In business activities, it is not strange for enterprises and companies to borrow money from banks. This is a suitable option for enterprises to solve temporary financial problems. However, most loans at banks require collateral. In case the collateral is property owned by the guarantor, the handling of the property will be simpler. But in the event that part or all of the collaterals is not owned by the guarantor, how will the property be handled? The Court’s opinion on this issue is expressed in Precedent No.11/2017/AL (adopted by the Council of Judges of the Supreme People’s Court on December 14, 2017 and published under Decision No. 299/QD-CA dated December 28, 2017 of the Chief Justice of the Supreme People’s Court).
Summary of precedent no.11/2017/AL
1. On June 16, 2008, Joint Stock Commercial Bank A (“Bank A”) and B Company Limited (“Company B”) signed Credit Contract No. 1702-LAV-200800142. Accordingly, Bank A lends Company B VND 10,000,000,000. Bank A has disbursed VND 3,066,191,933 to Company B.
The collateral for the above loan is the house and land at No. 432, Group 28, Ward E, District G, Hanoi City, owned and used by Mr. Tran Duyen H (“Mr. H”) and Ms. Luu Thi Minh N (“Mrs. N”) under the Contract of mortgage of land use rights and assets attached to the land dated June 11, 2008. This contract was notarized by the Notary Office 6 of Hanoi on June 11, 2008, and certified the secured transaction registration by the Department of Natural Resources and Environment of Hanoi on June 11, 2008.
As of October 5, 2011, Company B still owes principal and interest of VND 4,368,570,503.
2. On October 30, 2009, Bank A and Company B signed Credit Contract No. 1702-LAV-200900583. Accordingly, Bank A lends Company B USD 180,000. Bank A has fully disbursed USD 180,000.
The collateral for the above loan is a shipment of 19 finished product trucks with a tonnage of 1.75 tons, brand JMP new 100%, worth VND 2,778,750,000 of Company B under the Mortgage Contract No. 219/2009/EIBHBT -CC dated October 29, 2009 (“Contract No. 219”). This mortgage contract was registered for secured transactions at the Register of Secured Transactions in Hanoi on November 2, 2009.
At the first-instance court hearing, Bank A confirmed that Company B had fully paid off the principal debt and the remaining interest was USD 5,392.81; The collateral is 19 cars, 18 cars have been sold, only 01 car remains.
3. Since Company B did not pay all the principal and interest debts, Bank A sued Company B and requested the Court to:
– Force Company B to pay the principal and interest of the Credit Contract No. 1702-LAV-200800142 which is VND 4,368,570,503; and
– Force Company B to pay USD 5,392.81 of the interest debt of Credit Contract No. 1702-LAV-200900583.
If company B fails to pay or fails to pay in full, Bank A proposes to sell the collateral as:
– House ownership and residential land use rights at No. 432, Group 28, Ward E, District G, Hanoi City are owned and used by Mr. H and Mrs. N (“House and Land No. 432”);
– 01 finished product truck under the Mortgage Contract No. 219/2009/EIBHBT-CC.
4. At the first-instance court hearing, the parties had the following opinions:
– The defendant, Company B acknowledges the amount of principal, interest and collateral, but requests the Bank to allow the debt to be repaid in installments.
– Persons with related interests and obligations, Mr. H and Ms. N, admitted signing the House and Land No. 432 to secure a maximum loan of VND 3,000,000,000 from Company B. Mr. H and Ms. N request the Bank to extend the debt of Company B to arrange repayment for the Bank.
– The person with related rights and obligations is Mr. Tran Luu H2 (“Mr. H2”) on behalf of the children and grandchildren of Mr. H and Mrs. N living at home, land number 432 presented at the end of 2010, he just knows that his parents (Mr. H and Mrs. N) mortgage the family’s house to secure a loan from Company B. On the land that Mr. H and Mrs. N mortgage, there is a 3.5-storey house. which Mr. H2 and Mr. Tran Minh H paid to build in 2000, currently 16 people are living in. When signing the mortgage contract, the Bank did not consult with you and the people living in this house and land. Therefore, Mr. H2 asked the Court not to recognize the mortgage contract.
5. In the first-instance business and commercial judgment No. 59/2013/KDTM-ST dated September 24, 2013 (“First instance judgment”), the Hanoi People’s Court (“HN Court”) decided:
– Accepting the petition of Bank A:
- Forcing Company B to pay Bank A the outstanding amount of Credit Contract No. 1702-LAV-200800142 including principal, overdue interest, overdue interest, and late payment penalty interest with a total amount of 6,054.407,123 VND;
- Forcing Company B to pay Bank A the outstanding amount of Credit Contract No. 1702-LAV-200900583 which is USD 5,392.81
– In the event that Company B fails to pay the debt or fails to pay the outstanding amount of Credit Contract No. 1702-LAV-200800142, Bank A has the right to request the Civil Judgment Enforcement Department (CJED) of Hanoi city to handle the collateral which is House and Land No. 432 and the asset is a JMP truck with a tonnage of 1.75 tons assembled by Company B under Contract No. 219.
6. After the first-instance trial, the defendant and people with related interests and obligations all filed an appeal against the first-instance judgment.
7. At the Appellate Commercial and Business Judgment No. 111/2014/KDTM-PT dated 7/7/2014 (“Appellate Judgment”), the Supreme People’s Court in Hanoi (“Supreme Court”) decision:
– Uphold the decision of the first instance judgment on the loans and money that Company B must pay to Bank A
– Cancel the third party’s decision on mortgage of land use rights and properties attached to land
– Hand over the case dossier to the Hanoi Court to determine the part of the legal property owned by Mr. H and Mrs. N as security collateral for Company B.
8. After the appellate trial, Bank A and Hanoi Court made a written request to review the appellate judgment according to cassation procedures.
9. At the cassation appeal, the Chief Justice of the Supreme People’s Court appealed against the appellate business and commercial judgment of the Court of Appeal of the Supreme People’s Court in Hanoi. Proposing the Judicial Council of the Supreme People’s Court to annul the appellate business and commercial judgment of the Court of Appeal of the Supreme People’s Court in Hanoi and the first-instance business and commercial judgment of the People’s Court of Hanoi City, hand over the case dossier to the People’s Court of Hanoi for re-trial in accordance with law.
Comment of precedent no.11/2017/AL
Based on the summary precedent no.11/2017/AL, TNTP has a few comments as follows:
1. Conditions for a contract to mortgage land use rights
When mortgaging land use rights and/or assets attached to land, there are 03 cases as follows: (i) Mortgage of both land use rights and assets attached to land; (ii) Mortgage of land use rights but not mortgaged land-attached assets; (iii) Mortgage of assets attached to land but not mortgage of land use rights.
2. Mortgage of both land use rights and properties attached to the land
In case the mortgagor secures the property as both land use rights and assets attached to the land, in addition to the conditions for the transaction to be valid as prescribed in Article 117 of the Civil Code 2015, only the land use right is required. and assets attached to the land are owned by the mortgagor, the contract of mortgage of the property shall be legally valid.
Above is a comment on Precedent no.11/2017/AL of TNTP. Hopefully this article is useful to help enterprises limit the risks in drafting and resolving Contract disputes.