Precedent no. 11/2017/AL on commercial case concerning dispute over credit agreement

- Situation 1: 

A mortgagor put up their own land use right and property on land as security for a civil obligation but there are other assets on land owned by others; format and contents of the mortgage agreement are consistent with laws and regulations. 

- Legal solution 1: 

In this case, the Court must determine that the mortgage agreement is legally valid. 

- Situation 2: 

The mortgagor and mortgagee agree that the mortgagee has the right to sell the collateral being land use right of the land plot which has a house thereon not owned by the mortgagor. 

- Legal solution 2: 

In this case, the Court must accord the owner of the houses on the land plot the priority right to receive transfer of the land use right if needed.

Representation of the plaintiff, A Joint-Stock Commercial Bank, in the lawsuit petition dated October 6, 2011 and statements made at the court:

On June 16, 2008, A Joint-Stock Commercial Bank (hereinafter referred to as the Bank) and B Co., Ltd (hereinafter referred to as Company B) concluded a credit agreement No. 1702-LAV-20080142, thereby the Bank grants Company B a loan of VND 10,000,000,000 and/or equivalent foreign currency. Purpose of extending credit: raise additional working capital for operation of the registered line of business of Company B.

Executing the agreement, the Bank disbursed total VND 3,066,191,933 to Company B according to the credit agreements cum contracts of indebtedness. Up to October 5, 2011, Company B’s principal and interest in 3 contracts is VND 4,368,570,503 (including VND 2,943,600,000 of principal and VND 1,424,970,503 of interest).

The collateral for above loan comprises the houses and land (land plot No. 43, map No. 51-1-33 (1996) at 432, group 28, ward E, district H, Hanoi City under right to own and use of Mr. Tran Duyen H and Mrs. Luu Thi Minh N (according to the certificate of housing ownership and residential land use right No. 1010 (Processing and preserving of meat and meat products); issued by the People’s Committee of Hanoi City on December 7, 2000), pledged by Mr. Tran Duyen H and Mrs. Luu Thi Minh N under the mortgage agreement of land use right and property on land dated June 11, 2008. The mortgage agreement was notarized by Public Notary Office 6 in Hanoi City on June 11, 2008 and the Department of Natural Resources and Environment certified registration of secured transaction on June 1, 2008.

On October 30, 2009, the Bank and Company B kept continuing the credit agreement No. 1702-LAV-200900583, thereby the Bank grants Company B a loan of USD 18,000. The purpose of loan: payment of freight of export shipment; loan term of 09 months; interest rate of 5.1% per year; overdue interest rate of 150%.

Executing the agreement, the Bank disbursed fully USD 180,000 to Company B. Company B has just repaid the Bank the principal of USD 100,750 and the interest of USD 1,334.50. Up to October 5, 2011, Company B still be in arrears with the principal of USD 79,205 and the interest of USD 16,879.69, totaling USD 96,120.69.

The collateral for the loan under the credit agreement No. 1702-LAV-2009058 includes:

- The shipment of 19 trucks, load capacity: 1.75 tonne, JMP model, brand new, value of VND 2,778,750,000 (assembled by Company B according to the good in storage method, the Bank kept the certificate of roadworthiness of these trucks) which was pledged by Company B under the mortgage agreement No. 219/2009/EIBHBT-CC dated October 29, 2009. This mortgage agreement was registered as secured transaction by the Department of Registration of Secured Transaction in Hanoi City on November 2, 2009;

- The balance of the 3-month deposit account of VND 1,620,000,000 made at the Bank. Because Company B has repaid partial debt, the Bank release of VND 1,620,000,000 in the saving deposit of Company B, equivalent to the repaid amount of the debt.

At first instance court hearing, the representative of the Bank certifies that: As for the loan of USD 180,000, Company B has fully repaid the principal, and just owed the interest of USD 5,392.81; with regard to 19 trucks as collateral, 18 in which were sold, 1 truck remains unsold; request the Court to finish selling such remaining truck to collect the debt in arrears.

The Bank requires the Court to compel Company B to:

- pay the principal and interest in VND under the credit agreement No. 1702-LAV-200800142 of VND 4,368,570,503;

- pay the interest of USD 5,392.81 under the credit agreement No. 5.392,81 of VND 1702-LAV-200900583.

