Updated bankruptcy process in Vietnam

The following is a bankruptcy process updated according to the new Bankruptcy Law:

Insolvency status

An enterprise is considered insolvent (mất khả năng thanh toán) if it is “unable to pay the due debts within 3 months from the due date ”. Resolution 3/2005 clarifies that “due debts” are the unsecured debts or partly secured debts, which is expressly recognized by the relevant parties, supported by adequate evidencing documents and free of dispute. The court may require further evidence to prove the insolvent status of a company subject to a petition for bankruptcy proceedings.

Filing and acceptance of a petition for bankruptcy proceedings

Petition: An unsecured or partly secured creditor of a company by noticing that the company is in an insolvent status will have the right to file a petition for bankruptcy proceedings against such company together with evidence of the insolvent status.

Negotiation: The company subject to a bankruptcy petition may negotiate with the claimant within 20 days from the date of filing. If negotiation is successful then the bankruptcy petition could be withdrawn

Court’s fee: The petitioner must make an advance of the bankruptcy fees, determined by the court

Court: The provincial court of the locality where the company in bankruptcy registered for its business registration is in charge of bankruptcy cases for companies with “foreign” elements, branches or real estates in different districts. In other less complicated cases, the district court will be in charge.

Acceptance of bankruptcy hearing: The Court will issue a decision whether to commence the bankruptcy proceedings within 30 days from the date of acceptance of the petition for bankruptcy proceedings. Creditors and debtors of the company are also entitled for being noticed of such decision.

Commencement of bankruptcy proceedings

Appointment of a Receiver: Within three days from the commencement of bankruptcy proceeding, the court will appoint a receiver (being either qualified individuals or company). The receiver will play a major role in running the company’s operation and liquidating the company’s assets during the bankruptcy proceeding.  The receiver may act as the legal representative of the company if necessary.

Standstill: After the court accepts the petition, the disposal of the company’s secured assets for secured creditors will be temporarily suspended except where the secured assets are in danger of being destroyed or significantly losing their value. In addition, disputes relating to the company’s assets will be suspended by the relevant court or arbitration.

Limitation on operation: The company is also prohibited from (1) disbursing and concealing assets, (2) settlement of unsecured debts, (3) waiver of right to claim, and (4) turn unsecured loans to secured loans. Any material transaction by the company including material disposal or borrowing must be notified and approved by the receiver.

Company’s assets: Within 30 days from the date of receiving the court’s decision to commence bankruptcy proceedings, the company will have to list out an inventory of its assets in accordance with the detailed list submitted to the court and determine the value of such assets.

List of creditors: Within 30 days from the date of the court's decision to commence bankruptcy proceedings, creditors of the company must submit to the Receiver their detailed request for debt payment. Thereafter, the receiver must prepare a list of creditors with details of the debts thereof.

Creditors meeting: Within 20 days after completion of the list of creditors or the list of company’s assets, whichever is earlier, the court will convene the first meeting of the company’s creditors to discuss the company’s situation and approve a resolution to recover the company’s business, if the creditors consider that the company is recoverable. If the creditors consider that the company is not recoverable then the court will decide to commence the liquidation procedures. A creditor meeting requires a quorum of a number of creditors representing at least 51% of the unsecured debts. A decision of the creditor meeting requires the consents of at least 65% of the unsecured debts which will bind all creditors.

Suspension: From the date the Court decides to commence the bankruptcy proceedings to before the date of announcement of the company’s bankruptcy, if the company is not in bankruptcy the court may issue a decision to suspend the bankruptcy proceedings. Such decision may be appealed by the creditors.  

Recovery of business activities

After the creditor meeting decides that the company’s business may be recoverable, a recovery plan will be prepared by the company and approved by the receiver. The plan will then be subjected to the approval of the second meeting of the company’s creditors. The maximum term for the company to implement the business recovery plan is 3 years.

The court will then review and approve the recovery plan. Once the recovery plan is approved by the court, the company will be released from various operational restrictions imposed on the company discussed above. However, the company is required to report on the implementation progress every six months.

If the approved recovery is carried out successful then the court will terminate the process and the company will escape bankruptcy.

