Structural debt, bad debt and enterprise debt trading

1. State policy in promoting the settlement of bad debts

According to the report of the Government and the State Bank of Vietnam submitted to the National Assembly at the 3rd Session, the 15th National Assembly, as of December 31, 2021, that is, after nearly 5 years of applying Resolution 42/2017/QH14, the total the number of bad debts that have been handled reached VND 380.2 trillion, equivalent to 47.9% of the bad debts at the time of issuing Resolution 42 on August 15, 2017. In which, 40% of the total bad debt, equivalent to VND 148 trillion has been resolved due to self-payment by clients and the remaining 60% has been resolved through the application of pilot solutions to handle bad debts specified in Decree No. 42, such as selling bad debts and security assets at market value, exercising the right to seize security assets, transferring security assets which are real estate projects... Thus, there are still about 52.1% of bad debts have not been completely resolved after nearly 5 years of applying Resolution 42.

The Government report also highlights the difficulties in the application of solutions for debt recovery as prescribed in Resolution 42. One of such difficulties is Article 7 Resolution 42 which stipulates: “In the security agreement, there is an agreement on the guarantor's consent for the credit institution to have the right to seize the collaterals…”. However, security agreements which are signed before the effective date of Resolution 42 do not directly stipulate this content (because by the time such agreements are signed, Decree 163/2006/ND-CP did not prescribe this provision). Therefore, in order to be eligible to exercise the right to seize collaterals as mentioned above, credit institutions must renegotiate with the borrower/guarantor to re-enter into a security agreement with a seizure clause. However, there is often a shortage of cooperation from clients which makes it difficult for credit institutions to seize collaterals. In order to settle bad debts, hence, many banks and credit institutions have chosen to sell such bad debts of clients to third parties [2].

 

2. Mechanism of trading enterprise debt

In accordance with Law on Investment No. 61/2020/QH14, which takes effect from January 1, 2021, debt trading is not regulated as a conditional business line. Thus, except for enterprises which are established and managed by the State, debt trading activities are regulated in accordance with civil laws (contracts for purchase and sale of property rights, debt collection rights) and laws on enterprises (for debt trading enterprises). 

a) What a debt purchase and sale contract is

The right to collect the debt is regulated in Article 450 of Civil Code 2015 as a property right that can be purchased, sold, and transferred [3]. According to Circular 09/2015/TT-NHNN prescribing debt purchase and sale by credit institutions and foreign bank branches: “Debt purchase and sale means a written agreement on the transfer of a creditor’s right to claim a debt arising from the lending operation or a debt to be paid on a third party’s behalf in the guarantee operation, whereby the debt seller transfers the creditor’s ownership of the debt to the debt purchaser and receives a payment from the debt purchaser.” Thus, the debt purchase and sale contract is an agreement on the transfer of ownership of the debt, the right to request the borrower to repay the debt and other obligations of the debt seller to the debt purchaser. This is a transaction that does not affect any of the interests of the debtor. Therefore, in the absence of the law, the parties can enter into a debt purchase and sale contract without the consent of the debtor[4].

b) Conditions of validity of the debt purchase and sale contract

Regarding the format of the contract, according to Circular 09/2015/TT-NHNN, the debt purchase and sale contract must be made in writing and signed by the legal representative or authorized representatives of the debt purchaser and debt seller [5]. Currently, the laws do not have any regulation requiring the debt purchase and sale contracts to be notarized. Therefore, whether necessary, the parties agree to notarize or certify the debt purchase and sale contract.

Regarding the content of the contract, the debt to be purchased and sold must satisfy the following conditions[6]: (i) there are dossiers, related documents and records that fully and accurately show the state of the debt; (ii) there is no written agreement banning the purchasing and selling the debt; and (iii) the debt is not being used to secure the fulfilment of a civil obligation at the time of purchasing and selling the debt unless there is a written consent of the secured party on debt sale.

Debt purchase and sale contracts must contain the following main contents [7]:

• Time of signing the contract;
• Names and addresses of the parties to the contract;
• Name and positions of the representative of the parties to the contract;
• Names and addresses of the debtor and parties (if any) related to the purchased and sold debt;
• Details of the purchased and sold debt: loan amount and term, borrowing purpose, the book value of the debt by the time of purchasing and selling debt;
• Measures to secure the fulfilment of the payment obligation of the debtor regarding the purchased and sold debt (if any);
• Price of debt sale, payment method and term;
• Time, methods and procedures for the transfer of dossiers on debts, including dossier and documents on security assets for the debt (if any); the time when the debt purchaser takes up the debt seller’s rights and obligations to the debt;
• Rights and obligations of debt sellers and debt purchasers;
• Liability of the parties for breaching the contract;
• Settlement of arising disputes.

