Extract taken from 'The Lending and Secured Finance Review' – edition 5

Credit support and subordination

i SecurityMethods of securityMortgage

Mortgage is the most common form of security interest granted over property in Vietnam. By definition, a mortgage is a transaction in which the mortgagor uses its own property to secure the performance of the obligation to the mortgagee without giving possession of the property to the mortgagee. The core feature of a mortgage is that the mortgagor retains the use and possession of the mortgaged property. This feature distinguishes a mortgage from a pledge in which the pledgee takes possession of the property. As a result, a mortgage is typically taken with regard to not only immovable property but also intangible property, which is physically undeliverable, and movable property if the lenders do not wish to take possession of the movable property. Mortgage will also be taken with regard to movable property if the possession of the movable property by the lenders will cause material consequences to the business and operation of the borrower (e.g., material machinery and equipment of the borrower).

Pledge

In a pledge, the pledgee will take possession of the property. Given this possession feature, a pledge is typically taken with regard to movable property only, and the law imposes on the pledgee an obligation to take care of and preserve the pledged property. If the pledgee loses, mislays or damages the pledged property, the pledgee must compensate the pledgor for the losses and damage.

Mortgages and pledges are forms of security transactions rather than forms of transfers of title to assets. Indeed, the transfer of title to the assets from the mortgagor or pledgor to the mortgagee or pledgee only occurs upon completion of enforcement of the mortgage or pledge.

Other forms of securities

The law also provides for other forms of security interests, including, among others, guarantees, securities by way of deposit, security collateral, escrow accounts, retention of title, pledges of trust and liens.

Assignments by way of security, even though generally accepted in many jurisdictions, are not recognised under Vietnamese law as a security transaction. Since an assignment by way of security is not among the forms of securities recognised by Vietnamese law, the creation of security over contractual rights, bank accounts and equity interests is generally achieved by way of a mortgage.

Assets available for securityAvailable secured assets

Under Vietnamese law, assets are defined to include objects, money, valuable papers (e.g., shares or bonds) and property rights valuable in money. Property rights are in turn defined to include, among others, rights to receive payment under contracts, rights to dividend and other equity interests, intellectual property rights and other rights arising from assets.

Assets are categorised in two ways: immovable or movable assets. Immovable assets include the following:

  1. land;
  2. houses and construction structures attached to land (e.g., buildings, plants);
  3. other assets attached to land, houses and construction structures; and
  4. other assets as provided by law.

Movable assets are assets that are not immovable assets (e.g., equipment, inventory, bank accounts and securities).

Secured assets can be an existing asset at the time of the creation of the security or an asset to be created in the future (a future asset). Secured assets must be under the ownership of the securing party and be identifiable.

An economic organisation, subject to the land lease or allocation type, is entitled to mortgage the land use right and assets attached to the land to credit institutions authorised to operate in Vietnam. Although foreign bank branches, joint venture banks and wholly foreign-owned banks operating in Vietnam are also allowed to take mortgage of the land use right and assets attached to the land, the current laws do not, as yet, go so far as to permit foreign lenders to take such security interests, either directly or through a security agent established in Vietnam.

To conclude, foreign entities are only permitted to take a security interest over movable assets and property rights, including shares and rights relating to equity capital (other than property rights relating to immovable assets such as a land use right).

Rights under licences and regulatory approvals are sometimes used as secured assets even though the validity and enforceability of these securities are questionable because licences and approvals are generally issued to specific persons and are not assignable.

The most common secured assets are described below.

Shares

A pledge or mortgage over the shares held by shareholders of the borrower is allowed and can be perfected under the law of Vietnam. A mortgage is typically applied with respect to the security over non-listed shares, whereas a pledge is used for the security over listed shares because of the nature of blockading pledged shares at the Vietnam Securities Depository (VSD). The company issuing the shares is normally notified of the pledge or mortgage, and will acknowledge and consent to the pledge or mortgage.

Movable and immovable assets

As discussed above, current Vietnamese law does not permit foreign lenders to take a mortgage over land use rights or immovable assets located on land; it is, however, permissible for foreign lenders to take a mortgage or pledge over movable assets.

Contractual rights

A mortgage of contract rights (including rights under insurance contracts) is generally permissible and can be perfected under the law of Vietnam.

Lenders should consider requiring consent from the borrower's counterparties for any mortgage of the underlying contracts. Counterparties should be required to give acknowledgment and consent providing for, among other things, (1) step-in rights enabling the lenders to replace the borrower as a party under the relevant project agreements, or (2) the requirement that any payment from the counterparties be made to the account designated by the lenders, or both. However, state-owned enterprises being counterparties may be reluctant to give such acknowledgment and consent.

Receivables

Vietnamese law specifically recognises a mortgage over receivables, which can be perfected under the law of Vietnam. Enforcement of receivables requires assistance from the relevant counterparties. Therefore, similar to the contractual rights, the borrower should be required to obtain consent from its counterparties for a mortgage over receivables.

Bank accounts

A mortgage of bank accounts and the balance standing to the credit of the bank account is allowed and can be perfected under the law of Vietnam.

Conceptually, lenders and borrowers may have a contractual agreement on set-off of the loan obligation when due against the credit balances in the accounts of the borrowers opened with the lenders. In addition, the lender and the borrower may also agree that the lender is entitled to the credit balances in the accounts of the borrower opened with other banks for the payment of the loan obligation when due. In this case, authorisation by the borrower to, and undertaking to the lender by, the other banks should be procured.