Declaration of bankruptcy

The court will declare the company’s bankruptcy in the following cases: (i) the creditors fail to convene the creditors meeting; (ii) the creditors meeting fails to approve their resolution; (iii) the company in bankruptcy has no money or other assets to pay for the bankruptcy fee or advance the bankruptcy charges in case the petitioner is the company; (iv) after the acceptance of the petition for bankruptcy proceedings, the company is unable to pay for the bankruptcy charges; (v) no recovery plan is duly proposed or approved;  or (vi) the company fails to implement the recovery plan.

Assets liquidation

Process: The court’s decision to declare a company bankrupt will be sent to the judgment enforcement agency. The judgment enforcement agency will open a bank account and then request the receiver to start liquidating the assets of the company in bankruptcy.

Settlement of secured debts: After the commencement of bankruptcy proceedings, based on the receiver’s proposal, the judge will settle the secured debts in one of the following ways: (i) in case the secured assets are used to implement the business recovery procedures, the settlement thereof is subject to the creditors meeting’s resolution; or (ii) in case the company does not implement the business recovery procedures or the secured assets are unnecessary for the business recovery procedures, (a) if the secured agreements are due, the secured assets will be settled in accordance with such agreements; or (b) if the secured agreements are undue, such agreements will be suspended and the secured debts will be settled before the declaration of bankruptcy.

Priority of assets distribution: Where the court decides to declare the bankruptcy of the company, the assets of such company will be distributed in the priority order of (1) bankruptcy charges, (2) unpaid salary, severance allowances, social insurance, health insurance and other benefits of its employees, (3) the debts arose after the commencement of bankruptcy proceedings in order to recover the company’s business activities and (4) due financial obligations to the State, unsecured debts and secured debts which have not been settled since the value of the secured assets are not enough to pay the debts.

Termination of the liquidation procedures: The judgment enforcement agency will decide to terminate the assets liquidation procedures when the company has no more assets to carry out the assets distribution or the assets distribution has been fully completed.

Voidable transactions

Under the Law on Bankruptcy, inter alia, the following transactions may be held by the court to be invalid if conducted within six months prior to the date the Court issues the decision to commence the bankruptcy proceedings:

·         The payment of debts which are not yet due;

·         Payment of or to set-off the undue debts in favour of the creditors or with the amount of money greater than the undue debts;

·         Transactions relate to the asset transfers which are not based on the market price;

·         Swapping the unsecured debts to secured debts or partly secured debts;

·         Transactions out of business purposes of the company; and

·         Other transactions for the purpose of disposing of assets of the company.

A 18 month period applies to the above transactions with the related party of the Company. 

New Bankruptcy Law in Vietnam – Some new points

A new Bankruptcy Law has been issued and will become effective from 1 January 2015. The law contains various new points which hopefully will make it easier for a company to enter and exit bankruptcy process in Vietnam. In particular,

• The law for the first time introduces the use of receiver which is a private company with certain professional qualification to manage the bankruptcy process. Under the old regulations, the bankruptcy process is managed directly by the court through an asset management and liquidation unit.
• The insolvency status is defined as the inability to pay overdue debt for three months instead of the inability to pay overdue debt when due. The revised definition could help to reduce abuse of bankruptcy process to settle individual disputes.
• There is now a process for a higher court to review a decision to commence or not to commence a bankruptcy process issued by a lower court.
• Interests can continue to accrue from the time of the decision to commence a bankruptcy process to the time of the decision to declare bankruptcy. Under the old regulations, interests cease to accrue as soon as there is a decision to commence a bankruptcy process. The new provision is more protective to creditors as the bankruptcy process may well last for a couple of years;
• A secured creditor may not be able to enforce its security if the secured assets need to be used for the business recovery plan approved by the unsecured creditors.
• In terms of liquidation preference, it is now clear that taxes owed to the Government have same liquidation preference as other unsecured creditors. Debts arising from the business recovery plan have higher liquidation preference to other unsecured creditors. If the bankrupt company is a credit institution then deposits or monies paid by deposit insurance institution will have higher liquidation preference and special loans given the bankrupt credit institutions during the special control process will have the highest liquidation preference.
• The voidable preference may now extend to 6 months  (instead of 3 months) or, in the case of related persons, 18 months before commencement of a bankruptcy process and to sale transaction conducted not at market price or transaction outside the scope of business of the relevant company. There is also a process to review a court’s decision to void a transaction under the voidable preference regime.
• A bank where a company which is subject to a decision to declare bankruptcy has an account is expressly prohibited from paying debts unless approved by the court. 
• There are detailed procedures for liquidating assets of a bankrupt company. 