In addition, the parties may reach other agreements on other contents in the debt purchase and sale contract that are not contrary to the provisions of Circular 09/2015/TT-NHNN and relevant regulations.

c) Secured assets in debt purchase and sale transactions

According to the data from the Vietnam State Bank, at the end of 2021, the on-balance sheet bad debt ratio in the system of credit institutions was 1.9% (an increase of 0.21% compared to the end of 2020). The gross bad debt ratio was 7.31%, up sharply from 5.1% at the end of 2020 and nearly equal to the figure at the end of 2017 (7.4%) [8]. The inflation in bad debt is expected by the outbreak of the Covid-19 pandemic, especially the fourth wave with Delta variant in 2021 has caused heavy losses to the production and business activities of enterprises. However, banks always reassure their shareholders that the collateral of the debt is mainly real estate which is very secured. Specifically, according to the audited and published financial statements in 2021, the ratio of mortgaged real estate to total assets mortgaged, pledged, discounted, or rediscounted by some banks is as follows: Techcombank 64.25% [9], ACB 91.2% [10], BIDV 68.9% [11] and Agribank is 87% [12].

One of the measures to handle bad debts specified in Resolution 42 is to allow credit institutions to sell debts along with the sale of security assets. Thus, depending on the purpose of the debt purchaser and in case the property is not distrained [13], we can consider this activity as collateral purchase and sale. Although giving credit institutions and debt buyers the right to seize security assets, there are many different interpretations and applications of laws in terms of the process of receiving and handling debts secured by real estate. It is due to the high value of assets, the management of state agencies at the same time and the regulation under specialized statutory law such as the Law on Land, the Law on Investment, the Law on Enterprises, and the Law on Real Estate Business, ….. In fact, when handling real estate projects to recover debts, many difficulties and obstacles have arisen in carrying out the procedures, and satisfying conditions for the sale and transfer of real estate projects, while the investor (the debtor) also did not cooperate, intentionally obstructing and prolonging the process of handling assets by sending complaints to competent state agencies to prevent the process of handling secured assets. In some other cases, the collateral is a real estate project that is in the process of construction but the investor is no longer able to continue the project implementation. Credit institutions are also not allowed to do real estate business, so the real estate project needs to be carried out continuously by qualified investors.

3. Noticeable legal issues relating to debt purchase and sale

a)     Financial/legal due diligence

Any purchaser who wishes to purchase a debt must carry out the procedure of financial and legal due diligence. The purpose of the financial and legal due diligence is to assess the capacity of debt repayment and legal issues about the debt, obligations to other third parties (if any) or the type and residual value of collaterals. It is usually the financial advisor and legal consultant who will implement such due diligence procedures, and the advisors/consultants will assess the provided documents and make recommendations to the client before the purchaser decides to purchase the debt.

However, due diligence cannot comprehensively guarantee that the debt does not contain any potential problems and legal risks if the debtor intentionally conceals and fails to provide sufficient or dishonesty information to the advisors/consultants. Therefore, in any purchase and sale transaction, the honesty of the parties is always highly appreciated.

b)     Appraisal of the reserve price of the debt      

Although Decree 61/2017/ND-CP has been issued detailing the appraisal of the reserve price of bad debts, the implementation of such appraisal has many difficulties, especially in determining the reserve price of high-value debt and the value of the asset because of the fluctuation of the price over time such as the price of real estates.

 

c)      Enforcing civil judgments

There are many obstacles for the judgment enforcement authority when implementing the enforcement procedures such as the intentional non-cooperation of the judgment debtor, and the ambiguity in the court's judgment which made the judgment enforcement authority hesitate when executing the judgment. The author will analyze this issue in the next articles.

By: Luu Hung | LinkedIn and Phong Tran (Vento) | LinkedIn

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[1] Agribank, ‘Thong doc NHNN Nguyen Thi Hong tra loi chat van truoc Quoc hoi’ <https://www.agribank.com.vn/vn/ve-agribank/tin-tuc-su-kien/tai-chinh-ngan-hang/thong-doc-nhnn-nguyen-thi-hong-tra-loi-chat-van-truoc-quoc-hoi> accessed 15 July 2022

[2]  Cafef, ‘Ngan hang ban loat no tram ty dong’ <https://cafef.vn/ngan-hang-ban-loat-no-tram-ty-dong-20220518191124234.chn> accessed 20 July 2022

[3] Article 450 Civil Code 2015

[4] Article 365 Civil Code 2015

[5] Article 13 Circular 09/2015/TT-NHNN

[6] Article 4 Circular 09/2015/TT-NHNN

[7] Article 13 Circular 09/2015/TT-NHNN

[8] Can Van Luc, “Buc tranh no xau nganh Ngan hang va mot so kien nghi”, <https://www.sbv.gov.vn/webcenter/portal/vi/menu/fm/ddnhnn/nctd/nctd_chitiet?leftWidth=20%25&showFooter=false&showHeader=false&dDocName=SBV489213&rightWidth=0%25&centerWidth=80%25&_afrLoop=60246475443791224#%40%3F_afrLoop%3D60246475443791224%26centerWidth%3D80%2525%26dDocName%3DSBV489213%26leftWidth%3D20%2525%26rightWidth%3D0%2525%26showFooter%3Dfalse%26showHeader%3Dfalse%26_adf.ctrl-state%3Dw39cjgisc_51> accessed 18 July 2022

[9] Calculations from audited 2021 financial statements of Vietnam Commercial Joint Stock Bank

[10] Calculation figures from audited 2021 financial statements of Asia Joint Stock Commercial Bank

[11] Calculation data from audited 2021 financial statements of Vietnam Investment and Development Joint Stock Bank

[12] Calculations from the audited 2021 financial statements of the Bank of Agriculture and Rural Development of Vietnam

[13] Article 13, Resolution 42/2017/QH14