18 FAQs about establishing and conducting security contracts under Vietnamese law

Eestablishing and conducting security contracts

BLawyers Vietnam would like to present the following 18 Frequently Asked Questions about provisions in Vietnamese law on establishing and conducting security contracts.

1. What is collateral?

Collateral is property used by the securing party to ensure the secured party’s obligation execution through a security measure.

The properties used to ensure the obligation execution include:

(i) The existing property or off-plan property, unless the Civil Code and other relevant laws prohibit trading, transfer, or other change of ownership rights at the time of establishing the guarantee contract;

(ii) The property sold under property sale contracts with retention of ownership;

(iii) The property subject to obligations under infringed bilateral contracts in cases where there are lien measures;

(iv) The property under the general public’s ownership if prescribed by relevant laws.

2. What types of security measures does the Vietnamese law permit to ensure obligation execution?

There are 09 measures in place to ensure obligation execution, specifically:

(i) Pledge of property;

(ii) Mortgage of property;

(iii) Deposit;

(iv) Security collateral;

(v) Escrow deposit;

(vi) Title retention;

(vii) Guarantee;

(viii) Fidelity guarantees; and

(ix) Lien on property.

3. Can an obligation be secured by multiple properties?

Yes, it can. In cases where multiple properties are used to secure the execution of 01 obligation, the scope of security of each property is determined as follows:

(i) In cases where the securing party and the secured party have an agreement in the contract: The security scope of each property is determined according to the agreement of the parties.

(ii) In cases where the securing party and the secured party do not have an agreement in the contract: Any property can be used to completely secure the obligation execution.

4. What property rights can be used to secure the performance of obligations?

The party holding rights in the contract can use their property rights to ensure the performance of the following obligations:

(i) Right to ask for debt repayment, collectibles or request payments;

(ii) Right to extract, and manage investment projects;

(iii) Right to lease, and sublet;

(iv) Right to benefit from commissions, profit or other interests formed by money arising from contracts;

(v) Right to receive damages;

(vi) Other rights valued in money arising from the contract.

5. How is the security contract regulated?

(i) About the parties in the security contract

The parties in a security contract may include:

  • The securing party and the secured party; or
  • The securing party, the secured party, and the person with secured obligations.

(ii) About the form of the security contract

The security contract can be expressed in the following two forms:

  • The separate contract; or
  • Provisions on ensuring the obligation execution in other forms of civil transactions in accordance with the regulations of law.

(iii) Types of security contracts

There are 08 types of security contracts including the following:

  • Property pledge agreement;
  • Property mortgage agreement;
  • Deposit agreement;
  • Collateral agreement;
  • Escrow agreement;
  • Property sale contract with retention of ownership;
  • Guarantee contract;
  • Fidelity guaranteed contract.
6. From what time does the security contract take effect?

The validity of a security contract is determined according to the following 03 cases:

(i) A notarized contract: Taking effect from the time of notarization.

(ii) A non-notarized contract: Taking effect from the time agreed upon by the parties.

(iii) A non-notarized contract and the parties have no agreement on the validity of the contract: Taking effect from the time the contract is concluded.

7. In what cases can the securing party and secured party be changed?

The securing party and secured party can be changed in 02 cases as follows:

(i) In cases where the right to collect debts, receivables, or other rights to request payment is sold, transferred or otherwise transferred in terms of ownership: The buyer, the transferee, or the receiver of other kinds of transfer in terms of ownership will become the secured party.

The new secured party must inform the securing party about the change of the secured party before the secured obligations are implemented under the agreement or under laws.

(ii) In cases where the securing party, the secured party or the person with the secured obligations is a reorganized legal entity: The inheriting party will become the securing party, the secured party or the person with the secured obligations.

Note: When there is a change in the securing party or the secured party in the above cases, there is no need to re-establish the security contract.

