Trade finance has increased the importance of secured lending. There is a clear understanding of the variety of assets that can be used as security. Using dynamic assets such as accounts receivable and inventory as security is common. The increase in trade and the growing sophistication of the law have propelled change. Moreover, with trade has come the need to adhere not only to Vietnamese legal and commercial practices, but also to international practices. Clearly, security agreements fashioned in Vietnam are closer to international norms.
This article discusses the use of a company’s assets such as receivables and inventory as collateral to finance trade.
The general rules on secured transactions between a debtor and a lender first appeared in the 2005 Civil Code. Those rules reflected the then recent developments that had occurred in secured transactions. Before the 2005 Civil Code, secured transactions had been classified on the basis of type of asset. Movable assets had been used as collateral in a “pledge” while immovable assets had been used as collateral in a “mortgage”. Under the 2005 Civil Code, whether a secured transaction was a pledge or a mortgage depended on whether the creditor had possession (pledge) or did not have possession (mortgage) of the collateral. The rules have followed this concept even after the 2015 Civil Code came into effect.
Under current rules, the secured interest that is created on inventories and receivables is considered to be a mortgage, because possession of inventories and receivables remains with the customer–for example, raw materials used in production. This changes, of course, if the secured obligation is not satisfied when it falls due, and possession is taken by the creditor. However, whether an asset is movable or immovable no longer controls. But it is still relevant in order to understand the filing requirements.
To perfect a mortgage
The law does not require that a mortgage on inventory or receivables must be registered in order to be effective. However, without registration the priority of mortgages on assets that are not registered may be successfully challenged by a third party who has an interest in the same assets. Another risk is that a debt secured by an unregistered security will be treated as unsecured debt if the underlying asset is given as collateral to another lender who then registers its secured interest. According to the 2015 Civil Code, a lender’s secured interest in an asset that is registered will have priority over an unregistered interest in the asset. In case both mortgages have been duly registered, the lenders’ secured interest ranks according to the date of the registration. It is clearly advisable for a lender to insist that the secured interest it creates be registered, in order to ensure its priority.
There are several registration issues that a lender will want to take into account. Firstly, the current system for registration of a secured interest is hardly perfect. A mortgage on inventories or accounts receivable, say, must be registered with the National Registration Agency for Secured Transactions (“NRAST”), while a secured interest in immovable assets such as land, houses or buildings must be registered with the Land Registration Office under the provincial Departments of Natural Resources and Environment (“Land Registration Office”). We point out one simple problem that arises from this dual registration system. Many inventories, such as construction materials and fittings, eventually become part of a house or a building, ie, are attached to immovable assets. Likewise, plants and crops are considered as assets attached to land–an immovable asset–but they are certainly movable assets after they are harvested. Unfortunately, there is no rule for cross-referencing between the two registration systems. Therefore, it is uncertain if a collateral which has been registered with the Land Registration Office and which then becomes a movable asset, is recognized equally as though it had been registered with the NRAST, or vice versa. We suppose not.
Secondly, while access to registered information of movable assets is quite easy through NRAST’s online database, there is not yet a complete online database to track the mortgage status of an immovable asset. The current practice is that a lender must send a letter to the Land Registration Office to request information.
Although registration of a mortgage may give a lender certain comfort that it will be able to recover its debt when the debtor is in default, there is no substitute for a comprehensive security agreement. The language of a security agreement for dynamic underlying assets such as inventories and receivables is often tailored to a specific fact and security situation.
For example, security agreements with inventories as collateral will have special record-keeping and reporting requirements. There are notice requirements if there is an intention to dispose of the assets. An agreement may require that proceeds from the sale of the inventories or that payment of receivables be recorded separately. The agreement can provide that the proceeds, when received, be deposited into an account that is separate from the customer’s own accounts and to which separate rules apply. Agreement on supplements, amendments, and changes in underlying assets should also be made and registered with the NRAST.
If receivables are given as collateral, then upon the debtor’s default, a lender should have reserved the right to collect the receivables directly from the debtor’s customer. The lender may also request the debtor’s customer to pay interest on late payments. It is also important to insure that the lender may charge back any uncollected receivables against the debtor.
This is a brief discussion of security as used in trade finance in Vietnam. We expect that as time passes, the practice and sophistication of this form of asset-based financing will continue to change.
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 The Civil Code no. 33/2005/QH11 promulgated by the 11th National Assembly on June 14, 2005
 The Civil Code no. 91/2015/QH13 promulgated by the 13th National Assembly on November 24, 2015