Bui Duc Giang
Attorney at law and PhD in law
v The new Civil Code provides an open list of methods of enforcement of security and expressly provides for the possibility for the creditor to sell the secured property itself without authority from the securing party;
v Notice to the securing party and other secured creditors about realization of the secured property becomes a compulsory formality;
v Valuation of the secured property must reflect its market value;
v A priority agreement may be entered into by beneficiaries of security interests over the property concerned.
On November 24, 2015, the National Assembly passed the new Civil Code which will take effect from January 1, 2017 (the 2015 Civil Code). This text establishes a new legal framework for secured transactions with various changes to the current one. This article focuses only on the security enforcement process under the new rules of the 2015 Civil Code and tries to give an overview thereof.
When can the creditor exercise its powers?
Article 299 of the 2015 Civil Code provides for circumstances in which the creditor’s powers of enforcement arise. Those include the following:
* The debtor fails to perform or performs improperly the secured liability when it becomes payable;
* The debtor must early perform the secured liability because of its breach of the contractual obligation(s) or as prescribed by law; and
* Other circumstances as agreed by the parties or as provided by a law.
As such, on the one hand, this text sets out default rules on the creditor’s implied enforcement powers, and on the other hand it enables the parties to provide in the security document for other cases in which the creditor may enforce its security.
The second category of circumstances is normally (but not always) the case if there is an event of default.
The law may provide for enforcement powers in certain circumstances. For instance, under Clause 3, Article 296 of the 2015 Civil Code, in case the securing party has created more than one security interest over the property concerned, then such asset is realized to pay one of the creditors, the remaining secured debts will become payable automatically and the remaining creditors will be entitled to take part in the realization, subject to certain procedural requirements and rules of priority.
|National Assembly deputies vote to pass the revised Civil Code __Photo: Phuong Hoa/VNA|
Methods of enforcement
Under Clause 1, Article 303 of the 2015 Civil Code, the parties may agree that the pledged or mortgaged property will be realized in one of the following ways:
* The property will be sold by auction;
* The creditor will itself sell the property;
* The creditor will appropriate the property in replacement of performance of the secured debt by the securing party; or
* Other methods.
The list provided by this Article is an open one. The parties may agree on other ways to enforce the security. For example, the property may be rented out and rentals will be then used to pay the secured liability.
Furthermore, this Article makes it clear that the parties may agree that the property will be sold by auction. Normally, sale by auction automatically applies when the parties have not agreed on any way of enforcement, except where the law otherwise provides (Clause 2, Article 303 of the 2015 Civil Code).
Under Article 195 of the 2015 Civil Code, a person not being the owner of the property only has the right to dispose of the property under the authority given by the owner of such property or in accordance with a law. Clause 1, Article 303 of the 2015 Civil Code gives the creditor the power to sell the pledged or mortgaged property itself. Therefore, an agency for that purpose is no longer needed for the creditor to have a power of sale. However, it should be noted that in the absence of an express agreement, a power of sale will not be available to the creditor. Once the sale of the property has been completed, the owner of the property and the creditor or its agent must conduct the required procedures for transferring ownership over the property to the purchaser (Point b, Clause 2, Article 304 of the 2015 Civil Code).
Finally, it appears from the wording of Clause 1, Article 303 of the 2015 Civil Code that appropriation may be used only when the secured debt is a debt owed by the securing party but not by a third party. It is difficult to understand the reason behind that restriction.
Notice to the parties concerned
Article 300 of the 2015 Civil Code brings notice to the securing party and other secured creditors compulsory. It provides that “prior to realizing the secured property, the secured party must give a written notice within a reasonable period of time of realization of the property to the securing party and other secured creditors. When the secured property is in danger of being damaged resulting in its diminishing in value or losing its whole value, the secured party may immediately realize such property and at the same time shall notify the securing party and other secured creditors of the realization of the property.”
As “reasonable period of time” is a vague concept, it is desirable that the parties indicate in the security document or other document a specified period of time for the giving of notice.
If the creditor fails to give the notice, and thus causes damage to the securing party and/or other secured creditors, it shall compensate them for this damage (Clause 2, Article 300 of the 2015 Civil Code).
Handover of the secured asset for realization
Article 301 of the 2015 Civil Code prescribes that a person holding the secured property must hand it over to the creditor for realization in case the creditor’s enforcement powers are available and if such person fails to do so, the creditor may request the court to resolve the matter, unless otherwise provided by a relevant law. Likewise, the mortgagor or a third party holding the mortgaged property must hand it over to the creditor for realization (Clause 6, Articles 320 and Point c, Clause 2, Article 324 of the 2015 Civil Code).
It is unnecessary for the Civil Code to repeat that the creditor may request the court intervention in case the person holding the secured property refuses to hand it over to the creditor for realization since this right is obvious and recognized by the general law.
It is also regretful that Article 301 and Clause 5, Article 323 of the 2015 Civil Code address only to the right of the creditor to request the handover of the secured property and not the creditor’s right to seize the asset itself for realization. In this regard, it should be noted that Article 307 of the 2015 Civil Code expressly refers to seizure expenses. It is lawful for the creditor to seize the property concerned itself in case the securing party fails to hand it over to the creditor. Hopefully, an implementing text would expressly handle the issue in this sense.
In addition, the possibility for the creditor to seek assistance from local state agencies in order to seize the secured property does not feature on the 2015 Civil Code. In practice, this assistance has proved to be useful in certain circumstances and the option has been largely used by certain local banks.
Valuation of secured property
As a matter of principle, the parties may agree on the price of the secured property or to revert to a property valuation entity to determine the value of the property on enforcement (Clause 1, Article 306 of the 2015 Civil Code). Such agreement may be contained in the security document or be entered into at a later stage.
In the absence of an express agreement between the parties, the property shall be valued by a property valuation entity (Clause 1, Article 306 of the 2015 Civil Code).
Clause 2, Article 306 of the 2015 Civil Code requires the property concerned be valued objectively and in conformity with the market price. This requirement aims at protecting the securing party to avoid risks of undervaluation. Notably, the property valuation entity is obliged to obtain the market value of the property when determining its value. It will have to indemnify the securing party and the creditor against any damage caused to them in case of breach of the law (Clause 3, Article 306 of the 2015 Civil Code).
Payment of secured debts and priority
The proceeds from the realization of the secured property will be used first to pay all expenses incurred for taking care of, seizing and realizing, the pledged or mortgaged property and then to pay the secured debts, and any surplus proceeds shall be returned to the securing party (Article 307 of the 2015 Civil Code).
Under Clause 1, Article 308 of the 2016 Civil Code, when a single item of property is used to secure more than one debt, the order of priority for payment between the secured parties shall be determined as follows:
* Where the security interests are all enforceable against third parties, the priority of payment shall be determined according to the order in which enforceability against third parties was established;
* Where some of the security interests are enforceable against third parties while the other are not, beneficiaries of the former will rank ahead beneficiaries of the latter;
* Where all the security interests are not enforceable against third parties, the order of payment shall be determined according to the order in which they were established.
In practice, the rights of a subsequent secured creditor are precarious because it ranks behind the first secured creditor and its powers of enforcement are more limited. For that reason, Clause 2, Article 308 of the 2015 Civil Code allows the parties to enter into a priority agreement which regulates priorities between them. Under Clause 3, Article 296 of the 2015 Civil Code, it appears that such priority agreement may also establish the basis on which the various security interests will be enforced.-