On 19 March 2021, the Government issued Decree No. 21/2021/ND-CP on implementing the provisions of the Civil Code on securing performance of obligations (“Decree 21“). “Civil Code” here refers to Civil Code No. 91/2015/QH13 adopted on 24 November 2015 by the National Assembly.
Decree 21 will take effect on 15 May 2021 and replace Decree No. 163/2006/ND-CP on security transactions (as amended by Decree No. 11/2012/ND-CP, together referred to herein as “Decree 163“). For valid security contracts and security measures created and performed before 15 May 2021, Decree 163 still applies. Where such security contract and security measure has not yet been implemented or is currently being implemented and contains provisions inconsistent with Decree 21, the parties may agree to amend or supplement the security contract or security measure to comply with and for the application of Decree 21.1
The key highlights of Decree 21 are as follows:
- Application of specific laws and party autonomy
- Concept of secured obligor
- Description and identification of security assets
- Effect of security contracts and security measures
- Concepts of reasonable period in security enforcement and reasonable expenses paid to recipient of deposit or security collateral
- Enforcement of security assets
In more detail
1. Application of specific laws and party autonomy2
With regard to order of application, Decree 21 gives priority to the application of specific relevant regulations (if any) provided under other laws, such as the laws on land, residential housing, investment, enterprises, securities, insurance, banking, natural resources, fisheries, forestry, aviation, maritime affairs, intellectual property, science and technology and bankruptcy.
Notably, Decree No. 21 allows greater party autonomy in agreeing on security transactions, more specifically as follows:
- The agreement reached between the parties will be complied with if the parties in a relationship of securing performance of an obligation have an agreement that: (i) is different from the provisions of Decree 21 but complies with the basic principles of the civil law; (ii) does not breach the valid conditions of a civil transaction; and (iii) does not breach the restrictions [or limitations] on exercise of civil rights prescribed in the Civil Code or other relevant laws.
- If an agreement contains a provision on security for the performance of an obligation but the parties have not specified or have incorrectly identified the name of the security measure and such provision is consistent with the security measures prescribed in the Civil Code, the provisions on security measures applicable to the equivalent provision in the agreement will apply.
2. Concept of secured obligor
“Secured obligor” means a person whose obligations are secured by a security measure. The secured obligor may or may not concurrently be the securing party.
If the asset owner and the secured party agree to use the assets to secure performance of the obligation of another person, the provisions of the asset pledge or asset mortgage shall apply.
3. Description and identification of security assets
Description of security assets as agreed by the securing party and secured party must comply with the following requirements:3
- If the collateral is real estate or immovable property that is required by law to be registered, the information agreed in the description must be consistent with the information on the relevant certificate (i.e., the certificate of asset or property ownership, a certificate of land use right, or any other document certifying ownership of assets or property in accordance with the law).
- If the collateral is a property right, the agreed description must include the name of the property right and its legal basis.
- Certain assets are subject to special description requirements, as follows:4
- Description of an object with an auxiliary object, an integrated object or a special object must specify such object’s characteristics in order to identify it in accordance with the provisions of the Civil Code.
- Description of valuable papers, securities and the balance of a savings deposit at a credit institution or foreign bank branch must comply with the provisions of the law on valuable papers, securities or banking, respectively.
- For a project for the construction of residential housing, for the construction of other works not being residential housing, or other projects for which the relevant law requires a certificate or decision of a competent state agency, or any other legal basis, the description of the security asset in the security contract must specify such legal basis.
- The description of warehouse goods must set out the address and serial number (if any) of the warehouse or other indications of its location.
In addition, Decree 21 expressly provides for certain security assets, as follows:5
- Land use rights and assets attached to land
- Assets created from surface rights or from usufruct rights
- Assets created from surface rights or from usufruct rights
- Objects with auxiliary objects, integrated objects and special objects
- Valuable papers, securities and the balance of a savings deposit
- Asset rights arising from a contract
- Assets formed from capital contribution
- Right to exploit natural resources
- Asset rights arising from intellectual property rights, information technology, or science and technology activities
- Investment projects and assets belonging to an investment project
- Goods circulated during the course of production and business
Decree 21 also provides for identification of security assets in certain circumstances of changes of security assets, such as when security assets are divided, separated, consolidated, merged or mixed with another asset, processed into a new asset, used to contribute capital in a commercial legal entity, and installed or integrated by the securing party into software or a software system.6
4. Effectiveness of security contracts and security measures
Unlike Decree 163, which provides for the effectiveness of a security transaction, Decree 21 details the effectiveness of security contracts and security measures. Such approach is consistent with the Civil Code.
More specifically, regarding the effectiveness of security contracts:7
- A security contract that is notarized or certified in accordance with the Civil Code or other relevant law, or upon request, is effective as from the time of such notarization or certification. Otherwise, it is effective on the date agreed on by the parties. If the parties have not made any specific agreement, the contract is effective from the time it is entered into.
