Verdict 31/PTKT dated august 13, 2001 on settlement of credit contract dispute

THE SUPREME PEOPLE’S APPELLATE COURT OF HO CHI MINH CITY

VERDICT 31/PTKT DATED AUGUST 13, 2001 ON SETTLEMENT OF CREDIT CONTRACT DISPUTE

According to the plaintiff’s following statement of fact:

According to the credit contract No. HCM/FL/93/1 and HCM/RC/93/2 dated August 27, 1993, VID Public Bank offered Saigon Lodge Hotel Joint Venture Company a term loan amount of USD 400,000 and a revolving loan amount of USD 400,000 secured by mortgaging their hotel and guarantees provided by the company's directors. VID Public bank and Saigon Lodge joint venture company signed an agreement on mortgaging of Saigon Lodge hotel located at 215, Nam Ky Khoi Nghia, District 3, HCMC, which was notarized at the Notary Public Office of Ho Chi Minh city on March 30, 1993 with the register number 51771 and on November 15, 1994 with the register number 80208.

These loans started being withdrawn on March 1, 1994. According to the periodic inspection schedule, on June 20, 1998, the bank informed Saigon Lodge joint venture company of the requirement that the revolving loan limit had to be depreciated each year by an amount of USD 50,000 from December 31, 1998. Despite the bank’s repeated warnings, Saigon Lodge joint venture company refused to repay such amount.    On January 16, 1999, the bank sent Saigon Lodge joint venture company the written notice of recovery of the outstanding balance of UD 354,422 (including principal, interest and late payment interest amounts) which was determined as of January 15, 1999.

On March 15, 1999, VID Public bank filed a claim for Saigon Lodge's following payments:

Total debt that Saigon Lodge must repay was USD 354,478.13, including:

Principal debt: USD 350,000.00

Total interest payable till March 23, 1999: USD 3,470.84

Late payment interest amount paid per year of USD 50,000 till March 23, 1999: USD 1,007.29

On February 23, 2000, the People’s Court of Ho Chi Minh city held a mediation meeting between litigants. As participants agreed on repayment of debts, the Court issued the successful mediation report and granted the decision No. 27/CNTT-KT dated February 23, 2000 to endorse agreements between litigants. On August 25, 2000, the Supreme People’s Procuracy issued the Official Document No.19/KN-AKT stating their protest against the decision to endorse agreements between litigants No. 27/CNTT-KT dated February 23, 2000 of the People’s Court of Ho Chi Minh city.  In the cassation review verdict No. 07/GDT-KT dated February 20, 2000, the Supreme People’s Court revoked the Decision to endorse agreements between litigants No. 27/CNTT-KT and returned case dossiers to the People’s Court of Ho Chi Minh city to handle the case according to legal procedures.

In the trial court, the plaintiff requested Saigon Lodge to return total debt of USD 431,279.70, including:

Outstanding principal debt: USD 350.000,00

Interest amount accruing till April 23, 2001: USD 81,279.70

Additionally, Saigon Lodge had to pay the amount of principal debt at the interest rate of the overdue debt quoted by the State Bank of Vietnam during the period of default on debt repayment until they had managed to repay all of their outstanding debts. If Saigon Lodge fails to discharge their debt obligations, the Court ordered them to liquidate their mortgaged property, Saigon Lodge hotel, so that the bank recovered their debts. If Saigon Lodge hotel building in liquidation was unable to cover debts or its liquidation was unlikely, Mr. Vo Van Bang and Mrs. Huynh Thi My Duc, as two guarantors, acted on its behalf to repay debts.

The defendant (Saigon Lodge joint venture company): Confirming that the outstanding debt of USD 431,279.70 that the plaintiff stated was true. If Saigon Lodge fails to discharge our debt obligations, we agreed to liquidate our hotel building to pay our debts.

Other interested persons:

1) Mr. Vo Van Bang’s opinions: We, including 5 guarantors (2 Vietnamese nationals and 3 Malaysian nationals), are jointly responsible for providing security for such debt.  Requesting the Court to reconsider the type of guarantee specified in our letter of guarantee.

2) Mrs. Huynh Thi My Duc’s opinions: We only agreed to mortgage the Saigon Lodge hotel building, not our right to use the land plot located at 215, Nam Ky Khoi Nghia, District 3, HCMC. If liquidation of the hotel building takes place, signing a contract to rent the land plot with the holder of the land use right will be required.

3) Opinions of Mr. Saw Siang Kin, Mr. Lim Chui Pher and Mr. Lim Chooi Kui: We respect all of the Court’s decision pertaining to Saigon Lodge hotel's credit relationship with VID Public bank.  Especially, as we have part in guarantee liabilities, we are committed to fulfilling them.  VID Public bank is now bringing a legal action against us in Malaysia.

