Loan Security: A Financial Risk Management Tool for Vietnamese Enterprises

International practice has shown that these risks are not merely theoretical but can become reality. The case of Hector Finance Group Ltd & Huizhou Xinsheng Paper Industry Co. Ltd v Chan Chew Keak in Singapore is a typical example, demonstrating that the absence of any security measures can lead to a total loss of capital, with the company director personally bearing liability. The risks here are not only the loss of corporate assets but also direct legal responsibility. This article focuses on providing important notes for Vietnamese enterprises in establishing and managing security clauses in loan agreements, in order to minimize risks and protect their interests in the context of international financial integration.

1. Case Summary

The case of Hector Finance Group Ltd & Huizhou Xinsheng Paper Industry Co. Ltd v Chan Chew Keak arose from a risky financial decision in corporate governance in Singapore. Mr. Chan Chew Keak, director of both the parent company Hector Finance and its subsidiary Huizhou Xinsheng, instructed the subsidiary to lend a total of RMB 14 million to an external individual for investment in industrial land. Notably, this loan was made without any security measures in the contract. After receiving the money, the borrower defaulted and disappeared, causing direct losses to the subsidiary.

When the dispute arose, the plaintiffs accused Mr. Chan Chew Keak of breaching his duty of loyalty and duty of care to the company, even conspiring with the borrower to misappropriate assets. Mr. Chan Chew Keak argued that this was a legitimate transaction carried out for the company’s benefit with the tacit consent of shareholders, denying all allegations of fraud or collusion.

After reviewing all evidence and circumstances, the Singapore court ruled that Mr. Chan had breached his duty of care by allowing the company to lend a large sum without security, deeming it reckless management that posed serious risks to the company. However, the court rejected the allegations of breach of loyalty or conspiracy due to insufficient evidence. The court also clarified the right to sue: the parent company had no standing to claim damages since it did not directly suffer losses, while the subsidiary (the lender) was the proper party to seek compensation. The judgment emphasized that in commercial transactions, especially unsecured loans, directors may bear personal liability if negligent actions cause damage to the company, and courts will only intervene further when there is clear evidence of fraud or unethical conduct.

2. Concept and Role of Security Clauses in Loan Agreements

A security clause in a loan agreement stipulates that the borrower or a third party uses assets, property rights, or legal commitments to secure repayment obligations. This is a crucial legal mechanism to protect the lender’s rights while binding the borrower to contractual responsibility.

Under Vietnamese law, security measures are regulated in the 2015 Civil Code, including various forms such as pledge, mortgage, guarantee, deposit, escrow, and collateral.

The purposes of security clauses include:

• Risk mitigation for lenders: If the borrower defaults, the lender has the right to dispose of the secured assets to recover the debt.

• Incentive for borrowers: Having to pledge or mortgage assets makes borrowers more responsible in fulfilling obligations, since default may result in loss of ownership or use rights.

• Legal basis for enforcement: Security clauses provide grounds for lenders to sue or request competent authorities to handle secured assets in case of default.

• Transparency and fairness: Clearly defined security clauses ensure that both parties understand their rights and obligations, reducing disputes.

Common security measures:

• Mortgage and pledge of assets: Applied to both immovable property (land, houses) and movable property (vehicles, machinery, goods, receivables). Registration with competent authorities is usually required.

• Guarantee: A third party (individual or organization) undertakes to perform obligations if the borrower defaults. Often used in large loans where the borrower lacks sufficient collateral.

• Deposit, escrow, collateral: Monetary or equivalent assets used in short-term or commercial transactions.

In the context of international integration, security clauses are not only legal requirements but also financial risk management tools. Vietnamese enterprises, especially in cross-border loans, must carefully design security clauses consistent with both Vietnamese law and applicable foreign law to safeguard their interests and minimize disputes.

3. Vietnam’s Legal Framework on Loan Security

Loan security in Vietnam is governed by several key legal instruments:

• Civil Code 2015: General provisions on security measures for obligations (Articles 292–387).

• Law on Credit Institutions 2024: Governs lending activities and loan security by banks.

• Decree 21/2021/ND-CP: Provides detailed guidance on implementing the Civil Code regarding secured transactions.

• Circular 39/2016/TT-NHNN (amended by Circular 12/2024/TT-NHNN): Regulates lending activities of credit institutions.

Registration of secured transactions with competent authorities is mandatory for the security to be effective against third parties. Failure to register may result in loss of priority in asset recovery, especially in bankruptcy or multi-creditor disputes.

4. Practice in Vietnam

Similarities:

Just like Singapore, Vietnamese law recognizes unsecured lending as a legal and financial risk. The judgment of the Singapore Court in the Hector Finance case affirms the principle that managers must bear personal liability if management decisions cause damage to the company due to lack of prudence.

