The Government has submitted to the National Assembly a report on results of the settlement of bad debts under Resolution 42/2017/QH14 (Resolution 42).
Accordingly, as of December 31, 2021, after nearly five years of implementation of Resolution 42, an amount of bad debts valued at VND 380.2 trillion has been settled, equaling 47.9 percent of the total amount of bad debts to be settled under Resolution 42 plus bad debts arising after Resolution 42 came into force. Of this amount, the debt payment from customers is VND 148 trillion, accounting for roughly 40 percent, while the remainder comes from the application of the solutions prescribed in Resolution 42 such as selling bad debts and collaterals at market value, exercising the right to seize collaterals, transferring collaterals that are real estate, etc.
The Government’s report also highlights difficulties in the application of solutions for debt recovery prescribed in Resolution 42. For example, Article 7 of the Resolution stipulates that credit institutions, foreign bank branches and organizations that trade in or settle bad debts may seize collaterals of the bad debts from the guarantors if meeting several conditions one of which was “the security agreement contains an agreement on the guarantor’s consent to grant the credit institution or foreign bank the right to seize the collaterals in accordance with law”. However, as Decree 163/2006/ND-CP on secured transactions did not mention such agreement, security agreements signed before the effective date of Resolution 42 do not directly stipulate this content. Therefore, in order to be eligible to exercise the right to seize collaterals as mentioned above, credit institutions must renegotiate with the borrower/guarantor to re-enter into a security agreement with a seizure clause. However, there is often a shortage of cooperation from customers, which makes it difficult for credit institutions to seize collaterals. Therefore, many banks and credit institutions have chosen to sell bad debts of customers to third parties.
Mechanism for trading in enterprise debts
In accordance with the 2020 Law on Investment, which took effect on January 1, 2021, debt trading is not regulated as a conditional business line. Thus, except enterprises established and managed by the State, debt trading activities are regulated in accordance with the civil law (contracts for purchase and sale of property rights, debt collection rights) and law on enterprises (for debt trading enterprises).
What is a debt purchase and sale contract?
The right to collect debt is regulated in Article 450 of the 2015 Civil Code as a property right that can be purchased, sold and transferred. According to Article 13 of Circular 09/2015/TT-NHNN of the State Bank of Vietnam (SBV) (Circular 09), prescribing debt purchase and sale by credit institutions and foreign bank branches: “Debt purchase and sale contract means a written agreement on the transfer of a creditor’s right to claim a debt arising from the lending operation or a debt to be paid on a third party’s behalf in the guarantee operation whereby the debt seller transfers the creditor’s ownership of the debt to the debt purchaser and receives a payment from the debt purchaser.” Thus, the debt purchase and sale contract is an agreement on assignment of ownership of the debt, the right to request the borrower to repay the debt and other obligations of the debt seller to the debt purchaser. This is a transaction that does not affect any of the interests of the debtor. Therefore, in the absence of the law, the parties can enter into a debt purchase and sale contract without the consent of the debtor.
Conditions of validity
Regarding format of contract, according to Article 13 of Circular 09, the debt purchase and sale contract must be made in writing and signed by the legal representative or authorized representative of the debt purchaser and debt seller. Currently, the law does not require debt purchase and sale contracts to be notarized. Therefore, when necessary, the parties can agree to notarize or authenticate the debt purchase and sale contract.
Regarding content of contract, under Article 4 of Circular 09, the debt to be purchased and sold must satisfy the following conditions: (i) there are dossiers and related documents and records that fully and accurately show the state of the debt; (ii) there is no written agreement on ban on debt purchase and sale; and (iii) the debt is not being used to secure the fulfillment of a civil obligation at the time of debt purchase and sale, unless there is a written consent of the secured party on debt sale.
