Circular No. 06/2002/TT-BTP guides certain provisions of Government Decree No. 165/1999/NĐ-CP dated November 19, 1999 on secured transactions.

CIRCULAR

Guidelines for certain provisions of Decree No. 165/1999/NĐ-CP dated November 19, 1999 of the Government on secured transactions

of the Government on secured transactions

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Pursuant to Decree No. 38/CP dated June 4, 1993 of the Government on the functions, tasks, powers, and organization of the Ministry of Justice;

Pursuant to Decree No. 165/1999/NĐ-CP dated November 19, 1999 of the Government on secured transactions,

To ensure uniform implementation of Decree No. 165/1999/NĐ-CP dated November 19, 1999 of the Government on secured transactions, the Ministry of Justice issues guidelines on the following matters:

I. GENERAL PROVISIONS

1. On the scope of application as stipulated in Article 1 of Decree 165

1.1 Decree No. 165/1999/NĐ-CP dated November 19, 1999 of the Government on secured transactions (hereinafter referred to as Decree 165) was promulgated to specify the provisions on pledge, mortgage, and guarantee in the Civil Code. Therefore, this Decree shall be uniformly applied to the conclusion and performance of pledge, mortgage, and guarantee contracts with assets to secure civil obligations and the handling of pledged, mortgaged, and guaranteed assets.

1.2 In cases where specialized laws provide different provisions from those of Decree 165 on the same issue, such provisions of specialized laws shall apply; if there are no such provisions, then the provisions of Decree 165 and this Circular shall apply. The following are some specific cases:

a) Secured transactions involving pledges, mortgages, and guarantees with assets to secure obligations in economic and commercial transactions must comply with relevant provisions of legal instruments governing economic and commercial transactions; if there are no such provisions, then the corresponding provisions of Decree 165 and this Circular shall apply.

Example: For the handling of pledged, mortgaged, and guaranteed assets to recover debts for credit institutions, the provisions at Chapter V of Decree No. 178/1999/NĐ-CP dated December 29, 1999 of the Government on securing loans for credit institutions and implementing regulations shall apply; if there are no such provisions, then the corresponding provisions of Decree 165 and this Circular shall apply.

b) Mortgages and guarantees with land use rights must comply with relevant provisions of the Land Law; if there are no such provisions, then the corresponding provisions of Decree 165 and this Circular shall apply. The determination of the order of priority in payment when handling land use rights in cases of multiple secured obligations shall be carried out according to Clause 3, Article 14 of Decree 165 and Point 8.2, Clause 8, Section II of this Circular.

c) Pledges and mortgages of Vietnamese civil aircraft and Vietnamese ships must comply with relevant provisions of the Civil Aviation Law of Vietnam, the Maritime Code of Vietnam, and implementing regulations; if there are no such provisions, then the provisions of Decree 165 and this Circular shall apply.

1.3 For pledges, mortgages, and guarantees with assets to secure obligations in civil, economic, and commercial transactions with foreign elements, first apply the provisions of international treaties to which the Socialist Republic of Vietnam is a party; if there are no such provisions, then based on Article 834 of the Civil Code, the application of Vietnamese law on secured transactions shall be implemented as follows:

a) In cases where secured transactions are concluded in Vietnam, they must comply with the provisions of Vietnamese law on the form of secured transactions;

b) In cases where secured transactions are performed in Vietnam, the rights and obligations of the parties shall be determined according to Vietnamese law on secured transactions, unless otherwise agreed by the parties;

c) In cases where secured transactions are concluded and fully performed in Vietnam or mortgage and guarantee contracts with immovable property in Vietnam, they must comply with Vietnamese law on secured transactions;

d) For pledge and mortgage contracts of Vietnamese civil aircraft and Vietnamese ships, if concluded in Vietnam, they shall be resolved according to Vietnamese law on secured transactions; if concluded abroad, they shall be resolved according to the law of the place where the contract is concluded.

1.4 Decree 165 and this Circular also apply to the conclusion, performance of secured transactions, and handling of secured assets in cases where individuals or foreign legal entities participate.

2. On the assurance of future obligations as stipulated in Clause 1, Article 4 of Decree 165

The parties may agree on pledges, mortgages, and guarantees with assets to secure current obligations or future obligations. In cases where the parties agree on securing future obligations, such obligations must be described in the secured transaction document. When future obligations are established, the parties must prepare an annex detailing the obligations and their due dates; if the secured transaction has been registered, then changes to the secured obligations must be registered according to the law on secured transactions. Registration of changes to the obligations does not alter the order of priority in payment of the secured party when handling the secured asset, provided that securing future obligations was agreed upon at the time of concluding the secured transaction.

