subject law on secured transaction topic 09 evaluate the provisions on pledge of property of vietnamese 2015 civil code

Provision on definition of Pledge of propertyPledge of property is a security device regulated by the Civil Code.Article309 of Civil Code 2015 defined Pledge of property as “the delivery

MINISTRY OF JUSTICEHANOI LAW UNIVERSITY

FULL SEMESTERASSIGNMENT

SUBJECT: LAW ON SECURED TRANSACTION

TABLE OF CONTENTS

1 Provision on definition of Pledge of property 1

2 Provisions on collateral of Pledge of property 2

3 Provisions on subjects of Pledge of property 3

4 Provision on formalities of Pledge of property 5

5 Provisions on effectiveness of Pledge of property 6

6 Provisions on rights and obligations of pledgors and pledgees 7

7 Provisions on enforcement of Pledge of property 7

8 Provisions on termination of Pledge of property 8

CONCLUSION 9

The growth of the economy leads to the rapid development of civiltransactions, in which secured transactions play a very important role inprotecting the legitimate rights of subjects participating in civil transactions,encourage secured financing, facilitate access to credit and hence boosteconomic growth Pledge is one of the most commonly used security devicesin Vietnam todays In this essay I shall evaluate the provisions on Pledge ofproperty of Vietnamese 2015 Civil Code.

1 Provision on definition of Pledge of property

Pledge of property is a security device regulated by the Civil Code.Article309 of Civil Code 2015 defined Pledge of property as “the delivery by oneparty (hereinafter referred to as the pledgor) of property under its ownershipto another party (hereinafter referred to as the pledgee) as security for theperformance of an obligation” According to this article, Pledge of propertymust meet two requirements: (i) there is a conduct of “delivery” the propertyand (ii) the property must under the ownership of the pledgor, whereby the“delivery” act must be understood as the “delivery” in reality, which mean thepledgee must really obtain that collateral and not just receive delivery of legaldocuments which prove the ownership of the property.

This provision is entirely inherited from article 326 of Civil Code 2005,different to definition from article 329 of Civil Code 1995 as it extends thecollateral possibility not just as moveable property but can also be realproperty This extension is pertinent, as the need for Pledge of property isincreasing and there may be the need to put real property as collateral fromsome people However, because Pledge of property requires the act of

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“delivery” that property must be in reality as aforementioned, most of thetime, the collateral for Pledge is moveable property, rarely be real estate putdown to be collateral

This is quite an open provision, as it does not specify if the obligation must bethe obligation of the pledgor or not Hence, the pledgor can also be a thirdparty – who is neither parties of the secured obligation but delivers propertyunder his ownership to the pledgee to secure payment of performance of thatobligation

2 Provisions on collateral of Pledge of property

Whereas collateral in general can be property, acts which must be performedor even reputation, collateral of Pledge of property can only be property,including moveable property and real estate As earlier mentioned, thisinclusion of real estate is rational, to be more specific, it is because when thecountry has become more and more developed, more new services are startedto launch and become more diverse, including preserve property services, thepledgees have more measures to obtain, supervise the collateral even if thecollateral is real estate This is an improvement as it facilitates the party with1

rights to secure in the most effective way correspondingly

Civil Code 2015 only specifies one condition in article 309 that the propertymust under the ownership of the pledgor, but as per the nature of Pledge ofproperty, it must also meet other conditions: the property must be present, areidentified or identifiable, and transferable Thus, this security device is notapply to property to be formed in the future 2

In my opinion, the provisions of Civil Code 2015 in this matter are stilllacking and not quite reasonable, since (i) other conditions are not included

1 Nguyen Anh Tuan (2013), Cam co tai san – Mot so van de ly luan va thuc tien, Luan van thac si luat hoc,Truong Dai hoc Luat Ha Noi.

2 Bui Duc Giang (2020), Phap luat ve cam co tai san – Goc nhin tu thưc tien, Tap chi Ngan hang, (18), tr 19

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which can create confusion or misconception for people who are not involvedin legal profession reading the Civil Code and (ii) the requirement that theproperty must under the ownership of the pledgor can be troublesome whenapplies to real life With property that must be registered to have ownershipover such as car, motorbike, etc, the determination of who really own thatproperty is quite simple, but with properties that do not require this such asphone, laptop, how can the pledgee really identify if that property trulybelongs to the pledgor or not Most of the time, it is based on presumption ofpossession in reality and affirmation from the pledgor, which is incorrect in alot of situations The Civil Code does not regulate how can the pledgeeaccurately identify this, or if the property is under the ownership of others butnot the pledgor, can the pledgee still enforce it in accordance with theagreement, or how to protect the right of that pledgee, as the real owner hasrights to pursue his property, which makes the pledgee left with no moresecurity for the performance of obligation from the pledgor and it is difficultfor the pledgor to ask for another property as an substitute to be securedproperty.