Where Company B fails to repay or fails to repay fully, request the Court to sell the collateral, including:

- House ownership and residential land use right at 432, group 28, ward E, district G, Hanoi City of Mr. Tran Duyen H and Mrs. Luu Thi Minh N;

- 01 truck, load capacity: 1.75 tonne, JMP model, brand new, assembled by Company B under the mortgage agreement No. 219/2009/EIBHBT-CC dated October 29, 2009.

Representation of Mr. Tran Luu H1 - Director General of Company B, representative of the defendant:  Acknowledge the principal, interest and collateral as stated by the Bank but request the Bank to defer the repayment.

Representation of persons with relevant rights and obligations, Mr. Tran Duyen H and Mrs. Luu Thi Minh N:  They confirm they concluded the mortgage agreement of the houses and land No. 432 to secure the loan up to VND 3,000,000,000 of Company B. The mortgage agreement was notarized and registered as secured transaction. Mr. Tran Duyen H and Mrs. Luu Thi Minh N also helped Company B to repay about VND 600,000,000 of the loan secured by their house and land. They request the Bank to extend the debt of Company B in order for it to recover business and settle the debt to the Bank; request the Court not to summon his son, daughter-in-law, daughter, son-in-law to the trial.

Representation of Mr. Tran Luu H2, representing children and grandchildren of Mr. Tran  Duyen H, Mrs. Luu Thi Minh N who are living at 432:

In later 2010, he knew that his parents put up their house and land as security for the loan of Company B. After Mr. Tran Duyen H and Mrs. Luu Thi Minh N were granted the certificate of house ownership and residential land use right in 2000, Mr. Tran Luu H2 and Mr. Tran Minh H spent their money on building a 3.5-storey house on land and 16 members in the family are living there. When concluding the mortgage agreement, the Bank did not ask them for opinions. Therefore, he requests the Court not to recognize the mortgage agreement and consider VND 550,000,000 they repaid on behalf of Company B under the credit agreement secured by the houses and land at 432, but the Bank arbitrarily recorded such repayment to the loan in foreign currency secured by 19 trucks, that is an improper action.

In the First Instance Civil Judgment No. 59/2013/KDTM-ST dated September 24, 2013, the People’s Court of Hanoi City judged:

- Accept the lawsuit petition of A Joint-Stock Commercial Bank against B Co., Ltd.

- Compel the Company B to repay the Bank A the debt in arrears under the credit agreement No. 1702-LAV-200800142, including: VND 2,813,600,000 of principal, VND 2,080,977,381 of interest within the term of the loan; VND 1,036,575,586 of overdue interest until September 23, 2013; VND 123,254,156 of interest on late payment until sep 23, 2013; totaling: VND 6.054.407.123.

- Compel the Company B to repay the Bank A the debt in arrears under the credit agreement No. 1702-LAV-200800583, including USD 5,392.81 of overdue interest.

If Company B fails to repay or fails to repay fully the debt in arrears under the credit agreement No. 1702-LAV-200800142, the Bank A has the right to request Department of Civil Judgment Enforcement of Hanoi City to sell the collateral as per the law, including the house ownership and land use right at the land plot No. 43, map No. 5I-I-33 (1996) according to the certificate of house ownership and residential land use right No. 1010 7490390 granted by the People’s Committee of Hanoi City on December 7, 2000 to Mr. Tran Duyen H and Mrs. Luu Thi Minh N at the address 432, group 28, ward E, district H, Hanoi City to collect the debt…

If Company B fails to repay or fails to repay fully the debt in arrears under the credit agreement No. 1702-LAV-200800583, the Bank A has the right to request Department of Civil Judgment Enforcement of Hanoi City to sell the collateral being 1 truck, load capacity of 1.75 tonne, JMP model assembled by Company B under the mortgage agreement No. 219/2009/EIBHBT-CC dated October 29, 2009 to collect the debt.

In addition, the Court of First Instance decided the court fee and announced the appeal right to litigants as per the law.

After first instance trial, the defendant and the persons with relevant rights and obligations all appealed the First Instance Judgment.

