Bui Duc Giang
Attorney at law and PhD in law[1]
Charges are the most commonly used security interest in secured lending in Vietnam. As the charged property remains in the hands of the chargor, there are risks facing the secured banks. To be able to efficiently enforce the charges at a later time, banks should anticipate and prevent those risks at the time of entering into the charge agreements.
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Concept of charge
Article 317.1 of the Civil Code defines a charge as the “use by one party (below referred to as the chargor) of property owned by it as security for the performance of an obligation to the other party (below referred to as the chargee) without delivering possession of such property to the chargee”. It can be inferred from this definition that:
• A charge does not entail delivery of possession of the charged property to the chargee. The charged property remains with the chargor or a third party agreed by the chargor and chargee (Article 317.2 of the Civil Code). Consequently, the chargor is entitled to “exploit the utilities of, and enjoy the benefits and income derived from, the charged property, except where the benefits and income also form part of the charged property as agreed” (Article 321.1 of the Civil Code) and to “make investment in order to increase the value of the charged property” (Article 321.2 of the Civil Code). In certain cases (e.g. charges over machinery owned by a company or charges over a commercial building), the entitlement to use and/or exploitation of the charged property will enable the generation of cash flows which will be then used to refund the secured loan.
• It appears that the secured liabilities are not necessarily those of the chargor. In other words, the chargor is not necessarily the borrower.
• The property being the subject of the charge must be owned by the chargor. This principle is also provided in Article 295.1 of the Civil Code, under which “the secured property must be owned by the securing party […]”. As such, a charge over a property not owned by the chargor is voidable for breach of an implied prohibition of a law (i.e. the Civil Code) (Article 123 of the Civil Code).
A major difference between a charge and a pledge is that the charge does not require delivery of the possession of the charged property to the chargee, while the pledgor must deliver the possession of the pledged property to the pledgee. It should be noted receivables, contractual rights, intellectual property rights, shares, and bank account credit balances cannot be pledged but may only be charged as it is impossible to deliver their possession.
Secured property
Article 318.1 of the Civil Code prescribes that if a charge is created over a moveable or immoveable property having ancillary objects, such ancillary objects will be part of the secured property, unless otherwise agreed by the parties. Likewise, if a charge is created over part of a moveable or immoveable property having ancillary objects, such ancillary objects will be part of the secured property, unless otherwise agreed by the parties. As such, if a bank has a charge over the primary property, it will have a charge over the ancillary property. It can be inferred that this rule not only applies to ancillary property attached to the primary property at the time the charge was created, but also to items which subsequently become ancillary property.
For instance, in case of a charge over the right to use a land lot, if goods are taken onto the land and become fixtures, the charge will extend to such fixtures on the land whether they were on the land at the time of creation of the charge or they subsequently become fixtures.
Furthermore, a charge over property may contain an undertaking by the chargor to insure the property concerned. Article 318.4 of the Civil Code provides that:
• in case the charged property is insured, the chargee must notify the insurer that the insured property is being charged. The insurer shall pay the insurance proceeds directly to the chargee upon occurrence of an insured event.
• If the chargee has not given such notice, the insurer shall pay the insurance proceeds in accordance with the insurance contract and the chargor shall pay the money amounts received to the chargee.
As such, if the property being the subject of the charge is insured, the charge will have security over the proceeds of insurance taken out in respect of that property.
In addition, if a charge is created over the right to use a land lot and the property attached to the land is owned by the chargor, such property shall become part of the security, unless otherwise agreed by the parties (Article 318.3 of the Civil Code). It is noteworthy that this rule is subject to specific legislations (e.g. the residential housing legislation).
Finally, Article 295.2 of the Civil Code provides that “secured property may be generally described but must be identifiable”. Since possession is not a requirement of a charge, it is crucial that the identity of the property secured is properly defined[2].
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Charges over future property
At present, some remain opposed to the taking of security over future property, mainly because of the uncertain nature of this type of property. Some banks still say no to security over future property. Article 295.3 of the Civil Code expressly permits parties to provide for security interests in future property by providing that “secured property may be present property or property to be formed in the future”. The concept of “property to be formed in the future” is a bit confusing and should be read as “future property” for the purpose of application of the Civil Code. As such, it is possible to create a charge over future property.
In accordance with Article 108.2 of the Civil Code, future property may be property which at the time of creation of the charge (i) has not yet come into existence or (ii) has come into existence but is not yet owned by the chargor.