3 Provisions on subjects of Pledge of property

Subjects of Pledge of property are parties who take part in Pledge of propertyrelation As stipulated in article 309 of the Civil Code 2015, the subjects ofPledge of property include pledgor - the party who delivers property under hisownership, and pledgee – the party who receives the property from thepledgor as security for the performance of an obligation The pledgor can alsobe a third party – who is neither parties of the secured obligation but deliversproperty under his ownership to the pledgee Contrary to that, the pledgee canonly be the party with rights in the secured obligation by Pledge of property Because Pledge of property is a supplemental device to secure the mainobligation, the subjects of Pledge of property must also meet the requirements

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of legal capacity when entering into a contract There are no provisions onspecific subjects of Pledge of property, hence they are applied in accordancewith general provisions in article 20 to article 24 of Civil Code 2015 Thesubjects of Pledge of property can be individuals, legal entities, familyhouseholds, co-operate groups or other organizations without legal entitystatus.

However, the application of these general provisions in practice may lead tosome troubles, restrictions First, as article 309 stipulated, the pledgor must bethe owner of collateral that he delivered, but in the situation where the pledgoris a State owned enterprise, the property that this enterprise put down to becollateral are technically belongs to the entire people with the State as therepresentative owner, which means the properties are not under the ownershipof that enterprise, but because the State assigned the property for thatenterprise and its manage rights so that the enterprise can utilize and use it fortheir operation, the State owned property is really the subject of this Pledge ofproperty, not the State In this case, the requirement that the pledgor must bethe owner of the collateral is not suitable in practice and differs fromprovisions of other relevant legal documents.

Moreover, in the situation when one party of the Pledge of property is familyhousehold, co-operate groups and other organizations without legal entitystatus, according to Civil Code 2015, where a member involved in a civilrelation is not authorized by other member as the representative, such memberis the subject of the civil relation established and performed by himself orherself Nevertheless, Law on Land 2013 recognized household using land asa subject participate in transactions in relation to land use right, thereforethere is inconsistency between the Civil Code and Land on Law as to subjectparticipate in relation to land use right in general, and in relation to Pledge ofproperty contract in specific Hence, there should be more detailed provisions

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regulate this situation to create legal basis for the subjects when applying thelaw, and also synchronize, unify all over the country.3

4 Provision on formalities of Pledge of property

Civil Code 1995 and Civil Code 2005 require the Pledge of property contractmust be made in writing according to the law Nonetheless, Civil Code 2015dropped this requirement and stipulated in article 310.2 that only when thecollateral is real estate, the Pledge of property contract must be made inwriting The Pledge of property documents do not need to be notarised,authenticated or registered, unless in the case where the law providesotherwise

This begs the questions, if the pledgor or the pledgee is illiterate and thePledge of property contract must be made in writing, must there witnesses ornot? If there are no witnesses, how can rights of the illiterate party besecured? Provisions of today’s law have not yet regulated these problems,which cause loop-holes when applying the law in practice

Also, in the case where the Pledge of property contract must not be made inwriting and the parties involved choose to contracting by oral, when thepledgee sells the collateral to a third party and at the moment of enforcing thePledge, the pledgor is nowhere to be found to establish a contract with thatthird party, the pledgee still does not have the right to establish a contract withthat third party to sell the collateral by himself, then there is no possible wayfor that third party to transfer the ownership under his name because there areno contracts for sale and purchase of property or contracts for gifts ofproperty, etc to allocate to State agencies

3 Duong Thi Mung (2020), Cam co tai san theo quy dinh cua Bo luat Dan su nam 1015 va thuc tien thuchien, Luan van thac si Luat hoc, Truong Dai hoc luat Ha Noi.

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5 Provisions on effectiveness of Pledge of property

Article 310 of Civil Code 2015 seperated effectiveness of Pledge of propertyinto two different angles: (i) effectiveness of a contract of pledge of propertyand (ii) effectiveness against a third person

A contract of pledge of property shall be effective at one of these threemoments: (i) from the time of entering the contract, (ii) from the time inagreement or (iii) from the time provided by law This shows the spirit ofdignification of freedom of agreements from the Civil Code 2015.

