2015 Civil Code: A Few Major Points to Lending Activities
The new Civil Code No. 91/2015/QH13 just came into effect on 1 January 2017 (2015 Civil Code or new Civil Code), replacing the Civil Code No. 33/2005/QH11 promulgated by the National Assembly of Vietnam on 14 June 2005 (2005 Civil Code).
From a lending perspective, we have highlighted a few issues that we anticipate will have the most significant impact on your business.
I. Interest and Default Rates
a. Interest Rate:
Under the 2015 Civil Code, the cap of 150% of the prime interest rate has been removed and replaced with a ceiling interest of 20% on the principal unless otherwise provided by relevant laws. This ceiling interest rate may be adjusted by the Standing Committee of the National Assembly based on the actual situation, and as proposed by the Government.
As generally understood, “relevant laws” refers to specialized laws, e.g., the Law on Credit Institutions No. 47/2010/QH12, effective as of 1 January 2011 (Law on Credit Institutions), or the Law on the State Bank of Vietnam No. 46/2010/QH12, effective as of 1 January 2011 (Law on SBV). Under the Law on Credit Institutions, credit institutions and their customers are allowed to reach an agreement on the interest rate, but this is subject to the provisions of the law. 'Law' here may be understood as the Civil Code. Therefore, it is uncertain whether an interest rate in a lending transaction between the credit institution and its borrower that exceeds the ceiling rate of the Civil Code will be considered as a violation of the Civil Code.
At a workshop dated 23 December 2016 organized by the Ministry of Justice on the introduction of new regulations on interest rates and secured transactions under the 2015 Civil Code, the participants asked Government officials to collect and submit official opinions/recommendations to the National Assembly to amend the Law on Credit Institutions, or to issue a decree guiding the 2015 Civil Code regarding the same to avoid arguments on the application of the 2015 Civil Code and the Law on Credit Institutions.
b. Default Rate:
According to the 2015 Civil Code, if the interest rate is not clearly specified in the relevant agreement, then when a dispute on the interest rate occurs, the interest rate shall be equal to 50% of the interest rate provided under the 2015 Civil Code (i.e. 10% per annum) at the time of repayment.
In the case of an interest bearing loan, if a borrower fails to pay either in whole or in part when the loan becomes due, the borrower must pay interest on the principal at the rate agreed in the relevant agreement, and interest on the overdue interest at 10% (compound interest rate) in cases of late payment. The interest on the overdue principal equal to 150% of the lending interest rate prescribed in the relevant agreement unless otherwise agreed.
Under the new Civil Code, there are only nine (09) specific securities (including seven (07) securities already recognized under the 2005 Civil Code and two new securities - title retention and lien on assets) without irrevocable guarantees which are quite common in the banking practice. Though there is no specific provision on irrevocable guarantee under the new Civil Code, the parties may take advantage of loopholes to conduct a transaction in form of an irrevocable guarantee because there is no specific prohibition under the law.
b. Future obligation and future assets
Having taken into consideration weak points of the 2005 Civil Code, notable amendments have been put forward to make the 2015 Civil Code much more flexible and clearer in certain aspects. To name a few, it is the acknowledgement of future obligations and clear definition of "future asset". Accordingly, in case of securing a future obligation, the parties may agree on the scope of the secured obligation and the period for which the secured obligation must be performed, and when the future obligation arises, they do not have to create a security for such obligation again.
c. Security Registration and its effectiveness against a third party
For the registration of the security and its effectiveness against a third party, the 2015 Civil Code acknowledges that a security shall take effect against a third party from the time of registration of such security, or at the time that the secured party has the lien or taken possession of the secured asset(s). This provision likely causes controversies when secured party A registers the registration without having the lien or taking possession of the secured asset(s) while secured party B has the lien or takes possession of the asset(s) at the same time. There have been requests for the issue of a legal instrument guiding this point.