Contributed By VILAF
Project financing in Vietnam has thus far focused on the energy and infrastructure sectors. Major power projects have generally been implemented on a Build-Operate-Transfer (BOT) basis, as the BOT legal scheme in Vietnam is more developed than other forms of investment, such as Build-Transfer-Operate (BTO) or Build-Transfer (BT), etc.
As Vietnam introduced new regulations on renewable energy in 2017 with a promoted mechanism, foreign sponsors and financiers have express interests in developing and financing in these sectors. However, there have been some concerns regarding certain bankability issues of these projects, including the template power purchase agreement with limited room for negotiation.
There is no single or consolidated legal instrument that specifically governs project finance in Vietnam. Rather, it would be subject to different sets of legislation, including investment laws, enterprise laws, tax laws, foreign exchange control, loan registration, etc, and may be subject to amendment from time to time. The sponsors and financiers should take these factors into account when considering investments.
Generally speaking, sponsors can be foreign or local companies, or individuals who carry out investment activities. In practice, the sponsors of investment projects in major sectors (eg, infrastructure or energy) are normally organisations with appropriate financial and technical capabilities.
On the other hand, lenders are credit institutions with appropriate financial and credit capacity, including foreign credit institutions (and their subsidiaries or branches in Vietnam) and local commercial banks.
In Vietnam, the public-private partnership (“PPP”) is a form of investment on a contractual basis among the competent State authorities on one side, and the sponsors and the project company on the other side using the following contracts, among others: Build-Operate-Transfer (BOT); Build-Transfer-Operate (BTO); Build-Transfer (BT); Build-Own-Operate (BOO); Build-Transfer-Lease (BTL); Build-Lease-Transfer (BLT); and Operate & Management (O&M). PPPs are mainly used for infrastructure projects or the provision of public services.
PPPs are subject to certain key legislation, including the Law on Investment 2014, the Tendering Law 2013 and the Law on Construction 2014 and their respective guiding and detailing legal instruments, including, in particular, Decree 63/2018/ND-CP dated 4 May 2018 of the Government on PPP investment.
Noteworthy points on the legal requirements for PPP projects include the following:
Other issues that need to be considered when structuring a PPP project financing include the following:
Lenders normally require a comprehensive security package, which may include the following assets:
The collateral can include existing and future assets. Vietnamese laws recognise mortgages, pledges, liens, security deposits, performance securities, escrow accounts, guarantees, fidelity guarantees and title retentions. In the context of project financing, however, security is normally taken by way of mortgage, where the borrower retains possession over the secured assets.
For most types of assets, the security could be effective and binding on the contracting parties from the signing date of the relevant security documents, and security registration is only to ensure the priority right for lenders in case of enforcement. In such cases, security registration is conducted at the National Registration Agency for Secured Transactions of Vietnam (“NRAST”), and is normally quite straightforward. For some special assets, such as land use rights and assets attached to land, the security will only be effective and perfected upon registration with the relevant registrar, which is normally more complicated than the registration at NRAST. In addition, a security agreement with respect to immovable assets could be required to be notarised by a notary office at the province where the land is located.
Vietnamese law does not recognise the concept of a floating charge. A security interest over the whole business could be taken, although it is recommendable to take security over individual assets.
Security registration will be subject to a registration fee, although such fee is nominal. For security agreements that are subject to a notarisation requirement, the parties need to pay a notary fee, which is calculated based on the value of the relevant loan amount but capped at the amount of VND70 million (approximately USD3,000) per agreement.
In general, collateral could be described generally, as long as it is identifiable. It is not necessary for each item of collateral to be individually identified under a security agreement.
A mortgage of land use rights and assets attached to land needs to be taken with a licensed credit institution in Vietnam, including branches of foreign banks in Vietnam. It is not permissible for offshore lenders to take security over land use rights or assets attached to land. In practice, a mortgage of land use rights and assets attached to land in favour of offshore lenders through the arrangement of an onshore security agent may be permitted for BOT power projects and important infrastructure projects. However, this should be seen as a special preferential treatment applied to promote these types of projects, rather than a recognition of the onshore security agent arrangement in general.
A guarantee by a Vietnamese entity or individual, except for a licensed credit institution in Vietnam, to secure obligations of an offshore entity will require approval from the Prime Minister.