Example: On January 1, 2001, A agreed to lend B 100 million dong to build a factory, and they agreed that if B needed additional capital to complete the factory in the fourth quarter of 2001, A would lend B more money. To secure repayment of the 100 million dong loan, B entered into a mortgage contract with A using a house worth 300 million dong. Additionally, the parties agreed that in addition to securing the current obligation (repayment of the 100 million dong loan), the house would also secure any future loan B might take in the fourth quarter of 2001. On October 15, 2001, B borrowed another 150 million dong from A. In this case, B's obligation to repay 150 million dong is a future obligation and is also secured by the mortgage contract on the house worth 300 million dong.

3. On pledges, mortgages, and guarantees with assets formed in the future as stipulated in Clause 3, Article 4 of Decree 165

The parties may agree on pledging, mortgaging, or guaranteeing with future-formed assets and may choose assets from among the following cases:

3.1 At the time of concluding the security transaction, the asset does not exist; only after the conclusion of the security transaction will the asset be formed and belong to the guarantor (for example, pledging a ship that will be built after the bank provides the loan);

3.2 At the time of concluding the security transaction, the asset may be goods being produced or construction works being built; only after the conclusion of the security transaction will the asset be fully formed and belong to the guarantor (for example, pledging an assembly production line, mortgaging a house under construction);

3.3 At the time of concluding the security transaction, the asset exists but has not completed the procedures for confirming ownership of the guarantor; only after the conclusion of the security transaction will the asset belong to the guarantor through completing the procedures for transferring ownership such as purchase, exchange, gift, loan, inheritance;

3.4 Legal income sources according to the provisions of Article 176 of the Civil Code obtained by the pledgor, mortgagor, or guarantor after the conclusion of the security transaction.

4. Regarding pledging, mortgaging, or guaranteeing with assets managed and used by state-owned enterprises as stipulated in Clause 1, Article 5 of Decree 165.

State-owned enterprises may use assets entrusted by the state for management and use to pledge, mortgage, or guarantee. In cases where laws on state-owned enterprises and other related legal documents stipulate that pledging, mortgaging, or guaranteeing with assets must be approved by competent state authorities, state-owned enterprises can only pledge, mortgage, or guarantee with those assets if they obtain permission from competent state authorities.

5. Regarding the requirement that pledged, mortgaged, or guaranteed assets must be assets permitted for transactions and without disputes as stipulated in Clause 2, Article 5 of Decree 165.

5.1 Assets permitted for transactions are assets not prohibited from circulation according to the law at the time of concluding the security transaction.

5.2 Assets without disputes are assets whose owners or users are not challenged by third parties at court or competent state authorities regarding ownership or usage rights at the time of concluding the security transaction.

II. SOME SPECIFIC ISSUES IN CONCLUDING AND IMPLEMENTING CONTRACTS

PLEDGING, MORTGAGING, GUARANTING WITH ASSETS AND HANDLING SECURED ASSETS

1. The form of contracts for pledging, mortgaging, or guaranteeing with assets as stipulated in Article 10 of Decree 165.

1.1 Contracts for pledging, mortgaging, or guaranteeing with assets must be in writing, either as separate documents or included in the main contract. The parties have the right to agree on requesting a Notary Office to notarize the contract or a People's Committee of a district, town, city under provincial administration (hereinafter referred to as the People's Committee of a district-level administrative unit) to certify the contract. If the law requires the contract to be notarized or certified, the parties must comply.

1.2 Notarizing the contract for pledging, mortgaging, or guaranteeing with assets does not replace the registration of these contracts. Therefore, if the parties wish to enjoy priority in payment when handling secured assets, they must register according to the law on registering security transactions.

2. Regarding selling secured assets that are circulating goods during production and business operations as stipulated in Point b, Clause 1, Article 17 of Decree 165.

2.1. Based on the requirements of production and business activities, the guarantor may sell secured assets that are circulating goods during production and business operations and must fulfill the following obligations:

a) Notify the secured party in writing about the sale of secured assets before selling them. The parties may agree on the notification period when concluding the security transaction. The guarantor may notify about the sale of a specific asset or a batch of goods;

b) Record separately the proceeds from the sale of secured assets according to the accounting regulations of the Ministry of Finance.

2.2 After selling secured assets that are circulating goods during production and business operations, the right to demand payment, the proceeds, or assets obtained from using the proceeds become replacement secured assets for the sold circulating goods according to Point b, Clause 1, Article 17 of Decree 165. In the absence of other agreements, the replacement of sold secured assets shall be carried out as follows:

a) In the case where the right to demand payment becomes the replacement secured asset for the sold circulating goods, the guarantor must inform the debtor of this fact. Upon maturity of the obligation, if the guarantor fails to perform or performs incorrectly, the secured party has the right to request the debtor to pay the amount according to Article 31 of Decree 165;

b) In the case where the proceeds become the replacement secured asset for the sold circulating goods, the guarantor must deposit the proceeds into a separate account. The secured party has the right to request the credit institution where the account is opened to freeze the account and settle the obligation from the funds in the separate account, if upon maturity of the obligation the guarantor fails to perform or performs incorrectly;

c) The guarantor has the right to use the proceeds from the sale of secured assets to invest in production and business activities according to the agreement of the parties, and assets formed during this process automatically become replacement secured assets for the sold assets.

