Bui Duc Giang
PhD candidate at l’Université Paris 2 Panthéon Assas, France
State Securities Commission Chairman Vu Bang sounds a gong to open the first trading session of 2014 in Hanoi Stock Exchange__Photo: Trong Dat/VNA
Banks often lend against a security interest over securities. This article is concerned with security interests in marketable securities (or corporate investment securities), that is securities issued by a company and traded on a market. Usually, these take one of two forms: debt issues and equity issues. While shares of private companies may be used as security in accordance with general law of security transactions, marketable securities such as shares of public companies may be pledged in compliance with specific regulations (notably, Article 31 of the Regulations on registration, depository, clearing and settlement of securities issued by Decision No. 87/2007/QD-BTC of the Ministry of Finance dated 22 October 2007 as amended in 2010 (“Decision 87”), the Regulations on depository of securities issued by Decision No. 38/QD-VSD of the Vietnam Securities Depository (the “VSD”) dated 25 April 2012 as amended in 2013 (“Decision 38”) and Article 19.3 of Decree No. 163/2006/ND-CP dated 29 December 2006 on secured transactions as amended in 2012 (“Decree 163”)) (“Specific Rules”). When those specific rules do not deal with a specified aspect of taking security over marketable securities, normal rules of the general law of security transactions will apply.
1. Attachment and perfection
What security to take?
Valuable papers characterized under Articles 163 and 321 of the Civil Code as Vietnamese property constitute a broad category of secured assets under the Vietnamese general law of security transactions. Pursuant to Article 321 of the Civil Code and Article 3.9 of Decree 163, valuable papers comprise shares, bonds, bills of exchange, promissory notes, bank notes, certificates of monetary deposit, cheques, fund certificates and any other valuable paper as provided by law, the value of which is payable by money and which is permitted to be traded. In accordance with Article 19 of Decree 163, security over valuable papers takes the form of a pledge. A pledge denotes the delivery of property to another party as security for the performance of an obligation and it is enforceable against the parties from the time of delivery of the property to the secured creditor (Articles 326 and 328 of the Civil Code). As such, a pledge requires the delivery of the possession of the pledged asset to the creditor by way of security. The possession of what kinds of valuable paper may actually be delivered to the pledgee?
Firstly, as it is possible to deposit negotiable instruments with a bank and title to them is incorporated in themselves, negotiable instruments are susceptible to being pledged. Negotiable instruments include bills of exchange, promissory notes, cheques and other negotiable instruments, excluding long-term negotiable instruments issued by organizations aimed at raising capital on the market (Article 1 of the Law No. 49/2005/QH11 dated 29 November 2005 on negotiable instruments).
Furthermore, bearer securities certificates can be pledged, but only because title passes by delivery. Regarding marketable securities, as mentioned below, only book-entry securities are susceptible to being pledged under the Specific Rules. Those are intangibles, the possession of which cannot therefore be delivered to the secured creditor. Consequently, a mortgage appears to be the most suitable security over securities in the sense that it does not require delivery of the secured property to the secured creditor (Article 342.1 of the Civil Code).
Pursuant to Article 31 of Decision 38, pledged securities shall be freely transferable securities that have been re-deposited at the VSD. As such, the eligible securities must be book-entry securities, that is, shares or other securities held through a securities intermediary. Furthermore, they must have been centrally deposited with the VSD. Finally, they must not be subject to any transfer restrictions.
Pursuant to Article 31.3 of Decision 38, certification of the securities subject to a pledge may be done at the VSD only in case the pledgee is a credit institution fully recognized by the law.
With regard to the value of the securities, in practice, the secured creditor often requires a market value of the securities well in excess of the secured obligation to allow for fluctuations in prices.
The Specific Rules do not address the question of the extent of secured debts. Therefore, ordinary principles of the law on secured transactions will apply to this question.