As security interests are not centrally searchable, lenders mainly rely on appropriate representations and warranties given by the borrower to satisfy themselves with respect to the absence of other securities on their collateral. Lenders may conduct a search for information on security transactions on the online database of NRAST, but this search is not exhaustive because not all security transactions are required to be registered, and not all types of security transaction are registered at NRAST. For certain types of immovable assets, lenders may request information on security transactions over such assets at the relevant local land registration office.
A security interest could be released once the secured obligation(s) has been fulfilled, or in other cases as agreed between the parties. If a security has been registered, deregistration of the security should be done so that the security is completely released.
A secured lender could enforce its collateral if the borrower fails to perform or performs incorrectly the obligation when it falls due, or in other circumstances as agreed by the parties or as provided by law. Upon the occurrence of an enforcement event, enforcement of the security will generally be carried out in the following procedures:
If no agreement is made between the parties, the collateral shall be put up for auction.
In practice, lenders may have difficulty in requiring the securing party to hand over the secured assets to the secured party for enforcement. By law, the secured party may seek assistance from the People’s Committee at the ward level or from the local police with respect to the handover of secured assets. However, it is difficult to obtain such assistance in practice.
It is also noteworthy that the transfer of equity interest may require approvals from competent authorities and appropriate corporate approvals, which makes the enforcement process more complicated. Also, the transfer of equity interest to a foreign entity could be subject to a foreign ownership limit, as may be applicable to the business activities of the securing party. Meanwhile, the enforcement of listed shares could be subject to regulations on the stock exchange, such as a trading band in case of a transfer of listed shares.
A foreign law could be chosen as the governing law of a contract if said contract involves a foreign element (eg, where at least one party is a foreign entity or where secured assets are located outside Vietnam). Certain types of contracts, however, are required to be governed by the laws of Vietnam even if they involve a foreign element, such as a security agreement with respect to immovable assets. In addition, the application of foreign law must not go against the “fundamental principles of the laws of Vietnam", although there is currently no specific guidance on the meaning of this term.
Similarly, submission to a foreign jurisdiction is also permissible if the relevant matter involves a foreign element, except for certain matters over which Vietnamese courts have exclusive jurisdiction. Typically, a case involving immovable assets will be subject to the exclusive jurisdiction of Vietnamese courts.
In practice, Vietnamese judges are not familiar with foreign laws and it is also not common for Vietnamese courts to invite foreign law experts to advise on foreign law matters. Vietnamese judges may, therefore, at their sole discretion, apply Vietnamese law and ignore the parties’ choice of foreign law as the governing law.
A judgment of a foreign court could be recognised and enforced in Vietnam in accordance with a judicial assistance treaty or based on the principle of reciprocity. To date, Vietnam has limitedly entered into around 20 judicial assistance treaties with other countries and territories. On the other hand, given the lack of clear criteria and procedure and the absence of a system to track which countries have granted Vietnam judicial assistance, the application of the reciprocal principle is difficult and challenging in practice, and subject to the sole discretion of the courts. As a matter of fact, there are limited cases where a judgment of a foreign court has been enforced in Vietnam on the grounds of the reciprocal principle.
Meanwhile, a foreign arbitral award could be recognised and enforced in Vietnam in accordance with the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards (New York Convention). In principle, for the purpose of the recognition and enforcement of a foreign arbitral award, a Vietnamese court will not need to review the merits of the case. However, Vietnamese courts do have the power to refuse such recognition and enforcement on the grounds as prescribed in the New York Convention. In practice, the courts may review the merits of the case to determine if the foreign arbitral award is contrary to the “fundamental principles of the laws of Vietnam”, which is sometimes a subjective ground for refusal of recognition and enforcement of a foreign arbitral award.
There are no other major issues that might affect a foreign lender’s ability to enforce its rights under a loan or security agreement.
Foreign lenders are allowed to grant loans to local borrowers, subject to certain conditions:
Foreign lenders can take security over all assets except for “immovable assets”, which include land use rights and assets attached to land. As a result, a foreign lender may appoint an onshore security agent to take security over immovable properties on its behalf. This practice is more common in BOT projects, as under BOT regulations investors have a right to mortgage assets attached to land use rights or authorised licensed credit agents (Official Letter No 1604 of Prime Minister dated 12 September 2011). In non-BOT projects, state authorities often take the view that, as foreign lenders themselves are not entitled to take securities over immovable assets, they could not authorise such non-existent right to an agent to act on their behalf.