The trial court’s verdict No. 67/KTST dated April 23, 2001 of the People’s Court of Ho Chi Minh city was announced with the following subject matters:

1/ Accepting part of the claim filed by VID Public bank, ordering Saigon Lodge to pay VID Public bank an amount of USD 431,279.70, including:

Outstanding principal debt: USD 350.000,00

Interest amount accruing till April 23, 2001: USD 81,279.70

In terms of debt repayment methods: The aforesaid debt will be paid in a foreign currency unit. If they have no foreign currency to repay debt, they must pay the amount of USD 431,279.70 converted into Vietnamese dong at the forex buy rate quoted by Vietcombank branch of Ho Chi Minh city at the repayment date. Saigon Lodge will have to pay the interest amount at the overdue interest rate of the State Bank of Vietnam applied to the principal debt amount until debt obligations are all discharged.

If Saigon Lodge fails to repay debt to VID Public bank, they will have to be affected by coercive measures, including liquidation of the right to operate and manage Saigon Lodge hotel building for the remaining period of joint venture which lasts 11 years (according to the investment licence No. 494/GP dated December 31, 1992, the time span of the joint venture company is 20 years from the date of issuance of the investment licence). After such period, the property will be returned to Vietnamese parties. Liquidation of property must comply with the Law on Foreign Investment in Vietnam and other instructional documents of the Ministry of Planning and Investment. The new owner of the hotel building will only have the restricted right to use and operate the building within such remaining period according to the investment licence and must sign a contract to rent the land plot with the holder of the right to use the land plot (Mrs. Huynh Thi My Duc) under the guidance of the Ministry of Planning and Investment.

2/ Rejecting VID Public bank's claim that Mr. Vo Van Bang and Mrs. Huynh Thi My Duc have to pay on Saigon Lodge’s behalf if the Saigon Lodge building in liquidation is not enough to pay debt or such liquidation is unlikely.

3. In terms of legal costs: Saigon Lodge must be liable for legal costs totaling 33,280,700 dong (Thirty three million and two hundred eighty seven thousand dong) at the Law Enforcement Service of Ho Chi Minh city. Refunding all advance payment of legal costs specified in the receipt No. 003444 dated April 3, 1999 at the Law Enforcement Service of Ho Chi Minh city to VID Public bank

On May 3, 2001, VID Public bank filed an appeal for two issues:

- Ordering that Mrs. Duc and Mr. Bang as two guarantors be responsible for acting on Saigon Lodge’s behalf to repay debts.

- Ordering that ownership of Saigon Lodge hotel building and Mrs. Duc’s right to use the land plot where the hotel is built must be liquidated.

In the Appellate Court:

The plaintiff retained the aforesaid appeal claim.

The plaintiff and interested persons rejected the plaintiff’s appeal claim. Mr. Bang and Mrs. Duc supposed that they signed the guarantee agreement upon the plaintiff's request when they said that as shareholders they had to do so. This means that their signing of such guarantee agreement was not certified by the notary public office.

Opinions of the Procuracy involved in the appeal trial: Requesting the appellate court to trial this appeal to reject the appeal claim of the plaintiff and retain the trial court’s verdict.

The Supreme People’s Appellate Court of Ho Chi Minh City considered that:

Pursuant to evidencing documents and testimonies of litigants forming grounds for establishing that VID Public bank and Saigon Lodge signed the credit contract No. HCM/FL/93/1, HCM/RC/93/2 dated August 27, 1993. Saigon Lodge admitted and was committed to repaying revolving loan debt of USD 431,279.70 to VID Public bank, including:

Outstanding principal debt: USD 350.000,00

Interest amount accruing till April 23, 2001: USD 81,279.70

This part was not appealed by litigants and the trial court judgement that the defendant has to pay such amounts was founded.

In light of the plaintiff’s appeal claim that Mrs. Duc and Mr. Bang are bound to repay debts on behalf of the defendant if the defendant is unable to pay debts;

In light of the fact that Saigon Lodge signed a loan agreement with VID Public bank, and Mr. Vo Van Bang and Mrs. Huynh Thi My Duc gave a written guarantee to Saigon Lodge for the loan offered by VID Public bank. However, this guarantee was not certified by the Notary Public office. In clause 3 of Article 2 in the Decree No. 17/HDBT dated January 16, 1990 of the Ministerial Council, now the Government, elaborating on implementation of the Ordinance on Economic Agreements, regulating "Property guarantee is a security provided by using property under the ownership of the obligor for discharging his/her debt obligations in case of his/her breach of economic agreements. The guarantor must own the property whose value is not less than the value of the property for which it agrees to give guarantee.  Property guarantee must be made in writing with endorsement of the property given by the bank where the guarantor carries out their transactions and notary office or competent authority in charge of business registration (in the absence of the notary office)". This means that Mr. Bang and Mrs. Duc's provision of guarantee for Saigon Lodge's loan offered by VID Public bank was in breach of laws on guarantee. The trial court’s verdict would have declared this guarantee agreement null and void. Whereas the appellate court sees that the judgement on the case and the decision in which two guarantors were not bound to such guarantee were relevant, the appellate court considers that the modification of the trial court's verdict is not necessary.  Therefore, there is no sound and sufficient grounds for accepting the plaintiff's appeal claim.