A debt may be fully or partly secured. If there is no agreement on, or if the law does not provide, the scope of the security, the obligation is deemed to be fully secured including the obligation to pay interest rates and to compensate for damage (Article 319.1 of the Civil Code).
In theory, the secured obligation can be a liquidated obligation or an unliquidated obligation. However, because of the prohibition against unjust enrichment set out in Article 256 of the Civil Code and the obligation on the secured party to remit the balance between the price or value of the secured asset and the secured amount provided in Articles 355 and 338 of the Civil Code as well as Articles 64a. 2 (b) and Article 64b. 2 of Decree 163, it appears that the realization of the secured asset may take place only if the value of the asset is used to pay (i) the payment obligation, (ii) the interest rates, (iii) the damages and (iv) contractual penalties.
Article 319.2 of the Civil Code provides a principle that the secured obligation may be a future obligation. Article 8a of Decree 163 further indicates that “in case a security interest is created to secure a future obligation, the parties are not required to reach a specific agreement on the scope of the secured obligation or on the deadline for performing the secured obligation, unless there is some other agreement between them or unless the law otherwise stipulates. When the obligation is formed, the parties are not required to register changes to the registered items of the secured transaction”. This is very favorable for secured creditors. For example, when the value of the securities is much greater than the amount of the secured obligation, the security agreement may state that “the securities are pledged to secure the whole loan X and all other loans or financial obligations of the pledgor generating in the future relationship between the bank and the pledgor”.
In accordance with Article 31.3 and Article 31.6 of Decision 87 and Articles 31 and 34.1 of Decision 38, the procedures for the creation of a pledge over securities comprise the following steps:
the client sends a request to pledge the securities to its depository member where its account has been opened;
the depository member checks whether the securities at stake are susceptible of pleing pledged;
the depository member must lodge the application file for the creation of the pledge of securities with the VSD within one business day from the date of receipt of a valid request from the client; and
the VSD shall be responsible for processing the application for the creation of the pledge within one business day from the date of receipt of a valid application file from the member. In case of refusal of the creation of the pledge, the VSD must give in writing the grounds for its refusal.
Under Article 32 of Decision 38, the application file shall contain the following particulars:
a request for the transfer of the pledged securities made by the member of the pledgor (according to Form 29/LK);
a request for the pledge of securities made by the client with the confirmation of the member (according to Form 30/LK);
the list of pledged securities with confirmation of the pledgee (prepared according to Form 31/LK).
Pursuant to Article 31.1 of Decision 87, a pledge of securities centrally deposited at the VSD shall be implemented on the basis of a pledge agreement and the securities must be registered for trading at the VSD. As such, the pledge must take the form of a pledge contract and the securities to be pledged must have been registered at the VSD.
Article 19.3 of Decree 163 requires a further registration of the pledge at the National Centre for Registration of Transactions and Assets (NRAST) under the Secured Transaction National Registration Department of the Ministry of Justice. This registration ensures the enforceability of the pledge against third parties (Article 11.1 of Decree 163).
Article 31.4 of Decision 87 further provides that “a pledge of securities shall only take effect after the VSD has made the book entries for transfer of securities from the securities trading account of the member for the pledgor to the pledged securities account of the same member”. In practice, the VSD will not accept for the pledged securities account to be opened in the name of the pledgee, and that the pledged securities account is to be structured as a sub-account of the existing securities account of the pledgor (and therefore in the name of the pledgor).
In summary, the pledge takes effect between the parties if:
it is in the form of a pledge agreement; and
upon the making by the VSD of the book entries for transfer of securities from the securities trading account of the member for the pledgor to the pledged securities account of the same member.
The effective date of the pledge is the date on which the VSD makes a confirmation on the request for the transfer of the pledged securities (Article 34. 2 of Decision 38). The pledge is enforceable against third parties as from the date of its registration with the NRAST. Under Article 11.1 of Decree 163 and Article 325 of the Civil Code, priority is determined by the dates of registration and in absence of registration, by the dates of creation of the security interests.
