Corporate and M&A

By: Assoc. Prof. Murat Develioglu

Introduction

After being in force for 27 years, Financial Leasing Code numbered 3226 (“FLC” or “Law numbered 3226”) that had entered into force on June 28th, 1985, has been replaced by Financial Leasing, Factoring and Financing Companies Code numbered 6361 (“FLFFC” or “Law numbered 6361”), which entered into force through publication in the Official Gazette dated December 13^th, 2012 and numbered 28496. The application of the “sale and lease back” method, which occurs when the financial leasing company purchases an asset that originally belonged to the lessee and leases it back, thus providing the lessee with the opportunity to overcome any shortage of cash by utilizing its machinery and equipment as a financing tool. The discussions as to whether or not the application of this system was possible have come to an end with the entry into force of the FLFFC.

“Sale and Lease Back” in FLC and the Interpretation of the Court of Cassation

The “sale and lease back” method was not explicitly regulated by Law numbered 3226. Consequently, the applicability of this method has been a questionable issue. The provision that gave way to these discussions was Art. 4 of the FLC titled “Agreement.” The financial leasing agreement was defined by this provision, as follows:

 “Article 4 – The agreement shall be an agreement by which the lessor grants the possession of an asset to the lessee, under the condition of non-termination for a period of time and to provide all other benefits, purchased or otherwise obtained from a third person upon the demand and selection of the lessee, in consideration of a leasing fee.”

In accordance with the foregoing, under the financial leasing agreement, the lessor, meaning a financial leasing company, shall supply the asset from a “third person” upon demand of the lessee, and grant the possession thereof. Any interpretation made solely on a textual basis, made a structure consisting of three parties, namely, the lessor – lessee – third person, mandatory for financial leasing agreements.

The majority view of the doctrine did not find such a narrow interpretation appropriate[1]. The provision was thought to be interpreted broadly and made it possible for the lessor to supply the asset subject to the financial leasing agreement from the lessee, even though the provision included the phrase “third person.”

However, the Court of Cassation favored the narrow interpretation. The Court of Cassation General Assembly of Civil Chambers resolved as follows, in its decision dated 27.12.1995 and numbered 12-787/1157:

“The agreement concluded between … Institution and … JSC by Beyoğlu 19th Notary Public on 19.7.1991 is a form of “Leasing” agreement named as “sale and lease back”. The future leasing-taker (lessee) sells the asset under its ownership, to the Leasing giver and at the same time, leases it back. This way, a bilateral relation comes into question.

Meanwhile, the future lease-taker is a manufacturer who sells the assets it produced to the lease-giver and, afterwards, leases them back in order to conclude subleasing agreements.

However, apart from the obvious non-inclusion of these types of agreements within the scope of the law in the face of Art. 4 of the FLC, which stipulates the supply of the asset from a third person, the imperative nature of Art. 15 of the same law, which provides that the possession of the leased asset shall not be transferred (lease, loan for use etc.) does not give the opportunity to sublease. Thus, in the case at hand, the agreement shall not be deemed compliant with the Financial Leasing Code, even though the criteria laid out as a constituent element under Art 8 of the Code, which is the “registration to the special registry,”and under Art 9 of the Code, the ownership of the assets, subject to the agreement by the lessor and the possession thereof by the lessee, are met.

The claimant grounds its non-seizability complaint upon the Financial Leasing Code. However, there is no financial leasing agreement in compliance with the criteria set out by the Code and, therefore, is valid.”

The Regulation of Law numbered 6361

Law numbered 6361 is in line with the majority view of the doctrine; therefore, the view of the Court of Cassation did not prevail. Consequently, Art. 18 of the FLFFC, titled “Financial Leasing Agreement,” allows such method:

“Article 18 – The financial leasing agreement shall be an agreement by which the lessor grants the possession of an asset to the lessee, to provide all other benefits, purchased, otherwise obtained from a third person or from the lessee or passed into its ownership beforehand, upon the demand and selection of the lessee, in consideration of a leasing fee.”

As is clear, the FLFFC explicitly provides for the method of a “sale and lease back.” The preamble of the provision further clarifies, as follows:

 “By this provision, the financial leasing agreement is defined as provision of the needed assets from a third person or from the lessee by the lessor through purchasing, or otherwise obtaining, and their transfer to the lessee in consideration of a fee, while allowing the supply of the assets from the lessee, as well as from third persons, and making the usage of the sale and lease back method possible, which is a very common international practice.”

Conclusion

After Law numbered 6361, the “sale and lease back” method, a very common practice for meeting liquidity needs, despite the decision of the Court of Cassation General Assembly of Civil Chambers dated 1995, which is already used by companies and allowed by the doctrine under the abolished FLC, has explicitly become applicable.