This note provides a preliminary overview of the types of security available under Vietnamese law.
LEGAL INSTRUMENTS OF VIETNAM GOVERNING SECURED TRANSACTIONS
In Vietnam secured transactions are primarily governed by the following legal instruments:
- Law No. 33/2005/QH11 of the National Assembly dated 14 June 2005 adopting the Civil Code of Vietnam (in effect from 1 January 2006) ("Civil Code");
- Decree No. 163/2006/ND-CP of the Government dated 29 December 2006 on security transactions as amended by Decree No. 83/2010/ND-CP dated 23 July 2010 and Decree No. 11/2012/ND-CP dated 22 February 2012 ("Decree 163");
- Circular No. 05/2011/TT-BTP of the Ministry of Justice dated 16 February 2011 guiding the registration of and provision of information about security transactions and contracts, and notification of assets attached to enforce a judgement directly, by post, fax or email at registration centres of the National Office for Registration of Security Transactions under the Ministry of Justice ("Circular 05")
SECURED TRANSACTIONS IN GENERAL
Under Vietnamese law there are only two types of classic security which entitle the beneficiary to sell the object of the security and satisfy its claims by applying the proceeds of the sale: (i) a mortgage of property and (ii) a pledge of property. Other types of security used in Vietnam include performance bonds, security deposits and escrow deposits. In the context of Vietnam, guarantees are also referred to as a type of security.
The key characteristic of a mortgage in Vietnam is that the mortgagor is not required to part with possession of the mortgaged property; however, the parties may agree that a third party shall hold possession of the mortgaged property during the term of the mortgage. A mortgage can be granted over “revolving” property (e.g. security over interchangeable stock that can be replaced from time to time) and may also be granted over certain future property, although the definition of “future property” has recently been tightened in Decree 11/2012/ND-CP dated 22 February 2012 amending Decree 163 (“Decree 11”). Only a mortgage may be granted over land or assets attached to land.
In contrast to a mortgage, the pledgor is required to pass possession of the pledged property to the pledgee or a third party nominated by the pledgee for the term of the pledge. As possession is transferred to the pledgee this may, as a practical matter, make enforcement over the secured assets an easier process. .
A pledge may also be granted over “revolving” collateral (e.g. interchangeable stock that can be replaced from time to time) and may also be granted over certain goods to be created in the future.
A pledge may not be granted over land or assets attached to land.
Third party security
Security may also be provided by a third party for the obligations owed by the borrower or debtor and it is common in Vietnam to require guarantees or other forms of security from shareholders, holding companies or related group companies.
Security over most types of assets may be registered with the National Registration Agency for Security Transactions (“NRAST”), established under the Ministry of Justice. Security over land may be registered with the relevant Department of Natural Resources and Environment (“DONRE”) at its Land Use Rights Registration Centre. Other types of assets with their own central register of ownership may have their own registration requirements (e.g. the registration of mortgages for ships with the Vietnam National Maritime Bureau and with the Civil Aviation Authority for aircraft). For certain types of security e.g. security over land use rights, registration is necessary for the security to be legally binding and effective. However, other types of security do not need to be registered in order to be effective between the security provider and the secured party but must be registered in order to be legally binding vis-à-vis third parties (including other creditors of the mortgagor) and in order to confer priority.
A TYPICAL SECURITY PACKAGE
Vietnamese law does not recognise a form of security equivalent to an English law style fixed and floating charge. It is therefore necessary to take security over different classes of assets separately. A typical comprehensive onshore security package may include the following:
Land use rights and assets attached to land
A mortgage may be taken over these assets. Land use rights and assets attached to land may only be secured in favour of onshore banks (i.e., locally incorporated banks. This gives rise to complications in offshore financings. Solutions are available to overcome this limitation but their validity has not been confirmed by Vietnamese courts. Structuring an offshore financing to include security over land use rights and assets attached to land must therefore be planned carefully with your legal advisor.
