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Saturday, April 17, 2021

New decree on secured transactions

Updated: 15:45’ - 29/08/2012

Bui Duc Giang[1]

On February 22, 2012, the Government issued Decree No. 11/2012/ND-CP (the new decree), amending a number of articles of Decree No. 163/2006/ND-CP (Decree 163) of December 29, 2006, on implementation of relevant provisions of the Civil Code on secured transactions (Articles 318 thru 373). The new decree has made substantial changes to the current legal framework on secured lending. Nevertheless, some of these changes are not pertinent or seem to conflict with the provisions of the Civil Code. In this article, we will try to review the main points of the new decree.

Regarding secured assets, according to Article 4.1 of Decree 163 as amended by the new decree, secured assets may be existing assets or future assets which the law does not prohibit from being traded. The new decree has replaced the concept of “asset which is permitted to be traded” with “asset which the law does not prohibit from being traded”. The new approach is appropriate for one simple reason: The law lists only assets of which the trading is limited or prohibited and it cannot make a list of all the assets which are permitted to be traded, especially all the new categories of incorporeal assets.

Securing a future obligation - new Article 8a added to Decree 163 regulates specifically security provided to guarantee the performance of a future obligation. In case a security interest is created in guarantee of 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 another agreement between them or the law otherwise provides. Once the obligation is performed, the parties are not required to register changes to the registered items of the secured transaction.

This is a substantial change to the current regulations. Indeed, the Civil Code and Decree 163 merely stipulate that the secured obligation may be a future obligation (the Civil Code, Article 319.2) which arises from a civil transaction that is entered into after the execution date of the security (Decree 163, Article 3.6). The new decree goes further to indicate that it is unnecessary to provide for a precise description (including the scope and time limit) of the future obligation. This is derogation from the principle set out in Article 282.2 of the Civil Code which requires the object of a civil obligation to be defined precisely. As the secured transaction regulations constitute a separate branch of law, this derogation is valid.

The new conception of future obligation is very favorable for secured creditors, especially banks. For example, when the value of an asset is greater than the amount of a loan secured by this asset, the security document may state that “Asset X is mortgaged/pledged to secure the whole loan A and all other loans or financial obligations of the mortgagor/pledgor generating in the future relationship between the bank and the mortgagor/pledgor.”

Regarding general description of secured assets, Article 10.2 of Decree 163 sets out a principle whereby “general description of a secured asset does not affect the validity of the secured transaction”. This principle has been superseded by Article 1.20 of the new decree. One can deduce that secured assets must be clearly defined, otherwise secured transactions would be voided.

Debt claims or contractual rights must be described in a precise manner in accordance with Article 282.2 of the Civil Code mentioned above.

Requiring a specific description of secured assets may limit the use of future assets to guarantee an obligation because the validity of the contract would be affected by an insufficient description of such future assets. For instance, as of recent, a company being a faithful client of a bank may mortgage its account receivables (or the receivables bank account where such receivables are held) being cash flows generated in the future without having to describe those receivables. The parties should now take into account the new provisions before entering into a similar transaction.

Liens - According to Article 416 of the Civil Code, a lien over a property means the right of the obligee who currently and lawfully holds a property being the subject matter of a bilateral contract to continue to retain the property when the obligor fails to perform the obligation or performs the obligation not as agreed. It is similar to a common law (particular) lien. The lien is considered a sanction for breach of contract and not a security interest.

The new decree has enhanced the status of the retaining obligee because the latter must hand over the property to the mortgagee to realize in accordance with law only after the mortgagee or the obligor has performed the obligation owing to him (Article 21). Subsequently, as long as the obligee has not been paid in full, he has the right to hold the property. Regretfully, the new decree does not specify whether this principle applies in the event of the mortgagor (obligor) falling bankrupt. If such is the case, liens would prove to be a wonderful legal tool to protect the creditors’ rights.

Main clarifications

The securing party being a third party - Until recently, the banking community has not truly practiced security granted by a third party.

Article 3.1 of Decree 163 stipulates that the securing party may secure the performance of its civil obligation or that of another person. Furthermore, realization of secured asset in the event of a third party acting as a pledgor or mortgagor falling bankrupt is provided in Article 57.2 of the same. 

A distinction should be made between a pledge or mortgage over a third party’s asset and a pledge or mortgage granted with regard to a guarantee. In the first case, a third party uses its asset to secure a debtor’s obligation towards the secured creditor while in the second case, the guarantor pledges or mortgages its own asset to secure its guarantee undertaking (Decree 163, Article 44).

Valuable papers - To adapt to the new economic realities, Decree 163 added fund certificates to the list of valuable papers susceptible for use as secured assets (Article 3.9). This list now consists of share certificates, bonds, bills of exchange, promissory notes, bank notes, certificates of monetary deposit, cheques, fund certificates and any other valuable papers as stipulated by law.

