Distraining Collateral At Credit Institutions

ARTICLES

Distraining Collateral At Credit Institutions

During the past few years, legal enforcement activities relating to credit and banks have remained a conundrum as, despite great effort and unfaltering determination of legal enforcement authorities to solve the problem, the results of enforcing judgements and decisions of Courts have fallen short of expectations when enforcement ratio is still low, the money and work have yet to be done stay huge, and the enforcement process remains lengthy.

To boost the legal enforcement efficiency in this sector, the National Assembly has issued Resolution No. 42/2017/QH14 (“Resolution 42”) as a legal instrument to assist legal enforcement agencies and credit institutions in dealing with bad debts. The issuance of Resolution 42 ensures proper handling of bad debts and prevents cases where the bailiff distrains collateral, which acts as security for loans at credit institutions or branches of foreign banks, of the person against whom enforcement is sought, to execute other obligations not in accordance with the Resolution’s provisions and thus affect the ability of credit institutions to recover debts.

Within the scope of this article, the author will focus on analyzing and providing real-life scenarios relating to the act of distraining assets of a person against whom enforcement is sought where such assets have already been pledged or mortgaged at credit institutions.

1. In case credit institutions are the beneficiaries

The act of distraining collateral at credit institutions is a specific case of distraining assets – this is a method of coercive enforcement of judgements and decisions of civil courts; therefore, certain conditions must exist before this method can be applied. As prescribed in Article 70 of the Law on the Enforcement of Civil Judgements, the grounds for coercive enforcement of judgements are: (1) The judgement, decision; (2) The decision on enforcing the judgement; (3) The decision on coercively enforcing the judgement, unless the judgement, decision have decided on distraining or freezing the assets, accounts and the case of enforcing preliminary incentives of the Court.

When one of the above grounds exists, the bailiff will enact the distrainment. However, special attention should be paid to ensuring the judgements, decisions mentioned in item (1) have already taken legal effect or have not taken legal effect but must be implemented right away. 

Apart from the aforementioned grounds, to carry out the distrainment of collateral in case the beneficiary is a credit institution, the following conditions must also be satisfied:

Firstly: The enforcee has the ability to enforce the judgement but is not willing to do so

“Having the ability to enforce the judgement” is the case where the enforcee has the assets or incomes to perform their property obligations; on their own or through other people implement their obligation to enforce the judgement. Whether or not the enforcee has the ability to enforce the judgement will be determined by the bailiff via the process of validating judgement enforcement conditions. However, in reality, in case of distraining collateral, the bailiff always deems the enforcee capable of enforcing the judgement based on the fact that the enforcee has collateral at credit institutions.

Secondly: The distrainment of collateral can only be carried out if after the period allowed for voluntary enforcement, the enforcee is still not willing to enforce the judgement

The deadline for voluntary enforcement is 10 days, from the day the enforcee receives the decision on enforcement or a valid notification of such decision. The determination of deadlines for voluntary enforcement is a mandatory and first procedure of the bailiff in charge of organizing the judgement enforcement. Only when the deadline had passed but the enforcee has not carried out at all or has not carried out the full of their obligations shall the bailiff coerce the enforcee to perform their obligations in accordance with the judgement, decision. 

Consequently, a bailiff shall distrain collateral if one of the grounds prescribed in Article 70 of the Law on the Enforcement of Civil Judgements exists and shall only do so if after the time allowed for voluntary enforcement, the enforcee, although having the ability to enforce the judgement, has not voluntarily carried out such judgement.

2. In case an enforcee’s assets are pledged, mortgaged at a credit institution but the credit institution is not the beneficiary

Pursuant to Article 90 of the Law on the Enforcement of Civil Judgements guiding on distraining and handling assets being pledged, mortgaged, a bailiff can only distrain this type of asset if:

  • The enforcee does not have any other asset apart from the asset being pledged, mortgaged at the credit institution, or if they have other assets but those assets are not enough to enforce the judgment.
  • The asset being pledged, mortgaged at the credit institution is greater in value than the obligation it is secured for and the expense of coercive judgement enforcement.

For example

On December 1st, 2014, Mr. A mortgaged a 5-billion-dong house to the bank to take out a loan of 3 billion dongs, the term of which is 12 months starting from December 1st, 2014. On March 1st, 2015, Mrs. B filed a lawsuit demanding Mr. A to pay the debt of 1 billion dongs, in the Judgement No. 01/DSST dated May 1st, 2015, the People’s Court of District T ordered Mr. A to pay Mrs. B the debt of 1 billion dongs. On May 15th, 2015, Mrs. B requested the enforcement of that judgement. The legal enforcement agency determined the house which Mr. A had mortgaged to the bank is, at the time, worth 3,5 billion dongs both originally and additionally with interest; the expense of coercive judgement enforcement is approximately 300 million dongs. Apart from the aforementioned house, Mr. A did not have any other valuable asset to enforce the judgement. In this case, the legal enforcement agency had the right to distrain and handle Mr. A’s house for judgement enforcement, although the mortgage loan agreement between Mr. A and the bank was not due yet (December 1st, 2015).