The Appellate Judgment No. 111/2014/KDTM-PT dated July 7, 2014, the Appellate Court of People’s Court of Ho Chi Minh City decides:

Uphold the decision of First Instance Judgment No. 59/2012/KDTM-ST dated September 24, 2013 of People’s Court of Hanoi City on the credit agreement, regarding the loan and amount payable by Company B to the Bank A; quash the decision of First Instance Judgment No. 59/2013/KDTM-ST dated September 24, 2013 of People’s Court of Hanoi City in terms of the mortgage agreement and security of the third party, in specific:

... Quash the decision in terms of mortgage agreement of land use right and property on land owned by the third party (the houses and land No. 432, group 28, ward E, district G, Hanoi City) notarized by Public Notary Office 6 in Hanoi City on June 11, 2008 and registered as security by Department of Natural Resources and Environment of Hanoi City on June 11, 2008…

Refer the case file to People’s Court of Hanoi City to take further verification, take evidence and conduct re-trial, determine legal assets owned by Mr. Tran Duyen H and Mrs. Luu Thi Minh N as collateral of Company B for the loan at the Bank A under the credit agreement No. 1702-LAV-200800142 dated June 16, 2008.

In addition, the appellate court decided the court fee.

After appellate trial, the Bank and People’s Court of Hanoi City filed written requests to review the Appellate Judgment under cassation procedure.

In the appeal under cassation procedure No. 14/2016/KDTM-KN dated April 12, 2016, the Chief Justice of the Supreme People’s Court appealed Appellate Judgment No. 111/2014/KDTM-PT dated July 7, 2014 of the Appellate Court of the Supreme People’s Court of Hanoi. Request the Council of Judges of the Supreme People’s Court to quash the Appellate Judgment No. 111/2014/KDTM-PT dated July 7, 2014 of the Court of Appeal of the Supreme People’s Court in Hanoi and First Instance Judgment No. 59/2013/KDTM-ST dated September 24, 2013 of People’s Court of Hanoi City; refer the case file to People’s Court of Hanoi City to retry as per the law.

At the cassation trial, the representative of the Supreme People’s Procuracy concurs with the appeal of the Chief Justice of the Supreme People's Court, requests the Council of Judges of the Supreme People’s Court to quash the Appellate Judgment, refer the case file to Superior People’s Court of Hanoi City for appellate re-trial.

[1] The case file shows that in order to secure the loan under the credit agreement No. 1702-LAV-200800142 dated June 16, 2008 at the Bank of Company B whose Director is Mr. Tran Luu H1, the son of Mr. Tran Duyen H and Mrs. Luu Thi Minh N, on June 11, 2008,. Mr. Tran Duyen H and Mrs. Luu Thi Minh N put up the houses and land at 432, group 28, ward E, district G, Hanoi City as the collateral for the mortgage agreement of land use right and property on land dated June 11,2 008. This mortgage agreement was notarized and registered as secured transaction as per the law. 

[2] According to the certificate of house ownership and residential land use right dated December 7, 2000, the houses and land at 432, group 28, ward E, district G, Hanoi City (hereinafter referred to as house and land at 432) includes: 147.7 m2 of residential land , 85 m2 of house, house structure: concrete and brick; number of storeys: 02+01. When assessing the collateral, the Bank knew that apart from a 2-storey house ownership of which was registered on the land area of 147.7m2, there is also a 3.5-storey house ownership of which has not been registered, but the Bank only valued the land use right and the registered 2-storey house at VND 3,186,700,000. The Bank did not collect information and documents to verify the origin and owners of the 3.5-storey house. It exposes the Bank’s inadequacies and failure to assure benefits of the litigants. 

[3] During settling the case, on June 6, 2012, People’s Court of Hanoi City conducted a verification visit to the estate, determining that: there are 2 houses at 432 (including: the first house: 37.5 m2 of land area, 5.9m long, 6.35m wide; the second house: a 3-storey concrete house, with balcony, 61.3m2 of area) and there are 16 persons who registered permanent residence here. Before first instance trial, on September 21, 2013, Mr. Tran Luu H2 (the son of Mr. Tran Duyen H and Mrs. Luu Thi Minh N) submitted a proposal to People’s Court of Hanoi City, claiming that after being granted the certificate of house ownership and residential land use right in 2000, due to lack of accommodations, in 2002, Mr. Tran Duyen H and Mrs. Luu Thi Minh N agreed to let Mr. Tran Luu H2 and other children to spend their own money on building a new 3.5-storey house adjacent to the old 2-storey house on that land plot. Accordingly, People’s Court of Hanoi City knew that in fact the pledged land plot has 2 houses thereon (an old 2-storey house and a 3.5-storey house) which is inconsistent with the certificate of house ownership and residential land use right granted in 2000 and the mortgage agreement of land use right and property on land dated June 11, 2008. When resolving the case, although People’s Court of Hanoi City considered the request of Mr. Tran Luu H2 and other children relevant to the 3.5-storey house but it did not decide whether to sell the 3.5-storey house. This inadequacy does not assure the rights and legitimate interests of the litigants. 