Transfer of ownership over securities by way of security
In practice, it is quite common that the debtor transfers ownership of the marketable securities in favor of its creditor. Is that transaction valid and enforceable under Vietnamese law?
Pursuant to Article 318 of the Civil Code, security measures include pledge of assets, mortgage of assets, security deposit, deposit securing the return of leased property, escrow deposit, guarantee and reputation-based security. The first five security types constitute asset-based security whereas guarantee and reputation-based security involve mere personal undertakings to perform. The types of asset-based security that are mentioned in the Civil Code confer mere rights over the secured assets, while the ownership of the secured assets remains with the securing party. Therefore, Vietnamese law does not recognize the transfer of ownership over marketable securities in favor of a secured lender as security for a loan.
The Supreme People’s Court of Vietnam has invalidated contracts for the transfer of ownership over real property as security for loans by re-characterizing such contracts as mere mortgages or by ruling that that they constitute false contracts. Even if the assets which are the subject of the security measures are immovable assets, we understand that the Supreme People’s Court of Vietnam has established the principle that the transfer of ownership of an asset cannot be used as a means of security and that such transfer of ownership by way of security is not valid or enforceable.
2. Management and control of the pledge
The pledgor and the pledgee may by the pledge contract authorize the depository member to manage the pledged securities (Article 31.2 of Decision 87).
The pledged securities account will become an escrow account as from the date of validity of the pledge as Article 29.1 of Decision 87 prohibits all withdrawals of the pledged securities. In other words, the intermediary would not permit any dealings with the assets without the pledgee’s consent. Article 19.3 of Decree 163 gives the pledgee the right to require the VSD to guarantee his right of supervision over the pledged securities. As a result, in principle, the pledgee has both negative and positive control over the pledged securities. Under this text, unless otherwise agreed, the pledgee may sue the VDS in case of breach of its obligation to guarantee the pledgee’s right of supervision over the pledged securities.
3. Release of the pledge
The parties may request the release of the pledge over all or part of the pledged securities (Article 31.2 of Decision 87). In accordance with Article 31.3 and Article 31.6 of Decision 87 and Articles 33 and 34.1 of Decision 38, the relevant steps for the release include the following:
the client sends a request to release the pledge over securities to its depository member where its account has been opened;
the depository member must lodge the application file for the release of the pledge of securities with the VSD within one business day from the date of receipt of a valid request from the client.
the VSD shall be responsible to process the application within one business day from the date of receipt of a valid application file from the member. In case of refusal of the release of the pledge, the VSD must give in writing the grounds for its refusal.
Under Article 33 of Decision 38, the application file must contain the following items:
a request for the transfer of the pledged securities for the purpose of releasing the pledge (made according to Form 32/LK); and
a list of the pledged securities subject to the release with confirmation of acceptance of the release from the pledgee (prepared according to Form 33/LK).
Finally, pursuant to Article 31.5 of Decision 87, “the release of a pledge of securities shall take effect when the VSD makes a book entry transferring the securities from the pledged securities account to the trading securities account of the member of the pledgor”. The effective date of the release of the pledge is the date on which the VSD made a confirmation on the request for the transfer of the pledged securities for the purpose of releasing the pledge (Article 34. 2 of Decision 38).
4. Enforcement of the pledge
In principle, the enforcement of the security is conducted in accordance with the methods of enforcement that the parties have agreed on in the security agreement. Absent an agreed-on method of enforcement, the secured asset will be sold by auction (Article 58.1 of Decree 163).
Pursuant to Article 27 of Decision 38, “the VSD will transfer the pledged securities into the account of the pledgee only if the pledge agreement states that the method of enforcing the pledge is implemented by the transfer, via the VSD in favor of the pledgee, of the pledged securities under the ownership of the pledgor”. Although this text is slightly bewildering, such transfer should be understood as the first step for implementing the agreed-on method of enforcement and not a method of enforcement. To avoid subsequent conflict, it is therefore very desirable to expressly stipulate this in the pledge agreement.
