BANKRUPTCY

The Bankruptcy Law applies to all enterprises, including FICs and SOEs. Exceptions exist for enterprises linked to national defence and security, sectors of finance, banking and insurance, and other sectors directly supplying essential public utility products and services.


BANKRUPTCY LAW

(April 2007 Update)


1. Introduction

In Vietnam bankruptcy is governed by the Law on Bankruptcy No. 21/2004/QH11 passed by the National Assembly on 15 June 2004 (the "Bankruptcy Law"). The Bankruptcy Law applies to all enterprises, including FICs and SOEs. Exceptions exist for enterprises linked to national defence and security, the finance, banking and insurance sectors, and other sectors directly supplying essential public utility products and services. Although no list setting out the industries falling under this exception currently exists under the Bankruptcy Law, it is envisaged that such a list is forthcoming. In the meantime, it is assumed that the list of exempted areas of industries under a decree guiding the old law is still in force. Industries protected under the old law include:

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industries linked to the repair of weapons, military equipment, and other matters of strategy and defence;
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financial and monetary businesses and insurance businesses;
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power production and supply;
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urban public and communication works;
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railway and air transport;
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telecommunications;
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management and operation of water resources projects; and
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management and building of forests for special purposes and protection of forests.

The Vietnamese legal definition of the "state of bankruptcy" states, businesses "which are incapable of repaying their due debts at creditors' request, shall be regarded as falling into the state of bankruptcy".

2. Filing for Bankruptcy

The steps for filing for bankruptcy are as follows:

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the submission of application for, and opening of bankruptcy procedures;
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the restoration of business operations;
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the liquidation of properties, debts; and
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the declaration of bankruptcy of enterprises, cooperatives.

After the decision to open bankruptcy procedures is issued, the judges decide to either (i) begin procedures for restoration of business operations or (ii) apply for procedures for liquidation of properties, debts. The court may convert the procedures for restoration of business operations into procedures for liquidation of properties, debts or declaration of bankruptcy of enterprises.

Parties are eligible to file bankruptcy petitions

Several parties are eligible to file bankruptcy petitions including, the enterprise itself (i.e. its owner or the legal representative), a State enterprise owner, shareholders or a group of shareholders who have the right to file a bankruptcy petition as stated in the charter or resolved by a general meeting of the shareholders or partners of a partnership, unsecured or partially secured creditors, and employees of the enterprise in question. The owner or the legal representative of the relevant company must apply for a bankruptcy petition within 3 months from the date he/she acknowledges the fact that the company "falls into the state of bankruptcy".

It should be noted that any person filing a dishonest petition, or a petition without due cause, intending to harm the honour, reputation or operations of a business, will be subject to an administrative penalty and be disciplined depending on the nature and seriousness of the conduct. If damage is suffered, compensation is payable.

Contents of bankruptcy petitions

An unsecured or partly secured creditor does not have to wait until after the date of missed payment before filing a bankruptcy petition. As long as there is an outstanding debt and the debtor is on the verge of bankruptcy, a petition may be submitted. Unsecured or partly secured creditors must submit a list of unpaid due debts and the history of requests for payment of due debts with their petition.

Failure to pay wages and other debts owed to employees by a debtor is a basis for employees to file an involuntary bankruptcy petition if the debtor is on the verge of bankruptcy. Unpaid employees must itemise the number of months of unpaid salaries and the total amount of salaries and other debts which the business failed to pay to its employees.

For other persons such as owners or legal representatives of companies (on a voluntary basis) shareholders in shareholding companies, partners in partnerships and owners of SOEs, the petition for bankruptcy must include information stated in Section 3 below.

3. Court Procedure and Petitions

Under the old law, the People's Court of provinces and cities that are under the central Governmental control (provincial-level people's court) and the Supreme People's Court was entrusted with the power to carry out bankruptcy procedures for enterprises. The new law extends the power of the courts. Under Article 7:

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the district-level People's Courts have the authority to carry out bankruptcy procedures for co-operatives which have registered their business at the district-level business registries in their respective localities; and
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the provincial-level People's Courts have the authority to carry out bankruptcy procedures for enterprises, and co-operatives that have registered their business at the provincial-level business registries in their respective localities. For FICs, provincial-level people's courts of the localities where foreign invested enterprises in Vietnam are headquartered have the competence to carry out the bankruptcy procedure.

The court opens bankruptcy procedures when there is evidence that an enterprise is or is about to fall into a state of bankruptcy. When necessary, the court will first meet with the owners or the legal representatives of the potentially bankrupt enterprise.