Supervision over secured valuable papers - As previously provided, in the event of a pledge over a valuable paper, the pledgee has the right to require the person issuing such valuable paper or the Securities Depository Center to guarantee his right of supervision over the value of such valuable paper. Supervision over the value of valuable paper is an abstract concept and thus difficult to be implemented. Article 19.3 of the new decree replaces it by supervision over the valuable paper itself. The scope of supervision has been broadened, making it more pertinent and feasible.

Returning the difference - Under Articles 64a.2.b and Article 64b.2 of Decree 163, the secured party must pay the securing party the difference between the selling price (or the value) of the secured asset and the value of the secured obligation, unless there are  some other agreements. Two remarks can be made about this provision. Firstly, it seems that lawmakers confer upon the secured creditor the right to proceed with the sale of the secured asset. In order to give the secured creditor such right, the security document drafted before the enactment of the new decree must contain a clause whereby the securing party delegates in an irrevocable manner the power to sell the secured asset to the secured party on security realization. This is because under Article 198 of the Civil Code, a person who is not the owner of a property is allowed to dispose of this property only under a letter of attorney or by operation of law[2]. Secondly, because of the secondary nature of a security interest, Article 337 of the Code sets out a principle under which the pledgee may only realize the necessary number of items of property corresponding to the value of the secured obligation, which means that the security realization must not give the secured creditor more than the normal performance of the secured obligation would bring to him. Accordingly, if the proceeds exceed the amount payable, the remaining amount of the proceeds must be paid to the pledgor (the Civil Code, Article 338). The new decree has extended this rule to all types of secured transactions[3].

Limitations on persons eligible to purchase or receive secured assets - The new decree has brought a new principle related to the realization of secured assets under which “in case the secured asset is a right to use land or residential housing, then the entity or individual purchasing the secured asset or receiving such asset in replacement of performance of the obligation of the securing party must be within the category of entities eligible to be issued with a certificate of land use rights and ownership of residential housing and other assets attached to land; in case such entity or individual is not within such category, then it/he/she is only entitled to the value of the land use right or the value of the residential housing” (Decree 163, Article 58.6). This rule aims at preventing the use of secured asset realization as a means to legally obtain land in Vietnam. Persons which are not mentioned in Article 49 of the 2003 Land Law (amended in 2009), such as offshore banks or offshore enterprises, are not permitted to take over the land use rights or residential housing[4] or purchase such secured assets. As the secured party has the right to enjoy the value of the secured assets, the law may recognize that security over those special assets created in favor of the ineligible persons remains valid provided that the realization is effected by way of sale. Although the new provision does not state the possibility for the ineligible persons to take security over commercial buildings, it is probable that the prohibition is also applied to this case.

Nevertheless, offshore entities should be prudent when taking security over land use rights and assets attached to land. As a matter of law, there is no true concept of private ownership of land in Vietnam. Land is owned by all the people of Vietnam and the State administers the land on their behalf[5]. 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 a certificate of land use rights 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 (the Civil Code, Article 322.2). This is taken by way of mortgage[6] and it is possible to mortgage assets attached to land separately from the land use right itself (and vice versa). The land use right may be mortgaged only if the parcel of land has been allocated to the person possessing this right. However, a mortgage over an asset attached to land (a residential house or commercial building) is possible both in the case of a land lease or land allocation. It should be noted however that under the land law, a company is allowed to create such mortgages only in connection to loans granted by credit institutions to finance the borrowers’ business and/or production activities. A mortgage entered into by and between two (non-banking) companies for purposes other than business and/or production financing is likely to be null and void. A reform of the land law is under way and hopefully, new provisions would ease the taking of security over the land use right and assets attached to land.

Realization of land use right and assets attached to land - Two new provisions have been added to Article 68 of Decree 163 related to realization of security over land use right and assets attached to land. The ways of dealing with such special secured assets when they are separately used to secure loans are now clarified:

- If the mortgage is only created over the asset attached to land, on realization of the security, the purchaser or the person receiving such asset 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) unless there are some other agreements (Article 68.2).

- In case of mortgage of the land use right without mortgaging the asset attached to land, and the person possessing the land use right is also the owner of the asset attached to land, then such asset shall be realized at the same time as the land use right, unless there are some other agreements. The price of the secured assets may be agreed upon by the parties or by an expert[7] and the amounts obtained from the realization of the asset attached to land will be paid first to the mortgagor unless otherwise agreed (Article 68.3). The new rule would help overcome difficulties of realizing security taken over a land plot on which no building has been erected. It is however in the best interest of the secured creditor to exclude, when drafting the security document, the possibility of not realizing the asset attached to a land plot upon that of the land use right.

- In case of mortgage of the land use right without mortgaging the asset attached to land, and the person possessing the land use right is not the owner of the asset attached to land, then on realization of the land use right, the owner of the asset attached to land may continue to use the land in accordance with the agreement between the person possessing the land use right (the mortgagor) and the owner of the asset attached to land, unless there are some other agreements. The rights and obligations between the mortgagor and the owner of the asset attached to land will be transferred to the purchaser or the person receiving the land use right (Article 68.4). This benefits lessees of land use rights because unless otherwise agreed, they can fully take advantage of the land on which they have built some infrastructure as long as this is in accordance with the lease contract.

