New Turkish Law on Ship Finance




© Springer-Verlag Berlin Heidelberg 2015
Orestis Schinas, Carsten Grau and Max Johns (eds.)HSBA Handbook on Ship Finance10.1007/978-3-662-43410-9_12


12. New Turkish Law on Ship Finance



Kerim Atamer 


(1)
Department of Maritime and Insurance Law, Istanbul University, Law School, 34116, Beyazit, Istanbul, Turkey

 



 

Kerim Atamer



Abstract

On 1 July 2012, the new Turkish Commercial Code, as well as the Turkish Code of Obligations, has come into force. Later the same year, the Code on Financial Leasing, Factoring and Financial Institutions has been adopted. These legislative moves have brought about significant changes to the Turkish law regarding the finance of ships and new building. The purpose of this paper is to introduce the new legal framework with a view to establish interest and confidence in the Turkish market.



12.1 Introduction


The Turkish ship financing industry has witnessed significant legislative changes and various fundamental changes over the past three decades. In particular, with the new “Turkish Commercial Code1” (“N-TCC”) coming into force on 1 July 2012, the law on ship finance has been substantially modernized.2 The purpose of this paper is to shed some light on these issues. However, since the new Turkish legislation and the enforcement of ship mortgages have been outlined elsewhere recently (Atamer 2012, p. 75), the following overview will be limited to those substantive aspects of ship finance which have not been covered earlier.

References have been made in the course of this paper to several International Conventions and a number of legal sources from Germany, Switzerland, and Turkey. To highlight the point that two or more provisions of these different legal sources are identical or, at least, similar, the “equal to” sign ( = ) is used. Given that most of the terminology of Turkish Private and Procedural law has been adopted from German and Swiss sources, some of the original German terms and phrases have been included in the footnotes. This should make the information more accessible to readers from a German-speaking jurisdiction.

The law is stated as being applicable from 1 July 2012, which is the date when the new legislation has come into force.


12.2 Sources of Law



12.2.1 International Conventions


The new Turkish Maritime law has been primarily prepared on the basis of the latest International Conventions.3 With regard to ship finance, two significant Conventions have been adopted4: the “International Convention on Maritime Liens and Mortgages5” (“ICLM”), made at Geneva on 6 May 1993, and its sibling, the “International Convention on Arrest of Ships6” (“ICAS”), made at Geneva on 12 March 1999. The provisions of these two Conventions have been incorporated into the N-TCC. Currently, the legislative preparations for Turkey’s accession to these Conventions are underway. Both Conventions apply as a matter of lex fori.7


12.2.2 Conflict of Laws



12.2.2.1 The Code


The Turkish rules on Conflict of Laws are set out in the “Code of International Private and Procedural Law8” (“CIPL”). All legal affairs that contain a foreign element are governed by the CIPL.


12.2.2.2 Rights In Rem


The “rights in rem 9” on ships are governed by the law of the place of registration. This rule covers ownership, mortgages, usufruct, rights of retention, and other rights in rem. Taking into consideration the shipping practice of flagging-in and flagging-out, the “place of registration10” is further specified as the “register where the rights in rem are registered”. Accordingly, where a ship under a foreign flag is allowed temporarily to fly the Turkish flag, the rights in rem on such a ship are still governed by the principal register. The same applies also in respect of ships registered in Turkey which are temporarily allowed to fly a foreign flag.


12.2.2.3 Maritime Liens


A new provision has been introduced in the N-TCC in respect of the law governing maritime liens. According to this rule,11 which has been lifted from the ICAS,12 maritime liens are subject to Turkish law if proceedings were brought in Turkey.13 This solution corresponds to the consistent practice of the Turkish Supreme Court.


12.2.2.4 Contracts


The parties are left free to agree on the applicable law at the time of conclusion of the contract, or at any time thereafter.14 In the absence of such a choice, the “closest connection” criterion applies. It is presumed that the contract is most closely connected with the law of the place where the party, which is to perform the characteristic obligation, has its principal place of business at the time of conclusion of the contract.15


12.2.3 National Law



12.2.3.1 Civil Law


Turkish Civil law is primarily based on Swiss law.16 In particular, the “Turkish Civil Code17” (“TCivC”) has been largely translated and adopted from the “Swiss Civil Code18” (“ZGB”). Again, the “Turkish Code of Obligations19” (“TCO”) is essentially an abridged translation of the “Swiss Code of Obligations20”. As such, the Turkish law of Rights in rem and Obligations is generally in line with the Swiss law on these subjects. In addition, supplementary legislation on, say, financial leasing, banking transactions, pledge on motor craft and the like, has also been developed on the basis of the Swiss–Turkish general provisions of Civil law.