Within 5 days of the date of official acceptance of the application for opening bankruptcy procedures, notification will be sent by the court to the potentially bankrupt enterprises. Within 15 days of notification the enterprise must submit to the court:

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a statement of profit and loss explaining the cause of its unpaid debts;
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a report on measures taken to remedy the situation;
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a detailed list of the enterprise's assets;
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a list of creditors detailing secured and unsecured debts that are outstanding and not yet due; and
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a list of debtors detailing secured and unsecured debts both outstanding and not yet due.

4. Asset Management and Liquidation Team

Assets of the company falling into the state of bankruptcy

Assets of the company falling into the state of bankruptcy include:

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assets and rights to assets which the business had at the time the court accepted jurisdiction over the bankruptcy petition;
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profits, assets and rights to assets which the business will have due to implementation of transactions established prior to the court accepting jurisdiction over the bankruptcy petition;
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secured assets - if a security asset is paid to a secured creditor but the value of the asset exceeds the amount of the secured debt which must be paid, then such excess will constitute an asset of the business;
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the value of any LURs.

Liquidation Team

After the court issues a commencement decision, an enterprise may continue conducting business but will be monitored and inspected by the court and an AALT. The AALT is established at the time a judge makes the decision to commence bankruptcy proceedings. The team is comprised of an executor of the judgment-executing agency (a member of the executive branch) who acts as chairperson of the AALT, an officer of the court, a representative of the creditor, a representative of the enterprise subject to bankruptcy procedures, and representatives of the workforce when appropriate.

The AALT is responsible for organising and managing the properties of potentially bankrupt enterprises. It acts to supervise, organise, and list the assets of the enterprise. The AALT also organises debts owed to creditors and serves as a go-between the court and the debtor and creditors, advising the court on matters related to the bankruptcy and carrying out the judge's decisions regarding liquidation of properties.

Recovery of Assets after Invalid Transactions

If, 3 months prior to a bankruptcy petition, an insolvent business conducted one of the transactions listed below, they shall be considered invalid:

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donation of moveable or immoveable property to a another person;
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settlement of a bilateral contract in which the obligation of the business is clearly greater than that of the other party;
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payment of an undue debt;
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mortgage or pledge of assets in respect of debts; and
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other transactions for the purpose of disposing of assets of the business.

5. Permitted Business Activities during Bankruptcy Proceedings

Business may continue as usual, however it will be subject to the supervision and inspection of the court and the AALT. If the manager of the business lacks the ability to operate, or if he continues to operate in a manner jeopardising the business' assets, an administrator of the business may be appointed by the court at the request of the council of creditors.

The following activities may only be carried out with prior written consent of the court:

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pledge, mortgage, assignment, sale, donation or lease of any asset;
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receipt of assets from a contract assigning them;
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termination of performance of an effective contract;
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loan borrowing;
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sale or conversion of shares or transfer of ownership rights of any assets; and
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payment of any new debt arising from business activities and payment of wages of employees.

After the commencement of bankruptcy procedures a business is prohibited from:

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concealing or disposing of assets;
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paying any unsecured debt;
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abandoning or reducing any right to claim a debt;
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converting unsecured debts into debts secured by assets of the company.

Emergency Procedures

The AALT may request that the judges in charge of carrying out of bankruptcy procedures order an application of one or more emergency measures temporarily to protect the assets of insolvent businesses for the benefit of creditors. These measures are:

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permitting the sale of perishable goods, of goods near their end of use date, or of goods which may be difficult to sell unless sold at the right time;
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attachment and sealing up of assets of the business;
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freezing bank accounts of the business;
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sealing up of stores and funds, seizure and administration of accounting books and related business data; and
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prohibiting performance or ordering compulsory performance of a number of specified acts by the business or by other related individuals or organisations.

6. Restoration and the Creditor Conference

A petitioner cannot choose between liquidation and rehabilitation, the creditors make this decision. At the first creditors meeting, the chairman of the AALT must report on a variety of matters including the financial status of the enterprise at risk of bankruptcy, and the results of the asset inventory. The owner or legal representative of the enterprise must comment on the report made by the chairman of the AALT and propose solutions and plans to restructure the enterprise's business operations and the possibility and term of debt repayment. After the reports, the creditors must vote on a resolution restructuring the enterprise. The resolution must be passed by a majority of the unsecured creditors present at the meeting, with a quorum representing at least two-thirds of the value of the unsecured debts. At the first meeting, the judge appoints a person to manage the operation of the business activities of the enterprise.

Once the creditors pass the resolution, the procedures to restructure the business commence. Within 30 days of the creditors' resolution in favour of restructuring the business, the enterprise is required to submit its business restructuring plan. Creditors are also allowed to submit their own plans for restructuring. Within 15 days of receiving the business restructuring plan, the court must either: (i) introduce the plan to the meeting of creditors for its consideration and decision; or (ii) make suggestions amending and supplementing the plan if it does not include "necessary measures", such as:

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to mobilise new sources of capital;
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to change production and business goods of an enterprise;
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to renew production technology;
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to restructure the enterprise's or the cooperative's management apparatus and to merge or de-merge production divisions to enhance productivity and production quality;
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to issue new shares to creditors;
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to sell or lease unnecessary assets; or
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other measures not contrary to the law.

