SCIC To Take Control of State capitals in a Large Number of Vietnamese Enterprises

The Ministry of Finance has just issued Circular 118/2014 to allow State Capital Investment Corporation (SCIC) to take over State capital currently held by numerous provincial People’s Committees (PCs) and Ministries in a large number of enterprises. In particular, the SCIC will replace the provincial PCs and Ministries as representatives of State’s capital in:

• Limited liability companies with two members or more which have State capital;
• Joint venture companies in which provincial PC or Ministries are joint venture parties;
• Joint stock companies which are converted from wholly State-owned enterprises or which are newly incorporated in which provincial PC or Ministries are shareholders;
• Single member limited liability companies after being restructured pursuant to plans approved by the Prime Minister for the period 2011 – 2015; and
• Large State Economic Groups in case instructed by the Prime Minister.

To show commitment to the SOEs restructuring process, Circular 118/2014 expressly imposes liabilities to provincial PCs or Ministries which delay the transfer process. Circular 118/2014 is another effort in making SCIC to be a “Temasek” of Vietnam.

However, Circular 118/2014 would likely make it more difficult for existing and future strategic investors in SCIC-to-be-transferred enterprises to structure their investments. This is because existing and potential strategic investors in these enterprises usually want to have a shareholder agreement with representative of State capitals being provincial PCs or Ministries. If SCIC is to replace these provincial PCs or Ministries, it is not clear whether SCIC will accede to such shareholder agreement or if the strategic investor will need to re-negotiate and enter into a new shareholder agreement.

Having corporate operational flexibility through company charters in Vietnam

The charter (Điều lệ) (akin to the Articles of Association ) is probably the most an important corporate document of a Vietnamese company. However, many company charters in Vietnam simply just reflect (sometimes word-by-word) standard provisions of the Enterprise Law and its implementing regulations. Following the law in the charter may ensure that the company will have a charter that complies with the law. However, by doing so the shareholders/members of the company may not take advantages of the flexibilities in operation allowed by the Enterprise Law. Below is some examples:

• The Enterprise Law provides that assets that can be used for capital contribution in a company in Vietnam include cash, gold, foreign currencies, land user rights, intellectual property rights and “other assets specified in charter”. So if a company wants to receive other assets as a capital contribution (e.g. shares in other companies, cars), it should specify those other assets in its charter;
• The Civil Code provides that a legal person has the capacity to perform the rights and obligations consistent with its “operational objectives”. The operation objectives of a legal person are provided in the charter of such legal person. As such, having a broad operational objectives in the company’s charter would somehow provide a legal ground (or defense) for a company to perform many activities which are not clearly provided by law;
• The Enterprise Law requires certain matters in a joint stock company to be approved at a physical meeting of the general meeting of shareholders unless otherwise provided by the charter. A joint stock company may therefore opt out of this requirement if it considers having a physical meeting of the shareholders is cumbersome; and
• The Enterprise Law requires the collection of written opinions from shareholders by a joint stock company to follow a quite complicated procedures unless otherwise provided by the charter.  A joint stock company may therefore opt out of these complicated procedures if it considers these procedures cumbersome.

Vietnamese State Owned Economic Groups and State Owned Corporations

Many current problems of Vietnam economy come from large  State-owned Economic Groups (SOE Group)  (Tập đoàn kinh tế nhà nước) and State-Owned Corporation (SOE Corp) (Tổng công ty nhà nước) such as Vinashin and Vinalines. In an effort to restructure these large State-owned enterprises, the Government just issued Decree 69/2014 in July 2014. Decree 69/2014 contains some important points on the management and structure of an SOE Group or SOE Corp as follows:

• The group structure of a SOE Group and SOE Corp can only extend to up to three levels including the highest level being the parent company of the SOE Group or SOE Corp. This requirement would probably require current SOE Groups and SOE Corps to divest from subsidiaries which are not under direct control of the parent company or a direct subsidiary of the parent company within a SOE Group and SOE Corp. Decree 69/2014 sets a deadline of 1 September 2016 for the current SOE Groups and SOE Corps to do so;

• The parent company of a SOE Group now must have a charter capital of VND 10,000 billion (about US$ 480 million). So a few small SOE Groups (e.g. Vinatex or Bao Viet) must either raise its charter capital by September 2017 or lose the status of an SOE Group;

• Decree 69/2014 also requires a SOE Group to operate in both in Vietnam and foreign countries;

• At least 50% of the subsidiaries within an SOE Group must operate within its core business and must account for at least 60% of the capital invested by the parent company to all subsidiaries of an SOE Group;

• A member of the Members’ Council of the parent company in a SOE Group or SOE Corp must not be “leaders” within the State organisation, political or social organisation or subsidiaries of the parent company. It is not clear if this requirement is intended to prevent a manager of an SOE Group from holding concurrent offices in other State authorities or political organisations (including the Communist Party?); and

• Decree 69/2014 provides that an Advisory Committee will be set up to provide “objective opinions and advices” on decisions to be made by an SOE Group or SOE Corp. The Advisory Committee may include experienced researchers or experts in related academic institutions. The Advisory Committee may provide some independent input and monitoring to operation of an SOE Group or SOE Corp. However, its advice is not binding and it is not clear whether members of the Advisory Committee are subject to any confidentiality or fiduciary obligations.    

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.