04 noted issues on the establishment of effectiveness against third parties in secured transactions under Vietnamese law

04 noted issues on adverse effect on third parties in secured transaction

Civil transactions having a huge value are always applied in one or more security method(s) by parties to legally bind the party that shall perform the obligations. Accordingly, these security methods commonly become effective against third parties in secured transactions to protect the secured party and other relevant bona fide parties.

In this article, BLawyers Vietnam presents an overview of 04 crucial issues related to the establishment of adverse effects on third parties when parties agree on implementing the secured transactions.

1. What is the Vietnamese law regulating the effectiveness against third parties?

The prevailing law of Vietnam has no regulation about the definition of effectiveness against third parties. However, under other relevant provisions, the effectiveness against third parties is understood as the rights and obligations arising from parties in secured transactions that not only affect parties that directly participate in such transactions but also affect a third party if the parties establish a legitimate secured transaction, and the effective date from the time the security method is registered or from the time of the secured party lien or possession of the secured property.

2. The effective date of the effectiveness against third parties

The effectiveness against third parties in the secured transactions arises in the following circumstances:

  1. Circumstance 1: Regarding whether these security methods shall register at the competent authority under the law or the agreement of parties, the date of registration at the competent authority is the date when such security methods arise their effectiveness against third parties.
  2. Circumstance 2: Regarding cases that do not fall under Item (i) above and the secured party holds or possesses the secured property.
  3. Circumstance 3: In the event the secured property falling under the secured methods mentioned in Item (ii) above is assigned to other people to manage, the effectiveness against third parties arises from the following dates:
    • A party receiving a pledge of property, deposit, or security collateral over the secured property;
    • A property administrator directly receiving the secured property from a pledge party, deposit party, or security collateral party; and
    • A guaranteed agreement takes effect if other people directly administer a property that is used for pledge, deposit, or security collateral.
  4. Circumstance 4: If the secured property falls under the escrow deposit, the effectiveness against the third parties arises from the date such a collateral property is deposited into a blocked account at the credit institution in which the escrow is deposited.

Please note that a security method only becomes effective against the third parties if the guaranteed agreement satisfies the conditions of legal effectiveness.

3. The method of the secured party when the effectiveness arises against third parties

From the date the effectiveness arises against third parties, the secured party has the right to recourse over the secured property and is required to pay in the order of payment priority.

Accordingly, regardless of whether the secured property is transferred to another person due to purchase, exchange, transfer, or other relevant transmissions of ownership rights, possession rights or usage rights, or has benefits on the secured property that has no legal grounds, the secured party still has the right to recourse over such secured party.

In addition, if the securing party is deceased, or a legal entity ceases to exist, the secured party still has the right to recourse over the secured property but shall comply with the principles of payment priority and other regulations on inheritance.

However, please note that the secured property has no right to recourse over the following property:

  1. The secured property is sold, transferred, or transmitted on ownership rights based on the secured party’s consent and does not continue to be used for a guarantee of agreed obligations;
  2. The collateral is sold, replaced, or exchanged;
  3. The secured property is no longer exists or has been replaced by the other property; and
  4. Other circumstances under the laws.
4. The security methods raising the effectiveness against third party

When establishing a secured transaction, parties should note that the effectiveness against the third parties is not applied in all security methods to perform obligations which are regulated in Civil Code 2015. Accordingly, the effectiveness against the third parties only occurs in the 04 following security methods:

  1. Pledge of property;
  2. Mortgage of property;
  3. Retention of title; and
  4. Lien on property.

These security methods all have in common that the securing party will use their property which belongs to their ownership right to guarantee obligation performance towards the secured party. This is the condition for a security transaction to be effective against a third party.

The above is not official advice from BLawyers Vietnam. If you have any questions or suggestions about the above, please contact us at consult@blawyersvn.com. We would love to hear from you.

Date: 07 Mar 2024

Writer: Uyen Tran

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