Le Tung Lam, Do Ngoc Mai, Hoang Kim Thanh, and Truong Thi Lan Anh
In practice, deposits at banks are used as security a great deal. However, the legal framework applicable to that kind of property remains unclear. This article tries to give an overview of the applicable provisions regarding security over deposits and to suggest how to properly construe and improve them.
Legal nature of a deposit at a bank
The core business of a bank (bank) is to receive money (deposit) sent by the customer (depositor) and lend those monies to the borrowers. Therefore, it is important to identify who is the owner of the deposit:
When someone opens a bank account and makes a cash deposit, he at that time surrenders the ownership rights to the cash as it becomes an asset of the bank. The bank then becomes the owner of the deposit but the deposit itself is now a liability owed by the bank to the depositor. This view is supported by Articles 463 and 464 of the 2015 Civil Code of Vietnam (the Civil Code).
Pursuant to Article 463 of the Civil Code: “A contract for loan of property is an agreement between parties under which the loaner hands over a property to the borrower. When the loan becomes due, the borrower shall return the loaner a property of the same type in the same quantity and of the same quality and shall only be required to pay interest if so agreed upon or prescribed by law”. Accordingly, a deposit contract can be regarded as a “contract for loan of property” regarding a deposit. Consequently, the deposit is represented as a debt or liability owed by the bank to the depositor. In fact, savings deposit is the balance recorded on the savings deposit account. This balance represents the account holder’s receivable right, which is an intangible asset.
Furthermore, Article 464 of the Civil Code stipulates: “The borrower shall become the owner of the loaned property from the time of receipt of the property.” Accordingly, the bank will become the owner of the deposit from the time of receiving the deposit from the depositor.
Regarding ownership rights, Article 158 of the Civil Code provides: “Ownership rights include an owner’s rights to possession, use and disposition of his/her/its property in accordance with law.” Therefore, ownership rights of the bank can be expressed as follows:
Firstly, since the bank is holding the deposit, it is the possessor of the deposit.
Secondly, when accepting the deposit, the bank and the depositor have a tacit agreement that the bank shall have the right of an owner to use the deposit to invest for its lawful business provided that repayment to the depositor will be made as agreed (through capital, interest or service). Furthermore, the bank can use the deposit as a capital source for lending. Indeed, according to Article 4 of Decree 93/ND-CP dated August 7, 2017, regulating raised capital of credit institutions and foreign bank branches, raised capital of a bank includes deposits from organizations and individuals. Article 6.1 of this Decree allows a bank to use raised capital for business purposes in accordance with the Law on Credit Institutions, including lending activities. As a result, the bank’s right to use deposits to invest is a right of ownership established under the deposit contract, or in other words, derived from the deposit contract, the bank and the depositor have established for each other the ownership rights (to the bank) and the receivable (to the depositor).
Thirdly, as soon as the deposit account is opened and the property loan contract is entered into, the bank becomes the owner of the deposit from the time of receipt of the deposit and therefore has the right to dispose of the deposit according to its business objectives. The depositor is no longer the owner and can no longer unilaterally exercise the ownership rights to the deposit while the contract remains valid.
As long as the bank is legally the owner of the deposit, the depositor cannot intervene in the bank’s use and disposition of the deposit. However, the depositor has receivable over the deposit of which the value consists of the original debt and interest and may grant security over the deposit in a bank account in favor of the bank at which the account is opened to secure obligations that the depositor owes to the bank or in favor of a third party.
|A transaction office of Vietcombank in Can Tho city__Photo: Thanh Lien/VNA|
Types of security over deposits
The Civil Code contains no specific provisions on security interest over deposits. Regarding the use of deposits as security property, Article 13 of the State Bank of Vietnam’s Circular 48/2018/TT-NHNN dated December 31, 2018, on savings deposits, and Article 11 of the State Bank of Vietnam’s Circular 49/2018/TT-NHNN dated December 31, 2018, on time deposits, provide: “Deposits may be used as collateral assets in accordance with instructions of the credit institution which are compliant with regulations on security transactions.”