12.2.3.2 Maritime Law


Until midnight of 30 June 2012, the primary source of Maritime law has been the “Turkish Commercial Code21” (“TCC”) of 1956. The TCC had been drafted by the late Prof. Dr. Ernst Hirsch, who had been among the German academics those immigrated to Turkey before the Second World War. He has reported extensively about his work on Turkish law and legislation.22 In respect of the rights in rem on ships, Hirsch chose as his source the respective pieces of German legislation of 1940, including the “Act Concerning Rights on Ships and Ships under Construction23” (“SchRG”), the “Ship Register Directive24” (“SchRegO”) and other incidental legislation.25 Hirsch has translated the essential rules from these German sources and used them, mostly verbatim, for the Turkish provisions. The N-TCC, which has come into force on 1 July 2012, has generally retained the same rules and provisions. Some changes and new rules have been introduced in connection with the incorporation of the ICML and ICAS into the N-TCC. Other changes reflect the explicit intention to create more harmony with the original German provisions. The provisions of the N-TCC are supplemented by the “Ship Register Directive26” (“SRD”) of 1957, which is basically a translation of the SchRegO.27

Together with the N-TCC, the new “Code of Implementation and Enforcement of the N-TCC28” (“N-CIE”) has also been adopted.29 This Code sets out the transitional provisions.30 As of 1 July 2012, all references to the TCC are deemed to have been made to the corresponding provisions of the N-TCC.31 Other rules on Maritime law are to be found in particular Acts regarding, say, the International Register, financial leasing, and other incidental issues. These Acts will be considered later in their respective contexts.


12.3 Rights In Rem



12.3.1 Definition and Legal Qualification of “Ship”


Previous and new Turkish law does not settle on a singular definition of the term “ship”. Rather, most pieces of legislation say in their respective provisions on “definitions” as to what qualifies as a ship within the meaning of that legislation. However, the new law finally clarifies a legal discussion that had been going on for a long time. Under previous laws and practices, it was believed, particularly by the Supreme Court, that ships registered in Turkey are to be treated as “immovable property” (“real estate”). This erroneous assumption has been set aside by explicit provisions of the new law, which state clearly that as a general rule, all Turkish and foreign “ships are movable property32”. As such, all doubts as to whether ships might legally qualify as real estate have finally been abandoned. There are only few exceptions to this general principle, whereby Turkish and foreign ships are held subject to specifically identified provisions governing immovable property,33 to take due account of registration issues. However, in each of those cases, it has been carefully reviewed whether any conflict is created thereby with the specific rules on ships, and if so, additional provisions have been introduced to remedy any such conflict.


12.3.2 Registration


Five different means of registration for ships are recognized under previous and new Turkish laws. These are introduced as follows.


12.3.2.1 National Ship Register



Introduction

The oldest is the “National Ship Register” (“NSR”), which is subject to the provisions of the N-TCC and SRD. NSRs are maintained at ten Turkish ports, including Istanbul and Izmir.34 The legal provisions regarding the NSR have been compiled from the German sources listed earlier.35 Ships admitted for registration at the NSR are defined on the basis of a decision of the German Federal Supreme Court36 from 1951.


Rights to be Registered

In accordance with the German sources, Turkish law explicitly admits the registration of only four rights in rem in the NSR37:

1.

The property (ownership) in the ship;

 

2.

A ship mortgage;

 

3.

A right on the ship mortgage, such as a pledge;

 

4.

A usufruct.

 

In addition, a priority notice38 may be recorded to protect any of the four rights in rem.39 On the contractual side, financial leasing agreements in respect of ships must be registered.40 Finally, the registration in the NSR of bareboat charters has been explicitly admitted under the new law.41

Turning to proceedings of maritime enforcement, the following steps will be notified to and entered with the NSR: the arrest of a ship,42 a judgement upholding or setting aside a right in rem,43 the passing of title to the purchaser upon the judicial sale of a ship,44 and the deletion of registered rights in rem upon the judicial sale of a ship.45


Effect of Registration

The legal effect of entries made at the NSR is governed by provisions which have been translated from German rules.46 The general principle is set out to the effect that where a party is registered as the owner, mortgagee, holder of a right on the mortgage, or the usufruct holder of the ship, it will be presumed that such entry is correct.47 Therefore, third parties are allowed to rely upon the correctness of the NSR.48 It follows that the NSR protects the positive reliance on the existence of registered rights and therefore admits the acquisition in good faith of the ship mortgage from a person having no or defective legal title to such ship.

