A negative pledge is usually the first covenant a foreign lender requests and the last one it reads closely. In loans to Vietnamese borrowers, the clause sits on top of a legal system with a defined list of security measures, a registration-driven priority rule, a statutory insolvency waterfall and a large state-owned sector.
This article explains how a negative pledge and its companion pari passu clause behave when a Vietnamese obligor is solvent, stressed or bankrupt, and where lenders and borrowers should push when negotiating the text.
Contents
- Why a Negative Pledge Matters in Vietnamese Lending
- Scope of the Negative Pledge: What Counts as Security
- The Pari Passu Clause: Ranking Versus Payment
- Statutory Priorities on Insolvency
- Secured and Unsecured Creditors under the Civil Code 2015 and Decree 21/2021
- Security Registration and Its Effects
- SOE and Group-Company Issues
- Negotiation Points for Lenders and Borrowers
- Drafting Examples
- Frequently Asked Questions
Why a Negative Pledge Matters in Vietnamese Lending
Offshore lenders making loans to Vietnamese borrowers frequently advance unsecured or only partly secured facilities to Vietnamese companies, because taking onshore collateral involves foreign-exchange controls, registration steps and enforcement uncertainty. For that unsecured exposure, the negative pledge is the main structural protection of unsecured lenders: the borrower promises not to grant security over its assets to other creditors, so the lender does not find itself behind a queue of secured banks.
It helps to be precise about what a negative pledge does. A negative pledge is purely contractual. It creates no proprietary right in the borrower’s assets, binds only the borrower and does not, by itself, invalidate a mortgage later granted to a third party. If the borrower breaches it, the lender’s remedies are an event of default, acceleration and damages. Those remedies are valuable, but they are not the same as holding collateral.
Medium and long-term foreign borrowing by Vietnamese enterprises must be registered with the State Bank of Vietnam under Circular 03/2016/TT-NHNN, as amended (verify the current text). This negative pledge sits within that regulated frame, and its drafting should be consistent with the registered loan terms. Our banking and finance team sees these points tested in almost every cross-border mandate.
Scope of the Negative Pledge: What Counts as Security
Defining Security Broadly
The Civil Code 2015 (Law No. 91/2015/QH13) lists the recognised security measures in Article 292: pledge, mortgage, deposit, security deposit, escrow, retention of title, guarantee, credit-based guarantee and lien. A negative pledge written only around “mortgage or pledge” would miss most of that list. A sound definition of “Security” should capture each measure by name and then add a catch-all for any arrangement having a similar effect, including set-off arrangements, sale-and-leaseback structures, assignments of receivables and retention-of-title terms.
The Civil Code allows security over property to be formed in the future, so the negative pledge should restrict security over “present and future” assets and revenues. A guarantee is both a security measure and a form of debt; lenders usually address it through a financial-indebtedness covenant, and the two covenants must be read together.
Permitted Security, Permitted Liens and Baskets
No borrower can operate with an absolute prohibition. The negative pledge therefore carries a schedule of permitted security (often called permitted liens), plus one or more baskets. The commercial debate is about how wide those carve-outs run. The table below compares typical positions.
| Carve-out | Lender-leaning formulation | Borrower-leaning formulation | Vietnam-specific point |
|---|---|---|---|
| Liens by operation of law | Only where arising in the ordinary course and not overdue | All statutory liens, including those under dispute | Civil Code lien (cầm giữ) arises by law over assets held for a due obligation |
| Existing security | Listed in a schedule, amount capped, no extension | Existing security and its renewals | Check registry searches against the schedule |
| Purchase-money and retention of title | Limited to the acquired asset and its price | Any acquisition financing | Retention of title is a Civil Code security measure |
| Set-off and netting | Ordinary-course banking arrangements only | All bank set-off rights | Local bank facility terms often include broad set-off |
| General basket | Fixed small amount | Greater of fixed amount and a percentage of total assets | State the currency and exchange-rate source for dong-denominated assets |
A “greater of” basket grows with the business but can swallow the negative pledge if assets are revalued. Lenders should test baskets when security is created and bar carry-forward of unused capacity. Borrowers should insist that permitted security covers refinancing, so a routine renewal with a local bank does not trigger a default.
The Pari Passu Clause: Ranking Versus Payment
The Ranking Limb
A pari passu clause in its ordinary form says the borrower’s payment obligations rank at least equally with all its other present and future unsecured and unsubordinated obligations, except those preferred by mandatory provisions of law. It is a ranking covenant. It does not give the lender security, and it does not promise any particular recovery.
The pari passu clause blocks contractual subordination of the loan. Its mandatory-law exception is not boilerplate for Vietnamese borrowers; it imports the statutory priorities discussed below.
The Payment-Ranking Debate
A recurring question is whether a pari passu clause also requires ratable payment, meaning the borrower may not pay one unsecured creditor in full while leaving another unpaid. Sovereign debt litigation in the 2000s and 2010s brought that argument to prominence, and courts, market bodies and bond drafters responded with different approaches. Many modern sovereign forms now state that the clause is concerned with ranking only.