The above provision sets out the obligation of banks to issue internal regulations on deposit transactions, including regulations on use of deposits as collateral assets. However, this makes it difficult for banks and credit institutions to determine an appropriate security interest to be applied.
In practice, one may think about two types of security interest that might attach to deposits at banks which are charge and pledge.
Charge over deposits
Article 317 of the Civil Code stipulates: “Charge of property means that a party (the chargor) uses his/her/its own property to secure the performance of an obligation without transferring such property to other party (the chargee). The charged property shall be held by the chargor.”
This security interest is suitable to secured property being intangible property such as deposits since they do not require transfer of possession of secured property.
Pledge over deposits
Under Article 309 of the Civil Code, pledge of property means that a party (the pledgor) hands over its own property to the other party (the pledgee) to secure the performance of an obligation.
Pledge is a security interest that requires transfer of pledged property to the pledgee to secure the obligation between the parties. Besides, the pledgee must be obliged to “take care of and preserve the pledged property” under Article 313.1 of the Civil Code.
If a pledge is created over a deposit, it would be inconsistent with the legal nature of intangible property since pledge involves transfer of possession of pledged property, which is not possible for intangible property.
However, due to the fact that current laws and guiding texts do not have specific provisions on security interest over deposits, banks in Vietnam still accept pledge over deposits.
Above all, a charge is more appropriate than a pledge when the secured property is a deposit since there is no obligation to transfer the possession of the charged property to the chargee as deposits are intangible. In other words, charge is security that applies to intangible property.
Perfection of security interest over deposits
As per Article 297 of the Civil Code, perfection of security interest is understood as when security interest becomes effective for a third party, the secured party may reclaim the security property and is entitled to priority payment under Article 308 of this Code and other relevant laws.
In case of using a deposit as security property, it is difficult to determine the time when the pledgee gets the hold of property. Because in principle, when a deposit is made at a bank, what the depositor receives is the receivable (the right to claim the debt the value of which consists of principal deposit and interest), which is an intangible property. Thus, the pledgee cannot hold the secured deposit when taking a pledge.
Under Article 319.2 of the Civil Code, charge of property becomes effective for a third party from the time of registration. Accordingly, the enforceability of charge for third parties differs from pledge in the sense that it requires the parties to register the charge but does not require transfer of possession of secured property. Usually, banks have to register the security interest to ensure payment priority and the right to reclaim the property.
In practice, deposit charge may be registered at the Transaction and Property Registration Center or Office under the National Registration Agency for Secured Transactions in Hanoi, Da Nang or Ho Chi Minh City under Article 2.3 of the Ministry of Justice’s Circular 08/2018/TT-BTP dated June 20, 2018, guiding the registration of security measures, contracts on and exchange of information about security registration, and Article 9 of the Government’s Decree 102/2017/ND-CP on security registration.
Priority of security interest over deposits
A property might be used to secure more than one obligation. The secured party has the right to priority payment as provided in Article 308 of the Civil Code, as follows:
“1. When a property is used to secure the performance of many obligations, order of priority of payment to the joint secured parties shall be determined as follows:
a/ If all types of security become effective for a third party, the order of priority of payment shall be determined according to the order of effect for the third party;
b/ If some types of security become effective for a third party while others do not, payment for the obligation with security becoming effective for the third party shall be given priority;
c/ If all types of security do not become effective for a third party, the order of priority of payment shall be determined according to the order of establishment of types of security.”
Below we give an example of priority regarding pledge and charge when deposits are used as security property:
On November 1, 2018, Mr. A deposited VND 5 billion at ABC bank. Two days later, he used the deposit to create a charge with ABC Bank to borrow VND 2 billion from this bank, but it was only on November 8, 2018 that this bank registered this charge. On November 5, 2018, Mr. A used the deposit to create a pledge with DEF Bank to borrow VND 4.5 billion. When the repayment became due, he could not pay the debt and his deposit used as security property was realized. The question is which bank has priority in this case?
