Vietnam insolvency guide for directors

By Linh Bui, Ngoc Anh Tran, Thuy Linh Nguyen
Restructuring & Insolvency Vietnam

In brief 13 min read

The COVID-19 outbreak has had a devastating impact on the global economy, leading many companies to financial hardship. A number of governments around the world have introduced timely measures to ease the financial strain on businesses, ranging from increasing the threshold for companies to be considered insolvent, to suspension of directors' bankruptcy filing obligation.

The insolvency regulations in Vietnam, however, remain unchanged. This results in management personnel of Vietnamese companies facing a greater risk of incurring personal liabilities should their companies fall into the insolvent zone.

To help management safely navigate their companies through this challenging time, this Insight explores the insolvency and bankruptcy regulations in Vietnam, as well as the obligations and potential liabilities of management personnel of Vietnamese companies if their companies become financially distressed.

Who are management personnel?

'Management personnel of a company' is defined under Vietnamese law to include:

  • owner of a sole proprietorship or partners in a partnership;
  • Chairman and members of the members' council of a limited liability company;
  • Chairman of a single-member limited liability company;
  • Chairman and members of the board of management of a joint stock company;
  • Director or General Director (ie CEO); and
  • other persons holding managerial positions that are authorised to act on behalf of a company to enter into transactions under such company’s charter.

What are the duties of management personnel when a company is solvent?

In the ordinary course of business, management personnel owe general fiduciary duties to the company and its owners (eg shareholders or members) including to act:

  • in compliance with the law and the company's charter;
  • honestly and prudently to their best ability to maximise the interests of the company; and
  • loyally to the interests of the company and its owners.

It is clear under Vietnamese law that when a company is solvent, its management personnel should lead the company's operation in a way that benefits the entity itself and its owners. Should a manager breach one or more of these duties, he or she might be held personally liable for any loss or damage incurred by the company and its owners. Meanwhile, the law imposes no fiduciary duty on management personnel to consider the interests of creditors or other stakeholders when the company is solvent. Creditors of a solvent company can be protected by other means, including by way of the solvent company's obligations to creditors under contracts.

What are the duties of management personnel when a company is financially troubled?

Insolvency test

Under the Law on Bankruptcy 2014 (Bankruptcy Law), a company is considered insolvent if it fails to perform any of its payment obligations within three (3) months from the due date. There is no minimum threshold for an unpaid debt amount to trigger the state of insolvency, so a company can technically become insolvent even if it fails to pay an insignificant amount of debt.

Having said that, under a resolution of the Supreme Court guiding the old Law on Bankruptcy, 'due debts' are further clarified to only include unsecured debts or partly secured debts, which are expressly recognized by the parties, supported by adequate evidence and free of dispute. While such resolution is theoretically no longer effective, in practice, the court may take into account these conditions when considering whether to recognise a company as insolvent.

Duties of management personnel

The concept of 'zone of insolvency' (ie the period of time when a company experiences severe financial distress but has not officially become insolvent) does not exist under Vietnamese laws. Therefore, the above-mentioned duties of management personnel do not shift so as to become owed to creditors when it is likely the company is on the verge of insolvency.

However, should the company later become insolvent, transactions to dispose assets of the company entered into within 6 months (or 18 months in the case of related party transactions) prior to commencement of the bankruptcy proceedings (as discussed below) will be rendered invalid. These include, among others, transactions related to asset assignment not at market price, payment of an undue debt or transactions outside of the company's ordinary business.

Where a transaction is held invalid, the party causing it would be liable for any loss incurred by the other party in the transaction due to the transaction being invalid. There is a risk that, depending on the circumstances, the management personnel of the insolvent company who voted in favour of such a transaction could be found to have breached their fiduciary duties towards to the company and would be personally liable for the loss.

What are the duties of management personnel when a company is insolvent?

Bankruptcy proceedings

When a company crosses over into insolvency state, a request for bankruptcy against the company can be filed at the court and the bankruptcy proceedings might be commenced if there is sufficient evidence of the company's insolvency. As a result of the bankruptcy proceedings, the court will either issue a decision on rehabilitation of the insolvent company or declare that it has gone bankrupt.

