NEW DECREE ON SECURITY FOR PERFORMANCE OF OBLIGATIONS

LEGAL UPDATE

On 15 May 2021, Decree No. 21/2021/ND-CP, guiding the implementation of the Civil Code of 2015 on security for performance of obligations (Decree 21) came into force. It replaces Decree No. 163/2006/ND-CP as amended by Decree No. 11/2012/ND-CP dated 22 February 2012 (collectively referred to as Decree 163).

Especially the banking and financial sectors have been waiting for this regulatory guidance, as the Civil Code of 2015 lacks detailed instructions regarding security given for the performance of obligations. This lack of specific guidance has caused difficulties in implementing such measures in practice, particularly because secured transactions are routinely performed by commercial banks.

Hereafter we will set out the most important points.

1. Disposal of Collateral

Repossessing or otherwise disposing of a security asset to recover payable debts is usually the creditor’s ultima ratio. This is because the procedures for such disposal, although usually well-supported by a security contract, are generally time-consuming, troublesome and may require the debtor’s cooperation (e.g. by providing signatures).

Decree 21 now seems to make effort to resolve these difficulties with salvaging debt by disposing of a security asset. The new decree provides for a number of cases in which the transfer of an asset’s ownership would have to obtain written consent by the owner, a security contract or other documents evidencing the prior transfer of ownership of the security asset may be now applied to replace those written instruments.

This is not the first time that Vietnam’s regulators have chosen this mechanism for asset transfer. Already since 2014, when the Ministry of Justice, the Ministry of Natural Resources and Environment and State Bank of Vietnam jointly issued Circular 16/2014/TTLT-BTP-BTNMT-NHNN (Circular 16), parties secured by an asset (e.g. real estate) may be entitled to sign documentation for the transfer of this asset on behalf of the securing party. This requires the submission of an original copy of the notarised security contract or any other documents evidential of the underlying security agreement.

Circular 16 has been applied by some competent local departments and aided them to dispose of a variety of secured assets, mostly in the form of real estate, while other authorities were more reluctant to tap into this legal possibility. For instance, the department(s) of planning and investment have likely refused to approve the transfer of shares by way of security. It is likely that – on the back of the new Decree – Vietnamese authorities will be more willing and confident to support such applications for asset transfer.

2. Prevalence of Specialised Laws and Parties' Agreement

As an amendment to Decree 163, Decree 21 sets out the principles of application of law and the parties’ agreement(s). Despite the general scope of the law, in article 4.1 of Decree 21, it declares itself subsidiary to any industry or asset specific laws and regulations. It thus appears that law makers want to see Decree 21 (as a lex generalis) only applied to general security transactions, whereas more specific laws will prevail as a lex specialis .

Article 4.2 of Decree 21 also prioritises the parties’ agreement on the security measures. Therefore, if such agreement (i) diverges from the provisions of Decree 21, (ii) conforms to basic principles of civil laws, (iii) does not violate conditions for effectiveness of civil transactions, and (iv) does not violate limitations on execution of civil rights, then such agreement shall prevail. This amendment puts the parties to security agreements into a controlling position. As long as their agreement remains within legal guidelines, commercial terms of security agreements (regarding the disposal of secured assets) can be freely negotiated and will be enforceable under Vietnamese law.

3. Alteration of Collateral

Article 21 of Decree 21 is a new provision which aims to resolve “deadlock” situations in case the collateral undergoes an alteration during the performance of secured obligations. The lawmaker now recognises ten circumstances of collateral alterations either upon agreement, or without the agreement of the involved parties. Parties may thus agree on certain altering acts, such as asset-splitting, consolidation, merger, or the amalgamation of collateral with other assets, which results in the creation of a (legally) new asset.

Articles 21.1 to 21.4 set out the principles to determine the designated collateral inside newly formed assets. For example, if the asset is a result of splitting the collateral (including a change of ownership), such asset shall no longer be part of the collateral. Decree 21 also provides a template solution for cases in which the parties agree to use the collateral as capital contribution to a legal entity. These new provisions increase predictability and will thus be helpful to mitigate disputes among parties by helping to determine the fate of the collateral subsequent to its alteration.

If alteration of collateral occurs without the agreement of the parties – e.g. due to unilateral acts by a party, or by a governmental body or authority – Articles 21.5 to 21.10 of Decree 21, in addition to the Civil Code and Decree 163, provide some principles to determine what happens to assets after alterations. For instance, in case collateral is appropriated (by the government) due to national security and defense purposes, any compensation granted for the collateral’s appropriation shall replace the collateral.