The application file for the transfer of securities according to the pledge agreement must include the following items:
a request for securities transfer made by the member of the pledgor (made according to Form 07/LK);
a valid copy of the pledge agreement;
a document proving that the pledgor has not fulfilled the secured debt;
a written request made by the pledgee for the release from the escrow account and transfer of the pledged securities to its account; and
other documents (if any).
The VSD shall process the application file within 2 business days as from receipt of a valid application file.
Under the general law of security transactions, on default, the pledged securities may be sold to a third party. Enforcement can also be by appropriation. In both cases, the value of the pledged securities will be used to discharge the secured obligation.
The pledgee may sell the securities on a default without the need to apply to court if this method of enforcement is contained in the security agreement (Article 59.1 of Decree 163).
If the sale proceeds received by the secured creditor exceed the amount secured, the secured creditor must return the balance to the securing party unless there is some other agreement (Articles 355 and 338 of the Civil Code and Article 64a.2 (b) of Decree 163). This is because of the secondary nature of a security interest and the application of the principle of return of the property in case of unjust enrichment as provided in Article 256 of the Civil Code: the security enforcement must not give the secured creditor more than the normal performance of the secured obligation would bring to him.
On enforcement, it is possible for the secured creditor to take over the secured property in lieu and in place of performance of the secured obligation by the securing party without the need for court intervention (Article 59.2 of Decree 163). In order for the secured creditor to exercise that power, the security agreement must contain an express power for the pledgee to appropriate the securities. Furthermore, the secured creditor is under an obligation to remit the balance to the securing party unless there is some other agreement (Article 64b.2 of Decree 163).
Enforcement on corporate insolvency proceedings
As from the date on which a court accepts jurisdiction over a petition to commence insolvency proceedings, realization of the pledged securities of the insolvent pledgor is suspended. Such enforcement may be authorized by a court if the following conditions are concurrently met: (i) the secured debt has matured; (ii) the enforcement does not materially affect the business of the pledgor and (iii) the secured creditor provides in writing legitimate reasons for such enforcement and the necessity of it (Article 27 of the Law No. 21/2004/QH11 on Bankruptcy dated 15 June 2004 (the Law on Bankruptcy) and item 2, section II of the Supreme People’s Court’s Resolution No. 03/2005/NQ-HDTP dated 28 April 2005 guiding implementation of certain articles of the Law on Bankruptcy). In other words, the court will consider how the enforcement of the security would impinge upon the rescue of the insolvent pledgor in order to decide whether or not to authorize the enforcement. Moreover, on liquidation of the insolvent pledgor’s assets, the pledgee ranks in priority to all preferential creditors (e.g., insolvency expenses, claims of employees against the company or tax claims) and unsecured creditors (Articles 35, 36 and 37 of the Law on Bankruptcy).
5. Cross-border issues
In accordance with Article 27.3 of Decision 38, the pledgee may be a foreign credit institution, a bank with 100 percent foreign capital or a foreign bank’s branch in Vietnam. However, if the enforcement of the pledge over securities results in the offshore entity becoming the holder of the pledged securities, it shall be subject to foreign ownership caps and restrictions as provided under Vietnamese law. Consequently, under this text, on an enforcement, when transferring securities into the account of the pledgee in accordance with the pledge agreement, the VSD shall only transfer the aggregate amount of securities falling within the limits applicable to foreign investors.