There is no restriction on the granting of guarantees in favour of foreign lenders for the obligations of a borrower who is a resident in Vietnam.
A foreign investor can invest in Vietnam in several ways, including:
Similar to other countries, Vietnam reserves its sovereign right to limit foreign investment in certain sections by setting conditions on the following:
The basic foreign investment conditions are found in the Schedule of Specific Commitments in Services contained in Vietnam’s WTO accession package. Less restrictive conditions are available for foreign investors from countries that have regional co-operation arrangements with Vietnam, such as ASEAN countries under the ASEAN Economic Community framework. Conditions for sectors that are not opened to foreign investment under treaties can also be found in domestic regulations.
Offshore investors are entitled to repatriate their legal profits earned from investment activities in Vietnam, which can be either in cash or in kind. The repatriation can be made annually (ie, at the end of each fiscal year following the audited financial statements), or upon the termination of investment activities in Vietnam.
The repatriation of profits shall be subject to the following conditions:
Cash remittance must be made through the specialised investment account opened at authorised banks in Vietnam (ie, a direct investment capital account or an indirect investment capital account, as the case may be). The investor will be required to convert VND into foreign currency at a licensed credit institution (including a foreign bank’s branch) in Vietnam before repatriating its dividend offshore. The purchase and conversion of VND into foreign currency for repatriation will be subject to the availability of foreign currency at the repatriating bank.
As a matter of practice, offshore investors in a BOT project may enjoy certain special treatments provided in the Foreign Currency Regime under the project documents with the authorised state's bodies, including the guarantee on the offshore remittance of foreign currency, convertibility of VND to foreign currency, and availability of foreign currency for conversion.
A project company can maintain offshore foreign currency accounts for the following purposes after it has obtained licences from the SBV to open such accounts (Article 3 of Circular 20/2015/TT-NHNN):
Generally speaking, project agreements do not need to be registered or filed with the Government authority, and do not need to comply with any local formality in order to be valid or enforceable, except that a power purchase agreement non-PPP project in particular sectors (eg, a solar or wind power project) needs to comply with a prescribed template, with limited room for negotiation.
There is no local formality applicable to financing documents. However, foreign loans with a term of more than 12 months will need to be registered with the State Bank of Vietnam as a condition for drawdown (this requirement also applies to foreign loans that have a term of 12 months or less if they have been extended so that the total term loan is more than 12 months). On the other hand, security agreements will need to be registered with the competent authority to ensure the enforceability thereof (eg, a security over land use rights should be registered with the local land authority; a security over other assets, such as equity or receivables, should be registered with the National Registration Agency of Secured Transaction (under the MOJ), etc).
There is no private ownership of land in Vietnam. The land belongs to the people, represented by the State, and the State grants land use rights over certain land areas to a particular land user or for particular purposes (eg, to the project company to implement the investment project). The use right over a land area of the project company is evidenced by, among other things, a “certificate of land use right, house ownership and other assets attached on land”.
Similarly, there is no private ownership of natural resources in Vietnam, and the State will grant the right to explore or exploit the natural resource to the relevant companies by virtue of the relevant licence (eg, a mining licence is required for mining activities; water permits are required for the use of water, etc).
Vietnamese laws are silent on the trust concept.
Vietnamese laws do not explicitly recognise the concept of security agency, and it is still uncertain whether the appointment of a local bank to take security for and on behalf of offshore lenders is valid. The main risk with this arrangement is the legal uncertainty of the authorisation of an offshore bank to take security over immovable assets for a local bank, as its security agent. Since offshore lenders are not allowed to take security over immovable assets, the courts of Vietnam may take the view that the local security agent is only allowed to take a security interest over assets to which the offshore lenders, being the principal, are legally permitted, which does not include immovable assets.
In practice, the Prime Minister has granted special approval on a case-by-case basis for the use of a local security agent to take security over immovable assets in the case of BOT power projects and important infrastructure projects, but this is a special preferential treatment for those sectors currently being promoted.
A security interest can be enforceable against a third party from the time when the security is registered or the secured party keeps or holds the secured assets. The priority of competing security interests is determined by the chronological order of the registration of each security. If a secured transaction is not registered, the priority of foreclosing security interests is determined based on the date of the ecurity agreement.