When distraining pledged or mortgaged assets at a credit institution, bailiffs must immediately inform that institution and in this case, the amount of secured debt owed to that institution shall be paid for first.

Clause 3, Article 21 of Decree No. 62/2015/ND-CP also stipulates: “As regards an asset which has been legally pledged, mortgaged, if the result of verification at the time of enforcing the judgement shows that the asset is worth equally or smaller than the obligation due according to the pledge, mortgage agreement, the bailiff has to notify the lender of the enforcee’s obligations and request them to inform the civil judgement enforcement agency when all the contractual obligations are carried out or when the pledged, mortgaged asset is dealt with”. In this case, the civil judgement enforcement agency is only allowed to distrain, handle the asset after the mortgage has been released or after the credit institution has dealt with the asset to pay for the signed aggrement (if any) and the leftover money has been discounted.

However, if while the civil judgement enforcement agency is organizing the enforcement and finds out the enforcee as collateral for bad debt at credit institutions, not only Article 90 of the Law on the Enforcement of Civil Judgements but also Article 11 of Resolution 42 guiding the handling of bad debts at credit institutions has to be applied. Article 11 of Resolution 42 stipulates: “Assets used as collateral for bad debts of the enforcee which secure the payment of debt owed to credit institutions, branches of foreign banks, organizations that exchange or handle bad debts shall not be distrained to perform other obligations prescribed in Article 90 of the Law on the Enforcement of Civil Judgements, except for the implementation of judgements, decisions on alimony, compensation for loss of life, health and cases where there are written approvals from the credit institutions, branches of foreign banks and organizations that exchange or handle bad debts.” The combined application of Article 90 of the Law on the Enforcement of Civil Judgements and Article 11 of Resolution 42 ensures the satisfaction of both necessary conditions (the implementation of judgements, decisions on alimony, compensation for loss of life, health and cases where there are written approvals from credit institutions, branches of foreign banks, organizations that exchange and handle bad debts) and sufficient condition (the asset’s value is greater than the secured obligation and the expense of coercive enforcement and there are no other assets that can be used to enforce the judgement) during the process of settlement.

Example 1: 

The civil judgement enforcement agency is enforcing a court’s judgement ordering Mr. A to pay his debt of 300 million dongs to Mrs. B. According to the verification result, Mr. A’s only asset is a land lot comprising of 500m2 being mortgaged at Bank X for a loan of 400 million dongs. The result also suggests that this asset is worth approximately 1 billion dongs and Bank X states that this is a type-3 bad debt, the bank has not handled the asset yet and does not agree to let the legal enforcement agency handle it either. If determined on Article 90 of the Law on the Enforcement of Civil Judgements, the civil judgement enforcement agency has the right to distrain this asset to ensure Mr. A’s will perform his obligation towards Mrs. B. However, in light of Article 11 of Resolution 42, the civil judgement enforcement agency cannot distrain the asset because it is collateral for the bad debt at a credit institution; the obligation being enforced from Mr. A is a usual debt paying obligation, it does not fall into the category of alimony, compensation for loss of life, health and bank X also did not agree to let the civil judgement enforcement agency to handle the asset.

Example 2: 

The civil judgement enforcement agency of Tien Giang province is organizing the enforcement of Judgement No. 32/2015/HSST compelling Mr. Hai to compensate Mrs. Ha an amount of 120 million dongs (for murder). During the enforcement, it was determined that Mr. Hai’s only property is a land lot and house attached thereto currently being mortgaged at Vietnam Joint Stock Commercial Bank for Industry and Trade – Tien Giang branch to secure a loan of 200 million dongs. The verification result suggests the value of this asset is approximately 800 million dongs. In this case, according to Article 11 of Resolution 42, the bailiff has the right to distrain and handle the asset as provided for. However, if the Bank for Industry and Trade issues a document determining this is bad debt and attains the asset to handle according to Resolution 42, together with Clause 2, Article 4 of Multidisciplinary Circular No. 11/2016/TTLT-BTP-TANDTC-VKSNDTC, the Bailiff cannot distrain Mr. Hai’s asset to enforce the court’s judgement because this asset is being handled by the bank.

However, in case the Civil judgement enforcement agency had started the distrainment in accordance with Article 90 of the Law on the Enforcement of Civil Judgements prior to August 15th, 2017, the distrainment shall be continued according to provisions of the law on the enforcement of civil judgements

From the two examples above, it can be seen that the authority of Bailiffs when handling collateral of enforcees according to Article 90 of the Law on the Enforcement of Civil Judgements has been somewhat limited by provisions of Resolution 42. 

In addition to that, Article 13 of Resolution 42 further stipulates that credit institutions can sell bad debts currently being distrained to organizations that exchange and handle bad debts or debt exchanging enterprises. Before carrying out the sale of bad debt, a credit institution is obliged to provide full and authentic information about the collateral’s status of being distrained. The buyer will assess and determine the risk of purchasing this debt on their own.