Security condition in a secured transactions under Vietnamese laws - Apolat Legal

Security condition in a secured transactions under Vietnamese laws

Typically, when an individual or organization wants to receive a loan to serve different needs and purposes such as investment, business, capital mobilization, restructuring, etc., banks are ideal places to help them to achieve their goals. However, to be disbursed by the bank for substantial loans, individuals and organizations must meet other general conditions such as non-performing loans recorded in the bank system. Therefore, having collateral is one of the critical issues to be considered by the bank for a loan. Collateral can be land-use rights, factories, equipment and machinery, etc. Security is usually mortgage because the mortgagor does not have to transfer ownership but can still use it during the mortgage term. It can be clearly seen that any organization or individual, including a bank, when they want to lend, in addition to assessing the borrower’s financial ability, the collateral helps the lender feel more attentive and confident. Therefore, understanding the security conditions in the secured transaction is considered an essential condition for the secured transaction to be valid. 

A secured transaction must meet the conditions of content and form. Regarding the content, if the property used to secure the performance of obligations of the obligor is prohibited or restricted, it will lead to the secured transaction will be invalid. Regarding the form, Article 4 of Decree No.102/2017/ND-CP on registration of security stipulates that specific security must be registered for security such as mortgage of land use rights, mortgage of aircraft, pledge of aircraft.

Currently, the Civil Code 2015 stipulates 09 securities to secure the performance of civil obligations, including pledge, mortgage, deposit, security collateral, escrow deposit, guarantee, title retention, fidelity guarantees, a lien on the property. Security is used flexibly and diversely in many different fields. Lenders and borrowers often have access to secure in civil transactions, business and commercial transactions, which will apply in accordance with the provisions of the Civil Code 2015. In addition to the Civil Code, several specific fields rarely appear in daily transactions such as maritime, civil aviation, and land. The parties need to refer to and comply with the provisions of the Vietnam Maritime Code, Law on Civil Aviation 2006 (amended and supplemented 2014), Land Law 2013. Accordingly, the secured transaction is in one of the specific fields such as investment, enterprise, securities, insurance, banking, natural resources, aviation, maritime, and intellectual property specifics of security assets, establishment and implementation of security or handling of security assets, the specific provisions of the above fields shall apply.

The object of a secured transaction is property or reputation (unsecured). Collateral includes objects, money, valuable papers (such as stocks, bonds, drafts, promissory notes, bills, certificates of deposit, checks, fund certificates…) and property rights (rights to use land). In order for collateral to meet security conditions, collateral is divided into three groups: prohibited assets, restricted assets and assets not belonging to the group of prohibited or restricted assets. 

1. Prohibited assets: a secured transaction is a civil contract in which one of the conditions for a civil transaction to take effect is that “…the content of the civil transaction is not contrary to the law,…”. Accordingly, types of assets are prohibited in secured transactions for specific fields, specifically:

  • Regarding land: the State allocates land of organizations land without collection of land use levy; land of economic organizations, public non-business organizations that are leased land by the State with the collection of annual land rental; the land is not eligible for a mortgage but only assets on the land such as land use rights being distrained to secure judgment enforcement, land use rights without a land use right certificate; disputed land.
  • Assets prohibited by law from being produced, traded or used in Vietnam, such as counterfeit and smuggled goods (Appendix 1 of Decree 59/2006 dated June 12, 2006 as amended and supplemented under Decree 43/2009 May 7, 2009).
  • Organizations and individuals using land at airports and airfields: use the land for the right purposes; may not exchange, transfer, donate or lease land use rights, mortgage or contribute capital with land use rights.
  • The assets are prohibited from implementing security because it belongs to 8 business lines banned from investment and business under the Investment Law 2020.

2. Restricted assets: are not assets that are prohibited from secured transactions but will be restricted from secured transactions in some cases due to (i) legal regulations or (ii) binding agreements related parties such as:

Assets that the buyer deferred or gradually paid for the purchase within a period after receiving the purchased asset. The seller is entitled to retain ownership of the sold property until the buyer pays fully unless otherwise agreed. It means that the buyer does not yet have ownership rights to the property, typically in the form of an installment purchase. Buyers pay an installment of an asset, such as a motorbike, when they have full rights of an owner (right to possess, use and dispose of the property), that is when they fulfill their obligation to pay the seller in full.

Assets are being pledged, mortgage, deposit, secured collateral, escrow deposited, lien on the property to secure the performance of a civil obligation (unless permitted by law).

Enterprises should be careful in transactions related to securities 

As mentioned in the introduction, the security is chosen to prevent risks when the obligor fails to perform or is unable to perform the obligation. In addition to meeting the security conditions (type of collateral), the enterprise also needs to pay attention to the authority to sign a contract with an agreement to use security measures. Unlike individuals, businesses have a substantial and significant impact on the development of the country. Some businesses have thousands of shareholders with significant mobilized capital. Therefore, related to secured transaction s of an enterprise will carry a higher risk than that of an individual because only one or a few individuals with decision-making power in the company do not comply with them for the benefit of the company, leading to the signing of contracts without authority, thereby affecting the interests of small shareholders in the company in particular and the company in general.

The rights and obligations of the legal representative and the business manager in each type of enterprise will be different. However, the common point that can be seen is the responsibility to perform the assigned rights and obligations honestly, carefully, and best to ensure the legitimate interests of the enterprise, to be loyal to the interests of the enterprise, do not abuse their position and status and use the assets of the enterprise for personal gain or to serve the interests of other organizations and individuals. In order to prevent abuse of positions and status of business managers, the Enterprise Law 2020 stipulates:

  • For limited liability companies: The Board of Members has the right to approve contracts for borrowing, lending, sale of assets, pledge, mortgage, deposit, guarantee whose value are at least 50% of the total assets written in the latest financial statement or a smaller ratio or value specified in the company’s charter.
  • For joint-stock company: The General Meeting of Shareholders, Board of Directors need to approve pledge, mortgage, deposit, guarantee that are worth at least 35% of the total assets written in the latest financial statement.

Transactions involving security are often large in substance and complex in essence. Security conditions are intended to help the lender prevent risks, establish the right and order to handle the collateral that the lender can guarantee and minimize the risks for loans. In order to choose to use a security in accordance with the nature of the transaction and meet the security conditions are two fundamental conditions that at the beginning of the first stage, the parties must consider and properly implement to avoid risks in case of dispute arising.  

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.

Share: share facebook share twitter share linkedin share instagram

Find out how we can help your business


    Send Contact
    Call Us
    This site is registered on as a development site. Switch to a production site key to remove this banner.