Further guidance on divestment of State capital in Vietnamese State-owned enterprises

The Vietnamese Government has been pushing hard for divestment of State capital in Vietnamese State-owned enterprises whether by way of equitisation or sale of existing State capital. One of the key issues that hinder this process is the actual areas that the Government should be pushing. To address this issue, finally, in June 2014, the Prime Minister issued Decision 37/2014 setting out the State-ownership limit in various sectors or industries. This replaces Decision 14/2011 of the Prime Minister. In particular,

• Comparing older regulations, Decision 37/2014 has  opened for private ownership regarding a number of business sectors including (i) managing and exploiting important seaports, airports (exclusive of airports having important decision on national defense); (ii) producing cigarette; (iii) Radio broadcasting and television, and (iv) controlling and maintaining dykes, flood division and disaster prevention. Previously, companies in these sectors must be wholly owned by the State;

• Decision 37/2014 also removes the restriction on state ownership on enterprises operating in (i) producing pig-iron, steel with capacity up to 500,000 tons/year; (ii) producing rotary kiln cement with capacity up to 1.5 million tons/year; (iii) producing newspaper printing paper, writing paper of high quality; (iv) Building and repair of air transport facilities; and (v) producing large-scale power from 500 MW upwards. Previously, the State must own a majority of the capital in companies in these sectors;

• The State shall remain to hold 100% of charter capital for enterprises operating in, among other things, (i) business of lottery, publishing, (ii) business relating to national defence and security, and (iii) enterprises play a key role in the activity of production and business, development strategy, holding business keys and technology that the groups and state corporations need to hold 100% of the capital in order to carry out the tasks and main business line assigned;

• The State shall hold from 75% of charter capital for enterprises operating in, among others things, (i) providing telecommunication infrastructure, (ii) exploiting the mineral with large scale and (iii) exploiting oil and natural gas;

• The State shall hold between 65% and under 75 % of charter capital for enterprises operating in, among others things, (i) processing oil and natural gas, (ii) producing cigarette, (iii) wholesaling foodstuffs, medicine and gas and oil, (iv) banking finance (exclusive of insurance, security, fund management company, finance company and finance leasing company) (v) air transportation, and (vi) power distribution; and

• The State shall hold between 50% and under 65 % of charter capital for the enterprises operating in, among others things, international maritime transport and railway transportation.

The classification based on the voting thresholds of 65% and 75% under Decision 37/2014 may become obsolete if the voting thresholds under Enterprise Law are reduced to 51% and 65% under the proposed amendments to the Enterprise Law. 

Licensing procedures for purchasing shares in Vietnamese local companies - IC or BRC or Both

A major difficulty for a lawyer advising a foreign buyer purchasing equity interest in a local Vietnamese company (Local Co) is to determine whether an Investment Certificate (IC) should be obtained for the investment and if so, how the IC should be issued (e.g. to the foreign buyer or to the Local Co and for which project?). By way of background, the key incorporation document recording key corporate details such as name, address, business lines, owners, and capital structure of a Local Co is the Enterprise Registration (Đăng Ký Doanh Nghiệp) or Business Registration Certificate (Đăng Ký Kinh Doanh). Both terms are commonly abbreviated as BRC. On the other hand, a foreign investor setting up a new company in Vietnam will be issued an IC as the key incorporation document.

