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Updates on Implementing the Civil Code Regarding Security for Performance of Obligations

On March 19th 2021, the Government promulgated Decree No. 21/2021/ND-CP guiding on enforcing the Civil Code on security for performance of obligations which took effect on 15th May  2021, replacing Decree No. 163/2006/ND-CP on secured transactions and Decree No. 11/2012/ND-CP on amending and complementing a number of articles of Decree No. 163/2006/ND-CP.

This newsletter shall explain several updated points of Decree No. 21/2021/ND-CP in comparison with Decree No. 163/2006/ND-CP.

Heretofore, Decree No. 163/2006/ND-CP only regulated collateral in one article. In this new Decree, collateral is prescribed in one Chapter (Chapter II) to regulate collateral in detail, which has a few notable points as follows:

  1. List specific types of collateral

  • Land use rights and assets attached to land;
  • Properties formed from surface rights, usufructuary rights;
  • Auxiliary objects, synchronous objects, distinctive objects;
  • Valuable instruments, securities, deposit balance;
  • Property rights arising from contracts;
  • Properties formed from capital contribution;
  • Rights to exploit natural resources;
  • Property rights incurred from intellectual property rights, information technology or science and technology activities;
  • Investment projects and assets of investment projects;
  • Commodities circulating during manufacturing, business, and storage processes.
  1. Complementary and detailed provisions on securing collateral for performance of obligations

– Existing properties or off-plan properties, except for cases that the Civil Code or other relevant laws forbid sale, transfer or other change of ownership at the time of establishing security contracts, security measures;

– Properties sold under property sale agreements with retention of title;

– Properties considered as subjects of obligations under infringed bilateral contracts in case of lien measures;

–  Properties under general public’s ownership in cases prescribed by relevant laws.

(Heretofore, collateral only comprised existing properties or off-plan properties)

  1. Description of collateral

Description of collateral is agreed between securing party and secured party in accordance with following regulations:

  • In case the collateral is real estate or movable properties obliged to be registered by law, the described information in the agreement must be consistent with the information on the Certificate.
  • In case the collateral is property rights, the described information in the agreement must comprise the name and legal basis of the arisen property rights.
  1. Effect of security contracts

Security contracts notarized according to provisions of the Civil Code, relevant laws or requests take effect from the date of notarization.

Security contracts not in above case take effect from the date of agreement. In cases without agreements, security contracts take effect from the contracting date.

In case of collateral withdrawal according to agreement, the contents of security contracts relating to withdrawal of collateral are no longer valid.

Security interests which have not yet arisen antagonistic effect against third party do not alter or terminate the effect of security contracts.

  1. Antagonistic effect of security interests against third party – new provisions:

  • Security interests against third party only arise in case the security contracts have taken effect.
  • In case the security interests are obliged to be registered in accordance with the Civil Code or relevant laws or registered under agreement or at the request of secured party, the time of registration at competent state agencies according to relevant law is the effective time of antagonistic effect of security interest against third party.
  • In case not obliged to be registered, antagonistic effect of pledge of property, deposit,security collateral measure against third party arises from the time the secured party holds collateral. In case the collateral pertaining to such security interests is assigned to another person to manage, antagonistic effect of security interest against third party takes effect from the time:  
  • Pledgee, depositee, or receiving collateral party holds collateral;
  • Property manager directly receives collateral from pledgor, depositor or putting up collateral party;
  • Security contracts take effect in case another person is directly managing property used for pledge, deposit or security collateral interest.

Antagonistic effect of escrow deposit interest against third party takes effect from the time such escrow deposit is sent to escrow accounts at credit institutions where escrow deposit is made.

  1. Investment in mortgaged properties

Herein fore, the Government only regulated cases which are entitled to invest in mortgaged properties. In this new Decree, to protect rights and interests of the parties, the Government has brought about conditions to implement investment in mortgaged properties as follows:

  • There must be the approval of mortgagee when third party invests in mortgaged properties;
  • There must be the approval of mortgagee when mortgagor invests in the mortgaged properties thereby raising new properties not included in the mortgaged properties which were agreed in the mortgage contract.
  • Mortgagee has the right to request to end the investment if it reduces the mortgage value.

In ‘Chapter IV’ of Decree No. 21/2021/ND-CP guiding on the realization of collateral, notice on realization of collateral in case collateral is used to secure multiple obligations is prescribed as follows:  

  • In case a property is used as security for multiple obligations or held by another person, a letter of notice must be simultaneously sent to securing party, co-secured parties (if any) and individuals holding collateral;
  • In cases a property is used as security for multiple obligations with multiple secured parties, not only by informing method, but it also can be implemented through registration for notice on realization of collateral method in accordance with regulations and law on registration for security measures.

Duration of informing the realization of collateral to securing party is according to the agreements in security contracts or other agreements. In cases there is no agreement, it must be in a reasonable duration, but before at least 10 days over real estate or before at least 15 days over movable properties until the time of realization of collateral. Except for cases properties are in danger of being damaged, causing the deterioration in value or loss of the whole value, it must be realized immediately.

In general, the new Decree has more clear and detailed provisions on issues of secured transactions for the purpose of implementing such transactions more effectively as well as best protecting rights and interests of parties in such kind of transactions.

Writing date: 15/04/2021

The article is based on the current laws at the time of drafting as noted above and may no longer be appropriate at the time the reader accesses this article due to changes in applicable law and specific cases that the reader wants to apply. Thus, the article is for informational reference only.