04 notes on applying the order of payment priority when processing secured loans

Determination of payment priority order

By law of Vietnam, a secured property for multiple obligations that is processed for debt recovery may give rise to a priority order for payment among several lenders who have jointly received this secured property. The payment priority order of each lender will depend on the legal status of the secured transaction that the parties have established with each other.

In this article, BLawyers Vietnam presents 04 notes that determine the priority order of payment over the lender when handling secured properties for debt recovery.

1. The principle of priority in the order of establishment of security methods

If security methods take effect against a third party as stipulated by law, the payment priority order shall be determined based on the order of the date of effectiveness establishment against third parties for each secured transaction.

Accordingly, in the event of having both registered security method and unregistered security method, and the secured properties are held or possessed by the secured party, the payment shall be given to the secured party in priority for the registered security method that has taken effect against the third parties.

The specific situation for this principle is as follows: C borrows VND2.5 billion from D and registers a mortgage of C’s land-use rights valued at VND5 billion to ensure the obligation performance; subsequently, C borrows VND2 billion from Bank B and registers a security method by the mortgage of such land-use right. Thus, when handling this land-use rights to recover debt, D will have priority in payment first because the security transaction with D is registered for the mortgage first.

2. The principle of priority in the application of security methods that take effect against third parties

In cases where a transaction has both security methods taking effect against third parties and security methods not taking effect against third parties, this principle shall be applied to determine the payment priority order.

Accordingly, security methods taking effect against third parties shall be paid in priority, and unregistered security methods will take effect thereafter while handling secured properties for debt recovery.

For instance, A uses housing ownership rights valued at VND10 billion to secure loans of VND5 billion and VND2 billion from Bank B and person C, respectively. However, only Bank B is registered as a property mortgage, and regarding the loan from C, its security method is not registered. Therefore, when handling this house to recover debt, Bank B will be prioritized for payment.

3. The principle of priority in the order of establishment of security method

In cases where the security methods do not take effect against third parties, the order of payment shall be determined according to the chronological order of establishment of the security method, which means the security property secured for the first obligation, will be paid first to the secured party.

For example, H borrows money from G with collateral secured by a land-use right. Subsequently, H continues to borrow money from F, also securing the loan with the same land-use right. It can be observed that as neither of these loans is registered during handling the secured property, G will be paid first, and then F.

4. Other notes

The above principles for determining the order of payment priority will not be applied in cases where the secured parties can mutually agree on the order of payment priority. Additionally, it is important to note that the right to priority payment is limited to payment within the scope of security for the party to whom the right is subrogated.

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: 05 Mar 2024

Writers: Uyen Tran and Nhi Le


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