• Principle of personal liability of directors/managers:
  The Law on Enterprises 2020 stipulates that directors, general directors, and company managers must perform the duty of loyalty and the duty of prudence when managing the company’s assets and capital. If they make decisions that cause damage to the company due to lack of prudence, they must bear personal liability for compensation. This is similar to the judgment of the Singapore Court in the Hector Finance case, where the director was held liable for granting unsecured loans.

• Emphasis on the role of loan security:
  Both legal systems regard security as an important tool to mitigate risks and protect the interests of the lender.

Differences:

• Unsecured lending practices: In Vietnam, many enterprises, especially within corporate groups or among related parties, often lend internally without requiring collateral, relying on trust or to avoid registration procedures.

• Debt recovery difficulties: In disputes, unsecured creditors are disadvantaged if the borrower becomes insolvent, as they are classified as unsecured creditors in bankruptcy and usually recover only a small portion.

• Limited enforcement of director liability: Although the law provides for director liability, lawsuits against directors for negligence remain rare in Vietnam due to difficulties in proving “lack of due care,” cultural preference for internal resolution, and weak enforcement mechanisms.

These differences show that while Vietnam’s legal framework is relatively complete, business practices often neglect security arrangements, exposing enterprises to significant risks.

5. Key Notes for Vietnamese Enterprises

• Always establish security measures:
  Unsecured lending leaves the enterprise with virtually no legal “support” in the event of a breach. Each loan should be tied to at least one security mechanism that is valuable, easily verifiable, and easily enforceable. It is necessary to correctly identify the owner and the legal status of the asset (whether it is under dispute, seizure, freezing, already pledged to another party, etc.), while also assessing the actual realizable value to avoid “formalistic security.” For guarantees, the enterprise must review the authority to sign, the scope of liability, the conditions for calling the guarantee, and circumstances relating to the termination of guarantee obligations.

• Registration of secured transactions:
  Registering a secured transaction is the condition for it to be effective against third parties and to establish the order of payment priority. The enterprise must identify the correct registration authority, the timing of registration, and update changes to the secured asset (replacement, addition, transfer, division). Note that registering the wrong subject, misdescribing the asset, or omitting arising rights (such as new receivables) may result in the loss of priority, causing the enterprise to be “subordinated” to creditors who registered earlier.

• Multi-layered security structure:
  In complex credit transactions, the lender often does not rely on a single type of asset but designs a multi-layered security structure to increase debt recovery capacity and create multiple “lines of defense.” This approach may combine principal assets with ancillary property rights. At the same time, the lender may require joint guarantees from both the parent legal entity and key individuals to strengthen legal binding, with clauses clearly stipulating the scope of liability, conditions for calling the guarantee, and enforcement mechanisms.

• Strict corporate governance:
  The management must establish an internal credit approval process: risk assessment, lending limits, minimum security requirements, valuation and loan-to-value ratios, post-disbursement monitoring mechanisms, and early violation handling plans. Every lending decision must be documented, accompanied by legal opinions from experts such as lawyers, and approved by the proper authority to avoid risks of invalidity or personal liability. In cases of unsecured lending, it is necessary to demonstrate that the duty of care has been fully exercised: risk analysis, reasonable business justification, and supplementary mitigation measures.

• Compliance with international law in cross-border transactions:
  An international loan agreement must clearly specify the governing law, jurisdiction, dispute resolution mechanism (Court/Arbitration), recognition and enforcement of judgments in Vietnam, and mandatory regulations on foreign exchange, guarantees, and mortgages in the relevant countries. Security clauses must be compatible with the legal system of the country where the asset is located, avoiding “paper security” that cannot be enforced. For foreign currency loans, the enterprise must comply with foreign exchange management regulations, external loan reporting, restrictions on state guarantees, and adopt hedging measures against exchange rate fluctuations to avoid breaches of obligations due to market factors.

• Independent legal advice:
  Lawyers should be involved from the negotiation stage to design an appropriate security structure, review legal risk points (authority to sign, conditions for validity, registration, enforcement), and build a set of supplementary clauses. Before disbursement, it is necessary to require full legal evidence such as ownership documents, confirmation of no disputes, security registration certificates, and internal resolutions. Independent legal advice also helps identify unfavorable terms.

Conclusion

Loan security is not merely a technical clause in contracts but a core legal mechanism to protect lenders, bind borrowers, and ensure the safety of credit transactions. The Singapore case illustrates the severe risks of unsecured lending: corporate losses, personal liability of directors, and prolonged disputes damaging reputation. This serves as a warning for Vietnamese enterprises, especially as the country moves toward establishing International Financial Centers in Ho Chi Minh City and Da Nang, where international risk management standards will apply more rigorously.

To adapt, enterprises must treat loan security as a vital safeguard. This includes selecting appropriate security measures, registering secured transactions, building multi-layered structures, closely monitoring assets, and engaging independent legal counsel. Only by doing so can businesses minimize risks, protect their interests, enhance credibility and access to capital in an increasingly competitive and integrated financial environment.