To overcome difficulties, and legal inadequacies that often arise in the process of settlement of bad debts and collateral of credit institutions, the National Assembly passed and issued Resolution 42/2017/ QH14 on pilot settlement of bad debts of credit institutions (“Resolution 42”) takes effect from August 15, 2017. This Resolution has made it easier for credit institutions to settle bad debts and collateral and is almost considered a “prerogative” given to credit institutions. However, from January 1, 2024, Resolution 42 will no longer be effective, and this will have a significant impact on the banking industry’s rights in settlement of bad debts. Within this article, TNTP will clearly analyze the consequences of Resolution 42 when being expired.
1. Some basic and outstanding contents of Resolution 42
• Regarding conditions for seizing collateral:
To resolve difficulties of credit institutions in the process of settlement of collateral related to the delivery of collateral for treatment, creating favorable conditions for credit institutions to speed up the treatment of bad debts, to avoid the case of collateral owners deliberately being sluggish or resisting to prolong the treatment time, Resolution 42 allows credit institutions to exercise the right to seize collateral when all of the following 05 conditions are met:
Firstly, when a case of treatment of collateral occurs according to the provisions of Article 299 of the Civil Code 2015, the right to treat collateral arising in the following cases: (i) An obligator fails to perform or perform not as agreed an obligation when it falls due; (ii) An obligator must perform the secured obligation before time limit due to his/her violation against the obligation as agreed or prescribed by law; and (iii) Other cases as agreed by the parties or prescribed by law.
Secondly, in the security agreement, there is an agreement that the grantor agrees to allow credit institutions and foreign bank branches have the right to seize the collateral of bad debts when cases of disposal of collateral occur under the law.
This provision ensures that the seizure of collateral is carried out with the parties’ prior agreement. At the same time, Resolution 42 also prescribes that the “security agreement” according to the Resolution includes other documents recording the agreement between the parties.
Thirdly, secured transactions and security interests have been registered according to the law. This provision ensures the secured party’s rights that have adverse effects against a third party.
Fourthly, collateral is not a disputed property in a case that has been accepted but has not been resolved or is being resolved at a competent court; not being subject to temporary emergency measures by the Court; is not under distraint or applying measures to ensure judgment enforcement according to the provisions of law.
Fifthly, credit institutions, foreign bank branches, and organizations buying, selling, and treating bad debts have fulfilled their information disclosure obligations as prescribed in the Resolution.
• Regarding seizure of collateral:
Regarding authorization of seizure, to strictly control seizure, Resolution 42 stipulates that authorization to seize collateral is carried out as follows: (i) A credit institution is entitled to authorize the seizure of collateral solely to its affiliated assets management company; (ii) The bad debt purchaser/manager is entitled to authorize the seizure of collateral solely to a debt-selling credit institution or an assets management company affiliated to a debt-selling credit institution.
At the same time, Resolution 42 also clearly stipulates that credit institutions, bad debt purchaser/manager, and entity who is authorized to seize collateral may not take measures that violate the prohibitions of law during the seizure process.
Regarding the responsibilities of state agencies, Resolution 42 stipulates: (i) The local government and police authority of administrative division where the collateral will be seized shall, within its functions, tasks, powers, keep social safety and order during the seizure process at the requests of credit institution or bad debt purchaser/manager; (ii) If the grantor fails to cooperate or be present upon notice sent by credit institution or bad debt purchaser/manager, the representative of the People’s Committee of commune where the collateral will be seized shall witness and sign a record of collateral seize; (iii) The Ministry of Public Security shall direct police authorities to keep social security and order every time a credit institution or bad debt purchaser/manager exercise the right to seizure of collateral.
• Regarding the application of simplified procedures for settlement of disputes in respect of collateral at courts:
To shorten the process of resolving disputes through the Court and increase the efficiency of treatment of collateral through the Court, Resolution 42 allows the Court to apply simplified procedures to resolve disputes over the obligation to deliver collateral or disputes over the right to treatment of collateral.
Regarding the conditions for applying simplified procedures, Resolution 42 stipulates that simplified procedures will be applied when all of the following conditions are met: (i) The security agreement clearly indicates the grantor’s consent to the credit institution’s right to seize the collateral upon occurrence of the case of treating collateral as per the law; (ii) The secured transaction or security interests has been registered as prescribed by law; (iii) No litigant has resided overseas or no disputed property is located overseas, unless the overseas litigant and the other litigant in Vietnam have come to an arrangement over requesting the court to handle the case under simplified procedures or litigants represent items of evidence for their legitimate ownership of collateral and have come to an arrangement over the collateral treatment.
2. Meaning of Resolution 42 – “Prerogative” for credit institutions
• Creating a relatively solid legal framework to help the banking industry in treating bad debts to achieve positive results, bringing huge benefits to banks, businesses, and the economy.
• Covering shortcomings based on reviewing problems and providing content consistent with the practice that has a positive impact on the banking system in the treatment of bad debts.
• Promoting borrowers’ awareness and responsibility in paying debt to the bank.
3. What will be the treatment of bad debts when Resolution 42 expires?
Resolution 42 was born to overcome difficulties, and legal inadequacies in the process of treatment of bad debts of credit institutions. However, Resolution 42 has expired on January 1, 2024. The expiration of Resolution 42 has had a major impact on the ability of credit institutions to treat bad debts, one of which is that credit institutions no longer have the right to seize collateral without the consent of the mortgagor but must go through the legal proceedings to seize the collateral of the debtor. This ensures the borrower’s rights and ensures that the bank does not have too much power to unilaterally conduct collateral seizure activities.
Above is TNTP’s article on ” What will happen if Resolution 42/2017/QH14 on pilot settlement of bad debts of credit institutions expires?”. We hope this article will be helpful to our readers.
Sincerely,
