On 19 March 2021, the Government issued Decree No. 21/2021/ND-CP guiding the implementation of the Civil Code on security for the performance of obligations (“Decree 21”). Decree 21 came into force on 15 May 2021 and replaced Decree No. 163/2006/ND-CP (“Decree 163”).

Several salient provisions of Decree 21 are as follows:

Definition of the term “Reasonable period”

Under Decree 21, there has been a definition for “reasonable period”. It is worth mentioning that, although many laws and regulations used this term before, none has a clear definition for it. This is the first time, a regulation on security for the performance of obligations provided definition for “reasonable period”. A clear definition such as this could help in avoiding unnecessary confusion and arguments related to the use of this term.

Identification of several types of security assets

Decree 21 expressly provides several types of security assets under the law, including but not limited to: (i) land use rights and assets attached to land, (ii) assets created from surface rights or from usufruct rights, (iii) assets created from surface rights or from usufruct rights, (iv) objects with auxiliary objects, integrated objects and special objects, (v) valuable papers, securities and the balance of a savings deposit, (vi) asset rights arising from a contract, (vii) assets formed from capital contribution, (viii) investment projects and assets belonging to an investment project.

Application of specific law and regulation

Under Article 4.1 of Decree 21, in the event law and regulation on land, houses, investment, enterprises, securities, insurance, financial institutions, natural resources or other fields prescribe collateral, establishment, implementation of security measures or realisation of collateral specifically, these specific laws and regulations shall prevail.

Parties to the contract have more freedom in choosing contract terms

Other than the application of specific law, Decree 21 also provides that the agreement reached between the parties shall be complied with if the parties in a relationship of securing performance of an obligation have an agreement that is different from the provisions of Decree 21 but complies with the basic principles of the civil law and does not breach the valid conditions of a civil transaction and does not breach the restrictions on the exercise of civil rights prescribed in the Civil Code or other relevant laws.

Description of security assets

Previously, Decree 163 also requires the securing party and the secured party to describe security assets. However, the law was silent on the requirements and criteria for such description. Such requirements have been clearly provided under Decree 21. Further, not only Decree 21 set out requirements and criteria for security assets description in general, but it also provides detailed requirement for certain types of security assets.

Effectiveness of security contracts, security measures

Prior to the promulgation of Decree 21, there are various laws and regulations in many areas regulate the effectiveness of security contract and security measure. Each type of security contracts, security measure for each type of assets might not be similar regarding the timing for effectiveness. This might cause confusion for parties to the security contracts and security measures, especially those who are not familiar with Vietnamese law. Under Decree 21, the timing for effectiveness of security contracts and security measures for many types of security assets are regulated and put under one legal instrument.

Acceptance of a mortgage by an individual or economic organisation not being a credit institution

Decree 21 has recognised the right to accept a mortgage by an individual or economic organisation not being a credit institution over a land use right or assets attached to land being used by a family household or individual. Other than Decree 21, the current and previous laws and regulations on civil relations, land, credit institution and other relevant laws only recognised the right to accept mortgage by an economic organisation being a credit institution over a land use right or assets attached to land being used by a family household or individual.

Right of recourse to the security asset

Subject to several exceptions, the right of the secured party with respect to the collateral in a security measure that has taken effect against third parties shall remain unchanged or does not terminate if such collateral is transferred to another person as a result of a purchase and sale, gift, exchange, assignment or other transfer of ownership; or as a result of taking possession, using or receiving the benefit of the collateral without any legal basis.

Security by an asset to be formed in the future

Previously, under Decree No 163/2006/ND-CP, in the case where the security for performance of an obligation is an asset to be formed in the future, the secured party shall have the right to part or all of the security asset when securing party own such part or the whole of the security asset. Nonetheless, after Decree 21 became effective, the secured party shall have right to a part or all of the security asset to be formed in the future arises as from the time such part of or the whole security asset is formed.

Reservation of ownership

Previously, under Decree No 163/2006/ND-CP, in case where the security for performance of an obligation is asset to be formed in future, the secured party shall have right to part or all of the security asset when securing party own such part or the whole of the security asset. Nonetheless, after Decree 21 became effective, the secured party shall have right to a part or all of the security asset to be formed in the future arises as from the time such part of or the whole security asset is formed.

Realisation of security assets

Under Article 300 of the Civil Code, prior to carrying out realisation of the security property, the secured party must provide written notice. However, the Civil Code does not provide requirements and conditions concerning such a notice. Decree 21 has provided a guide on the mandatory content of the abovementioned notice. Additionally, the method for notification and notification terms are also set out under Decree 21.

If you have any questions or require any additional information, you may contact Nguyen Mai Phuong of ZICO Law Vietnam (a member of ZICO Law).

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