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Sunday, April 21, 2019

Taking security over future property in Vietnam

Updated: 15:59’ - 31/10/2013

Bui Duc Giang
PhD student at l’Université Paris 2 Panthéon Assas, France

Taking security over future property as part of a security package granted to financial creditors is a common feature of financings in Vietnam. Mortgage is the appropriate type of security over future property because of the absence of the requirement of delivery of the possession of the secured asset to the creditor. Although, the concept of future property seems to cover only tangible assets and is not suitable for intangibles, the law addresses various aspects of this form of security and thus eases the attachment, perfection and enforcement process. A mortgage over a future building is governed also by the land legislation.

Validity of security over future property

As elements of background, Vietnamese law recognizes fourth categories of assets: objects (e.g., a machine), money, valuable papers (e.g., a bond) and patrimonial rights (e.g., a debt claim). Under the Civil Code, a security interest can attach in a future object (Article 320) and the mortgaged asset can be a future asset (Article 342.1). Furthermore, Article 4.1 of Decree  No. 163/2006/ND-CP dated 19 December 2006 on secured transactions as amended by Decree No. 11/2012/ND-CP dated 22 February 2012 (Decree 163) provides that the secured asset may be future property[1] that the law does not prohibit from being traded. Therefore, in principle, it is possible to create security over future property. However, as a pledge requires delivery of the possession of the asset to the creditor by way of security (Articles 326 and 328 of the Civil Code), future property can only be mortgaged[2].

Article 4 of Decree 163 provides that future property don’t comprise land use rights and intends it to include (i) property to be acquired from utilisation of the loan; (ii) property currently in the phase of being created or which currently being created in compliance with the law as at the time of entering into the security transaction and (iii) property already in existence and falling into the category of assets for which ownership must be registered, but which is only registered in accordance with law after the time of entering into the secured transaction.

This classification of future assets is fairly repetitive and appears to cover only tangible assets which are being created or which have been physically created. It does not seem to take account of the time of acquisition of the asset by the securing party[3] - criteria nevertheless crucial already recognized by Article 320.2 of the Civil Code[4]. Furthermore, it does not fit well with future intangibles[5].

Attachment and perfection of the security

In principle, a security transaction is enforceable against the parties from the date of its execution unless otherwise provided by the parties (Article 10.1 of Decree 163). Nevertheless, as the secured asset is future property, the date of acquisition of the asset must be also taken into account. Indeed, pursuant to Article 8.1 of Decree 163, “when the securing party acquires ownership over a part or the whole of the secured asset, the secured party has rights to such part or the whole of such secured asset”. As such, a security interest cannot attach in an asset before the securing party has acquired ownership over it. The rights of the secured creditor arise only upon acquisition of the asset. Indeed, the agreement for security over a future asset “creates an inchoate security interest which is waiting for the asset to be acquired so that it can fasten on to the asset but which, upon acquisition of the asset, takes effect as from the date of the security agreement[6]”.

For instance, a debtor executed a mortgage in favor of X over a future asset on 1 March and has ownership over it on 15 September. In accordance with the above text, the mortgage attached on 15 September. Suppose that on 1 April, the debtor executed a second mortgage over the same future asset in favor of Y. Who wins, X or Y? One may argue that the security interest does not attach until the securing party has ownership over the asset, so that the competing interests of X and Y attach simultaneously. Furthermore, may X win because X is the first in time? The answer can be found in Article 11.1 of Decree 163 and Article 325 of the Civil Code under which, priority is determined by the dates of registration and in absence of registration, by the dates of creation of the security interests.

As for registration, it should be noted that under Article 12.4 of Decree No. 83/2010/ND-CP dated 23 July 2010 on registration of secured transactions as amended by Decree No. 05/2012/ND-CP dated 2 February 2012 (Decree 83), re-registration of the security transaction may be carried out upon the coming into existence of the future property unless the latter is a circulating good or a motor vehicle with its frame number already recorded upon security transaction registration. It is advisable to proceed with that re-registration because a third party may claim their interest in the property and may get priority in case of discrepancies between the information related to the future property in the registered contents and the information related to the property in existence.

Description of the future property

In its 2006 version, Decree 163 provides in its article 10.2 that general description of the secured asset does not affect the effectiveness of the security transaction. However, this provision has been deleted out of the 2012 version of Decree 163. The major reason of such deletion is the avoidance of repetition because pursuant to Article 33 of Decree 83, general description of the secured asset does not affect the validity of the registration of the security transaction. Therefore, a security agreement would remain valid even if the description of the secured asset is vague. However, it is common practice that this principle applies only to security over moveable assets and not to real estate. Furthermore, in accordance with Article 11.1 (f) of Decree 83, the security registrar may refuse to register a security interest upon becoming aware that information contained on the application file is inconsistent with the information stored at the security registrar.  Future property should therefore be identified in such a way that such identification would ease the re-registration of the security interest at a later stage.