8. In what cases is the security contract declared nullified?

Pursuant to the Civil Code 2015, a security contract is declared nullified if it falls into the following cases:

(i) The security contract does not meet one of the conditions for validity of civil transaction, specifically:

  • The parties in the contract do not have legal personality and/or legal capacity in conformity with such security contract;
  • The parties in the transaction do not act entirely voluntarily;
  • The purpose and contents of the contract are contrary to the law and/or social ethics.

(ii) The security contract is established for the purpose of concealing another transaction;

(iii) The security contract is established due to a mistake that causes one party or parties to fail to achieve the purpose of the contract;

(iv) Any party entering into a security contract as a result of deception, threat or compulsion;

(v) The security contract is established by a person who lacks cognition and behavioral control;

(vi) The security contract does not comply with the law on the form of the contract.

In addition to the cases of invalidity under the Civil Code 2015 mentioned above, the security contract can also be nullified pursuant to other relevant laws.

9. How are the procedures for ensuring the performance of obligations in a security contract handled when a portion of its substance is found nullified?

When the secured obligations under the following contract contents are deemed nullified, they will become unsecured obligations, specifically:

(i) In cases where the collateral is jointly owned (excluding cases that the collateral is the common property of spouses): The substance belongs to the rights of the person not participating in the contract.

(ii) In cases where the securing party or the secured party consists of multiple individuals: The substance related to one or multiple individuals who do not have legal personality or legal capacity in compliance with such contract.

(iii) In cases where 01 obligation is secured for fulfillment by multiple properties: The substance related to one or multiple ineligible properties for use as security for obligation execution.

(iv) Other cases pursuant to the Civil Code and other relevant laws.

10. When the security contract or the contract with secured obligations is nullified or canceled or unilaterally terminated, how is the validity of the remaining contract determined?

When one of the two above-mentioned contracts is nullified or canceled or unilaterally terminated, the validity of the remaining contract is determined as follows:

(i) In cases where the security contract is nullified or canceled or unilaterally terminated: The validity of the contract with secured obligations does not terminate.

(ii) In cases where the contract with secured obligations is nullified or canceled or unilaterally terminated, proceed as follows:

  • The parties have not executed the contract with secured obligations: The validity of the security contract terminates.
  • The parties have executed the substance or completion of the contract with secured obligations: The validity of the security contract does not terminate.

The secured party has the right to handle the collateral to pay for the repayment obligations to the parties to whom they are obligated.

11. How is a security contract using marital property established?

Establishing a security contract using marital property is implemented as follows:

(i) For marital property in the balance of deposits in credit institutions, branches of foreign banks, securities, or other movable properties that are not required by the law for registration.

Except in the following instances, any spouse who makes a deposit in the form of money or securities or owns moveable property may establish and implement security contracts and/or security measures on their own:

  • The spouse applies the property regime according to the agreement, and this regime has different regulations. At the same time, the secured party has been informed of these regulations;
  • The spouse has another agreement and the secured party has been provided with information about this agreement.

(ii) In cases where spouses agree to use shared properties to contribute capital to a legal entity or to establish a sole proprietorship (“SP”).

In this case, the contributor and/or the owner of the SP can, by themselves, establish and execute the security contract related to the contributed capital in the legal entity and properties belonging to the SP.

Note: If the spouses do not have a written agreement on the use of shared properties to contribute capital to a legal entity, but satisfy the following two conditions, they are regarded as having reached an agreement:

  • Contribution has been accurately implemented as prescribed by law; and
  • Individuals who do not directly conduct business are aware of or should be aware of the contribution but do not object to it.

(iii) The security contract was established according to sections 11.1 and 11.2 above but the spouses are divorced.

In this case, the spouse who has established the security contract will continue to execute that contract, unless a legally enforceable judgment or decision of the Court states otherwise.

12. Can the pledged property be sold, replaced, exchanged, or donated?

Maybe. The pledged property can be sold, replaced, exchanged, or donated if it falls into the following two cases:

(i) The pledgee agrees; or

(ii) If other relevant laws permit the pledgee to sell, replace, exchange or donate the pledged property, the pledging measure will be terminated from the time when the buyer/replacement recipient/gift recipient of the property establishes ownership rights over that property.