However, it ought to be emphasized that the Turkish ship mortgage is identical with the German ship mortgage in that the registration does not provide any prima facie or conclusive evidence in respect of the claim that is secured by the mortgage.49 As such, to give another example, if the claim ceased to exist, the transfer of the mortgage to a third party will not confer on that third party the right to enforce the mortgage for such claim that no longer exists. However, the parties are free, as in German law, to create the ship mortgage for an abstract acknowledgement of debt50 to overcome any problems associated with this legal position.

On the other hand, the negative reliance is also protected in that a right, which is not registered, is presumed not to exist.


12.3.2.2 Register for New Buildings


The “Register for New Buildings51” (“NBR”) has been established as of 1 January 1957 under the provisions of the TCC, which is now kept pursuant to the N-TCC. Additional provisions are to be found in the SRD. The Turkish provisions52 have been generally adopted from the corresponding German provisions regarding the NBR.53

Under current German and previous Turkish law, the registration of a “ship under construction” ( = “new building”) is admitted only if and whenever a mortgage or arrest is to be simultaneously registered.54 This limitation is abandoned under the new Turkish law, which finally gives leave to the registration of new buildings for the sole purpose of making the ownership public.55 This had been recognized as a pressing need in Turkish practice, because it was noted on several occasions that the ownership in the new building requires public information in cases where a person other than the shipyard is the owner. Particularly, if the shipyard went bankrupt, the prior registration of the ownership would ensure that the owner of the new building is protected against the creditors of the shipyard.

The information to be registered is identical with German law.56 A ship under construction might even be registered if the owner was a foreign person or entity.57 Other than the ownership, the only right in rem that might be entered with the NBR is the mortgage on a new building.58 The registered mortgage on a new building carries the same legal effect as the ship mortgage.59 Finally, priority notices are also admitted in respect of the NBR. The notices to be made to the NSR in enforcement proceedings apply to the NBR as well.


12.3.2.3 Special (Flag-in) Register (Roll)


On the basis of German law,60 Turkish law also recognizes the options of flagging-in and flagging-out of ships.61 Foreign ships that are temporarily allowed to fly the Turkish flag are recorded in a “Special (Flag-in) Register62”. Technically, however, this list of ships is not a register, but simply a “roll63” of the ships using this option. Therefore, rights in rem, such as mortgages, cannot be created or transferred by way of entry into this roll.64

In Turkish practice, this roll is usually referred to as a “bareboat register,” because the bareboat charter is generally considered the primary agreement under which the ship may be let out to a Turkish interest. However, as a matter of law, the agreement may also be a financial leasing agreement65 or a usufruct. In all these cases, the ownership in the vessel will still be maintained in the foreign principal register, whereas the possession will pass to a Turkish interest, enabling it to obtain permission to fly the Turkish flag. Therefore, this roll is better described with reference to the flag-in procedure rather than the underlying type of agreement.

In this connection, Art. 16 of ICLM ought to be given due consideration whenever the Convention comes into force for Turkey.


12.3.2.4 Turkish International Ship Register



Introduction

In 1999, the “Turkish International Ship Register66” (“TISR”) was introduced under the provisions of the “Act on the Turkish International Ship Register” (“TISR-A”). This Act is supplemented by the provisions of the “Regulation on the Turkish International Ship Register67” (“TISR-R”). The TISR has been established in Istanbul with a branch office in Izmir.68


Incentives

From a financial point of view, registration with the TISR is extremely advantageous.69 All transactions related to ships registered, or to be registered, with the TISR, such as sale and purchase agreements or mortgages, are exempted from all types of taxes, levies, and dues. More importantly, the owners of such ships are free from paying corporate income taxes. Several incentives have also been allowed in respect of crew wages and social security arrangements.


