On 19 March 2021, the Government has issued Decree 21 guiding the Civil Code on obligation performance security (Decree 21/2021). Decree 21/2021 replaces Decree 163 of the Government dated 29 December 2006 on security transactions (Decree 163/2006) from 15 May 2021.

Parties’ autonomy

Decree 21/2021 appears to allow the parties to a security transaction to agree on any issue relating to a security transaction as long as such agreement complies with the fundamental principles of the Civil Code 2015, does not violate the conditions for a transaction to take effect, and does not violate the limitation on the exercise of civil right under the Civil Code 2015 and other relevant law.

It is not clear if the parties can agree not to follow the provisions of Decree 21/2021 as long as such agreements comply with these mentioned conditions. For example, Article 9.1 of Decree 21/2021 regulates that the description of the security assets is agreed by the secured party and the securing party, but it is also followed by the requirement that such description must be in accordance with several other provisions of Decree 21/2021. It is not clear if the parties can apply Article 4 to describe the security assets in a manner different from the provisions of Decree 21/2021, or, even if the parties have the right to agree on the description of the security assets, such description must follow Article 9.1 of Decree 21/2021.

Concept of obligor and obligee

Decree 21/2021 defines that the obligor (“người có nghĩa vụ được bảo đảm” in Vietnamese) is a person whose obligation is secured by security measure. It is also clearly stated that the obligor may or may not concurrently be the securing party (“bên bảo đảm” in Vietnamese).

Interestingly, Decree 21/2021 removes the express description in Decree 163/2006 that the obligee is the secured party in a secured obligation. It is not clear if this change provides for the possibility that the secured party needs not to be the obligee in a secured transaction (see more discussion here).

Description of security assets

In addition to the issue mentioned above, the provisions relating to description of security assets under Decree 21/2021 have the following issues:

· if the security assets are immovable assets or movable assets subject to registration, the description must be in accordance with the registration certificate of such assets. It is not clear if this requirement means the description to be exactly similar to the information in the registration certificate, or the description must not be contrary to such information;

for security assets being property right, the description must include name of and legal basis establishing the property right. It is not clear if the description of legal basis must specify the exact articles of legal documents regulating such property right;
the description of security assets being valuable paper, securities, and deposit balance must be in accordance with the regulations on these types of assets. This provision is problematic. While it is quite easy to own these types of assets, the regulations on valuable paper, securities, and deposit balance are specialized law and complicated and it is difficult to detect which part of these regulations that the description must follow. The requirement that the description must comply with specialized law is far more difficult than the requirement in the Civil Code 2015, which only requires the description to be identifiable; and
Decree 21/2021 has the following vague requirement: if a project must have other legal basis, the description of such project as security assets must specify such legal basis. Such requirement is problematic since it requires the specific description of something that is vague.

Limitation to the creation of security interest over equity interest

The securing party when creating security interest over equity interest of a company must comply with any requirement provided in such company’s charter. This could create an obstacle for the securing parties since they may not be able to control changes to the charter of the relevant company (if they are minority shareholders/members of such company).

Effectiveness of security contract and effectiveness against third party of security interest

Decree 21/2021 makes clear that the effectiveness of a security contract is different from the effectiveness against third party of the security interest. Furthermore, the effectiveness against third party of the security interest is conditional upon the effectiveness of the security contract.

No clarification of recourse to security assets

Decree 21/2021 does not clarify the meaning of “recourse” (quyền truy đòi) to security assets. In the draft of Decree 21/2021, recourse over security assets is defined as the right of the secured party in a security interest which has effectiveness against third party to request any third party to return the security assets. However, this provision is removed in the official Decree 21/2021.

No clear right to seize security assets

Unlike Decree 163/2006, Decree 21/2021 no longer provides the secured party with the right to seize the security assets if the holder of such assets failed to hand over such assets within the time limit set out in the realization notice. In such case, Decree 21/2021 only enables the secured party to inspect the security assets to prevent its disposal, or to enforce or to request the court to handle. During the workshop commenting the draft of Decree 21/2021, many banks have requested as their top priority to have the right to seize security assets similar to which provided in Resolution 42 on pilot scheme for handling of bad debts of credit institution. The absence of such right in Decree 21/2021 could weaken the possibility to realize the security asset in practice.

However, Decree 21/2021 clearly states that if the secured party enforces the security assets following the agreement in the security contract, the authorization or consent of the securing party will not be needed. Theoretically, this provision can be considered better than the provision on “right to seize”.

Confusing regulation when the mortgaged assets are the subject of an invalid transaction

Article 36 of Decree 21/2021 provides that the secured party (i.e., the mortgagor) in a mortgage transaction will be deemed to be an innocent third party if the mortgaged assets has been transferred (chuyển giao) to the secured party. If the mortgagor is an innocent third party then the mortgage will remain valid even if the mortgaged assets are the subject of an invalid transaction. However, it is not clear how transferring of a mortgaged assets is different from handing-over (giao) of such assets.

Receiving the asset in replacement of obligation performance

With Article 59 of Decree 21, receiving the asset in replacement of obligation performance becomes a very strong option to realize the security asset. Article 59 provides that such receiving is a basis for the secured party to establish its title over the security asset, and the security contract can be used to request the competent authority to conduct the procedures to change the title over the security asset from the securing party to the secured party.

This post is written by Nguyen Hoang Duy and edited by Nguyen Quang Vu.

Vietnam Business Law