Aircraft and vessels

Security over aircraft may be created by way of a mortgage or pledge, but security over vessels may only be created by way of a mortgage.

Creation and perfection of security

A security transaction is created by an agreement between the securing and the secured parties. There is no restriction under Vietnamese law on taking security over all or substantially all of the assets of a company. However, the security interests should not be documented in a single security agreement given that the security arrangement will be registered with the different registrars depending on the types and locations of the secured assets.

The security agreement will be effective as of the execution date, unless otherwise agreed by the parties or provided by law (e.g., a land use right mortgage agreement will be effective as of the time of registration in the cadastral register). The security agreement over the land use right or the security agreement over the land use right and assets attached to the land must be notarised or authenticated, except for where parties or a party to the security agreement are enterprises operating in real estate business; the notarisation must be implemented at a notary office and the authentication must be implemented at the commune people's committees.

Generally, security interest created over property in Vietnam will be enforceable against third parties as of the time when, inter alia, the security is registered, or the secured party keeps or holds the secured. Security over movable assets (other than aircraft and vessels), property rights and shares will be registered with the Centre for Registration of Transactions and Assets of the National Registration Agency for Secured Transactions (NRAST) under the Ministry of Justice of Vietnam. In addition to registration with the NRAST, the shares of public companies deposited with the VSD will be blocked by it upon creation of a security over such shares. The Civil Aviation Authority of Vietnam under the Ministry of Transport will register security assets being aircraft, whereas the Vietnam Maritime Administration, or maritime bureaus and port authorities as delegated by the Vietnam Maritime Administration, under the Ministry of Transport, will register security assets being vessels. Security over land use rights and assets attached to land will be registered in land registration offices under the Ministry of Natural Resources and Environment.

There are certain administrative fees related to the security transaction registration. The registration fee at the NRAST is 80,000 Vietnamese dong per application. For registration at a land registration office, the registration fee will be occasionally decided by the provincial people's council. For registration at the Civil Aviation Authority of Vietnam, the fee will be determined by the value of each security transaction, ranging from 1.8 million to 18 million Vietnamese dong. The registration fee at the Vietnam Maritime Administration is 80,000 Vietnamese dong per application. For voluntary securities blockade services at the VSD, service fees are determined based on the number of securities offered for the blockade, ranging from 5 million to 150 million Vietnamese dong.

ii Guarantees and other forms of credit supportGuarantees

The use of guarantees is common in the Vietnamese corporate lending market. A guarantee is an undertaking made by the guarantor to the beneficiary to perform an obligation on behalf of the guaranteed party when the obligation falls due and the guaranteed party fails to perform such obligation. The guarantor and the beneficiary may agree to use a security interest created over property such as a mortgage or pledge as security for the performance of the guaranteed obligation.

The beneficiary may not demand the guarantor to perform an obligation on behalf of the guaranteed party until the obligation falls due, and where the beneficiary is able to offset the obligation with the guaranteed party, the guarantor does not have to perform the guaranteed obligation.

Standby letters of credit

Vietnamese law is silent on the concept of a standby letter of credit as a security measure. However, a standby letter of credit is commonly used by Vietnamese credit institutions as a security measure. Generally, Vietnamese credit institutions describe a standby letter of credit as a guarantee of payment by a bank on behalf of its clients, in which the bank fulfils payment obligations if the client fails to fulfil a contractual commitment with a third party. Given the above, the standby letter of credit seems to fall within the scope of a guarantee under the law of Vietnam. By law, the guarantee arrangement (in the form of the standby letter of credit) to secure the payment obligations of the borrower with respect to the foreign loans should be included in the application for registration of the foreign loan to be submitted to the SBV for its approval of the foreign loan.

Negative pledge undertakings

Negative pledge undertakings are usually provided in facility agreements. These provisions may mitigate risk to lenders with respect of certain assets of the borrower or any obligor by not permitting the borrower or obligor to create security or quasi-security over any assets.

iii Priorities and subordinationPriorities

Payment priority is provided under Vietnamese law as follows:

  1. where all securities are registered, the payment priority will be determined according to the order in which the securities are registered;
  2. where there are both registered and not registered, the obligation for which the security is registered will be paid first; and
  3. where all securities are not registered, the payment priority will be determined according to the order in which the securities were created.
Subordination

Vietnamese law is silent on subordinated debt of enterprises (except for subordinated debts issued by credit institutions subject to the SBV's regulations on prudential ratios and limits for operations of credit institutions). Subordination is generally left to be agreed by the parties. Vietnamese law provides that the order of priority for payment between the jointly secured parties may be changed if the jointly secured parties reach an agreement on changing the order of priority for payment as between themselves.

As a matter of practice, a creditor is entitled to contractually agree that its rights are subordinated to the rights of another creditor by an intercreditor or subordination agreement, subject to the rights of the parties possibly being limited by bankruptcy, insolvency, liquidation, reorganisation, or other laws of general application relating to or affecting the rights of creditors.

Security sharing

An asset may be used by the borrower as security for its performance of several obligations if, at the creation of the security transaction, the value of the asset is higher than the total aggregate value of the secured obligations of the borrower, unless otherwise agreed or provided by law. In addition, if the asset is enforced to fulfil an obligation that has become due, other undue obligations of the borrower shall also be deemed as due and all secured parties shall be entitled to take part in enforcement of the asset. If the parties wish to continue the performance of the undue obligations, it may be agreed by the parties that the borrower shall use other assets as security for its performance of the undue obligations, which may arguably be interpreted that the former asset is enforced to fulfil the due obligation only.