Ships Admitted for Registration

Rather than provide a definition of ships that may be registered, a more pragmatic solution has been chosen for the TISR.70 Accordingly, the TISR is open only for ships that are used for commercial purposes, such as the carriage of goods or passengers, or for fishing. A tonnage limitation applies to ships imported from abroad to protect the national shipbuilding industry and coastal carriage. Special purpose ships and other craft are admitted on the basis of a list, which is prepared and updated by the Ministry. As for the details of the registration, reference is made71 to the rule governing the NSR.72


Applicable Provisions

The rules regarding the rights in rem on ships, including registration, are to be defined by the TISR-R.73 However, this Regulation provides only for a minimal number of rules, and refers to the SRD for all other issues that are left open.74 It follows that the rules and provisions of the N-TCC and the SRD also govern the TISR, to the extent that the TISR-A and the TISR-R do not set out specific provisions. Indeed, the provisions on the TISR have been clearly reserved in the N-TCC as well.75 This means that the particular provisions of the TISR-A and TISR-R will apply with priority. However, as for matters left open in those two sources, the provisions of the N-TCC and the SRD will be applicable.


Rights to be Registered

The following rights in rem have been admitted for entry with the TISR:

1.

The property (ownership) of the ship;

 

2.

A ship mortgage76;

 

3.

A right on the ship mortgage, such as a pledge.

 

However, the usufruct has not been mentioned for ships registered in the TISR. Priority notices, as well as the notices in enforcement proceedings, as considered earlier, are applicable to the TISR as well.

Turning to contracts, financial leasing agreements in respect of ships are admitted for registration,77 whereas bareboat charters are not.78 Financial leasing agreements concluded with a foreign lessor may also be registered with the TISR.79 As such, there is no need in such cases to apply the flag-in procedure described earlier, as the ship will be entitled to fly the Turkish flag upon registration with the TISR.80


12.3.2.5 Home Port Log


Finally, a package of legislative measures adopted in 2009 has established yet another register that may be translated as the “Home Port Log81” (“HPL”). The HPL is primarily intended for the registration of pleasure boats, yachts, other water craft, as well as all ships and vessels of inland navigation. As the result of a severe error made by the legislative bodies, mortgages cannot currently be entered with the HPL. Also, the legal qualities attached to the NSR, NBR and TISR have not been explicitly repeated in respect of the HPL. As such, the HPL will not be of any interest to international financial markets, and will therefore not be further considered in this paper.


12.3.2.6 Statistics


According to the latest official statistics,82 the number of vessels registered with the NSR totals 11,328 with a total deadweight tonnage (DWT) of 864,315. On the other hand, whereas the total number of ships entered with the TISR is only 1,362, their collective DWT of 9,089,000 is roughly 11 times higher compared to the ships registered with the NSR.


12.3.2.7 Authority


Following a recent restructuring in the Government, the “Undersecretariat of Shipping” has been merged, as of 1 November 2011, into the Ministry of Transportation, which has formally assumed the name of the “Ministry of Transportation, Shipping Affairs and Communication83”. One of the administrative units established within this Ministry is the “General Directorate of Maritime Affairs84”. The list of duties assigned to this Directorate includes all issues relating to the registration of ships and all other water craft.85 It follows that, as of 1 November 2011, the five registers described above are all kept under the authority of the Ministry of Transportation, Shipping Affairs and Communication.


12.3.2.8 Public Registers


In a direct adaptation of the German rule, the NSR, NBR, and TISR are all described explicitly as public86 registers.87 Accordingly, any person can review the entries in the NSR. However, as for the NBR and TISR, it is additionally required that a legitimate interest88 is demonstrated.89 To obtain certified copies from the NSR and NBR, it is required in accordance with the German original that a legitimate interest can be shown.90


12.3.2.9 State Liability


Concerning the State’s liability for properly keeping and maintaining the registers, the NSR, NBR, and the TISR are all governed91 by the general provisions of Civil law.92 As such, the State is liable for all damages arising from maintenance of the registers. It is settled under Swiss and Turkish law that this provision calls for the strict liability of the State. As such, any negligence of the registrar is not required to be proved for such liability to arise. However, it must be shown that the registrar must have acted in breach of the law.93 These principles apply in exactly the same terms to the NSR, NBR, and TISR. Where liability is established in accordance with these provisions, it is ultimately the Turkish Treasury that will pay out any indemnity adjudged by the Court.


12.3.3 Ownership


The scope and protection of ownership in a ship or new building is subject to the general provisions.94 However, particular provisions are available for the passing and abandoning of ownership in ships and new buildings. Under the new law, the transfer of ownership in ships95 and new buildings,96 which are registered in Turkey, has been brought in line with international practices. Accordingly, the validity of the transfer now requires two steps. On the one hand, the transfer must be recorded in a formal document to be signed by the parties, and the signatures must be authenticated by a notary public. Such a document may also be drawn up at the NSR, NBR, or TISR.