This is the first time which effectiveness against a third person of Pledge ofproperty is directly regulated by provision in the Civil Code This provisioncan be understood that when establishing a security transaction, there mayarise rights and obligations not only for the pledgor and the pledgee, but alsofor a third person who is not a subject of that transaction, by which the pledgeof property shall be enforceable against that third person from the time whenthe pledgee holds the pledged property if it is moveable property, from thetime of registration if an immovable property is the subject matter of apledge.4 However, the Civil Code 2015 does not have any provisions regulatethe time-limit when the parties must register, which party has the obligation toregister, etc, which may leads to disputes or non-unify application Thisprovision does not require registration of pledge for the Pledge to enforceableagainst third person, except for real estate, in my opinion this is reasonablebecause in the case of Pledge of property, the collateral has already beenphysically transferred to the pledgee Therefore, the pledge's possession of theproperty is sufficient to inform any third party about the existence of thepledge transaction with respect to that asset

4 Nguyen Minh Tuan (2016), Binh luan khoa hoc Bo luat Dan su cua nuoc Cong hoa xa hoi chu nghia VietNam nam 2015, Nxb Tu phap, Ha Noi.

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6 Provisions on rights and obligations of pledgors and pledgees

The obligations and rights of pledgors are listed at article 311, article 312 ofCivil Code 2015 Similarly, the obligations and rights of pledgees are listed atarticle 313, article 314 of Civil Code 2015 Compare to Civil Code 2005,these provisions are basically inheritance of provisions in Civil Code 2005,but their ways of using words are appended and more improved to consistentwith the nature of regulated relations, for example, article 312.1 of Civil Code2015 uses “terminate use of the pledged property” instead of “suspend” CivilCode 2015 also opens the scope of the pledgor and the pledgee’s rights suchas rights to “exchange or give the pledged property” , rights to “lease, lend5

the pledged property” 6

7 Provisions on enforcement of Pledge of property

The Civil Code does not propose provisions regulate enforcement of Pledgeof property in specific but regulate enforcement of security devices in general.As for cases where the pledger can enforce Pledge of property, they are listedat article 299 of Civil Code 2015 This provision not just introduces thedefault principles of the enforcement rights of the pledgee, on the other handalso allows the parties to agree in their Pledge of property contract on otherenforcement cases

Article 303 provides different enforcement ways, including selling by auction,selling the property by the secured party, receiving the property inreplacement of the and other methods as the pledger and pledgee agreed Thisprovision shows the respect of Civil Code for the freedom of agreements, asthey can select a method in article in accordance with their agreement or setthemself a separate method that they agreed upon

5 Article 312.4 of Civil Code 2015

6 Articl 314.3 of Civil Code 2015

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Regarding enforcement procedure, the notice process of enforcement mustconduct in accordance with provision from article 300 However, these articledoes not clarify how can a period of time considered “reasonable”, are thereany differences in period of time if the collateral is moveable property and ifit is real estate, etc Concerning the valuation of security property process, therequirement that “the security device shall be objectively valued inconformity with the market price” as stipulated in article 306.2 is reasonableto avoid the collateral being priced below the market price, which affects theinterests of the pledgee However, Article 306 does not specify whether thisrequirement applies when the security parties agree on the collateral price,especially if the agreed price is significantly lower than the market price.

8 Provisions on termination of Pledge of property

Article 315 of Civil Code 2015 listed four situations that terminate Pledge ofproperties: (i) the obligation secured by the pledge has terminated, (ii) thepledge of property has been cancelled or substituted with another security,(iii) the pledged property has been realized and (iv) as agreed by the parties.In the first situation, the most common case of termination is when the loansecured by Pledge of property is fully paid by the borrower The final case oftermination is when the parties agree to terminate this security measure Thisagreement may be stated in the Pledge of property contract alreadyestablished or given at another time within the validity period of the pledgecontract Article 316 provided that when the Pledge of property is terminatedin the first two cases and the fourth case of termination, the collateral anddocuments related to the collateral shall be returned to the pledgee; profitsand incomes collected from the collateral are also returned to the pledgee,unless otherwise agreed These provisions are entirely inherit from Civil Code2005 and basically meet the requirements of reality

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