The concept of contractual subordination is not explicitly recognised under Vietnamese law. Generally speaking, it could be expected that contractual subordination provisions will not be affected by the insolvency of a borrower in Vietnam, provided that such provisions are not contrary to the basic principles of Vietnamese law. With respect to project financing, inter-creditor agreements amongst the onshore lenders, offshore lenders and the borrower have been more common in recent practice.
A project company needs to be organised under Vietnamese law in order to implement an investment project in Vietnam. A project company is typically organised in the form of a limited liability company, although it can also be incorporated as a joint stock company.
Under the law of Vietnam, insolvency is limited to two basic routes: reorganisation and liquidation.
The reorganisation process commences with a meeting of creditors before a judge approving the company's rehabilitation. Within 30 days of the creditor resolution, the enterprise is obliged to make a plan to rescue the business, detailing how it intends to repay its debt and restructure its business operations (“Rehabilitation Plan”). The Rehabilitation Plan must identify the measures to be taken for the recovery of the business operations and the conditions, time limit and plan for the payment of debts.
Once the Rehabilitation Plan has been prepared, it is submitted to the court for consideration and approval before being submitted to the creditors for approval, which requires a vote by a majority of unsecured creditors holding at least 65% of the total unsecured debts of the enterprise. Once the Rehabilitation Plan receives approval from both the court and the creditors, notice of the approval will be sent to all creditors and published in a newspaper, and the Rehabilitation Plan will become effective. Once the Rehabilitation Plan is approved, the parties will follow this plan to rehabilitate the company’s status. If the Rehabilitation Plan is not approved, or if the parties fail to implement the approved plan, the insolvent entity will proceed to the liquidation process.
Unless otherwise approved by creditors, the Rehabilitation Plan must be implemented within three years of the date of the creditors' meeting that approved the Rehabilitation Plan.
Under the law of Vietnam, the borrower may still continue its business operations following a decision to commence the insolvency process, but must be subject to the supervision of the judge and the asset manager or asset management entity (Article 47.1 of Law on Bankruptcy 2014). Therefore, unless otherwise specified under the contract or subject to the decision of the judge or asset manager/asset management entity, the lender will continue to perform the existing loan agreements. After the date of the issuance of a decision to commence bankruptcy proceedings, interest on any debts shall continue to accrue in accordance with agreements, but payment of such accrued interest shall be temporarily suspended. If the insolvent entity is declared bankrupt, the interest on debts no longer accrues (Article 52 of Law on Bankruptcy 2014).
If security interests are used for the Rehabilitation Plan as approved by the relevant secured creditors, the handling of the secured assets will be in accordance with the resolution from the creditors' meeting. Where the security interests are not used for the Rehabilitation Plan, the assets will be disposed of according to the relevant security contract. With regard to any secured contract that is not due, the Court shall suspend the contracts and disposal of the secured debts before the declaration of bankruptcy.
If the assets put up as collateral are likely to be damaged or dramatically devalued, the asset manager and/or asset management entity shall request the judge to immediately dispose of such assets.
Pre-existing security interests shall be settled on the following principles:
Under the Law on Bankruptcy 2014, the assets of an entity that has been declared insolvent by the court will be distributed in the following order:
In addition, if the company in bankruptcy is a financial institution and has received financial support from the Government, including special loans, then such Government support may take precedence over all other liabilities of such company (Article 100 of the Bankruptcy Law 2014).
Under Article 53 of the Law on Bankruptcy 2014, all secured assets will be enforced to fulfil the obligations towards secured creditors before the Court declares an entity insolvent. Therefore, the secured creditors shall not be listed in the order for the distribution of assets after the Court declares the entity bankrupt.
Any remaining amount of the asset value after every payment prescribed above has been made shall belong to the relevant members of the co-operative, private members or shareholders etc, as the case may be.
If the value of the assets of the insolvent entity is not enough to make the payment as prescribed above, entities with the same priority shall be paid in proportion to the available funds against the debt.
Ambiguity if a third-party security provider becomes insolvent
If a security provider becomes insolvent and the secured obligation is due, the enforcement of the secured asset shall be conducted in accordance with the Bankruptcy Law (Article 57.2(a) of Decree 163/2006). However, the Bankruptcy Law appears to primarily regulate the enforcement of assets owned by an insolvent company used to secure its own obligation, rather than the enforcement of assets owned by an insolvent company (ie, the security provider) used to secure the obligation of a third party (ie, the borrower). The rights of creditorscould be affected if the security agreement does not clearly resolve such issue.