The court must convene the creditors meeting within 10 days of deciding to refer the plan to the creditors. At the creditors meeting, a plan is adopted where a majority of unsecured creditors holding at least two-thirds of the total unsecured debts vote in favour of the plan.

After creditors approve the plan, the judge adopts the resolution. At this stage, the AALT is dissolved and the creditors become responsible for supervising the implementation of the plan.

Secured Creditors and Setting Off

Where a secured creditor has a lien or mortgage over assets necessary for carrying on the business of the enterprise or the cooperative, problems may rise since a secured creditor is entitled to have its debts settled by its mortgaged assets. In practice, before attending the first meeting of creditors, the chairperson of the AALT should meet with the secured creditor to get the creditor's consent to release the asset for use in the reorganisation. Where the trustee is unable to secure the consent of the secured creditors, the secured creditors will have the power to veto the process.

The act of setting off or a creditor assuming ownership of a debtor's collateral or debtor's accounts in the creditor's possession in the event an enterprise defaults, is only permitted prior to the commencement of bankruptcy proceedings. After proceedings have commenced, a secured creditor may only assume ownership over properties mortgaged or pledged after a judge issues decisions to open liquidation procedures. The debt secured with collateral is prioritised with repayment of the collateral prior to repayment of unsecured debts. This seems to mean that the practice of "setting off", holding either collateral or other assets independent of a judge's order, is not sanctioned under the Bankruptcy Law. For example, a creditor bank may offset the debt which a defaulting enterprise owes by taking possession of an account used for collateral or an independent account held at the creditor bank up to the point in which bankruptcy proceedings commence. After the point of commencement, banks are prohibited from "performing any acts to clear or pay amounts borrowed from the banks by enterprises."

7. Liquidation

Property liquidation procedures will occur in three situations:

(i) In special cases

Where enterprises which have conducted business operations at a loss have enjoyed special measures applied by the State to rescue their business operation but still cannot repay their due debts at the creditor's request, the courts shall issue the decision to open the procedures for liquidation of the enterprise's properties without having to convene the creditors meeting to consider the application of restoration procedures.

(ii) When the creditor’s conferences fail

When the creditor's conference fails, the judges shall issue decisions to open property liquidation procedures in cases where: (i) the owners or lawful representatives of enterprises or cooperatives fail to participate in the creditors meeting without plausible reason; or (ii) the creditors conferences were postponed in some case according to the regulations of law.

(iii) After the adoption of the resolution of the first conference of creditors

The court may order liquidation of an enterprise where the first creditors meeting passed a resolution reinstating the business but the enterprise failed to formulate a reinstatement plan or the creditors meeting did not pass a resolution of restatement, or, if the enterprise fails to implement a court approved reinstatement plan.

Priority of Claims and Distribution

The order of priority for payment of debts is as follows:

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fees and costs of bankruptcy procedures;
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unpaid wages, allowances for termination of employment, and social insurance and other interests under signed collective labour accords and labour contracts;
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unsecured debts, including tax debts, owed to the creditors whose names appear on the list of creditors.

If there is a balance left over after all creditors have been paid in full, the balance either belongs to the owner of the enterprise, members of company, the owners of the State enterprise or the shareholders of the shareholding companies.

Personal Liability

The general directors, the chairman and other members of the board of management (in shareholding companies) or the board members (in limited liability companies), the owner of a private enterprise and the partners in a partnership of a bankrupt business are prohibited from holding similar positions in any other business for 1-3 years after the date of declared bankruptcy. These individuals are also prohibited from establishing a business for 1-3 years from the date of declaration of bankruptcy.

The general directors and members of the board of management of a bankrupt SOE with 100% State capital will be permanently prohibited from holding the same position in any SOE. A person assigned to represent the State's equity in any enterprise that is declared bankrupt will be permanently prohibited from holding any managerial position in any enterprise with State capital.

The only exception to the prohibitions discussed above is when bankruptcy is caused by force majeure.

Procedure under Enterprise Law

Vietnam has not signed any cross-border insolvency treaties. Article 4 provides that the Bankruptcy Law shall apply to all enterprises and cooperatives that operate in Vietnam, except as otherwise provided in international conventions signed by Vietnam. There is no wording in the Article extending the law's application to the assets of enterprises or cooperatives located overseas. Thus, the result is that the new law is silent on both inbound and outbound cross-border insolvency issues.