I describe the debate at a general level; no outcome in a sovereign dispute should be assumed to transfer to a corporate borrower in Vietnam.
For loans to Vietnamese borrowers, the practical lesson is drafting discipline. If the lender wants ratable payment, it should say so expressly, for example through a pro rata sharing clause among lenders and an undertaking about payments to other creditors. If the borrower wants ranking only, it should add a sentence confirming that the clause does not oblige it to make payments rateably. Silence invites an argument, and in a Vietnamese insolvency the answer is largely replaced by statute anyway.
Statutory Priorities on Insolvency
Ranking under the Law on Bankruptcy 2014
The Law on Bankruptcy 2014 (Law No. 51/2014/QH13, effective 1 January 2015) sets the order in which a bankrupt enterprise’s assets are distributed. In summary, Article 54 places bankruptcy costs first, then amounts owed to employees (wages, severance, social and health insurance and other contractual entitlements), then debts incurred after commencement to revive the business, and finally tax obligations and unsecured debts, which share pro rata (verify the exact sub-order and numbering against the current consolidated text).
Secured claims work differently. Collateral value is applied first to the secured obligation; any shortfall falls into the unsecured class, and any surplus returns to the estate. How bankruptcy costs and employee claims interact with collateral proceeds is a point on which the wording needs careful reading, so verify before advising on recovery models.
The consequence for a pari passu clause is clear. Unsecured lenders protected only by a negative pledge do rank equally among themselves, but only behind bankruptcy costs, employees and any secured creditors, and only for a pro rata share of what remains. The mandatory-law carve-out is therefore doing real work. Our restructuring and insolvency practice models this waterfall early, because it drives the price of unsecured risk.
Clawback of New Security Before Bankruptcy
The Law on Bankruptcy 2014 also allows the court to declare certain transactions void if made within six months before it accepted the petition. Article 59 includes transactions that convert an unsecured debt into a secured or partly secured debt using the enterprise’s assets (verify the current article reference). A lender that waits until distress to ask for security, or a borrower that grants it in exchange for a waiver, risks having the new security unwound.
Secured and Unsecured Creditors under the Civil Code 2015 and Decree 21/2021
Decree 21/2021/ND-CP, effective 10 May 2021, implements the Civil Code provisions on security. It elaborates on the scope of secured obligations, future assets, third-party effect and the handling of collateral (verify article references before citing). Together, the Civil Code and the Decree make the gap between the two classes of creditor concrete.
| Issue | Secured creditor | Unsecured creditor |
|---|---|---|
| Source of right | Security agreement and, where required, registration | Loan agreement only |
| Priority | Ranked among secured parties by Article 308 of the Civil Code | Ranks pari passu with other unsecured creditors, behind statutory priorities |
| Enforcement | Handling of collateral under Article 303 and Decree 21/2021, including agreed out-of-court methods | Court or arbitration judgment, then enforcement against general assets |
| Insolvency position | Paid from collateral first | Pro rata share of what remains |
| Role of negative pledge | Secondary protection, mainly against competing security | Primary protection of position |
Article 308 is the key rule. Where one asset secures several obligations, priority among the secured parties follows the order in which each security acquired effect against third parties; where none has, the order of establishment applies. This is why a later secured creditor who registers first can outrank an earlier lender whose only protection is a contractual negative pledge. The lender may then sue for breach, but it cannot displace the registered creditor.
Article 303 also permits several methods of handling collateral, including public auction and sale or acceptance of the asset by agreement, which is why borrowers resist wide security grants.
Security Registration and Its Effects
Registration and Priority
Under the Civil Code, security takes effect against third parties from registration, or from possession or control in cases the law recognises. Decree 99/2022/ND-CP, effective 1 January 2023, governs security registration and the National Registry for Security Transactions under the Ministry of Justice. For land use rights and assets attached to land, registration is handled by the land registration system, and for land use rights it is generally a condition of the security’s validity rather than only its priority (verify against the Land Law 2024).
A negative pledge does not appear on any public register. Lenders therefore need a due diligence process, not only a negative pledge. At closing and periodically thereafter, they should search the security registries, obtain officer certificates that no unregistered security exists and require notice of any new registration.
What a Registry Search Will Not Show
Possessory pledges, set-off rights, retention of title and statutory liens may never reach a registry, so a clean search is helpful but incomplete. A well-drafted negative pledge with a certification covenant closes some gaps, not all. For secured lenders, security registration is the moment of truth: an unregistered mortgage may lose priority to a competitor who registers first, so it belongs on the closing checklist with a long-stop date.
SOE and Group-Company Issues
State-Owned Borrowers
State-owned enterprises raise their own issues. Borrowing, guarantees and security over significant assets may need approval from the owner’s representative or a competent authority under the rules on managing state capital in enterprises and the Law on Enterprises 2020 (verify the current legislation, which has been under revision). A lender should request evidence of those approvals and a legal opinion on capacity.