Enforcement of secured assets
An automatic moratorium arises from the date a bankruptcy petition is accepted by the court (Article 41.3 of the Bankruptcy Law 2014), during which a secured creditor can only enforce the secured asset with the approval of the court. In practice, the process to obtain this approval can be time-consuming.
The bankruptcy process under the Law on Bankruptcy is applied to all enterprises and co-operatives that are established and operated in accordance with the applicable Law on Enterprise of Vietnam.
The project company is required to obtain a construction-all-risk policy for the construction of the project. Other customary policies are also acquired for the operation of the project.
Only a project company with foreign ownership of more than 49% can obtain non-life insurance from qualified offshore insurers that satisfy certain conditions, including the following:
In other cases, project companies must insure their business and assets with insurers that are established and licensed to operate in Vietnam.
There are no specific fees and/or taxes on insurance policies over project assets.
Foreign creditors can be named as beneficiaries under insurance policies if they are so designated by the insured party.
In general, interest payments and relevant fees payable to offshore lenders are subject to a withholding tax of 5%. Certain offshore lenders, such as central banks or banks owned by governments or French lenders, may be exempted from such withholding tax in accordance with tax treaties between Vietnam and the relevant country.
Other than the withholding tax, there are no taxes or duties applied to foreign lenders making loans to local companies.
There are no legal restrictions under Vietnamese law on the interest rate of loans made by foreign lenders to a Vietnamese borrower. In practice, however, if the interest rate is unreasonably high, the registration of the relevant foreign loan with the State Bank of Vietnam could be challenged.
Generally speaking, a transaction involving a foreign element (eg, if there is a foreign contracting party or if the assets subject to the contract are located offshore) may be governed by foreign law if the parties so agree (except for certain specific transactions that must be governed by Vietnamese laws, as discussed below).
With respect to project financing, the project agreements can be governed by foreign laws, with English law normally chosen by the parties. However, land lease contracts are governed by Vietnamese law, as they relate to immovable assets in Vietnam.
With respect to project financing, the financing agreements can be governed by foreign laws, with English law normally chosen by the parties. However, security agreements over immovable assets in Vietnam (if any) are governed by Vietnamese law.
With respect to project financing, Vietnamese law will be applied to the following, among others:
There is no particular domestic policy in Vietnam regarding Islamic finance.
Generally speaking, for transactions that can be governed by foreign laws, if the parties choose Islamic law as the governing law, such transaction will follow the applicable rules of Islamic law to the extent these rules do not contradict the basic principles of Vietnamese law.
As discussed above, there is no particular domestic policy in Vietnam regarding Islamic finance (including the issuance of sukuk and the practice of takaful insurance). Generally speaking, the regulatory and tax frameworks for the provision of Islamic finance are similar to those applicable to the provision of non-Islamic finance in Vietnam.
As discussed above, there is no particular domestic policy in Vietnam regrding Islamic finance.
The requirements for Islamic banks to be authorised or admitted to carry out business in Vietnam are similar to those that apply to non-Islamic banks. Generally speaking, a foreign credit institution (regardless of whether Islamic or non-Islamic) may operate in Vietnam as a representative office, a joint-venture bank, a wholly-owned subsidiary, a branch or a financing company. Subject to the form of the presence, specific requirements will apply – eg, minimum capital, operating licence, capacity/creditability of shareholders/owners, qualification of board directors and managers, organisational structure, etc.
The requirements for takaful operators to be admitted in Vietnam are similar to those applicable to non-Islamic insurance companies. Generally speaking, a foreign insurance company (regardless of whether Islamic or non-Islamic) may operate in Vietnam as a joint-venture insurance company, a wholly-owned subsidiary, a branch (only applicable to non-life insurance) or a representative office. Subject to the form of the presence, specific requirements will apply – eg, minimum capital, operating licence, capacity/creditability of shareholders/owners, qualification of board directors and managers, etc.
As discussed above, there is no particular domestic policy in Vietnam regarding Islamic finance or Shari'a-compliant products and transactions. Generally speaking, the frameworks that apply to Shari'a-compliant products and transactions are similar to those that apply to non-Shari'a-compliant products and transactions. It should be noted that the applicable Shari'a rules may not contradict the basic principles of Vietnamese laws.
The supervisory bodies of financing products and transactions depend on the specific category of such product or transaction. For example: