What should businesses keep in mind when bond issuers fail to meet payment obligations?
When businesses invest in bonds—especially privately placed bonds between organizations—failure by the issuer to pay principal and interest on time presents a significant risk. A recent appellate ruling by the People’s Court of Hanoi highlights key legal issues surrounding bond payment obligations and debt recovery rights. This case serves as a valuable legal lesson for enterprises participating in Vietnam’s corporate bond market.
Bondholder rights in privately placed bond contracts
Corporate bonds provide fixed returns but come with risks, especially when issuers default. Buyers of such bonds typically have the following rights:
Right to receive timely principal and interest payments
This is the core obligation of the issuer. In the referenced case, the issuer defaulted on three bonds totaling over VND 154 billion, with maturity ranging from 2013 to 2017. The breach led to substantial losses and forced the buyer to file a lawsuit for recovery.
Right to late payment interest penalties
Where stipulated in the contract or allowed under the 2015 Civil Code, bondholders can claim late interest penalties—often 150% of the agreed rate. However, courts may not always accept compounded interest (interest on late interest) unless legally justified.
Right to prove lawful ownership
A key challenge in the dispute was the bondholder's inability to fully document internal bond transfers within affiliated companies, resulting in part of their claim being rejected.
Legal factors affecting bond debt recovery
To recover funds from a bond contract, meticulous legal preparation is essential. Focus on these three elements:
Statute of limitations
Per the Commercial Law, the limitation period for commercial disputes is two years from the infringement date. However, if the bond transaction falls under the Securities Law or lacks commercial characteristics, the Civil Code applies—with a three-year limitation. The appellate court accepted the claim partially based on Article 429 of the Civil Code.
Proof of lawful bond transfer
The court rejected part of the claim due to inconsistent documentation and missing confirmation from the depository institution, weakening ownership claims.
Authority to sue
Courts also scrutinize whether the person signing the lawsuit had legal authorization. Without proper power of attorney, the claim may be deemed invalid.
Legal strategies for businesses facing bond payment violations
When an issuer breaches bond obligations, businesses should adopt a comprehensive legal strategy combining negotiation, notice, and litigation:
Send a formal payment demand, specifying deadlines and legal consequences.
Prepare debt reconciliation reports as legal evidence.
Compile a complete lawsuit file: contracts, bonds, deposit certificates, reconciliation records, and correspondence.
File the lawsuit within the applicable statute of limitations.
Litigate with clear legal arguments on contract terms, interest rates, limitations, and ownership documentation.
Properly handling a bond dispute helps recover funds and preserve financial credibility in the market.
Facing risk from a defaulting bond issuer?
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