Amid an unstable economy, businesses may encounter various legal issues, including the risk of insolvency. When this occurs, the handling of secured assets becomes a critical legal concern, especially when such assets are owned by a third party. This raises questions not only about the rights of financial institutions but also about the obligations and responsibilities of third parties in their legal relationship with the insolvent business.
In this article, BLawyers Vietnam includes 03 notes about dealing with secured assets owned by third parties during the bankruptcy process.
1. The right to handle secured assets
Under the law, a secured asset is any property an individual or organization uses to ensure full performance of their obligations. This includes pledges, mortgages, deposits, escrows, guarantees, retention of ownership, surety, or holding of property.
In credit relations, when a third party uses their property to secure an obligation of another enterprise, the financial institution is entitled to handle the secured property in the following cases:
- The due obligations are not fulfilled, or are incorrectly fulfilled, by the obligated party; or
- The obligated party must perform its secured obligations earlier than agreed due to a breach of the agreement or according to the law; or
- Other cases agreed upon by the parties or provided by law.
However, when the competent ’People’s Court (“Court”) accepts a bankruptcy petition from the business, the right of financial institutions to handle collateral will be restricted in order to ensure fairness between creditors and protect common interests during the bankruptcy process.
2. When can credit institutions “recover” secured assets owned by third parties during bankruptcy proceedings?
Pursuant to the Law on Bankruptcy 2014, bankruptcy is defined as a situation when a business loses its ability to pay and is declared bankrupt by the Court. Such Law stipulates that within 05 working days from the date the Court accepts the bankruptcy petition, the handling of assets of the insolvent business must follow these principles:
- The People’s Court and Arbitration center must temporarily suspend the resolution of civil, business, commercial, and labor cases involving the financial obligations of the business.
- Competent authorities must temporarily suspend the handling of collateral assets of the business in relation to secured creditors.
Thus, competent authorities must issue a decision to temporarily suspend the handling of collateral of the third party from the secured creditors, including financial institutions, within 05 working days from the date the Court accepts the bankruptcy petition. This is also clearly guided by the Supreme People’s Court in the Official Letter No. 199/TANDTC-PC dated 18 December 2020 regarding the resolution of some issues in bankruptcy cases.
The only case where financial institutions can continue handling collateral is when the debt is classified as bad debt under Resolution No. 42/2017/QH14 dated 21 June 2017 by the National Assembly on pilot bad debt handling for financial institutions. In this case, if the collateral of the third party is involved in a bankruptcy petition before the court, financial institutions still have the right to seize and handle the collateral according to the law. Additionally, the financial institution may request the Court to address this issue during the bankruptcy proceedings according to current regulations.
It can be understood that during the bankruptcy process in the Court, financial institutions are not allowed to “reclaim” the collateral of a third party. Instead, they must comply with bankruptcy law and await the Court’s decision on whether or not to open bankruptcy proceedings before proceeding with further actions.
3. Legal consequences of the Court’s decision to open or decline bankruptcy proceedings
Within 30 days from the date of accepting the petition for bankruptcy, the Court must issue one of the following decisions:
- Decision for opening bankruptcy proceedings: if the business is determined to be insolvent, the Court will open bankruptcy proceedings. In this case, the handling of secured assets will follow the resolutions adopted at the creditors’ meeting pursuant to the Law on Bankruptcy 2014. If the business recovery plan involves the use of secured assets, the creditors’ meeting must specify the duration of asset use and the handling method for the secured assets, and obtain the secured creditor’s consent for such usage. Clearly, the rights of financial institutions are impacted since, under the Court’s view, secured assets may be prioritized for use in the enterprise’s business recovery process. Consequently, the financial institution’s ability to dispose of secured assets will be delayed until the creditors’ meeting is convened.
- Decision for declining bankruptcy proceedings occurs when the business does not fall under the insolvency criteria specified above. In such cases, the temporary suspension of handling collateral will end, and financial institutions may proceed to “recover” the secured assets in accordance with the Law on Credit Institutions and related guiding regulations.
The handling of secured assets owned by a third party during the bankruptcy proceedings of an enterprise presents a complex legal issue, requiring a comprehensive understanding of the provisions set forth in the Law on Bankruptcy 2014 and related legal documents. Relevant parties, including credit institutions, the enterprise, and third parties, must work closely together and strictly adhere to legal procedures to safeguard their rights throughout the bankruptcy resolution process.
The above is not official advice from BLawyers Vietnam. If you have any questions or suggestions about the above, please contact us at info@blawyersvn.com. BLawyers Vietnam would love to hear from you.
Date: 13 February 2025
Writer: Thao Luu
