Set out below are some legal issues in transfer of debts (Debts) from a credit institution (Originator) to a company licensed to trade debts in Vietnam (Debt Trading Co). Debt trading between a credit institution and a credit institution is useful for the credit institution to handle its bad debts or to issue assets-backed securities:
Credit institutions are allowed to negotiate loan interest rates based on market demand and supply and the creditworthiness without being restricted to maximum interest rate except in some cases. Meanwhile, interest rates of loans extended by non-credit institutions are subject to the maximum interest rate of 20% per annum under the Civil Code 2015. In practice, interest rates of consumer loans are quite high and could be higher than the maximum rate of 20% per annum. If the interest rate of the Debts is higher than 20% per annum, it is not clear at law whether the Debt Trading Co, upon owning the Debt, can continuously charge such interest rate;
If a mortgage over the land use rights and/or assets attached to land is created to secure the debtors’ obligations to pay the Debts, the transfer of such mortgage to the Debt Trading Co as mortgagee may not be possible. This is because under the Law on Land 2013, land users who are organizations have the rights and obligations to "mortgage their land use rights and assets attached to land at a credit institution authorized to operate in Vietnam". The Debt Trading Co as a non-credit institution authorized to operate in Vietnam is not entitled to take the mortgage;
If the Debts are loans extended to a developer for purpose of development of a commercial housing development project, it is not clear at law whether the Debts can be transferred from the Originator as a credit institution to the Debt Trading Co as a non-credit institution. This is because Article 69 of the Law on Housing 2014 restricts the capital sources to fund a commercial housing development project to, among other things, loans granted by credit institutions, financial institutions operating in Vietnam. Accordingly, if the Debts are transferred to the Debt Trading Co who is not a credit institution, the transferred Debts does not belong to the categories of capital sources permitted by the Law on Housing 2014 for a commercial housing development project;
The Originator as a credit institution is subject to confidential obligations with its customers under banking regulations. The Originator as a credit institution is not allowed to provide “customer information” relating to the Debts and debtors of the Debts to the Debt Trading Co unless otherwise consented by the debtors in writing or in another form as agreed with the debtors. The Debt Trading Co must also keep such customer information confidential and can only provide that customer information to third parties if consented by the debtors; and
If the Debts are parts of a syndicated loan participated in by the Originator together with other credit institutions, it is not clear at law whether the Debts can be transferred to the Debt Trading Co since, as a non-credit institution, the Debt Trading Company is not entitled to participate in a syndicated loan transaction under Circular 42/2011 of the State Bank of Vietnam. In this case, in order to buy the Debts, the Debt Trading Co may need to buy the entire syndicated loan to convert it into a bilateral loan.
This post is contributed by Ha Thi Dung, a partner at Venture North Law.