It should be borne in mind that the residential housing legislation defines a future residential house as “a house which is in the process of being built and has not yet been accepted for use” (Aricle 3.19 of Housing Law No. 65/2014/QH13 dated November 25, 2014). This definition only takes account of the physical existence of the property - which is the first limb of the Civil Code’s definition mentioned above and thus ignores the second limb of this one being the time of acquiring the property. This is a pity and in practice deprives banks of an efficient security interest, especially when financing sales of residential houses (located outside a commercial real estate project area) the owernship of which has been duly registered. In such cases, banks, purchasers and sellers generally have to revert to alternative solutions which are costly and even risky for some of them. More generally, taking security over future houses remains a complicated area of law for the time being.
As mentioned earlier, Article 295.1 of the Civil Code requires the charged property be owned by the chargor. Obviously, at the time of entering into the charge over the future property, the latter is not yet owned by the chargor. So, what is the rationale behind the green light given to the taking of security over future property?
Pursuant to Article 319.1 of the Civil Code, “a charge over property shall be enforceable against the parties from the time of its creation, unless otherwise agreed by the parties or provided by a law”. A charge does not immediately attach to the charged property if a law[3] prescribes that the charge attaches at a later time. In case of a charge over a future property, it can be inferred that the Civil Code implies that the charge has not attached to the future property for the time being but will attach to it when it comes into existence or is acquired by the chargor. Hopefully, texts implementing the Civil Code would expressly provide for this subtlety in order to avoid potential conflicts.
In addition, as mentioned above, under Article 295.2 of the Civil Code, “secured property may be generally described but must be identifiable”. Future property can be definite and ascertainable notwithstanding the possibility of it never coming into existence as the charge attaches when the property comes into existence. However, future property being charged will need be sufficiently identifiable at the time of coming into existence or being owned by the chargor.
Enforceability of charges
Article 319 of the Civil Code makes a distinction between enforceability against the parties and enforceability against third parties. Accordingly, “a charge over property agreement shall be effective from the date of entering into it, unless otherwised agreed by the parties or otherwise provided by a law”, and “a charge over property shall be enforceable against third parties from the date of its registration”.
As such, a charge agreement duly entered into by the chargor and the charge will be enforceable against the chargor (and consequently, the chargor will be bound by its obligations provided in the agreement) from the date of entry unless otherwise agreed by the parties or provided by a law. If the parties to a charge agreement have agreed that the charge attaches at a later time, the charge attaches at the time specified in the agreement. In all cases, the charge is enforceable against the chargor if it has attached to the charged property.
Article 298.1 of the Civil Code stipulates that “registration shall be a condition for enforceability of the secured transaction only if so provided by a law”. The time of entering into a contract in writing is the time when the last party signs the contract or put its acceptance on the face of the contract by other form (Article 400.4 of the Civil Code). A law may provide that the charge agreement will be effective after the time of entry. For instance, Article 188.3 of Land Law No. 45/2013/QH13 dated November 29, 2013, expressly stipulats that the land use right charge agreement “shall be registered with the [competent] land registration office and take effect from the time of registration into the cadastral dossier”.
The registration of the charge serves as a warning to third parties that a given secured party claims a charge in specific secured property. Searching the register will not disclose all the details of the charge agreement.
If a charge is duly registered, it will be enforceable against third parties as from the time of registration (Articles 297.1 and 298.2 of the Civil Code). The chargee will have the right to recover the charged property and the right to be paid in priority from the value of such property (Article 297.2 of the Civil Code). A “third party” means a party (other than the chargee and the chargor) which has a conflict of interest with the chargee. Third parties may therefore be other secured creditors, purchasers or lessees of the charged property, sellers of the charged property in case the latter is subject to a retention of title clause, or judgement creditors, etc.
Handover of documents with respect to charged property
Article 320.1 of the Civil Code provides that the chargor has the obligation to “hand over documents relating to the charged property if the parties so agree, unless otherwise provided by law”. As such, unless so prescribed by a specific law, the chargor will have to deliver documents relating to the charged property to the chargee if this obligation is provided in the charge agreement or agreed by the parties after the execution of the charge agreement. In other words, banks are not entitled to retain them in the absence of express agreement between the parties.
In light of the above, the Civil Code’s provisions concerning charges over property contain various changes. Careful drafting of guiding texts is needed to avoid potential conflicts and ensure a smooth enforcement of the charges.-