In light of the plaintiff's appeal for the court's ruling on liquidation of ownership of the hotel building and the right to use the land plot of Mrs. Duc:

As for the credit contract No. HCM/FL/93/1, HCM/RC/93/2 signed on August 27, 1993, in order to guarantee implementation of this contract, Saigon Lodge mortgaged the hotel building located at 215 Nam Ky Khoi Nghia, District 3, HCMC to VID Public bank. This mortgage was notarized by the Notary Public office of Ho Chi Minh city with the notary register No. 51771 dated March 30, 1993 and No. 80208 dated November 15, 1994.

Saigon Lodge hotel located at 215 Nam Ky Khoi Nghia, District 3, HCMC on the land plot of 815m² is now under the ownership of Mrs. Huynh Thi My Duc according to the decision on certification of the land use right No. 944/QD-DD dated October 15, 1993 of the Land Management Unit of Ho Chi Minh city.  According to restrictions in the 1993 Land Law and the Ordinance on rights and obligations of domestic entities allocated and receiving land hired by the state on October 14, 1994, private entities are prohibited from using the right to use land for contribution of capital to form a joint venture with foreign partners. This was the reasons why Saigon Lodge did not obtain the certificate of land use right. As Saigon Lodge hotel is the property of Saigon Load joint venture company, it must be subject to regulations laid down in the Law on Foreign Investment in Vietnam and investment licence. According to the investment licence, the time limit for this joint venture is 20 years. This means that the remaining time limit is 11 years after which the property must be returned to Vietnamese parties. If Saigon Lodge fails to repay debt to VID Public bank, they will have to be affected by coercive measures, including liquidation of the right to operate and manage Saigon Lodge hotel building for the remaining period of joint venture which lasts 11 years (according to the investment licence No. 494/GP dated December 31, 1992, the time span of the joint venture company is 20 years from the date of issuance of the investment licence). After such period, the property will be returned to Vietnamese parties. Liquidation of property must comply with the Law on Foreign Investment in Vietnam and other instructional documents of the Ministry of Planning and Investment. The new owner of the hotel building will only have the restricted right to use and operate the building within such remaining period according to the investment licence and must sign a contract to rent the land plot with the holder of the right to use the land plot (Mrs. Huynh Thi My Duc) under the guidance of the Ministry of Planning and Investment.

Since this dispute arises from implementation of the credit contract between Saigon Lodge and VID Public bank, the court does not handle the dispute over contribution of capital between parties in the Saigon Lodge joint venture company.  Hence, it is prohibitory to integrate the right to use the land plot at 215 Nam Ky Khoi Nghia, District 3, HCMC of Mrs. Huynh Thi My Duc in the joint venture without permission from parties involved in the joint venture. In addition, during the process of the Court’s handling this case, the Ministry of Planning and Investment also sent the Directive No. 7916/BKH/QLDA dated November 14, 1998 providing instructions for parties on submission of the application for modification of the investment licence but parties involved have failed to do so. On July 17, 2000, the Ministry of Planning and Investment issued a Notice No. 4388/BKH-QLDA clearly stating “Liquidation of the building is allowed only when terms and conditions of the mortgage agreement dated November 15, 1994 are observed, except the right to use the land plot where the building is located and attached equipment; and liquidation only helps collect the remaining outstanding debt.  The time length of liquidation of the right to use and operate the building is not longer than the remaining lifetime of the building in accordance with the investment licence No. 494/GP dated December 31, 1992. After liquidation, the new owner of the building must use the building to serve purposes specified in the investment licence and must pay rentals to the person allocated the right to use such land plot".

Therefore, there is no sound and sufficient grounds for accepting the plaintiff's appeal claim.

Based on the aforesaid arguments, the Supreme People’s Appellate Court of Ho Chi Minh city considers that there are sound and sufficient grounds for accepting the request from the Procuracy to hear the appeal.

In order to assure enforcement of the court’s judgement, it is necessary to reserve the decision to apply interim injunction No. 239/QDADBPKCTT dated July 31, 2001.

Pursuant to Article 70 of clause 1 of the Ordinance on procedures for handling of economic cases.

HEREBY DECIDES

1. In terms of formalities, accepting the appeal claim of VID Public bank because it was filed within the prescribed duration.

2. In terms of inclusions, rejecting the appeal claim of VID Public bank and retaining the trial court's judgement on economic case No. 67/KTST dated April 23, 2001 of Ho Chi Minh city People's Court.

3. In order to assure enforcement of the court’s judgement, it is necessary to reserve the decision to apply interim injunction No. 239/QDADBPKCTT dated July 31, 2001.

4. Total legal cost of this appellate court: VID Public bank is liable for 200,000 dong in total legal cost of this appellate court which is withheld from legal costs paid in advance.