The bankruptcy procedures under the Bankruptcy Law can be summarised in six steps as follows:

Step 1: Filing bankruptcy request
Step 2: Commencement of bankruptcy proceedings (unless the request 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

In general, bankruptcy is a long and complicated process in Vietnam, which often takes years to complete. Therefore, in practice, there is a limited number of cases where bankruptcy procedures have been initiated and even fewer cases in which the courts have declared a company to be bankrupt. It is reported that in 2017, there were more than 400 cases where bankruptcy requests were filed, out of which only 45 companies were declared bankrupt, as compared with more than 10,000 companies being liquidated during the same period.

Despite not being a common process, there are critical implications on the duties, obligations and potential liabilities of management personnel upon a company becoming insolvent or subject to bankruptcy proceedings.

Duty to file for bankruptcy

Under law, the bankruptcy request can be filed by any of a company's unsecured or partly secured creditors, its employees or shareholders.

At the same time, the law also imposes a duty on the company's legal representative(s) and certain other management personnel to file for bankruptcy when the company is insolvent. Other management personnel include the owner of a sole proprietorship or a single-member limited liability company, partners in a partnership, Chairman of the Board of Management of a joint stock company and Chairman of the Members' Council of a multi-member limited liability company, Notably, this duty to file for bankruptcy is not imposed on members of the Members' Council and Board of Management (unless such member holds the chairman position).

A bankruptcy request must be filed at the court as soon as possible after the legal representative or any other management personnel is aware that the company is insolvent. As mentioned above, the Bankruptcy Law provides no minimum threshold for an unpaid amount of debt to trigger insolvency. Therefore, theoretically, the legal representative or other manager has to file for bankruptcy for any single item of debt being overdue for more than three (3) months (with focus on unsecured and partly secured debts, as discussed above). However, in practice, it is likely that the financial situation of the company will need to be considered as a whole.

Fiduciary duties to creditors and other stakeholders

In many jurisdictions, upon a company becoming insolvent, the fiduciary duties of its directors would expand to include the obligations to consider the interests of the company's creditors. Accordingly, directors are required to take into account the interests of creditors when making any decisions in the company's operation. Normally, this involves directors having to prevent diminution of the company’s assets to the prejudice of creditors’ interests.

Vietnamese laws do not expressly provide for such a shift in the duties of management personnel of an insolvent company. However, upon commencement of the bankruptcy proceedings, various restrictions would apply to the company's operation, all aiming at preservation of the company's assets for distribution of proceeds to the company's creditors later. Therefore, in practice, management personnel of an insolvent company must also take into account the interests of the company's creditors after the company is insolvent.

There might be, however, certain situations where the interests of the company and its owners conflict with those of its creditors. One example would be an investment or transaction which could benefit the company financially and commercially when successful but, at the same time, the company's creditors would bear the risk of its failure. In some jurisdictions, directors might not be held in violation of their duties when approving such an investment which eventually lead to greater losses for creditors. It is unclear, however, whether the same conclusion can be drawn for Vietnam given the lack of clarity of law.   

Duties in relation to operation of the insolvent company

During the bankruptcy process, the company can continue to operate but at the same time is put under strict supervision of the court and of an asset management officer or firm appointed by the court. Under many jurisdictions, a director has a positive duty to prevent his or her company from trading if the company is insolvent. While the same concept does not exist under Vietnamese laws, there are several restrictions on the types of transactions that an insolvent company can conduct after the bankruptcy proceedings have been commenced against it.

'Prohibited' transactions

After commencement of the bankruptcy proceedings by the court (ie after step two of the bankruptcy procedures as described above), management personnel of the insolvent company are prohibited from approving any transactions with an attempt to conceal or dispose of any of its assets or other transactions having the similar effect. These transactions are strictly prohibited and are invalid.

Reportable activities

The management personnel must report to the appointed asset management person or firm and obtain their approval before carrying out various activities which involve dealing with the company's assets. These include, among others, transfer of ownership in any asset or making payment for debts after commencement of bankruptcy proceedings, including paying employees' wages. Transactions carried out without proper approval are void from the outset.

COVID-19 related relief measures in relation to insolvency regulations

Other countries

To ease the financial strain of the COVID-19 pandemic on the economy, a number of governments have introduced relief measures to support affected businesses, including temporary suspension or relaxation of insolvency regulations. In particular, depending on the jurisdiction, the thresholds for initiating bankruptcy proceedings have been increased, and both the directors' obligation to file for bankruptcy and liability from insolvent trading have been temporarily suspended. These all aim to help financially distressed businesses avoid bankruptcy.


