Protecting The Interests Of Businesses In Borrowing And Lending Contracts

The increasingly developed market economy not only brings many opportunities for businesses but also creates many challenges, especially the problem of financial loans. Loans are an important financial tool, helping businesses increase working capital, optimise business opportunities and expand production scale.

Borrowing and lending not only bring timely financial resources but also help businesses take advantage of financial leverage to increase profits. However, besides the obvious benefits, borrowing and lending activities also contain many legal risks if not carefully managed and regulated. The article Protecting The Rights Of Businesses In Loan And Lending Contracts will provide readers with an overview of borrowing and lending contracts and measures to protect the interests of businesses in its.

1. Overview of the property loan contract

1.1. Definition of property loan contract

Pursuant to Article 463 of the Civil Code 2015 “A property loan contract is an agreement between the parties, whereby the lender delivers the property to the borrower; When the payment is due, the borrower must return to the lender the property of the same type according to the quantity and quality and only have to pay interest if there is an agreement or prescribed by law“. Accordingly, a property loan contract is a form of civil contract, expressing an agreement between the borrower and the lender. Through this agreement, the parties commit to each other on the delivery, receipt and return of assets, as well as the rights and obligations of the parties without the participation of the credit institution.

1.2. Characteristics of property loan contract

(i) Object of the property loan contract. According to the definition in the Civil Code 2015, property is an object, money, valuable papers, property rights and includes movable property and real estate. The object of the property loan contract is the types of assets assigned by the lender to the borrower and then the borrower must return the assets of the same type according to the quantity and quality. Thus, not all assets are subject to the adjustment of the property loan contract. Because the object of the property loan contract must be an alternative and identifiable asset, that is, the borrowed property must be clearly defined in terms of value, quantity, quality, type and other characteristics to avoid disputes later and can be replaced by another asset of the same type of the same quality.

In fact, one of the most common types of borrowed and lent assets between businesses/individuals is money, also known as loans. Loans play an important role in ensuring business continuity and promoting business growth. In addition to money, other types of assets such as goods, machinery, and equipment can also be the subject of  property loan contract, depending on the needs and agreements between the parties. Sometimes the assets can be intangible assets such as stocks, intellectual property rights, software, etc. However, intangible asset borrowing is typically less common and can be more complicated due to the difficulty in determining the value and quality of the asset.

(ii) Form of property loan contract. According to the provisions of Article 119 of the Civil Code 2015, the parties to the contract can choose the form of oral, written, behaviooral or thorough data messages. This means that the property loan contract can also be executed in these forms, depending on the agreement and actual conditions of the parties involved. However, in order to minimise the risk of disputes, the parties should prioritise choosing the form of writing. The form of oral contract should usually only be applied in cases where the value of the borrowed assets is small or between the parties who have a close relationship. When a dispute arises,  oral property loan contract are often difficult to prove and clearly define the rights and obligations of the parties, leading to more complicated dispute resolution.

(iii) Rights and obligations of the parties to the property loan contract.

• Depending on each type of property loan contract, the lender will have corresponding rights and obligations in accordance with the law.

For non-term property loan contract. Pursuant to Article 469.1 of the Civil Code 2015, the lender has the right to request the borrower to pay the property and interest if there is an agreement (the interest is calculated by the time the lender receives the property back) at any time but must notify the borrower before a reasonable time limit,  unless otherwise agreed by the parties.

For term property loan contract. Upon the expiration of the term of the contract, the lender has the right to request the borrower to pay the loaned property, the lender can only reclaim the property before the term if agreed by the borrower. In addition, if the parties have an agreement on the interest rate, the lender has the right to request the payment of interest as agreed.

Regardless of the type of property loan contract, the lender is obliged to hand over the assets in full quantity, quality and type as agreed upon to the borrower. If the lender intends to deceive the borrower into transferring assets that do not ensure quality, causing damage to the borrower, it must pay compensation.

• Borrower. It is a person who needs material help from the lender. Therefore, the borrower must voluntarily fulfil all its obligations arising from the signed contract. The borrower must fully pay the borrowed money or assets and interest if there is an agreement or prescribed by law. If the subject matter of the contract is property, the borrower must pay with assets of the same type.

If the non-term property loan contract, when the lender requests to repay the debt, the borrower must perform the contract within the agreed period. The borrower also has the right to return the property at any time and only has to pay interest until the time of repayment but must notify the lender in advance for a reasonable time.

If the property loan contract has a term and the borrower repays the debt ahead of time, it must pay the entire principal and interest of the whole loan term, unless otherwise agreed by the parties. Because when giving a loan, the lender has determined that during that lending period, the property and money will not be used for other purposes, so when returning the property, the lender has no plan to use that property. In other words, the lender will be passive when the borrower returns the property ahead of time (Article 470.2 of the Civil Code 2015).