A debt purchase and sale contract must contain the following main contents: time of signing the contract; names and addresses of the parties to the contract; names and positions of the representatives of the parties to the contract; name(s) and address(es) of the debtor and parties (if any) related to the purchased and sold debt; details of the purchased and sold debt, including amount and term of the debt, borrowing purpose, and book value of the debt by the time of purchase and sale; measures (if any) to secure the fulfillment of the payment obligation of the debtor regarding the purchased and sold debt; price of debt sale, payment mode and time; time, mode and procedures for the transfer of documents on the debt, including also dossiers and documents on security assets for the debt (if any); the time when the debt purchaser takes up the debt seller’s rights and obligations to the debt; rights and obligations of the debt seller and debt purchaser; liability of the parties for breaching the contract; and settlement of arising disputes.
In addition, the parties may reach agreement on other contents in the debt purchase and sale contract that are not contrary to the provisions of Circular 09 and relevant regulations.
Security assets in debt purchase and sale transactions
Data from the SBV showed that by the end of 2021, the ratio of bad debts in the Table of the system of credit institutions was 1.9 percent (an increase of 0.21 percent compared to the 2020’s figure). The gross bad debt ratio was 7.31 percent, up sharply from the rate of 5.1 percent at the end of 2020 and nearly equal to the rate of 7.4 percent of 2017. The inflation in bad debt can be attributed to the outbreak of the Covid-19 pandemic, especially the fourth wave with Delta variant in 2021 that has caused heavy losses to production and business activities of enterprises as well as people’s livelihood. However, banks always reassure shareholders that the collateral of the debt is mainly real which is very secure, and there is nothing to worry about.
One of the measures to handle bad debts specified in Resolution 42 is to allow credit institutions to sell debts along with the sale of security assets. Thus, depending on the purpose of the debt purchase and in case the property is not distrained, we can regard this as collateral purchase and sale. Although giving credit institutions and debt buyers the right to seize security assets, there are many different interpretations and applications of laws in terms of the process of receiving and handling debts secured by real estate. It is due to the high value of assets, governance of state agencies, and provisions of specialized laws such as the Land Law, Investment Law, Enterprise Law, Law on Real Estate Business, etc. In fact, when handling real estate projects to recover debts, we have also encountered many difficulties and obstacles in meeting the procedures, and conditions for the sale and transfer of projects, while the investor (debtor) did not cooperate, intentionally obstructing and prolonging the process of handling assets by sending complaints to competent state agencies to prevent the process of handling secured assets. In some other cases, the collateral is a real estate project under construction but the investor is no longer able to continue the project implementation. Credit institutions are also not allowed to do real estate business, so they cannot continue to implement housing projects by themselves, but must seek a qualified investor that will further implement the projects and carry out the procedures necessary to transfer and issue a title to the property to a future purchaser of the
Noticeable legal issues
Financial/legal due diligence
Any purchaser who wishes to purchase a debt must carry out the procedure of financial and legal due diligence. The purpose of the financial and legal due diligence is to assess the capacity of debt repayment and legal issues about the debt, obligations to other third parties (if any) or the type and residual value of collaterals. It is usually the financial advisor and legal consultant who will implement such due diligence procedures, and the advisors/consultants will assess the provided documents and make recommendations to the client before the purchaser decides to purchase the debt.
However, the due diligence cannot comprehensively guarantee that the debt does not contain any of potential problems and legal risks if the debtor intentionally conceals and fails to provide sufficient information to the advisors/consultants. Therefore, in any purchase and sale transaction, the honesty of the parties is always highly valued.
Appraisal of the reserve price of the debt
Although the Government has issued a decree to detail the appraisal of the reverse price of bad debts, Decree 61/2017/ND-CP, the implementation of such appraisal faces many difficulties, especially in determining the reverse price of high-value debts and/or the value of property that fluctuate over time, such as real estate.
Execution of civil judgments
There are many obstacles for the judgment execution agencies during the process of executing judgments which result from intentional non-cooperation of the judgment debtor, leading to many difficulties in the inventory of assets serving judgment execution, or ambiguity in court judgments that may cause apprehension to judgment executors.-