The Hanoi Department of Planning and Investment (Hanoi DPI) seemed to share the lawyers’ frustration when in May 2013, it sent a request to the Ministry of Planning and Investment (MPI) seeking clarification on the rules. We do not know whether and how the MPI responded to the Hanoi DPI’s request. However, the Hanoi DPI’s letter to the MPI provides many useful information about the licensing practice in this regards. In particular, according to Hanoi DPI,

• Before May 2013, when a foreign investor purchases equity interests in a Local Co, Hanoi DPI would issue a new IC to the Local Co to replace its existing BRC. After acquisition, the Local Co will have the new IC as its incorporation document and will be treated as a foreign-invested enterprise (doanh nghiệp có vốn đầu tư nước ngoài) for all purposes;

• After May 2013, the Hanoi DPI will not continue the current practice and will not accept new IC applications submitted by foreign buyers purchasing equity interests in a Local Co in Hanoi until there is further guidance by the MPI;

• There has been inconsistent guidance by different departments of the MPI. The Business Registration Department of the MPI took the view that there is no procedure for “replacing” a BRC with an IC if a foreign buyer purchases equity interests in a Local Co. The Foreign Investment Department on the other hand has advised a Local Co to (1) amend the existing BRC to record the new foreign buyer as an owner and (2) thereafter, apply for a separate new IC recording the project that the Local Co is implementing;

• MPI were asked to provide guidance on (1) timing, sequence, and procedures to amend an existing BRC of a Local Co to record a new foreign buyer and, if applicable, to obtain a new IC, (2) in what circumstances a new IC is required (depending on the business lines of the Local Co or the level of foreign ownership in the Local Co?), (3) can the foreign buyer voluntarily apply for a new IC even if one is not required, (4) if a new IC is issued in subsequent to a BRC, what happen if a new IC is not issued after the BRC has been amended, (5) which tax department will be in charge of a Local Co after a foreign buyer’s purchase (the tax department in charge of foreign-invested companies or the tax department in charge of domestic companies), (6) licensing procedures and management regime for branches of Local Co after a foreign buyer’s purchase, especially in case the Local Co is involved in conditional businesses for foreign investors such as retail, restaurant), (7) exact definition of foreign-invested enterprises in light of a very broad definition provided in the Investment Law for the purpose of land regulations, tax regulations and reporting obligations; and (8) procedures to record foreign buyers being non-founding shareholders in the BRC of a Local Co being joint stock company;

• The Business Registration Department of the MPI considers an “acquisition” (mua lại) of a Local Co being the purchase of 100% charter capital of such Local Co which must be a sole-owner company (doanh nghiệp tư nhân). In January 2010, the Foreign Investment Department of the MPI agreed to the Ho Chi Minh DPI that a new IC will be issued to replace the existing BRC of a Local Co if the foreign buyer acquires 100% equity interest of such Local Co. In February 2013, the Business Registration Department of the MPI took a different view that there is no procedures for replacing an existing BRC with a new IC;

• In Ho Chi Minh City, when a foreign investor purchases equity interests in a Local Co, HCMC DPI would (1) amend the current BRC of the Local Co to record the foreign buyer and (2) thereafter,  issue a new IC to the Local Co for an investment project. Hanoi DPI disagrees with HCMC DPI’s approach due to the uncertainties (see above);

• In Vinh Phuc province, the Vinh Phuc DPI applies Hanoi DPI’s approach;

• In Can Tho province, the Can Tho DPI applies Hanoi DPI’s approach for Local Co being manufacturing entities. Can Tho DPI does not accept purchase of equity interest by foreign buyers in Local Co being trading or services entities;

• In Da Nang, if a foreign buyer acquires no more than 49% equity interest in a Local Co, Da Nang DPI will only amend the existing BRC and will not issue an IC. If a foreign buyer acquires from 51% to less than 100% equity interest in a Local Co, Da Nang DPI adopts HCMC DPI’s approach. If a foreign buyer acquires 100% equity interest in a Local Co, Da Nang DPI will issue a new IC to replace the existing BRC; and

• In Binh Duong, if a Local Co is a manufacturing entity then Binh Duong DPI adopts Hanoi DPI’s approach in case the foreign buyer acquires 51% or more of the Local Co. If foreign buyer only acquires no more than 49% of a Local Co being a manufacturing entity then Binh Duong DPI only amends the existing BRC and does not issue an IC. If a Local Co being trading or services entity then Binh Duong will issue a new IC to replace the existing BRC even the foreign buyer only acquire 1% of the charter capital.