Article 8.1 of Decree 163 provides that “when the securing party acquires ownership over a part or the whole of the secured asset, the secured party has rights to such part or the whole of such secured asset”. This text implies that the secured asset can be identified at the time the security needs to be enforced.

Enforcement of the security

The enforcement of a mortgage over a future asset is governed by the general legal framework applicable to enforcement of a mortgage of property and by certain specific rules.

Under Article 56 of Decree 163, a creditor may enforce its security in the following circumstances:

- The debtor fails to perform or performs incorrectly the secured obligation when it falls due;

- The debtor has to early perform the secured obligation because of its breach of that obligation pursuant to an agreement or as provided by law[7];

- The law requires that the secured asset be realized in order for the securing party to perform other obligations[8];

- Other cases as agreed by the parties or provided by law.

A further prerequisite for enforcement is set forth in Article 8.1 of Decree 163 under which the mortgagee may enforce its security only after the securing party has become the owner of the secured asset. However, pursuant to this text “with respect to property the law requires that the ownership over which be registered but the securing party has not yet completed registration[9], the secured party is still entitled to realize the asset at the enforcement date”.

The enforcement of the security is conducted in accordance with the methods of enforcement that the parties have agreed on in the security agreement (Article 58.1 of Decree 163)[10]. Those methods of enforcement include (i) sale of the secured property, (ii) take-over of the secured property in lieu of performance of the secured obligation by the securing party[11], (iii) receipt of a sum of money or another property from the account debtor in the case of the mortgage over a debt claim[12] and (iv) other methods as agreed by the parties (Article 59 of Decree 163).

Before enforcing a security interest, the secured party must give notice of the enforcement[13] to the securing party and the other registered secured creditors (if the asset has been secured in favor of more than one creditor) or register the notice of enforcement with the relevant registrar of security. This notice requirement does not apply in certain cases (for instance if the secured assets are susceptible to loss or devaluation or are debt claims) (Articles 61 and 62 of Decree 163). The secured party can only enforce the security upon the expiry of a waiting period, which may be agreed by the parties. Absent such agreed-on waiting period, the time for realization which shall not be earlier than 7 days for moveable assets and 15 days for real property as from the date of the notice of enforcement (Article 62 of Decree 163).

Furthermore, the competent State authority shall rely on the outcomes of the realization of the secured asset in order to conduct procedures to transfer ownership or use right over this asset to the purchaser or the secured party taking over the asset (Article 8.2 of Decree 163).

Mortgage over a building to be erected

Take the example of a mortgage over a future building. The definition of future property mentioned above fits well with a building to be erected in the future.

The Land Law No. 13/2003/QH11 dated 26 November 2003, as amended in 2009 and 2010 (the Land Law) allows an enterprise whether domestic or foreign-invested, to mortgage at an onshore credit institution[14] its assets attached to the land that it has obtained from the State by way of allocation or lease (Articles 110.2 (d), 111.1(b) and 119.2(b)). Therefore, it is possible to take a mortgage over a future building.

The law does not require registration of the mortgage over a building to ensure its validity: the security is enforceable against the parties from the date of its execution unless otherwise provided by the parties (Article 10.1 of Decree 163). Attention should be paid to the description of the secured future building. In practice, it should contain at least the information related to the building as mentioned on the construction permit.

In addition, notarization of a residential house is compulsory (Article 93.3 of the Law No. 56/2005/QH11 on Residential Housing as amended in 2009). It is noteworthy that the parties may choose to notarize their mortgage agreement (Article 9.1 of Decree 163) (e.g., for legal certainty). It may happen that a notary refuses to notarize a mortgage over a future building (or more broadly a future asset) by arguing that the object of the mortgage should be “real” in accordance with Article 35.4 of the Notarization Law although this view is strongly criticized by both academics and practitioners.

The mortgage over a future building is enforceable against third parties from the date of its registration with the provincial land use right registration office (Article 11 of Decree 163 and Article 5 of Joint Circular 20/2011/TTLT-BTP-BTNMT of the Ministry of Justice and the Ministry of Natural Resources and Environment providing guidelines for registration of mortgages over land use rights[15] and assets attached to land dated 18 November 2011). As noted above, although re-registration of the mortgage upon completion of the building is not a compulsory further step to ensure its enforceability against third parties, it is advisable to proceed with such re-registration, for a third party (a purchaser or another mortgagee) may claim their interest in the building and may get priority if the information related to the building in the registered contents is different from the information related to the building in existence.