Note that in BOT and PPP style project financings further complications arise due to the requirement that in order to effectively grant a mortgage the mortgagor must have paid land rent (if the land is leased by the mortgagor) or land use fees (if the land has been allocated to the mortgagor, which applies to Vietnamese enterprises only) upfront for the use of the land over the entire term of the land use right. Under Vietnamese BOT and PPP legislation project companies are exempt from the payment of land rent/land use fees – casting uncertainty on their ability to grant security over such assets.
Physical movable assets
Security should be taken by way of mortgage if the mortgagor is to continue to use the assets or by pledge if possession of the secured property is transferred to the secured party.
Bank accounts may be secured by way of mortgage or pledge. If the security provider is to continue to have control over the bank account a mortgage should be taken. In the past, Vietnamese law provided for a relatively broad concept of “future property” and was understood to recognise security over bank accounts despite the fluctuating nature of bank balances. However, the more stringent definition of “future property” put forward under Decree 11 may limit the extent to which security may validly be taken over bank accounts in Vietnam going forward.
Shares should ideally be secured by way of a pledge with perfection of the security taking place by deposit of physical share certificates with the pledgee or, where no share certificates have been issued, by way of registration with the issuer or registrar of the shares. Although the pledgee takes possession of the share certificates it would be usual for the pledgor to be contractually entitled to continue to exercise voting rights and other rights in connection with the pledged shares until the occurrence of a default, (subject to appropriate controls, limitations and negative covenants). Additional requirements apply where the pledged securities are listed on a stock exchange in Vietnam (the Ho Chi Minh City Stock Exchange or the Hanoi Stock Exchange). Before a pledge over listed securities becomes valid, the custodian that maintains the securities accounts on behalf of the securities owner with the Vietnam Securities Depository (“VSD”) is required to instruct the VSD to transfer the pledged shares into a securities pledge account from which the pledged shares cannot be traded.
Mortgage of receivables
Vietnamese law permits mortgages of certain contractual receivables (including the right to reclaim debts, contractual property rights, and rights from insurance policies). Generally security should be taken by way of a mortgage. There is some uncertainty under Vietnamese law over the validity of security over other types of contractual rights and receivables and a security assignment of certain contractual rights and noncontractual claims may be more appropriate in certain cases.
IP rights are generally able to be used as collateral, although certain limitations may apply to moral rights of copyrights holders that may not be transferred. Security granted over assets arising from copyright, industrial property ownership and plant varieties are required to be registered with the NRAST.
Until recently, the laws of Vietnam did not provide for the concept of security agency. However, Circular 42/2011/TTNHNN by the State Bank of Vietnam dated 15 December 2011 regulating the provision of co-financing for clients by credit institutions (“Circular 42”) now specifically provides that the members of a syndicated loan may appoint one of their members as a security agent to manage and realise the security (Article 13.2 and Article 13.3 of Circular 42). Circular 42 does not resolve all issues in connection with security agency in Vietnam (such as whether the security agent can enter into security documents on behalf of a potentially changeable syndicate of lenders), however, it does provide some welcome guidance and clarity.
REALISATION OF SECURITY
The realisation of the security is largely dependent on the agreement between the parties as set out in the security agreement. The security may be realised when the mortgagor/pledgor fails to perform its obligations when they fall due or in other circumstances agreed in the security agreement. For security transactions that are required to be registered, notice is also required to be given to the relevant registration authority. Where the property also secures obligations owed by the mortgagor/pledgor to other parties, the secured party that intends to realise the security is also required to give notice to such third parties. The security may be realised by way of (i) direct sale of the property by the mortgagee/pledgee or auction of the property, (ii) the mortgagee/pledgee acquiring the ownership of the secured property, and (iii) other agreed methods for the realisation of the security.
In practice, enforcing a mortgage may be more difficult than enforcing a pledge as the mortgagor retains possession and the mortgagee is required to involve the local enforcement agencies or the courts.
It should be noted that Vietnam has a developing legal system that, in some respects, lacks the certainty of more developed legal jurisdictions. Actual instances of enforcement of complex and wide ranging security packages in Vietnam are extremely rare and no matter how robust the security structure may be, proceeding to enforcement proceedings is something that should be considered extremely carefully.