Vietnam's new Law on Bankruptcy will take effect from 1 January 2015, bringing in a number of changes, including a new definition of 'bankruptcy'. Partner Robert Fish and Junior Associates Giang Quang Nguyen and Linh Nguyen look at the most significant features of the new law and note what will differ from the current regime.
The new Law on Bankruptcy (the New Bankruptcy Law) provides for a new definition of 'bankruptcy'. An enterprise is considered to have gone bankrupt if it meets both of the following conditions:
- the enterprise is insolvent; and
- the enterprise is declared by the court to have become bankrupt.
An enterprise is considered 'insolvent' if it fails to meet any of its payment obligations within three months from the due date. Instead of waiting for a creditors' request to trigger the status of insolvency, under the New Bankruptcy Law an enterprise will automatically be deemed insolvent after the three-month period has lapsed.
There are three categories of person that have the right to file a bankruptcy petition:
- creditors of unsecured or partly secured debts;
- employees of the enterprise; and
- the enterprise itself.
It is noteworthy that employees no longer have to file bankruptcy petitions through an elected representative or a union representative. If the enterprise does not pay an employee their salary and/or other payments due to him/her within three months from the due date, the employee can personally file a bankruptcy petition. This will place a greater burden on the enterprise, because any employee with any unpaid debt (whatever the amount is) can file a bankruptcy petition against the enterprise after the three-month time limit.
The issue of provincial courts being overloaded with bankruptcy cases has been addressed under the New Bankruptcy Law.
Under the current Bankruptcy Law, a provincial court has jurisdiction over the bankruptcy proceedings of all enterprises registered for business at the business registration office of the respective province. This has been amended under the New Bankruptcy Law, where district courts are to have jurisdiction over bankruptcy cases of enterprises that have headquarters in the district. Provincial courts will then only deal with complicated cases or cases that involve special elements such as offshore assets, a foreign party or branches or real estate property in different localities.
The New Bankruptcy Law introduces new concepts of 'asset management officers' and 'asset management and liquidation firms' to replace the complex 'Committee for Management and Liquidation of Assets' in the current Bankruptcy Law. Asset management officers and asset management and liquidation firms are responsible for managing and liquidating assets during bankruptcy procedures.
An asset management officer is an individual who specialises in the management and liquidation of assets of an insolvent enterprise in the course of bankruptcy settlements. An asset management officer must have a degree in law, economics, accounting, finance, or banking and have at least five years' experience in such sector, or be a qualified lawyer or auditor. These persons must obtain a certificate to qualify as an asset management officer. Further details in relation to the procedures to obtain this certificate are to be stipulated in future regulations. An asset management and liquidation firm is an enterprise established by one or more asset management officer(s) and has the same function as an asset management officer.
An asset management officer and/or an asset management firm is responsible for conducting the bankruptcy procedures, including ascertaining the company's assets, creditors and debtors and implementing measures to preserve and/or distribute the assets of the company and any decisions of the court in relation to the bankruptcy.
The bankruptcy procedures under the New Bankruptcy Law can be summarised in six steps as follows:
Step 1: Filing bankruptcy petition
Step 2: Commencement of bankruptcy proceedings (unless the petition is withdrawn)
Step 3: Appointment of asset management officer/firm
Step 4: Creation of creditors' list
Step 5: Creditors' meeting
Step 6: Rehabilitation or bankruptcy and liquidation of assets
After receipt of a valid bankruptcy petition, a time limit of three days is given to parties to initiate a negotiation session. The purpose of this session is to see if the debtor is able to repay the outstanding debts. If the negotiation is initiated, the court shall set a time limit for negotiation which must not exceed 20 days and, if the negotiation succeeds, the petition will be withdrawn and the case closed. If the negotiation fails or cannot be initiated or conducted, the court will announce the commencement of bankruptcy proceedings.
The bankruptcy proceedings start with a decision by the court on appointment of an asset management officer or firm to manage and liquidate the applicable assets (the Bankruptcy Manager). Creditors have 30 days from the commencement of the bankruptcy procedures to submit their debt demands to the Bankruptcy Manager, who will compile a consolidated list of creditors.
The creditor meeting will then be held to decide on the future of the enterprise. This meeting can only be held if there are creditors present who hold at least 51 per cent of the unsecured debts. This quorum was previously the presence of creditors who represent two-thirds of the total unsecured debts of the enterprise by value. In the event that the quorum is not met, the creditors’ meeting will be postponed and reconvened within 30 days. If the quorum is still not achieved at the reconvened creditor meeting, the court then has the authority to issue a decision declaring the enterprise bankrupt without input from the creditor meeting.
Based on the result of the meeting (if applicable), the court will either issue a decision on rehabilitation of the enterprise or a declaration on bankruptcy of the enterprise.
If the enterprise is declared bankrupt, it is required to liquidate its assets and distribute the proceeds in the following order (after payments of secured debts):
1. bankruptcy fees;
2. unpaid salaries and other payments to employees;
3. debts arising after the commencement of bankruptcy proceedings; and
4. financial obligations to the State, unsecured debts (including secured debts that are unpaid because the value of the collateral was less than the debts).
The scope of the New Bankruptcy Law now extends to apply to credit institutions, but note that a bankruptcy petition can only be filed against a credit institution if the State Bank of Vietnam has first issued a decision on:
- the removal of the status of special control; or
- the termination of the application for solvency restoration measures; or
- the non-application for solvency restoration measures,
- and the credit institution concerned remains insolvent.
At that time, creditors, employees, shareholders and members of cooperatives will have the right to file a bankruptcy petition. Additionally, an insolvent credit institution has an obligation to file a bankruptcy petition, otherwise the State Bank of Vietnam will step in and make the filing on its behalf.
As has been well documented, the previous Law on Bankruptcy was largely a failure in providing a legal regime for the orderly dissolution of companies in Vietnam with very few formal bankruptcy cases being brought compared to the large number of business that simply ceased operating without undergoing any formal process. It is hoped that the New Bankruptcy Law will address some of the deficiencies in the existing law, for example, with the new definitions of 'bankruptcy' and putting the management of proceedings in the hands of specialist insolvency practitioners. This will hopefully enhance creditors' ability to recover unpaid debts in a more orderly and transparent manner.