13. Must the mortgagor notice when mortgaging leased or lent property?

Yes, he/she/it must. In cases where leased or lent property is used for mortgaging, the mortgagor must inform the mortgagee of the lease or borrowing.

In cases where the mortgage measure has entered into effect against a third individual and the mortgagor leases or lends collateral without informing the mortgagee, the lease/rental contract will be terminated at the time of collateral processing.

14. What are the conditions for economic organizations that are not credit institutions to mortgage land-use rights and assets attached to land owned by households and individuals?

When mortgaging land-use rights and assets attached to land from households and individuals using land, economic organizations that are not credit institutions must meet the following conditions:

(i) The mortgagee is the economic organization according to the Law of Land;

(ii) Accepting mortgage as security for obligation execution does not violate any prohibitions of the Civil Code and other relevant laws, and does not contradict social morals in contract relationships relating to investment projects, construction projects, outsourcing projects, services and other transactions;

(iii) In cases where the secured obligations include interest payment, interests that arise as a result of late payment, interest of principal of undue debt, interest of principal of due debt, interest of unpaid interest or other interest cannot exceed the agreed limit of interest under the Civil Code.

In cases where the parties have agreed on the handling of the obligation to repay overdue debts of the party with the obligation and there are no other regulations, only one processing is carried out for each act of failure to repay the debt on time.

(iv) Other conditions for the execution of civil transactions under the Civil Code and other relevant laws.

15. If the mortgaged property is the subject of a nullified civil transaction, how is the mortgage contract processed?

The mortgage contract is not nullified when the mortgaged property has been transferred to the bona fide mortgagee in the following cases:

(i) The mortgaged property is not required to be registered;

(ii) The mortgaged property has been registered at a competent authority but but has been transferred to the bona fide mortgagee immediately and this person relies on that registration to establish and execute the transaction.

However, if the property must be registered but has not been registered, the security contract will be nullified, except for the following two cases:

(i) The mortgagee receives this property through auction at a competent organization;

(ii) The mortgagee receives this property under a judgment or decision of a competent authority and is the owner of such property, but then this person is not the owner as a result of the judgment or decision being amended or annulled.

Note: The transfer of mortgaged property occurs when the mortgagor does not transfer the property but the mortgagee has held the Certificate of mortgaged property under the agreement or has taken other necessary practical measures to ensure that the mortgagor does not violate obligations.

16. What types of guarantee agreements are there?

The guarantee agreement can be presented in the following 3 forms:

(i) A separate guarantee contract;

(ii) The guarantee letter; and

(iii) Other types of guarantee commitment.

17. When is the guarantor required to carry out the guarantee duty?

The guarantor must carry out the guarantee duty when the secured obligation is violated on one of the following grounds:

(i) The obligor fails to carry out the obligation in a timely manner;

(ii) The obligor fails to carry out the obligation before the deadline agreed upon;

(iii) The obligor fails to adequately carry out the obligation;

(iv) The obligor fails to correctly carry out the obligation;

(v) The obligor lacks the capacity to carry out the obligation under the Civil Code;

(vi) Other grounds agreed upon or prescribed by the Civil Code and the relevant laws.

When the guaranteed obligation is violated due to one of the above mentioned grounds, the obligee must inform the guarantor that they need to carry out the guarantee duty.

18. What rights and obligations does the guarantor have when carrying out the guarantee duty?

(i) The guarantor has the following rights:

  • When receiving notice from the obligee, the guarantor has the right to refuse carrying out the duty in cases where the grounds provided by the obligee is not within scope of guarantee commitment;
  • After carrying out the guarantee duty, if the obligor still conducts the guaranteed obligation, the guarantor has the right to request the obligee to return the received property or the corresponding value of the fulfilled guarantee duty.

(ii) The guarantor has the following obligations:

  • Carrying out the guarantee duty within the deadline agreed upon;
  • In cases where no agreement is reached, the guarantor must carry out their duty within a reasonable period from the date on which they receive notice of the obligee.

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: 9 Jan 2024

Writer: Chi Huynh

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