Mr. A and ABC Bank signed the charge contract on November 3 but until November 8, ABC Bank registered this charge transaction, so the perfection of this charge contract started from November 8.
Meanwhile, though Mr. A attached a pledge with DEF Bank on November 5, 2018, earlier than when ABC Bank registered the charge, the pledge contract between this bank and Mr. A would not become effective for a third party since it could not hold Mr. A’s secured deposit of VND 5 billion for the reason that such deposit is an intangible property.
Therefore, by the time the collateral was realized, ABC Bank would be given payment priority. After the payment is made to ABC Bank, the remainder may be used to pay to DEF Bank.
To avoid risks of perfection and priority compared to pledge as security interest over deposits, we suggest banks stipulate that charge is the most appropriate security interest over deposits.
Enforcement over deposits
Article 303 of the Civil Code provides methods of realization of pledged or charged property as follows:
“1. The securing and secured parties may reach agreement on one off the following methods of realizing pledged or charged property:
a/ Auction of the property;
b/ Sale by the secured party of the property;
c/ Appropriation by the secured party of the property as a substitute for the performance of the obligation of the securing party;
d/ Other methods.”
When a bank accepts a charge over a deposit, it is impossible to apply the property auction method since the deposit is an intangible property.
The appropriation method would not work either due to the fact that the collateral in this case is a receivable. Besides, this method is not optimal because it cannot be applied when the secured deposit is used to secure the loan provided to a third party, and the property that the secured party appropriates is the deposit amount which is the value of the receivable but not the receivable itself.
Therefore, with respect to charge over a deposit, the secured party should apply the method of enforcement2. There may be two scenarios that need to be dealt with:
Scenario 1: The secured party is the bank holding the deposit
In this scenario, it should be provided that the secured party may appropriate the credit balance of the deposit account itself as a substitute for the performance of the obligation of the securing party/depositor.
Scenario 2: The secured party is not the bank holding the deposit
In this scenario, it is advisable to obtain a commitment during the enforcement over the secured property, as follows:
If the depositor/borrower breaches the secured obligation when the latter becomes due, the secured party must inform the depositee about the realization of the secured property.
The depositee, depositor and secured party must coordinate with one another in realizing the secured property.
The depositee must transfer the whole credit balance of the deposit account to the secured party to perform the secured obligation.
In case the secured creditor is not the bank holding the deposit, the secured creditor needs to obtain certain undertakings from the depositee to avoid withdrawals and other transactions from the depositor which would diminish the secured property and prevent risks for the secured creditor.
Accordingly, the depositee has to follow instructions given by the secured creditor in enforcing security interest without the secured creditor’s consent, as follows:
The depositee acknowledges and agrees with the secured creditor that:
· The depositee will cooperate with the secured creditor in realizing the secured property and reclaiming the debt of the secured creditor.
· The depositee will comply with instructions for the disposition of funds from any deposit account given by the secured party.
· The depositee will not exercise any right of set-off (or allow the depositor to perform set-off) which reduces the value of the secured property unless agreed by the secured creditor.
· If the depositee holds any security interest over the deposit, the secured creditor’s security interest has priority over the depositee’s security interest.
· In order to preserve the value of the collateral, the depositee will not allow the depositor withdraw or conduct other transactions with respect to the deposit that depleting the value of the collateral.
· The depositee will not vary the terms and conditions under which any deposit account is maintained without the consent of the secured party.
In light of the above, it may be inferred that general regulations on secured transactions should clearly state that charge is the security used for deposits and provide detailed guidance on creation and enforcement of charge. Pending the enactment of those new rules, careful drafting of security documentation is needed to protect secured parties.-