In practice, this document will invariably correspond to the Bill of Sale used in international practice, with the additional requirement that the signature of the buyer must also be inserted. On the other hand, delivery of the possession of the ship has been introduced as an additional requirement. As a matter of practice, this will be achieved invariably by substitution of the captain and crew with the simultaneous production of the Protocol of Delivery and Acceptance. Included in such a transfer are also the ship’s appurtenances, unless the parties have agreed otherwise, or these belong to third parties.97


12.3.4 Usufruct


Under current German and previous Turkish law, the application of the usufruct on ships is strictly limited to two specific cases.98 However, under new Turkish law, these restrictions have been abandoned, and the usufruct is made generally available.99 It remains to be seen whether this option will be of interest in practice. As for the details of the usufruct on ships, only a few specific provisions have been set out, with a reference being included100 to the general provisions.101


12.3.5 Mortgage on Ships and New Buildings



12.3.5.1 Sources


As was mentioned already, previous and new Turkish law of ship mortgages102 is largely based on the German reform legislation of 1940. Considering further the fact that the German provisions on the ship mortgage have been copied directly from the “security mortgage on real estate103” of the “German Civil Code104” (“BGB”), it follows that the current Turkish ship mortgage is essentially identical with the German security mortgage on ships and real estate. Only a few exceptions have been admitted. Indeed, to achieve some degree of harmony with the general rules of Turkish law on real estate mortgages as set out in the TCivC, a few references were made to those rules. Notable examples are the provisions on the ranking and scope of Turkish ship mortgages. However, as those provisions have their origins in the ZGB, the Turkish ship mortgage can be qualified as a German “security mortgage on ships and real estate105” with a flavor of the Swiss “mortgage on real estate106”. Nevertheless, the principal nature and character of the Turkish ship mortgage as an offspring of the German original is no way prejudiced. This legal state of affairs has been generally retained in the N-TCC. However, several amendments have been made to bring the Turkish provisions even closer in line with the German originals.


12.3.5.2 Legal Character


The original Turkish name for a ship mortgage is “gemi ipoteği”. As the word “ipotek” implies, it is a translation of the German word “Hypothek”. As a matter of law, “Hypothek” denotes the Roman law terminology that a pledge is created without transfer of possession.107 As such, the widespread practice to translate the term “Hypothek” as “mortgage” into English is not necessarily accurate. A better translation would be “hypothèque” as is used in Art. 1 ICLM. Nevertheless, to follow established practice, the Turkish “ipotek” will be described as a “mortgage” in this paper, as well.

The ship mortgage is defined on the basis of the German original108 as a right created to secure a claim, which right entitles the mortgagee to seek recovery from the proceeds of the ship.109 It follows that the mortgage grants the mortgagee a right in rem in the ship as opposed to a mere contractual claim against the ship-owner. Indeed, a ship-owner may agree to a mortgage on his/her ship for a debt, for which he/she is not personally liable, in which case the owner will be held liable exclusively to tolerate enforcement110 into the ship. The extensive scholarly discussions on this important point in German law111 are obsolete in Turkish law because if the proceeds of the judicial sale do not fully cover the claim, a “certificate of insolvency112” will be issued only as against the personal debtor, not the owner of the real estate or ship on which the mortgage was created. Accordingly, the owner of a ship who agrees to provide a mortgage for a third party’s debt does not become thereby personally liable for that debt.

The mortgage and the claim secured thereby are strictly intertwined. Accordingly, one cannot be transferred without the other.113


12.3.5.3 Creation of Ship Mortgage



Agreement

A ship mortgage is created by the agreement of the parties and registration. Turkish law does not impose any standard type of agreement. In practice, there are probably as many forms in circulation as there are foreign and local law firms involved. Most of these forms are based on English standard texts, whereby attention ought to be paid to achieving full harmony with the applicable Turkish law(s).

Ship mortgage agreements must be concluded in writing and the signatures of the parties must be certified by a notary public.114 Under the new law, the mortgage agreement may also be concluded at the NSR, NBR or TISR.115 This will confer on the mortgagee an important advantage in enforcement proceedings.116 The notarial certification may as well be obtained abroad, in which case Apostilles from the respective Authorities would be required. The agreement may be concluded abroad in a foreign language. If so, however, a certified Turkish translation would have to be submitted to the registrar.