Finally, pursuant to Article 68.2 of Decree 163, in case where there is no agreement on the method of realization of the secured property, then such property shall be sold by auction. If the mortgage is only created over the asset attached to land, on enforcement of the security, the purchaser or the secured creditor taking over such asset attached to land is permitted to continue to use the land and will be subrogated to the rights and obligations of the mortgagor in the contract on land use right as between the mortgagor and the land user (for example a contract for lease of a commercial building) except where there is some other agreement.

It is apparent from the above that although there is a relatively good legal basis for the taking of security over for future property, there is still room for improvement. Notably, the law should (i) re-define the concept of future property by taking into account the time of acquisition of the asset, (ii) explicitly specify the form of security over that special kind of property, (iii) be clearer on the identification of the future asset and (iv) be consistent in respect of the possibility for an offshore entity to take mortgages over assets attached to land. Reform of the relevant provisions of the Civil Code governing secured transactions is currently on the National Assembly’s legislative program. One can hope that in the foreseeable future, Vietnam will adopt a more comprehensive legal framework and thus ease the taking of security over after-acquired property.-

 



[1] Vietnamese law uses the expression “property to be formed in the future” which is confusing and inaccurate. It should be read “future property” instead.

[2] A mortgage is a security interest which does not require delivery of the secured property. Security interests under Vietnamese law (including mortgages) confer mere rights over the secured assets, while the ownership over them remains with the securing parties. For a presentation of mortgages of property generally, see (in Vietnamese)  Vu Thi Hong Yen, Mortgaged assets and their realization under Vietnamese civil law in force, doctoral thesis, Hanoi Law University, June 2013; Bui Duc Giang, “Legal consequences of mortgage over property under applicable provisions”, Banking Review, issue 4, February 2012, pp 41-48 and “In search for the philosophy of mortgages over patrimonial rights under Vietnamese law”, Banking Review, issue 7, April 2012, pp. 56-63.

[3] The former definition of future property under the 2006 version of Decree 163 appears to be more satisfactory, see Bui Duc Giang, “New decree on secured transactions”, Vietnam Law & Legal Forum, Vol. 18 - No. 216, August 2012, pp. 11-14.

[4] In accordance with this text, future objects means moveable or immoveable property which falls under the ownership of the securing party after the time when the obligation is created or the secured transaction is entered into.

[5] Although Article 22.1 of Decree 163 clearly provides that the mortgage may attach to a future debt claim.

[6] Gullifer (L.) (ed), Goode on Legal Problems of Credit and Security, Sweet & Maxwell, 4th edition, 2008, No. 2-13.

[7] For instance, in accordance with Article 34 of the Law on Bankruptcy No. 21/2004/QH11 dated 15 June 2004, if the court decides to commence liquidation procedures against an enterprise, debts which are not yet due for payment from the date on which the judge issues a decision to commence liquidation procedures shall be treated as due for payment.

[8] Eg., in insolvency proceedings of the securing party, Article 35 of the Law on Bankruptcy.

[9] For instance, real property (Article 167 of the Civil Code).

[10] Absent an agreed-on method of enforcement, the secured asset will be sold by auction.

[11] In such case, the parties may reach an agreement or reply on a property evaluation entity to fix the selling price of the secured asset (Article 64b.1 of Decree 163).

[12] See (in Vietnamese) Bui Duc Giang, “Legal framework applicable to the enforcement of mortgages over debt claims”, State and Law Journal, issue 5 (301), May 2013, pp.  43-49.

[13] The notice of enforcement must contain inter alia (i) the reasons for enforcement; (ii) the secured obligation; (iii) a description of the secured asset; and (iv) the method, time and location of the enforcement.

[14] As a matter of principle, a mortgage entered into by and between two (non-banking) companies or between a Vietnamese company and an offshore bank or company is likely to be voided. However, Article 58.6 of Decree 163 seems to allow an offshore bank to take security over the assets attached to land provided that the realization of those assets must be effected by way of sale. But as a special branch of law, the Land Law qualifies Decree 163. See Bui Duc Giang, “New decree on secured transactions”, Vietnam Law & Legal Forum, Vol. 18 – No. 216, August 2012.

[15] There is no true concept of private ownership of land in Vietnam. Land is owned by the people of Vietnam and the State administers the land on their behalf. The State allocates or rents out parcels of land to a named individual or entity for a specific use only. This individual or entity will then be issued with a certificate of land use right and ownership of residential housing and other assets attached to land. Security over land relates only to the land use right rather than ownership title to the land itself.

VNL_KH1 

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