In case the parties have an agreement on the purpose of the loan, the lender has the right to check whether the use of the borrower’s assets is for the right purpose as agreed or not. If the property is used for improper purposes as agreed, the lender has the right to cancel the contract (Article 467 of the Civil Code 2015).

(iv) Interest. It should be noted that the interest rate in property loan contract is only applied when there is an explicit agreement between the parties or in accordance with the law. This means that if there is no agreement or legal regulation on interest rates, the borrower may not have to pay interest. In case there is an agreement on the interest rate, the lender and the borrower should note that the interest rate is limited to 20%/year according to Article 468 of the Civil Code 2015. If the parties agree on an interest rate that exceeds this level, the excess will not be effective, unless otherwise provided by the relevant laws. This provision safeguards the borrower from being charged an excessively high interest rate. In addition, the Civil Code 2015 also stipulates overdue interest rates (Article 466.5 (b)) and late payment interest rates (Article 468.2) to protect lenders if borrowers fail to repay debts on time.

2. Measures to protect the interests of enterprises in property loan contract

2.1. Review the terms to check the legality, strictness and transparency of the property loan contract

(i) Terms on loan assets and collateral (if any). When considering this clause, it is impossible not to mention the ownership of the property, because in case the parties sign a property loan contract but the lender does not have the ownership of the aforementioned loaned property, the property loan contract will be invalidated due to an object that cannot be performed. Therefore, the first thing the parties need to do is to check the legality and ownership of the loaned assets and collateral, especially the ownership certificate for the assets that need to be registered for ownership.

In addition, “the borrower must return the lender the same type of property in accordance with the quantity and quality”, so the clause on borrowed assets should clearly describe the type of loaned asset, clearly stating the quantity and value of the asset, quality and condition. For example, for money, it is necessary to specify the exact amount; for assets such as equipment and machinery, it is possible to estimate the current market value and describe the quality and condition of the asset at the time of lending, enclosed with documents, handover minutes if necessary. The detailed description of the assets helps ensure transparency, fairness, and efficiency in the execution of the contract.

(ii) Clause on the obligation to repay the borrowed property. As analysed above, this is an important type of clause in any property loan contract , whether the value is large or small. Considering that in fact, in addition to the case of due repayment under the property loan contract, there may be cases such as the borrower repaying the borrowed property ahead of time or the lender requesting the borrower to repay the borrowed property ahead of time:

• For the case where the borrower repays the borrowed property before the due date, it is something that the lender must be aware of, because the aforementioned repayment has indirectly affected the interest that the lender would have received if the borrower had repaid the same part of the property interest in the agreed term.
• In case the lender requests the borrower to repay the borrowed property before the due date, in order to be able to do this, the consent of the borrower is required.

2.2. Ensuring control and supervision of collateral

(i) The lender control right. When the borrower uses the asset as collateral, establishing a tight asset control mechanism will help ensure that the asset is effectively managed and protected. This control allows businesses to quickly detect and address related risks, ensuring that assets are always in the best condition. Unlike common credit contracts, it is very rare for property loan contract between businesses to require a guarantee certificate (one of the security measures for effective loans/payments). Accordingly, the lender’s control will be expressed through the right to periodic asset inspection, the right to request property insurance, the right to request maintenance and repair, the right to temporarily seise assets, the right to sell collateral, the right to request information, etc.

(ii) The borrower’s right to custody of the collateral. In case the borrower transfers the ownership of the collateral to the lender to secure its loan, the borrower still has the full right to supervise the collateral. However, the above agreements need to be fully recorded in the property loan contract. The above agreement aims to ensures that the lender cannot use or dispose of the borrower’s collateral without consent and when the debt repayment obligations haven’t been incurred. It also prevents the lender from engaging in unsuitable actions regarding the collateral.. Accordingly, the borrower’s right to supervision is expressed through the right to periodic inspection of the collateral, the right to be provided with information on the current condition of the collateral, the right to repair the collateral, etc.

2.3. Use professional legal advice services

The use of professional legal consulting services is very important to protect the interests of businesses in property loan contract. Legal experts with professional knowledge and practical experience will assist businesses in drafting, negotiating and checking the legality of the terms in the contract. This not only helps businesses avoid legal risks but also ensures clear, transparent and beneficial contract terms. Moreover, when a dispute occurs, support from professional lawyers will help businesses solve problems effectively. Lawyers can represent businesses in lawsuits, using litigation skills to protect their interests in court. The professionalism and understanding of legal consultants not only help businesses feel secure and focus on their main business activities but is also a key factor in resolving legal disputes smoothly.

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