A state guarantee, where available, is governed by separate rules such as Decree 91/2018/ND-CP (verify) and does not change how the borrower itself ranks. SOE borrowers also tend to ask for a carve-out for security “required by law or by a competent state authority”. Lenders should accept it only if it is confined to identified statutory requirements, because an open-ended version can swallow the covenant.
Group Companies and Upstream Support
A lender to a holding company is structurally behind creditors of the subsidiaries that own the operating assets. A negative pledge should therefore extend to material subsidiaries, and a related restriction on subsidiary debt should accompany it. If the group wants subsidiaries to give security for the holding company’s debt, related-party approval rules under the Law on Enterprises 2020 (see its related-party provisions; verify the article) and corporate-benefit questions apply. These points should be dealt with in board and shareholder approvals at signing.
Lenders should also watch asset transfers to sister companies that then grant security; a disposals restriction and a wide “group” definition reduce that risk.
Negotiation Points for Lenders and Borrowers
Lender Priorities
- In every negative pledge, define “Security” by reference to every Civil Code measure plus a similar-effect catch-all.
- Cap permitted security by amount and by asset, and avoid open-ended baskets.
- Extend the negative pledge to material subsidiaries and require prompt notice of new security.
- Pair the negative pledge with debt and disposals covenants.
- Require certificates and registry searches, not the covenant alone.
- Keep the mandatory-law exception narrow and tied to identified provisions.
Borrower Priorities
- Secure a general basket sized to the business, with a growth element such as a percentage of total assets.
- Carve out refinancing, ordinary-course liens, bank set-off and security required by law.
- Negotiate a cure period for any negative pledge breach, and a materiality threshold before a breach becomes an event of default.
- Resist extending the negative pledge to every affiliate; limit it to defined material subsidiaries.
- Keep the pari passu clause as a ranking covenant, with express language excluding any ratable-payment obligation.
Drafting Examples
The following examples are paraphrased, illustrative formulations rather than extracts from any published form. They must be adapted to the facility, the governing law and the security package.
Drafting a Negative Pledge
“The Borrower shall not, and shall ensure that no Material Subsidiary will, create or permit to subsist any Security over any of its present or future assets or revenues, except for Permitted Security. ‘Security’ includes any mortgage, pledge, deposit, escrow, retention of title, lien, assignment or other arrangement having a similar effect under the laws of any jurisdiction.”
The negative pledge is completed by a Permitted Security definition listing each exception: statutory liens, existing security in a schedule, purchase-money security, ordinary-course set-off, refinancing of permitted debt and a general basket stated as the greater of a fixed amount and a percentage of total assets, measured when the security is created.
Drafting a Pari Passu Clause Beside a Negative Pledge
“The Borrower’s payment obligations under the Finance Documents rank at least equally with all its other present and future unsecured and unsubordinated payment obligations, except for obligations mandatorily preferred by law applying to companies generally. This clause governs ranking only and does not oblige the Borrower to make payments rateably.”
A lender wanting more than a bare negative pledge would delete the last sentence and add a sharing clause among lenders. A borrower would resist any promise tied to payments to other creditors. Either way, the Vietnamese statutory priorities remain the baseline.
Frequently Asked Questions
Does a negative pledge stop a Vietnamese borrower from mortgaging assets?
Not legally. It is a contractual promise, so a later mortgage to a third party can still be valid and, if registered first, rank ahead. The lender’s remedies are default, acceleration and damages.
Does a pari passu clause guarantee equal recovery in bankruptcy?
No. Under the Law on Bankruptcy 2014, bankruptcy costs, employee claims and secured creditors rank first. Unsecured lenders then share pro rata in what remains (verify the sub-order).
What is the difference between permitted security and a basket?
Permitted security covers defined categories, such as statutory liens or existing mortgages. A basket is a general allowance for other security up to a stated amount or percentage of assets.
Can a foreign lender register a negative pledge in Vietnam?
No public register records a purely contractual negative pledge. Lenders instead rely on registry searches of actual security, officer certificates and notification covenants (verify any developing practice).
Are state-owned borrowers treated differently?
Their capacity and approval requirements differ, and carve-outs for state-mandated security are common. Their insolvency ranking is not improved by state ownership alone, and a state guarantee requires separate analysis.
The next practical step is a single-page review: before your next term sheet, test each negative pledge you have signed: pull the existing facility agreements, list every permitted-security carve-out and basket, and compare them with the Vietnamese statutory ranking and registration position described above.
Need advice on a cross-border facility? IVLF Advisors LLC offers a confidential preliminary consultation for lenders and borrowers structuring or reviewing a negative pledge, pari passu clause or security package in Vietnam. Please use the contact form on this website to arrange one.
This article provides general information only and does not constitute legal, tax or financial advice. Laws and regulations change, items marked “verify” should be checked against current text, and you should obtain advice on your specific circumstances before acting.
This article is provided for general information only and does not constitute legal advice for any specific case. Regulations may change – please consult a qualified professional before acting. Should further analysis be required, please contact one of our lawyers below.
