Understanding The Debt Purchase And Sale Between Credit Institutions

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Understanding The Debt Purchase And Sale Between Credit Institutions

Under Circular 09/2015/TT-NHNN dated 17 July 2015 of the State Bank of Vietnam describing debt purchase and describing debt purchase and sale by credit institutions and foreign bank branches (“Circular 09”), debt purchase and sale is “a written agreement on the transfer of a creditor’s right to claim a debt arising from the lending operation or a debt to be paid on a third party’s behalf in the guarantee operation whereby the debt seller transfers the creditor’s ownership of the debt to the debt purchaser and receives a payment from the debt purchaser.”[1]

The Law on Credit Institutions allows the banks or financial institutions to do sale and purchase of debt among the credit institutions, but such debt sale and purchase must be compliant with the State Bank’s regulations.[2]

In term of debts purchase and sale, the relevant parties shall follow the statutory conditions as follows:

Conditions for debts to be purchased and sold[3]

  • Dossier and related documents and records of the debt to be sold and security contract (if any) provided by the debt seller must fully and accurately show the state of the debt in accordance with law;
  • There is no written agreement on prohibition of debt purchase and sale; and
  • The debt is not used to secure the fulfillment of a civil obligation at the time of debt purchase and sale, except the case where the secured party accepts in writing the debt sale.

Conditions for the credit institution to be debt purchaser[4]

  • Being a credit institution or foreign bank branch, which was already approved by the State Bank of Vietnam for debt purchase activity as stated in its establishment and operation license;[5] and
  • Its non-performing loan (i.e. bad debts) ratio is under 3%, except cases of debt purchase under an approved restructuring plan.

General conditions and rules for relevant parties to perform debt purchase and sale[6]

  • Debt purchase and sale must not be in contrary to the contents of credit contracts and guarantee contracts signed by debts sellers, clients and guarantors;
  • Debt purchase and sale shall be agreed by the parties and comply with the Circular 09 and relevant regulations;
  • The relevant parties being credit institutions, branch of foreign banks must promulgate internal regulations on debt purchase and sale (clearly stating the decentralized competence based on the principle of division of responsibilities for appraisal of and decision on debt purchase and sale; debt purchase and sale modes; debt purchase and sale process; debt assessment process; debt auction process for debts auctioned by these institutions or branches themselves, and risk management of debt purchase and sale transactions) before conducting the purchase and sale of debts;
  • Debt purchaser being credit institutions, branch of foreign banks must comply with regulations on assurance of safety for their operations;
  • Debt sellers may not redeem the debts they have sold;
  • In case of selling part of a debt or selling a debt to more than one purchaser, the debt seller and debt purchaser shall agree on proportion, modes, rights and obligations of each party, determination of the value of security assets (if any) for the part of purchased and sold debt and other specific contents of the debt purchase and sale contract in accordance with the laws; and
  • Debts to be sold shall be monitored, accounted and statistically reported in accordance with the laws.

General process and procedures for the parties to perform debt purchase and sale

Step 1: Promulgation of internal regulations on debt purchase and sale

Pursuant to the Circular 09, the parties must promulgate internal regulations on debt purchase and sale before conducting the purchase and sale of debts.[7]

Step 2: Selection of debt purchase and sale mode

The debt seller may select either of the following debt purchase and sale modes as below:[8]

  • Agreement: through direct negotiation between the debt seller and debt purchaser or through a broker; or
  • Auction: a debt seller may hire a professional auction organization to auction debts in accordance with the law on asset auction or organize by itself the debt auction.

Step 3: Establishment of debt purchase and sale council[9]

The debt seller shall establish debt purchase and sale councils in accordance with its charter and internal regulations on debt purchase and sale.

The composition, tasks and powers (including determination of debt purchase and sale price for case of debt purchase and sale under agreement, or reserve price in case of debt auction) shall be stipulated by the debt seller.

Step 4: Assessment and determination of debts[10]

The debt purchase and sale price shall be based on the agreements between the parties pursuant to the book value of the debts and interest that the debtor shall pay in future, classification of debt group, recoverability of the debt and value of the security asset (if any).

Step 5: Negotiation and signing of the debt purchase and sale contract[11]

The parties may negotiate and reach agreements in a debt purchase and sale contract that are not contrary to the Circular 09 and relevant regulations. Such debt purchase and sale contract must have the following principal contents:

  • Signing date of the contract;
  • Names and addresses of the parties to the contract;
  • Names and titles of representatives of the parties to the contract;
  • Names and addresses of the debtor and parties (if any) related to the purchased and sold debt;
  • Details of the purchased and sold debt: loan amount and term, borrowing purpose, book value of the debt by the time of purchase and sale;
  • Measures (if any) to secure the fulfilment of the payment obligation of the debtor regarding the purchased and sold debt;
  • Price of debt sale, payment mode and time;
  • Times, modes and procedures for the transfer of documents on debts, including dossier and documents on security assets for the debt (if any); the time when the debt purchaser takes up the debt seller’s rights and obligations to the debt;
  • Rights and obligations of the debt seller and debt purchaser;
  • Liability of the parties for breaching the contract; and
  • Settlement of arising disputes.

Step 6: Transfer of rights and obligations related to debts[12]

Under the law, the debt purchaser takes up the debt seller’s rights and obligations over the debt at the time stated in the purchase and sale contract. Hence, the debt seller shall transfer to the debt purchaser the rights obligations related to the debt including rights and obligations over debt security measures (if any). The transfer of rights and obligations over debt security measures must comply with the law on secured transactions and relevant regulations. The registration of change of the secured party must comply with the law on secured transactions.

Step 7: Reporting to the State Bank of Vietnam [13]

The debt seller and debt purchaser shall report on their debt purchase and sale transactions in accordance with the State Bank’s regulations on statistical reports.

Legal consequence after the transaction is completed

Under the Circular 09, upon the execution of debt purchase and sale contract, the debt seller shall transfer to the debt purchaser the rights and obligations including rights and obligations over debt security measures (if any) and the debt purchaser shall take up the debt seller’s rights and obligations over the debts at the time of such contract taking effect.[14]

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.

This article is for general information only and is not a substitute for legal advice.

 

[1] Article 3.1 of Circular 09

[2] Article 95.2 of the Law on Credit Institutions

[3] Article 4 of Circular 09

[4] Article 5.3 of Circular 09

[5] In order to obtain an approval for this debt purchase activity, the credit institution must prepare and apply an application dossier to the State Bank in accordance with Article 6 of Circular 09. Within 40 (forty) days after receiving a complete and valid dossier, the State Bank shall consider and approve debt purchase by the credit institution or foreign bank branch by a decision on modification and supplementation of the latter’s license. This document is an integral part of the license.

[6] Article 5 of Circular 09

[7] Article 23 of Circular 09

[8] Article 10 of Circular 09

[9] Article 11 of Circular 09

[10] Article 12 of Circular 09

[11] Article 13 of Circular 09

[12] Article 14 of Circular 09

[13] Article 22 of Circular 09

[14] Article 14.1 and Article 14.2 of Circular 09