2.3 In the cases specified in Point 2.2 above, the parties must prepare an annex to the contract or amend and supplement the existing pledging, mortgaging, or guaranteeing contract to describe the replacement secured assets for the sold assets. The replacement of secured assets mentioned above must be registered with the authority responsible for registering security transactions.

From the moment ownership is transferred according to Article 432 of the Civil Code, the buyer of the collateral, which is goods circulating in the production and business process, becomes the owner of such property, and such property is no longer the collateral for the obligor's obligations towards the obligee.

2.4. In cases where the amount receivable from the sale of the collateral or the proceeds from its use are insufficient to secure the performance of the obligation, the obligor must supplement the collateral, except where the parties have agreed otherwise. The parties agree on the type of supplementary collateral; if they cannot reach an agreement, the obligee has the right to choose the obligor's assets to be added to the collateral.

3. Regarding the handling of security transactions in cases where the obligor is a business reorganized pursuant to Article 21 of Decree 165.

3.1. In cases where the obligor is a business that has been divided, split, merged, consolidated, or converted, the security transaction terminates, except where the obligee and the newly organized businesses have agreed otherwise or where the law provides differently.

3.2. In cases where the parties have not agreed otherwise or where the law does not provide differently, the collateral securing the debt obligation of the business when it is divided, split, merged, consolidated, or converted shall be handled as follows:

a) For businesses that are divided or split: if the collateral can be divided proportionally according to the debt obligation of the business when divided or split, then it shall be divided accordingly; if the collateral cannot be divided proportionally according to the debt obligation and the divided or split businesses do not have an agreement on a guarantee measure, then the obligee has the right to request the business to perform its obligation before division or split.

b) For businesses that are merged, consolidated, or converted: the collateral for the debts of the business prior to merger, consolidation, or conversion shall continue to be used as collateral for those debts of the new businesses after merger, consolidation, or conversion.

3.3. In cases where the business cannot implement the measures prescribed in Point 3.2 of this Clause, the obligee has the right to handle the collateral to perform the obligation before the division, split, merger, consolidation, or conversion.

3.4. In all cases of transferring the security obligation by collateral prescribed in Point 3.2 of this Clause, the parties must agree to re-conclude the security transaction.

4. Regarding the implementation of necessary measures under the law after registering the notification document requesting the handling of collateral as stipulated in Article 27 of Decree 165.

After registering the Notification Document Requesting Handling of Collateral with the registration authority for security transactions, the obligee has the right to take the following measures to protect the collateral:

4.1. Inventory the collateral.

4.2. Supervise the use and exploitation of the collateral.

4.3. Require the obligor not to use or exploit the collateral if such use or exploitation reduces or diminishes the value of the collateral.

4.4. Require the obligor to transfer the collateral for direct possession or authorize a third party to hold the collateral.

4.5. Seek out and recover the collateral if it is sold or disposed of by the obligor in any form.

4.6. Request state authorities with jurisdiction to temporarily suspend procedures for transferring ownership or usage rights of the collateral to others if the obligor sells or transfers the collateral contrary to the agreement.

4.7. Request state authorities with jurisdiction to assist in handling the collateral as provided for in Clause 3, Article 23 of Decree 165; apply necessary measures to compel the obligor or a third party holding the collateral to hand over the collateral as provided for in Clause 3, Article 29 of Decree 165.

5. Regarding the method of handling land use rights pledged or guaranteed as stipulated in Article 32 of Decree 165.

The handling of land use rights pledged or guaranteed shall be carried out as follows:

5.1. In cases where a household or individual farmer pledges or guarantees by the value of land use rights, the handling shall be carried out according to the agreement of the parties; if there is no agreement or if the agreement cannot be implemented, the pledgor or guarantor has the right to choose one of the following methods of handling:

a) Request the Auction Center in the location of the land to organize the auction of the land use rights.

b) Initiate legal proceedings as provided for by law.

5.2. In cases where an organization or individual who is not a household or individual farmer pledges or guarantees by the value of land use rights, the handling of land use rights pledged or guaranteed shall be carried out according to the agreement of the parties; if there is no agreement or if the agreement cannot be implemented, the pledgor or guarantor has the right to choose one of the methods of handling specified in Points 5.1.a and 5.1.b of this Clause or transfer the land use rights pledged or guaranteed to another person to settle the obligation.

