Right to seize collateral in trading and handling bad debts

Lawyers Duong Quoc Thanh - Nguyen Thanh Ha

Paralegal Hoang Viet Anh

On 21 June 2017, at the 3rd session of Legislature XIV, the National Assembly officially passed Resolution No. 42/2017/QH14 on pilot settlement of bad debts of credit institutions ("Resolution 42"). This is apparently a positive signal for Vietnam’s banking sector, given that the amount of bad debts, amount of implicit debt risk and amount of debt sold to Vietnam Asset Management Company currently unhandled account for 10.08% of the total outstanding loans of the banking sector (equivalent to about VND 600,000 billion, according to statistics reported by the Governor of the State Bank to the National Assembly, as at 31 December 2016).

One of the most noteworthy points in Resolution 42 is the right of credit institutions, branches of foreign banks, bad debt purchaser/managers ("Credit Institutions") to seize collateral. Accordingly, from the date Resolution 42 takes effect, if the Credit Institutions meet five (05) conditions stipulated in Article 7.2 of Resolution 42[1], they have the right to seize collateral to handle debts. The above provisions will create advantageous conditions and shorten time for the Credit Institutions in the process of dealing with bad debts since it is possible for them to directly seize collateral instead of performing the procedures for initiating a lawsuit which costs time and expenses to handle collateral.

Additionally, in connection with Article 7, a question is raised that if the collateral is currently a subject of a lawsuit case, how can the Credit Institutions start to seizure the collateral when they are fully meet the remaining conditions mentioned in Article 7.2 of Resolution 42. At this time, two (02) cases need considering:

Case 1: The collateral is a subject of a civil case in which the Credit Institutions are the plaintiff requesting the competent Court to seize the property

In this case, the Credit Institutions only need to withdraw their petition in accordance with the provisions of the current Civil Procedure Code. Accordingly, after making sure that the collateral is no longer a subject of any case being processed by the Court, the Credit Institutions may start seizure procedures based on the provisions of Resolution 42.

However, kindly note that the Credit Institutions should withdraw the petition only if the mortgage contract clearly states that the Credit Instructions have a right to seize the collateral. If the mortgage contract only regulates vaguely that the Credit Institutions have a right to handle the collateral, the Credit Institutions should not withdraw the petition because the terms on realization of the collateral do not explicitly stipulate the right to seize collateral.

Case 2: The collateral is a subject in a lawsuit between the guarantor (or the holder of the collateral) and another third party or the collateral is currently a subject in criminal case

In this case, the Credit Institutions are obliged to wait for the Court's decision in order to carry out the subsequent appropriate steps. This may result in the fact that the Credit Institutions spend too much time waiting for such decision or that they even could not seize the collateral because of the Court's decision. Therefore, in order to avoid this situation, before signing a security contract, the Credit Institutions should have measures to ensure and also regulate in the security contract that (i) the collateral is not a subject of a dispute with any party; and (ii) consent of all co-owners or relevant parties (if any) is obtained to use the asset as a security measure in the security contract.

Moreover, in Article 8 of Resolution 42, the Credit Institutions as the plaintiff in a case, have a right to request the Court to apply simplified procedures on settling disputes related to obligations to deliver the collateral or the right to realize the collateral of bad debts when the parties fail to reach an agreement in accordance with the security contract on realization of the collateral of bad debts. In our experience, the application of the simplified procedures may shorten litigation time by 3 to 7 months in comparison with the normal procedures.

However, under conditions specified in Point a and b, Clause 1, Article 317 of the 2015 Civil Procedure Code[2], the Credit Institutions will encounter difficulties applying the above-mentioned simplified procedures at the Court since in most of the lawsuits initiated at the Court, the borrowers or guarantors do not cooperate, not acknowledging their obligations or even trying to fly.

Having a resolution on settling bad debts is urgently necessary to canalize flow of the economy. In particular, Resolution 42 will impact the economy in that it will reduce social costs and bank interest, from which the enterprises, borrowers and banks would benefit. However, exercise of the right to seize the collateral of the Credit Institutions would never be easy due to non-cooperation of the borrowers or guarantors. At that time, the right to seize the collateral of the Credit Institutions should have support from the competent authorities or the State agencies to enforce the right to seize the collateral and coerce the borrowers or guarantors to hand over the collateral.

From the Credit Institutions’ view, with Resolution 42 coming into effect, dealing with bad debts will help reduce costs of risk prevention. Furthermore, the Credit Institutions may improve their credit quality because the borrowers will become aware of their loans once the regulations on realizing the collateral are clearly defined.

 


[1] Article 7. Right to seize collateral

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2. A credit institution or the bad debt purchaser/manager is entitled to seize collateral put up by a grantor or holder of collateral only if it satisfies fully the following conditions:

a) Occurrence of any case in terms of treatment of collateral prescribed in Article 299 of the Civil Code;

b) The security agreement clearly indicates the grantor’s consent to the credit institution’s right to seize the collateral upon occurrence of the case of treating collateral as per the law;

c) The secured transaction or security interests has been registered as prescribed by law;

d) The collateral is not in dispute in a case that has been accepted but remained unsolved or has been resolving at an authorized court; the collateral is not put under temporary emergency measures; and the collateral is not distrained or under judgment enforcement as prescribed by law;

dd) The credit institution or bad debt purchaser/manager has fulfilled obligation to publish information as prescribed in Clause 3 or Clause 4 of this Article.

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[2] Article 317. Conditions for application of simplified procedures

1. The Court shall resolve a case according to simplified procedure when all of the following conditions are satisfied:

a) The case has simple details, clear legal relationship and the involved parties have admitted their obligations; materials and evidences are sufficient, ensuring the sufficiency of grounds for the resolution of the case and the Court does not have to collect materials/evidences;

b) Addresses of residence and headquarters of all of involved parties are determined;