- If a security asset is withdrawn pursuant to an agreement, the contents of the security contract relating to such withdrawn asset are no longer effective; if the security asset is supplemented or replaced, any amendment or supplement to the security contract relevant to such supplemented or replacement asset is implemented in accordance with the provisions of the Civil Code and any other relevant law.
- A security measure that has not yet become effective against a third party does not change or terminate the validity of the security contract.
Regarding the effectiveness of a security measure:8
- A security measure is only effective against third parties when the security contract has taken effect.
- If the Civil Code or another relevant law requires that a security measure be registered, or if it is registered pursuant to an agreement [of the parties] or at the request of the secured party, the time of registration at the competent agency as prescribed by the relevant law is the time when such security measure becomes effective against third parties.
- Unless falling within (ii), a pledge, deposit (đặt cọc) or security collateral (ký cược) is effective against third parties from the time the secured party holds the security asset.
“Holding the security asset” means that the secured party directly manages, controls or dominates the security asset, or another person manages it pursuant to an agreement or pursuant to law but the secured party still controls and dominates such asset.
- If a security asset falling within the security measures prescribed in (iii) above is assigned to another person to manage, such security measure is effective against third parties starting from the time:
- When the mortgagee, the party receiving the deposit or receiving the security collateral holds the security asset
- When the asset manager directly receives the security asset from the pledgor, depositor or bailor
- When another person is currently directly managing the security asset and such asset is used as a pledge, deposit or security collateral
- An escrow deposit (biện pháp ký quỹ) is effective against third parties from the time the asset is deposited into the escrow account at the credit institution holding the escrow deposit account.
5. Concepts of reasonable period in security enforcement and reasonable expenses paid to recipient of deposit or security collateral
“Reasonable period” means: (i) a period of time formed in accordance with a custom established between the parties; or (ii) a period of time during which, under normal conditions, the parties to a security contract or security measure or other subjects [parties] with related rights and interests may exercise their rights or perform their obligations. “Reasonable period” is referred to under Decree 21 as follows:
- If the pledged property is an object in danger of losing or diminishing its value, the pledgee holding such property must notify the pledgor and demand that the pledgor advise a resolution within a reasonable period; if the pledgor does not reply within such reasonable period, the pledgee may take necessary measures to prevent such loss or diminution in value.
- A guarantor must perform the guaranteed obligation within the agreed term. If there is no such agreed term, the guarantor must do so within a reasonable period after receiving notice from the principal.
- Reasonable period for notification on enforcement of security assets will be discussed in Section 6.
For deposit and security collateral, “reasonable expenses” to be paid to the recipient of the deposit or security collateral for its preservation is defined as actual, necessary and legal expenses at the time of payment which, under normal conditions, the recipient of the deposit or security collateral must pay in order to ensure it is not lost, destroyed or damaged.
6. Enforcement of security assets
Decree 21, requires a notice on enforcement of security assets to comply with the following:9
- Mandatory contents: An enforcement notice must include enforcement reason, security asset to be enforced, and the time and place of enforcement.
- Notification method: An enforcement notice must be in writing, directly or via authorization, postal service, electronic means in the form of data message, or other method. If a security asset is being used to secure many obligations and there are many secured parties, notification could also be made by registering the enforcement notice in accordance with the laws on registration of security measures.
- Notification term is according to the agreement between the parties. If there is no agreement, notification must be made within a reasonable period, but at least 10 days (for movable assets) or at least 15 days (for immovable assets) before the time of security asset enforcement, except for immediate enforcement applicable for security assets in danger of losing or diminishing its value. No term is applied by laws and only prior notice is required for enforcement of security assets being listed as securities, goods on the commodity exchange, or other moveable property for which a specific and clear market price can be determined.
Enforcement period is as agreed on by the parties. If there is no such agreement, the secured party will determine the enforcement term after serving the enforcement notice.10
Under Decree 163, if the securing party or party holding the security asset fails to deliver the security assets, the secured party has the right to seize the security asset and seek support from the communal People’s Committee and local Public Security. However, under Decree 21, the secured party only has the right to conduct an actual inspection of the security asset in order to prevent its dispersal and to ensure its realization, or to petition a court to settle the matter.11
If the parties agree to enforce security assets by means of auction, Decree 21 expressly provides for the parties’ autonomy in deciding the procedures and organization of such auction. The laws on auction only applies when there is no such agreement between the parties.12
1 Article 61 of Decree 21.
2 Article 4 of Decree 21.
3 Article 9 of Decree 21.
4 Articles 12, 13, 18, 19 of Decree 21.
5 Articles 10-19 of Decree 21.
6 Article 21 of Decree 21.
7 Article 22 of Decree 21.
8 Article 23 of Decree 21.
9 Article 51 of Decree 21.
10 Article 52.4 of Decree 21.
11 Article 52.6 of Decree 21.
12 Article 52.2 of Decree 21.