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Loophole in law creates a breach of contract!

The article written by Lawyer Tran Thanh Tung – Partner of Phuoc & Partners and Mr. Le An Hai, is published in The Saigon Economic Times dated 25/2/2016, No. 9-2016 (1.315).

For more information about Mr. Tung, please click here

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A friend of mine, who is currently the leader of a well-known garment company confided that his company had an ovedued debt couple of years ago. Now, after arranging sufficient funds, he would like to settle the outstanding debt but he could not do so due to regulations of the laws. This might sound like a joke but this is a true story.

Wanting to pay debt but not being allowed to do so

 In 2014, his company bought materials from a foreign company. The goods were duly delivered and the payment supposed to be dued within 2 months from the date of receiving the goods. However, because of financial difficulty, he was not capable to make full payment but only amount of the debt and the foreign company agreed to defer the remaining debt.

Once his business was in a better situation, he decided to quickly arrange to pay off the outstanding debt. However, the bank stopped his payment transaction and requested his company to register payment of the remaining debt with the State Bank of Vietnam (SBV) before able to clear off the debt. The reason explained by the bank is that the debt lasted over one year, hence it must be considered as a mid-term loan and must be registered with SBV before payment.

He was nervous and wondered whether such aberrant regulation truly exists. Being unable to complete the registration in short time, in such situation, he could sign a new loan agreement with the foreign partner in order to register the loan, however, the foreign partner might think that he, the debtor, just brings up such silly requirement to delay the repayment once more time. “They deferred my loan without calculating any interest, if I could not pay them back soon, I would not only lose prestige, but also take the risk of losing our business conection” – he shared.

Odd regulations

 Pursuant to Decree 219/2013/ND-CP and to Circular 25/2014/TT-NHNN, mid-term and long-term foreign loans (above 1 year) must be registered with SBV in order to disburse and repay to debtor.

According to the regulation, a foreign loan incurres in a situation where “a borrower receives a credit fund from a creditor who is foreign individual or organization by signing and implementing a foreign loan agreement under the form of a loan contract, purchase and sales contract having clause on deferred payment, lending entrustment contract or finance leasing contract or contract on issuance loan instrument of the borrower”. Accordingly, purchase and sale contract having clause on deferred payment may be seen as  a foreign loan contract. In details, at the Article 6 of Circular 25 regulates specifically that the importation of goods under a contract having deferred payment clauses, the importer is obliged to register for foreign loan if the term of payment has nature of a mid-term or long-term loan.

Definitely, sales and purchase of goods contracts are appearently different from loan contracts. On one hand, this is a goods’ transaction, on the other hand, there is a currency’s transaction. However, at Decree 219 and Circular 25, the lawmakers do not provide any instructions to define sale and purchase of goods contracts having terms on deferred payment. The question here is whether the parties must indicate the deferred payment term in the contract or they could agree after the goods have been deliveried. For safety reasons, the banks always consider sale and purchase of goods contracts having payment term above one year from the date of signing contract as contracts having deferred payment. This method is opposited with international business precedents, however, in some extents, due the ambigous in wording of the law, the bank’s requests may not seem unreasonable.

 This article is not going focus further on debating on the wording of the law, in another extent let have an observation on the consequences when conducting such regulation with the business reality.

In particular, to transactions happening in reality, registering sale and purchase contracts having deferred payment to SBV will create additional administrative procedure, causing higher transaction cost and unnecessary time cost. In fact, it is indicated that the time spending for conducting foreign loan registration and receiving approval from SBV might take 01 and 02 months, in some distinct cases it may take even longer. In such period the enterprises shall have to pay the interests if the debt is also interest calculated. This regulation obviously does not support the business activities of enterprises.

On the contrary, to mischievous enterprises intentionally delaying payments of the debts, this mechanism create a legal ground for such enterprises to refuse or delay the payment of their debts. It could be assumed that these enteprises may purchase goods having deferred payment but deny making payments. Until being chased for payment, they leave the debt overdue for one year and then, report to debtors that the debt has to be registered with SBV before being paid off. By this way, they can welsh on the debt for a long time, in such situations, their creditors cannot do anything.

Therefore, could we assert that this disposition of the law deliberately leads to breaches of contracts?