Key issues

Securing parties - Artile 3.1 of the new decree makes a list of persons who may be securing parties, including those using assets owned by them, using their land use right, using their reputation or undertaking to perform work with the secured parties to secure the performance of civil obligations in favor of the secured parties. This list ignores the rights to exploit natural resources expressly mentioned as a type of secured assets in Article 322.3 of the Civil Code. In this regard, Decree 163 conflicts with the Civil Code. Neglecting this, from a practical view, will make secured creditors more reluctant to accept the mortgage over this kind of intangible assets.

Future assets - The new decree changes the concept of future assets. Under its Article 4.2, future assets do not include land use rights and include the following three categories of asset:

 - Assets formed from loan capital (assets acquired from utilization of loans);

- Assets currently in the phase of formation or legally created at the time of entry into the security transaction (assets of which the physical formation or creation occurs at the time of execution of the secured transaction, for example a building under construction);

- Assets already formed and subject to ownership registration, provided they are registered in accordance with law after the time of entry into the secured transaction (for example, a house which has been built but not yet registered with the provincial-level land use right registry office).

As a reminder, Article 4.2 of Decree 163 took into consideration the time of acquisition of the ownership of the secured asset to determine the future nature of an asset. A future asset is one owned by the securing party after the secured obligation arises or the secured transaction is entered into. The new decree has the merit of making a clear list of future assets. However, this list covers only corporeal assets and thus not all kinds of future assets, especially incorporeal assets called asset-rights under Vietnamese law. These tend to account for a large part of a company’s assets. It is difficult to use the list, for example, in order to define whether a debt claim is a future asset[8]. A future debt claim can be defined as one that has not been created because the legal transaction or event susceptible to give rise to it has not intervened[9].

Order of priority for payment between a beneficiary of a guarantee and other creditors taking security over the same asset - Article 47a added to Decree 163 specifies payment priority between a guarantee and a pledgee, mortgagee, recipient of a performance bond, a security deposit or an escrow deposit. From now on, these have priority over the guarantee if their secured transactions have been duly registered. In absence of registration, payment will be made according to the order in which the security transactions were entered into. It is a common practice that a bank asks a guarantor to use his asset(s) to secure his guarantee undertaking (in general in the form of a mortgage or pledge). There is no reason to consider that the rights of other creditors prevail over those of the guarantee. To address this matter, Article 325 of the Civil Code provides that the order of priority for payment must be determined according to the order of registration of the secured transactions or to the order in which the security transactions were established (in absence of registration).

Double registration - Under new article 19.3 of Decree 163, if the pledged asset is any type of securities which must be registered and deposited, then the pledge must be registered with a center for registration of assets and transactions under the National Secured Transaction Registration Department of the Ministry of Justice, and the registration and depositing of the securities must be made at the Vietnam Securities Depository Center in accordance with the law on securities[10]. Regretfully, there is no need for such (time-consuming) double registration, especially when the law requires the pledged securities account be blocked.

Although important changes have been made to the current legal position on secured transactions, there is still room for improvement. Reform of the relevant provisions of the Civil Code pertaining to secured transactions is currently on the National Assembly’s legislative program. This reform should be synchronized with that of other laws, especially the bankruptcy law. One can only hope that in the foreseeable future, Vietnam will adopt a more attractive framework on secured transactions to help credit in a market that sorely needs it.-

[1] Business Lawyer at Audier and Partners Vietnam LLC (A&P) and Doctoral Intern at l’Université  Paris 2 Panthéon Assas, France.

[2] See Bui Duc Giang, “Legal consequences of an asset mortgage under applicable provision”, Banking Review of the State Bank of Vietnam, issue 4, February 2012.

[3] Security interests under Vietnamese law consists of pledge of property, mortgage of property, performance bond, security deposit, escrow deposit, (ordinary) guarantee and guarantee by prestige of a socio-political organization.

[4] Vietnamese law recognizes sale (private sale or auction of secured assets) and takeover of the secured asset as the main ways of realizing security over land use rights and assets attached to land (Decree 163, Article 59).

[5] The 1992 Constitution as amended in 2001, Article 17.

[6] Unlike English law, a mortgage merely gives the secured creditor rights over the secured asset.

[7] Price assessing entities in Vietnam are not very functional. This is why generally local banks have their own assessment personnel.

[8] The security over debt claims is in the form of a mortgage.

[9] H. Synvet, “Le nantissement des meubles incorporels”, Droit et Patrimoine (2005), issue 140.

[10] The relevant texts include Decision No. 87/2007/QD-BTC, dated October 22, 2007, of the Ministry of Finance promulgating the Regulation on securities registration, deposit, clearing and settlement (amended in 2010), and Decision No. 26/QD-VSD, dated April 22, 2010, of the Vietnam Securities Depository Center promulgating the Regulation on deposit of securities.


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