Overview

The practice of mortgaging property to secure the lending of money from the bank is very common among enterprises as well as individuals. However, there are many cases where the bank conducts the auction of mortgaged property without the owner’s approval leading to the latter objecting, which remains as one of the big issues in our legal system. Therefore, a study of the regulations and examining real cases make for better understanding and application.

Analysis

The law that directly governs the relationship between the securing party and the secured party under a mortgage contract is the Civil Code 2015 (the “Code”).  Article 299 of the Code illustrates different cases when the secured party can realize the mortgaged property, which includes:

  • When the securing party fails to perform its obligation within the time limit; or
  • Due to the breach of contract or violations of law by the securing party; or
  • Other cases as prescribed by law or agreed by parties.

The Code also stipulates different methods to realize mortgaged property in Article 303.1 as follows:

  • Put the property up for an auction;
  • The secured party can sell the property by itself;
  • The secured party can accept the property as substitution for the performance of obligations of the securing party;
  • Other methods.

Therefore, both parties can agree on methods to realize mortgaged property in their mortgage contract. In case there is no term relating to method to realize mortgaged property, following Article 303.2, the property will be put up for auction, unless otherwise prescribed by the law.  However, the secured party has obligation to notify the securing party of the realization of property within a reasonable time limit.  If not, the secured party has to compensate in case the realization of property causes damage to the securing party.

In fact, one of the most notable cases is the case between the Saigon North Branch of Military Bank (“the Bank”) and Dong Tay Pharmaceutical Joint Stock Company (“Dong Tay”).  Dong Tay entered into a credit contract with the Bank under which the Bank would lend Dong Tay 4.5 billion VND. To secure the loan, Dong Tay mortgaged its two land areas to the Bank. As Dong Tay failed to repay its debt, the Bank decided to forward the loan to the Military Bank Assets Management Company Limited (“MBAMC”) for handling. Then, without notifying Dong Tay, MBAMC conducted an auction for both mortgaged land areas. Pursuant to abovementioned clause of the Code, the Bank had the right to realize the two land areas by auction or other methods as agreed by both parties because Dong Tay failed to perform its obligations.

Nevertheless, the Bank failed to notify Dong Tay of the realization. Therefore, the appellate court ruled in favour of Dong Tay announcing that the Bank had violated the law when conducting the auction of mortgaged land areas without notifying the securing party.

Consequently, it is important for both parties to make a detailed contract containing all necessary requirements in accordance with the Code: such as cases of realizing mortgaged properties, method to realize mortgaged property and how to legally proceed with procedures to efficiently achieve the resolution of remaining issues between parties.


DISCLAIMER

This LBN newsletter are NOT legal advice. Readers are advised to retain a qualified lawyer, should they wish to seek legal advice. VCI Legal are certainly among those and happy to be retained, yet VCI Legal is not to be hold responsible should any reader choose to interpret/apply the regulations after reading this LBN without engaging a qualified lawyer.