.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.