4. Effect Against Third Party

Registration of a security interest is legally required in some cases (e.g. registration for mortgage of land use right) and may be optional in others. In optional cases, the registration is made with the National Registration Agency for Secured Transactions (NRAST).

Article 11.1 of Decree 163 imposed registration requirements if a party’s security interest was to be enforceable against third parties. Following the principle of publicity, as widely known in other jurisdictions, third parties would only be bound by two other parties’ security agreement(s), if these had been duly registered with NRAST or other authorities, as applicable.

This mechanism is not proliferated in Decree 21, which might mean that the registration will no longer be absolutely required to render security agreements third-party enforceable. Article 23 of Decree 21 pins the agreement’s effect against third parties on the question whether or not such security contract has already entered into force.

Depending on the type of security in question, third-party enforceability may also depend on other events (e.g. from the time the secured party “takes control of” the collateral if the security interest has not been registered).

5. Future Collateral

Under Article 8 of Decree 163, the secured party would only be entitled to future collateral (i.e. collateral, which had not been created yet) from the moment that the securing party had rights over such collateral. This view has now changed, as Article 24 of Decree 21 declares the relevant time to be the date that such collateral is formed, seemingly regardless of when (and if) the securing party obtains the rights over the same or not.

6. Investment in Mortgaged Assets

According to Article 321.2 of the Civil Code, the securing party has the right to invest (in) the security assets in order to increase their value. Decree 163 further strengthens this right by prohibiting the secured party to restrict the securing party (or a third party) to invest in the mortgaged asset to improve its value. This permission to invest has crystallized problems, each time there was a decrease in value of an asset (e.g. after the investment defaults).

Article 20 of Decree 21 now provides some protection to the secured party, by requiring the secured party’s permission if (i) such investment is conducted by a third party or (ii) the mortgagor invests in mortgaged assets thereby forming new assets that are not included in the mortgaged assets as agreed upon under the mortgage agreement. More importantly, the secured party shall also have the right to request termination of any investment in the mortgaged assets if there is any decrease in its value.

The securing party and/or third party are also obliged to compensate the secured party for any losses incurred due to any failure to comply with provisions in relation to investment in the mortgaged assets (Article 20 of Decree 21).

7. Security over Marital Property

As a matter of due diligence, during most Vietnamese M&A transactions involving individual sellers, the person’s marital status plays a role. Despite additional procedural costs and expenses, we would thus usually advise our clients to require a certificate of the sellers’ marital status and (if married) a waiver by their spouse over the shares to be sold and any interests therein. To avoid any unclarities about the validity of a transaction, and as to circumvent the provisions on ‘communal property’ provided under the Law on Marriage and Family, this has become common practice in Vietnam.

This has applied similarly to security transactions in Vietnam. Decree 21 now introduces some relief to this procedure in security transactions, clearly stating that, unless otherwise agreed by the two spouses and the secured party has agreed with or been notified of the same, individuals are entitled to establish and implement a security contract over an asset belonging to two spouses without consent (which is a deposit balance at a credit institution, securities or other movable assets which are not required to be registered by law), if they are recorded or deemed as the holder of the asset.

This relief reflects the bona fide principle under both the Civil Code 2015 (Article 133.1) and the Law on Marriage and Family (Article 32), whereby the secured party is usually in good faith about the security providers sole proprietorship and should therefore be protected against any spousal disaccord in this regard.

That said, the enforceability of this regulation is currently being challenged by legal minds, invoking their interpretation of Article 36 of the Law on Marriage and Family. They propose to extend the requirement of written consent from this law (regarding the use of spousal property in business), to the question of sole spousal disposal over communal property as collateral in security agreements.

Therefore, where communal property is used to secure an obligation, it is advisable to run a background check on or obtain written spousal approval, to ascertain the legality and enforceability of the security facility.

8. Conclusion

Decree 21 marks a significant effort of local lawmakers in bringing the legislation on security transactions to the next level of maturity. In the context of the legislative incentive to streamline procedures and increase transparency for secured parties, Decree 21 forms an important steppingstone. As usual, working with these new regulations in practice over the coming months will be the litmus test of this new legal framework. Until there is a sufficient body of reference cases, we therefore still recommend seeking experienced legal advice to secure the enforceability of security transactions against possible uncertainties under Decree 21.

For more information, please contact:

Mark Oakley / Managing Partner

mark.oakley@acsvlegal.com

Leif Schneider / Senior Associate

leif@acsvlegal.com

Huyen Pham / Senior Associate

huyen.pham@acsvlegal.com

© 2021 ACS Legal Vietnam Company Limited – All rights reserved

This legal update is not an advice and should not be treated as such.

Open in PDF: New Decree on Security for Performance of Obligations