Concerns over prohibition against debt collection service


Article 6 Investment Law 2020 stipulates that “Debt Collection Service” is one of the businesses that are prohibited from investment. This regulation will come into force on 1 January 2021, whereby service contracts for debt collection concluded before that will be invalidated. Accordingly, contractual parties involved have to liquidate the contract as stipulated in the provisions of civil law and other relevant legislation. [1]

Banning against debt collection service has resulted from that many enterprises, for recent years, have taken advantage of this business to appropriate assets or practice usury. Such acts cause social disorder and safety, leading to many consequences for the community (according to the Government’s Report).

Entities are performing debt collection activities

Debt collection means requiring debtors to pay creditors outstanding due or overdue amount or property as obligated by a contract or by a decision of a competent State’s authority. In addition to debt collectors operating under Decree No. 104/2007/ND – CP, which is prohibited under the Investment Law 2020, lawyers and law firms are able to practice debt collection as a professional field.

However, approaches to recover debts between lawyers and collecting firms are obviously different. Lawyers collect debts by negotiation, conciliation or filing a lawsuit to arbitration or court, and by enforcement of State’s agency. The recovery process is properly conducted with costs and plans prescribed by laws. Meanwhile, debt recovery companies often run the business by all possible methods, whether legal or not, to achieve the purpose with costs as a percentage of the recovered amount.

herefore, the debt collection process of a lawyer is influenced by many different factors amongst which there are two main and most important ones are the legality of the collecting dossier and the solvency of debtors. Creditors must have a legal basis and a set of evidence debt payment demand. Especially, at the stage of judgment execution, debtors must have assets to obey the Court’s judgement. In contrast, debt recovery companies coerce debtors into signing debt statements, or they keep sticking, pushing or pressuring families, partners, customers, etc. of these people. Such measures are to push debtors close to the dead-end and, despite having no assets, they must borrow or seek money, even by breaking laws to escape the pressure from debt collecting companies. Unsurprisingly, the debt recovery ratio of such enterprises reaches 90%, compared to that of the judgment enforcement agencies, which is only 50%. [2]

Thus, it can be said that without the existence of debt collecting service firms, creditors are still able to claim for their money by various methods by themselves, or through lawyers and law firms.

“Debt collection service” is disguised after being banned

There are some perspectives showing that, after the 2020 Investment Law comes into effect, the debt collection companies can no longer operate the service. As a result, they have to create other business models, other disguised activities to continue to collect debts for customers. For example, debt collectors and their clients enter into a debt trading agreement, which is in fact there is no “buying and selling” but papers. Instead of collecting debts under debt recovery service contracts, the collecting companies base on debt trading contracts to fulfil the purpose. This method, however, can only be done few times because of restrictions under Decree 69/2016/ND-CP of the Government providing conditions for debt trading enterprises.

Accordingly, an enterprise or an individual must register the business line of debt trading if he continually one of the following activities for the purpose of profit-making, including: debt purchase, debt sale, brokerage to trade debts, consultancy to trade debts, and debt exchanges. Enterprises operating in debt trading activities must meet conditions on internal management regulations, conditions on enterprise managers, and conditions on charter capital … [3] Especially, stipulatory capital for this service must be at least VND 100 billion, and must annually report to People’s Committees of provinces and cities under central authority about the total of debts which is purchased and sold, the value of brokerage or consultancy contracts. These conditions are definitely barriers for organizations and individuals wishing to switch from debt collection business to debt trading.

In addition, a debt trading transaction must have a written contract, accompanied by proper invoices, and tax returns. Any debt trading contract made to conceal the debt collection service can be completely invalidated as it is considered to be a falsification. [4] It is assumed that if a debt collector and a creditor entered into a debt trading agreement to conceal its debt collection service, did the buyer has the right to claim debts or not if, according to a normal debt trading agreement, the buyer shall pay the seller first to be transferred the right to own the debt? In case the debt collector is contractually entitled to claim debts under the debt trading agreement, even though the debt trading value is not paid yet, he is considered to owe his client. Then, if the debt collector after finishing his job does not pay the creditor, then the creditor has to continue to claim the collector for his debt. On the other hand, if the debt collector paid the debt trading value, the debt trading transaction is considered to be real and risks are transferred to the collect if he could not collect debts. This is definitely not what a debt collecting enterprise wants because its purpose is collecting money not buying debts. Moreover, a debt trading enterprise may have its operation license revoked if it violates the regulations on the scope and conditions of their operations. Therefore, bypassing the law by converting debt collection into debt trading is not a good idea.

There is another way that a debt collector chooses is to operate through authorization with a fee. However, the fee must be fixed and is unable to be determined on a percentage basis, which is an advantage of debt collection service to be lost in case of authorization. If the fee for authorization is only for presenting debtors and distracting State’s authorities from another agreement consented by debt collectors and creditors, the authorization shall be abolished for falsification, and the debt collection agreement will be null and void for breaching laws. [5] Risks in this transaction will be on both sides.

Of course, if debt collection enterprises operate in compliance with laws and do not cause social disorder, perhaps this service will not be banned. In other words, misbehaviors of debt collecting companies result in the prohibition against this service rather than the nature of the business, which is governed by Decree No. 104/2007/ND-CP. If the law and competent agencies do not have proper sanctions and control, debt collection enterprises will likely continue to misbehave. Therefore, the above assumptions are entirely possible to happen. Also, there is no guarantee that if there is a conflict arisen from disguised debt trading transactions, debt collectors will not use the same “gangster” measures to threaten their own clients.

According to the law of supply and demand, where there is a demand there is a supply, and debt collection is a factual demand. Despite the outstanding advantages of hiring a lawyer or law firm, which are ensuring the law compliance and order of society, drawbacks are that the long proceedings of court, the low rate of success and the delay of judgment enforcement agencies. Meanwhile, the proceeding process is prolonged, the debt recovery rate of judgment enforcement agencies is low and delayed. Thus, the judicial reform must be stronger whereby proceedings at court must be shorten, more transparent and the final judgement must be precise to be executed. Additionally, the Law on Enforcement Of Civil Judgments needs a change to make the process of applying emergency measures easily and quickly to freeze debtor’s assets, and to enforce debtors to obey the judgement. Thus, the debt recovery through lawyers and law firms will be more efficient and trusted by creditors.

Article By Pham Thi Thoa