[4] Pursuant to Section 4, Clause 19, Article 1 of Decree No. 11/2012/ND-CP dated February 22, 2012 of the Government on amendments to Decree No. 163/2006/ND-CP dated December 29, 2006 on secured transactions: “ In case only the land use right is mortgaged while the property on land is not and the land user is not the owner of the property on land, when the land use right, is handled, the owner of the property on land may further use land as agreed with the land user, unless otherwise agreed upon. Rights and obligations of the mortgagor and the owner of the property land shall be transferred to the buyer or the recipient of the land use right." In this case, when concluding the mortgage agreement of land use right and property on land, the mortgagor (Mr. Tran Duyen H and Mrs. Luu Thi Minh N) and the mortgagee (the Bank) both knew that on the land plot of Mr. Tran Duyen H and Mrs. Luu Thi Minh N, apart from the registered 2-storey house, there is also a non-registered 3.5-storey house but they only agreed on mortgage of the land use right and the 2-storey house on land. Where there are multiple assets on land, including the asset owned by the land user and the asset owned by others, the land user is only entitled to mortgage the land use right and property on land under their ownership, if the mortgage agreement is made in the format and with contents in accordance with laws and regulations, it shall be legally valid. Therefore, the Court of Appeal was not right when determining that the mortgage agreement of land use right and property on land dated June 11, 2008 partially invalid (the part associated with the 3.5-storey house) and quashing the decision of First Instance Judgment in terms of mortgage agreement and referring the case file to People’s Court of Hanoi City to conduct further verification, take more evidence, and determine the legal assets legally owned by Mr. Tran Duyen H and Mrs. Luu Thi Minh N. With the documents and items of evidence in the case file, it would have been necessary for the Court of Appeal to consider settling the collateral including land use right and the house legally owned by Mr. Tran Duyen H and Mrs. Luu Thi Minh N as per the law. When re-settling the case, the Court of Appeal must require the relevant litigants to provide documents proving the origin of the 3.5-storey house to ensure the legitimate rights and interests of those who spent their own money on building the house and are living there. Moreover, the Court of Appeal must ask opinions and encourage the litigants to reach an agreement on settlement of the collateral. If the mortgagor and mortgagee agree that the mortgagee has the right to sell the collateral being land use right of the land plot which the house thereon not owned by the mortgagor, the owner of such house must be given the priority right to receive transfer of the land use right if needed (receipt of transfer). 

[5] In addition, the Court of First Instance, pursuant to the agreement of the parties in Clause 5.4 Article 5 of the credit agreement on interest on late payment of the unpaid interest “interest on late payment shall be charged after 10 days since the due date, the interest rate shall be 2% of the unpaid interest; 30 days after the due date, this interest rate shall be 5% of the unpaid interest”, accepted the claim of the Bank to compel Company B to pay VND 123,254,156 of interest on late payment. This decision is unacceptable and illegal, because that is compound interest. The Court of Appeal did not discover this error and still upheld this decision of First Instance Judgment. This is an inadequacy. 

Based on the above-mentioned facts and matters,

 “[4] Where there are multiple assets on land, including the asset owned by the land user and the asset owned by others, the land user is only entitled to mortgage the land use right and property on land under their ownership, if the mortgage agreement is made in the format and with contents in accordance with laws and regulations, it shall be legally valid.. 

... If the mortgagor and mortgagee agree that the mortgagee has the right to sell the collateral being land use right of the land plot which the house thereon not owned by the mortgagor, the owner of such house must be given the priority right to receive transfer of the land use right if needed (receipt of transfer).”

Pursuant to Clause 2 Article 337, Clause 3 Article 343, Article 345 of the Civil Procedure Code 2015; Resolution No. 103/2015/QH13 dated November 25, 2015 on implementation of the Civil Procedure Code;

1. Accept the appeal under cassation procedure No. 14/2016/KDTM-KN dated April 12, 2016 of the Chief Justice of the Supreme People’s Court. 

2. Quash the Appellate Judgment No. 111/2014/KDTM-PT dated July 7, 2014 of the Court of Appeal of the Supreme People’s Court in Hanoi regarding the commercial case concerning dispute over credit agreement between the plaintiff, A Joint-Stock Commercial Bank, and the defendant, B Co., Ltd, and 10 persons with relevant rights and obligations. 

3. Refer the case file to Superior People’s Court of Hanoi City for re-conducting the appellate trial as per the law.