Mr. Pham Quoc Tuan - Managing Partner
Mr. Than Trong Ly - Associate
Mr. Dang Phuc Nguyen - Junior Associate
INADEQUACY FROM A REAL CASE
In April 2017, the People's Court of H. City decided to initiate the bankruptcy process of Hoang Minh Co., Ltd. (“Hoang Minh”) due to the fact that Hoang Minh was in the bankruptcy status, failing to repay several debts overdue more than three (03) months. Among the debts Hoang Minh was obliged to pay, there was a loan of nearly VND 20 billion which Hoang Minh borrowed from XYZ Bank (the “Bank”), secured by the land use right of Mr. Le Quang Tam (the “Secured Assets”) under the mortgage agreement between Mr. Tam and the Bank (the “Secured Debt”).
As a secured creditor of Hoang Minh, the Bank has attended several working sessions and creditors’ meetings of Hoang Minh under the summons of the Court. However, at the beginning of November 2017, when receiving the Decision on declaration of bankruptcy of Hoang Minh (“Bankruptcy Decision”), the Bank was startled to find that the Bankruptcy Decision did not address the settlement of the Secured Debt of Hoang Minh to the Bank. This caused difficulties to the Bank when Mr. Tam argued that the Bank had no legal grounds to handle the Secured Assets because the Bankruptcy Decision does not provide this matter.
... TO THE UNCLEAR PROVISIONS OF THE LAWS ON BANKRUPTCY
In fact, this is an issue that many banks, as creditors of the enterprises declared to be bankrupt, may face. In principle, after the Court issues the Decision on initiation of a bankruptcy process, the asset management officer or the asset management or liquidation enterprise (“Asset Management Officer”) will propose the Judge to handle the debts suspended at the time the Court accepts the bankruptcy case. However, it is noted that under Article 41.3 of the Law on Bankruptcy, the suspension of settlement is only applied to the secured debts secured by the assets of the bankrupt enterprise rather than the ones secured by the properties of a third party. In other words, the Secured Assets will not be proposed for handling by the Asset Management Officer for settlement.
At the same time, the Law on Bankruptcy only provides Article 55.3 on the performance of the guarantor's property obligation on behalf of the principal when the principal becomes insolvent without any further guidance for handling with the debts secured by properties of a third party under other form such as pledge or mortgage. This makes the creditors secured by the properties of a third party very nervous because their legitimate rights and interests are not protected.
In addition, when dealing with the property issues in the Bankruptcy Decision, normally the content of such Decision only includes (i) the plan for distribution of value of the assets before and after the declaration of bankruptcy of the enterprise; and (ii) the liquidation of assets and auction of the remaining assets of the enterprise in which, the assets divided and liquidated are merely the properties of the enterprise after the inventory as regulated. Therefore, in practice there have practically been many cases in which the Court has dealt only with the matters related to the assets of the enterprise without considering the handling of the debts secured by the third party assets.
WHAT THE SECURED CREDITORS NEED TO DO TO PROTECT THEIR RIGHTS AND INTERESTS?
Although the status of “secured creditor” is recognized when the debt of a creditor is secured by the assets of a third party, the Law on Bankruptcy does not particularly provide the settlement of the secured assets in this case, so the creditors must proactively conduct some necessary measures to protect their legitimate rights and interests.
First of all, prior to the submission of the bankruptcy request by Hoang Minh, as the guarantor for the debt of Hoang Minh, the Bank may initiate a lawsuit against Mr. Tam, as the pledger, in order to request Mr. Tam to perform the debt payment obligations or realize the secured assets to repay the debt to the Bank (“Initiation of Lawsuit”). For the next steps, during the handle of the bankruptcy process of Hoang Minh, the Bank should work with the Judge or the Asset Management Officer to be recognized as the “secured creditor” and send a written document requesting the Court to recognize the result of settling the dispute with Mr. Tam. In such case, if Hoang Minh is declared to be bankrupt, the Bankruptcy Decision will recognize the settlement of the Secured Assets, consolidating the legal ground for conducting relevant procedures in the judgment execution stage.
If the Court does not recognize the handling of the Secured Assets in the Bankruptcy Decision, as a creditor of Hoang Minh, the Bank is entitled to request the Court to reconsider the Bankruptcy Decision issued. Pursuant to Article 108.1 of the Law on Bankruptcy, because the Bankruptcy Decision also resolves other issues in accordance with the law, the Bank may request the Court to record a separate item in the Bankruptcy Decision on the handling of Hoang Minh's debt secured by the Secured Assets of Mr. Tam. If the Court still refuses to settle the matter between Hoang Minh, the Bank and Mr. Tam relating to the Secured Assets, the Bank may conduct the Initiation of Lawsuit against Mr. Tam, if such action has not been conducted.
The case of the Bank as shared above by DIMAC is a practical experience for the creditors of a bankrupt enterprise to handle the debts secured by the assets of a third party.
 The names of the parties mentioned in this article are for calling and illustration purposes only and do not imply any indication of, relation to or association with or creation of disadvantages for any company having the same or similar name.
 Article 4.1, Law on Bankruptcy
 Article 4.4, Law on Bankruptcy
 Article 41 and Article 53, Law on Bankruptcy
 If the principal or both the guarantor and the principal are insolvent, the guarantor will take the liability of the principal in accordance with the provisions of the law.
 Article 108, Law on Bankruptcy
 Article 64, Law on Bankruptcy
 Article 111, Law on Bankruptcy