In civil and commercial transactions, parties frequently establish security measures to ensure the fulfilment of obligations. In the event of a breach, particularly a failure to fulfil payment obligations leading to outstanding debts, the secured party is entitled to realize the pledged or mortgaged property to recover the debt. This article examines the legal framework governing the realization of pledged and mortgaged property as a means of debt recovery.
1. Legal basis for realizing pledged and mortgaged property
Pursuant to the Civil Code 2015, pledges and mortgages are security measures aimed at guaranteeing the performance of obligations. The principal distinction between these two mechanisms lies in the transfer of possession: in a pledge, the secured party holds the collateral, whereas in a mortgage, the securing party retains possession unless otherwise agreed.
Pursuant to Article 299 of The Civil Code 2015, the realization of pledged or mortgaged property is permitted in the following circumstances:
• The obligor fails to perform or improperly performs the secured obligation upon its maturity.
• The obligor has to fulfil the secured obligation ahead of time due to a contractual breach or as prescribed by law.
• Other cases as agreed upon by the parties.
2. Procedure for realizing pledged and mortgaged property for debt recovery
As mentioned above, when the obligor breaches obligations, the secured party shall have the right to realize the pledged or mortgaged property. Consequently, in the event of a default in payment obligations, the secured party may initiate debt recovery proceedings through the realization of the pledged or mortgaged property. The procedure of debt recovery through the realizing these properties is currently prescribed as follows:
2.1. Notification and receipt of pledged and mortgaged property for realizing
According to the provisions of Clause 1, Article 300 of The Civil Code 2015, before realizing the pledged or mortgaged property, the secured party is responsible for sending a notice to the securing party and other secured parties (if any). The notice must be in writing and comply with the timeframes prescribed under Article 51 of Decree 21/2021/ND-CP: If the parties do not otherwise agree before the time of realizing the pledged or mortgaged property, the notice must be sent at least 10 days for movables and 15 days for immovables. However, if the collateral is at risk of damage, resulting in a decline in value or loss, the secured party may proceed without prior notice but must subsequently inform the relevant parties.
For pledged property, the secured party has usually held the property right from the time of signing the contract. For mortgaged property, the mortgagee may need to request the transfer of the property. However, in practice, the mortgagor and the party holding the property often do not cooperate in handing over the property. In this case, the secured party has the right to request the competent Court to compel them to hand over the property.
2.2. Valuation and realize of collateral
Collateral valuation is a necessary step to determine the value of the property, thereby serving the realization and payment. Pursuant to Article 306 of The Civil Code 2015, the securing and secured parties may reach an agreement on the price of the collateral or have the collateral valued by a property valuation organization.
Pursuant to the provisions of The Civil Code 2015 in Article 303, the prescribed methods of realizing property include:
• Auctioning the property;
• The secured party selling the property;
• The secured party receiving the property as a substitute for the performance of the obligation by the securing party;
• Other methods as mutually agreed upon, provided that such methods do not contravene legal provisions or social ethics.
In the absence of an agreement on the method of realization, the property must be auctioned unless otherwise stipulated by law.
2.3. Payment after realizing pledged and mortgaged property
After realizing the pledged or mortgaged property, pursuant to Article 307 of The Civil Code 2015, the sum of money obtained from realizing property shall be paid as follows:
• First, payment of the expenses for the property preservation, storage and realizing;
• Second, the payment to the secured party is an amount equivalent to the value of the obligor’s obligation. If a property is used to secure multiple obligations, the secured parties have the right to agree to determine and change the order of payment priority. In the absence of an agreement, based on Article 308 of The Civil Code 2015, the order of payment is as follows:
– In case all security measures are effective against third parties, priority is determined based on the order of establishment of such effect;
– In case there are both security measures effective and ineffective against third parties, obligations secured by enforceable interests take precedence;
– In case none of the security measures affect a third party, priority follows the chronological order of security establishment.
The realization of pledged and mortgaged property serves as a fundamental mechanism for ensuring the performance of obligations in civil and commercial transactions. Adherence to the prescribed legal procedures is essential to safeguarding the legitimate rights and interests of all parties involved and mitigating potential disputes.
This article provides an overview of the legal framework governing the realization of pledged and mortgaged property as a means of debt recovery. It is hoped that the insights presented herein will be of value to our readers.
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