6. Regarding the handling of guaranteed assets as stipulated in Article 35 of Decree 165.

6.1. Guaranteed assets shall be handled in the following cases:

a. When the due date for performing the obligation arrives but the guaranteed party does not perform the obligation or performs it incorrectly.

b. The guaranteed party lacks the ability to perform the obligation in cases where the parties have agreed that the guarantor only needs to perform the obligation when the guaranteed party lacks the ability to perform their own obligation.

6.2. The handling of guaranteed assets shall be carried out according to the provisions on handling collateral in Chapter III of Decree 165 and this Circular.

6.3. In cases where the parties have agreed to guarantee by assets but have not specifically identified the type of asset, the parties must agree specifically on the type of asset to be handled; if the parties cannot reach an agreement, the guarantor has the right to choose the guaranteed party's assets for handling.

7. Regarding the exploitation and use of collateral as stipulated in Article 36 of Decree 165.

In the case where it is necessary to process collateral assets for payment of obligations but such processing has not yet been carried out, the exploitation and use of collateral assets shall be conducted as follows:

7.1. The secured party may directly or authorize a third party to exploit and use the collateral asset or permit the guarantor to exploit and use that asset.

7.2. Any income or profit derived from the exploitation and use of the collateral asset must be accounted for separately and used to pay off obligations after deducting reasonable and necessary expenses for the exploitation and use of the collateral asset by the secured party or a third party, including:

a) Management of the collateral asset;

b) Repair and maintenance of the collateral asset;

c) Financial obligations to the State (taxes, fees) related to the exploitation and use of the asset;

d) Other reasonable and necessary expenses for the exploitation and use of the collateral asset.

In the event that the guarantor exploits and uses the collateral asset, the income or profit derived therefrom shall be used to pay off obligations without deducting expenses incurred by the guarantor, except in cases where the parties have agreed otherwise.

7.3. Payment of obligations from the proceeds of income or profit derived shall be implemented according to the provisions of Clause 8 of this Section.

8. Regarding the payment of proceeds from the sale of collateral assets as stipulated in Article 37 of Decree 165

The proceeds from the sale of collateral assets shall be used as follows:

8.1. In the case where one asset is used to secure the performance of one obligation, after deducting the following costs, the remaining proceeds from the sale of the collateral asset shall be used to pay the obligation to the secured party:

a) Costs for preserving and selling the asset;

b) Financial obligations to the State (taxes, fees) related to the disposal of the collateral asset;

c) Other reasonable and necessary costs related to the disposal of the collateral asset.

In the case where the obligation secured is a loan, payment to the secured party shall be made in the following order: principal debt, interest, penalties, and compensation for damages (if any); if the proceeds from the sale of the asset exceed the amount owed, the excess shall be returned to the guarantor; if the proceeds are insufficient, the guarantor shall pay the remaining amount.

8.2. In the case where one asset is used to secure the performance of multiple obligations, after paying the costs specified in points 8.1.a, 8.1.b, and 8.1.c of this clause, the remaining proceeds from the sale of the asset shall be used to pay the obligations to the co-secured parties using that asset in the following priority order:

a) In the case where one asset is used to secure the performance of multiple obligations and all related security transactions are registered with the security transaction registration authority, the priority order of payment among the secured parties shall be determined based on the time of registration of the security transaction. The secured party in the security transaction registered first shall be paid first, followed by subsequent secured parties; if any of the registered security transactions are voided, the secured party in that transaction shall not enjoy the priority order of payment.

Security transactions registered at the same time (same hour, minute, day, month, year) shall have the same priority order of payment. If the proceeds from the disposal of the collateral asset are insufficient to pay the secured parties with the same priority order of payment, the proceeds shall be distributed among them in proportion to their respective debts, unless the parties have agreed otherwise.

b) In the case where some security transactions securing multiple obligations with one asset are not registered, the secured party in the registered security transaction shall be paid first; the remaining proceeds shall be used to pay the secured party in the unregistered security transaction.

After paying the co-secured parties using one asset according to the priority order specified in points 8.2.a and 8.2.b above, if there are remaining proceeds from the sale of the asset, they shall be returned to the guarantor; if there is a shortfall, the guarantor shall pay the remaining amount.

8.3. In the case where the guarantor is a bankrupt enterprise, the Judge handling the bankruptcy petition shall issue a decision to preserve the collateral asset and organize the determination of its value. If the value of the collateral asset is insufficient to pay off the debt of the secured party, that secured party shall participate in the distribution of the remaining value of the enterprise's assets like other unsecured creditors. If the value of the collateral asset exceeds the debt, the difference shall be added to the remaining value of the bankrupt enterprise's assets.

III. IMPLEMENTATION PROVISIONS

1. This Circular takes effect fifteen (15) days after its issuance.

2. During implementation, if there are any difficulties, individuals and organizations are requested to report to the Ministry of Justice for research and resolution./.