At this regard, it should be noted that some caps on foreign ownership in Vietnamese companies are provided notably in the Regulations on capital contribution into, and purchase of shareholding in, Vietnamese enterprises by foreign investors, issued by Decision No. 88/2009/QD-TTg of the Prime Minister dated 18 June 2009 and its implementing Circular No. 131/2010/TT-BTC of the Ministry of Finance dated 6 September 2010, Decision No. 55/2009/QD-TTg of the Prime Minister on percentage of participation of foreign investors in the securities market of Vietnam dated 15 April 2009, Vietnam’s WTO commitments and regulations applicable to special sectors. Those caps include the following:
ownership ratios for sectors may be provided under specific regulations (e.g. 30 percent for banks);
unless a lower percentage applies, the cap on foreign ownership in all public companies including those listed on the Ho Chi Minh City Stock Exchange and the Hanoi Stock Exchange remains at 49 percent; and
equitization plans for 100 percent State-owned capital enterprises converting their form of ownership may specify foreign ownership limits.
In short, the cooperation and good will of the securities company and the VSD are important in the process of enforcement of the security. The law in this area has not been well settled. Reformation of the law should be a joint effort of the drafters of the amended Civil Code and the reformers of the Specific Rules. As special law, the Specific Rules should be completed in a coherent and efficient way to ease the taking of security over that special kind of intangibles.-
 Gullifer (L.) (ed), Goode on Legal Problems of Credit and Security, Sweet & Maxwell, 4th edn, 2008, no. 6-01. Under Article 6.1 of the Law No. 70/2006/QH11 dated 29 June 2006 on securities as amended in 2010, securities means evidence from an issuing organization certifying the lawful rights and interests of an owner with respect to an asset or capital portion. Securities may take the form of certificates, book entries or electronic data, and shall comprise: (i) shares, bonds and investment fund certificates; (ii) share purchase rights, securities rights, purchase options, sale options, future contracts, groups of securities and securities indices; (iii) investment capital contribution contracts; and (iv) other types of securities prescribed by the Ministry of Finance.
 The general law includes the Civil Code, Decree No. 163/2006/ND-CP dated 19 December 2006 on secured transactions as amended in 2012 and Decree No. 83/2010/ND-CP dated 23 July 2010 on registration of secured transactions as amended in 2012 and some other implementing texts. See, Bui Duc Giang, “Taking share security in Vietnam: law and practice”, Vietnam Law & Legal Forum, Vol. 20, nos 231-232 December 2013.
 The reader is reminded that “securities” should not be confused with security interests but denote issues on the market, and debt issues may be either secured or unsecured.
 In the case of bearer securities, title is not recorded on the issuer’s register but is vested in the holder of the certificate for the time being and is transferred by delivery.
 Timothy N Parsons, Lingard’s Bank Security Documents, 5th edn, 2011, no 15.1.
 About share transfer restrictions for instance, see Bui Duc Giang, “Taking share security in Vietnam: law and practice”, Vietnam Law & Legal Forum, Vol. 20, nos 231-232, December 2013.
 “Article 14 of Decision 87 - Securities registration at the VSD
1. The following types of securities must be registered at the VSD:
(a) securities of public companies and of listed organizations.
(b) government bonds listed on the Stock Exchange or a Securities Trading Centre.
(c) bonds of economic organizations and of local authorities listed on the Stock Exchange or a Securities Trading Centre.
(d) fund investment certificates listed on the Stock Exchange.
(e) other types of securities which must be registered at the VSD pursuant to an agreement reached between the VSD and the issuing organization.”
 Decision No. 290/2008/DS-GDT of the Division for civil matters of the Supreme People’s Court of Vietnam dated 25 September 2008.
 Decision No. 325/2011/DS-GDT of the Division for civil matters of the Supreme People’s Court of Vietnam dated 29 April 2011.
 However, this appears to imply that the pledgee must first send an order to realise the pledged securities to the securities company holding the securities in the pledged securities account in the name of the pledgor.
 It might be inferred from this that the pledgor must be the debtor and not a third party.
 It is difficult to understand why the law maker provides that appropriation of the securities may take place only in case the secured obligation is that of the securing party. Consequently, the only option available for the creditor taking a pledge over the securities owned by a third party (and not of the debtor) is the sale.