The Government of Vietnam has issued some measures to support the domestic economy, including a social security package of VND62 trillion (roughly US$2.66 billion) to support people directly affected by COVID-19. Commercial banks have also been instructed by the State Bank of Vietnam to adopt regulations on relaxation of debt payment for their impacted borrowers. However, the Bankruptcy Law and relevant regulations of Vietnam remain unchanged. Given this lack of legislative relief from the obligations under the law, management personnel of Vietnamese companies may face an increased risk of being personally liable should their companies fall into an insolvent state.

Liabilities of directors for breach of duties

Management personnel of the insolvent company may be held personally liable for non-compliance with the obligations under the Bankruptcy Law as discussed above, depending on the actual violation and the seriousness of the violation, as well as the consequences.

Administrative fines and criminal liability

If the legal representative or any management personnel with the obligation to file for bankruptcy fails to do so as required by law, he or she is liable to a small administrative fine of VND1~3 million (c. US$43~130). Depending on the nature and seriousness of the actual violation, the management personnel can also be subject to disciplinary action (eg warning, demotion or forced resignation, which might be more relevant to public servants in State-invested entities) or be held criminally liable.

Compensation for losses and damages

In general, management personnel of a company are personally liable for losses and damages incurred by the company as a result of their breach of fiduciary duties. The law, however, provides an exemption from compensation liability for any member of the board of management of a joint stock company who votes against a loss-resulting resolution.

Members of a limited liability company or certain shareholder(s) of a joint stock company can sue the company's management personnel for civil liability where such manager breaches his or her fiduciary duties or any law. The claim can be made against the manager in the name of the relevant member or shareholder or on behalf of the company.

In addition, when a company is insolvent, the management personnel may be liable for losses resulting from his or her failure to file for bankruptcy or his or her decision to approve transactions which are prohibited or which have not been approved by the appointed asset manager. It is unclear under the Bankruptcy Law who is entitled to make a claim for such losses against the manager, whether it is the company itself, its shareholders by way of derivative action or a creditor who suffers losses in such a case.

As there is no express duty of a management personnel owed to creditors provided under law, it is unclear whether a creditor can make a claim against any management personnel directly for a breach of fiduciary duties or violations of the Bankruptcy Law. In the absence of a clear, specific rule in Vietnam, creditors can potentially rely on the general rules in relation to non-contractual damages under the Civil Code to make claims against management personnel for their losses.

Risk of disqualification

In addition to being personally liable, management personnel of an insolvent company might also face the risk of being disqualified from their position.

During the course of bankruptcy proceedings, the legal representative of an insolvent company can be replaced if the court finds that he or she is incapable of continuing to manage the company or might have conducted a 'prohibited' transaction.

After the insolvent company is declared bankrupt, its management personnel might also face the risk of being prohibited from establishing and managing other companies for a period of three years if he or she is found to have approved a 'prohibited' transactions or intentionally failed to file for bankruptcy. More restrictions will be imposed on management personnel of State-invested entities.

Disqualification does not apply if a company goes bankrupt due to a force majeure event. In practice, there have been some discussions as to whether the COVID-19 pandemic qualifies as force majeure. However, to prove that COVID-19 satisfies the statutory test of force majeure might not be straightforward.


In light of the above, management personnel are recommended to take the following actions to avoid or mitigate potential liabilities which might result from their companies being insolvent.

Pre-insolvency stage
  • Paying attention to the financial situation of the company, including the company's cash flow position, management accounts or upcoming due debts to allow timely intervention.
  • Seeking advices from financial and legal advisors for any concern over the financial state of the company.
  • Reviewing ongoing contracts to consider the risk of default in the near future or legal basis for deferring payment if needed.
  • Making sure that all transactions of the company are for valid purposes and are on arm's-length basis, especially transactions out of normal operations of the company.
When insolvent
  • Refraining from voting in favour of the transactions that are not in the ordinary course of business which may be considered as 'prohibited transactions' under the Bankruptcy Law, and casting a vote to expressly object to such resolutions.
  • Communicating with creditors in a timely and transparent way to manage their expectation and seeking to restructure overdue debts where possible.
  • Carefully considering the need to file a bankruptcy request to avoid personal liability.