In the wake of the global Covid-19 pandemic, economies worldwide are struggling to survive, even with strong government support. Vietnam is no exception, and many enterprises are at the end of their rope, unable to continue suffering losses while struggling to find revenue. Bankruptcy law has not been a popular recourse because of the costs, delays, and uncertainties involved. But while M&A deals have served to replace depleted investors with well-capitalized ones, looking forward, it is likely that in some cases, the only way out will be through bankruptcy.
According to a survey by the Private Economic Development Research Board in September 2021, 69% of the 21,500 surveyed enterprises in Vietnam have had to suspend their operations because of Covid. The government has tried to soften the blow with a range of measures, but in 2020 alone, according to a report from the Supreme People’s Court, local courts already handled 225 bankruptcy petitions.
GOVERNING LAW
The key legislation here is Law No. 51/2014/QH13 on Bankruptcy dated 19 June 2014 applies to enterprises and cooperatives, not individuals, and addresses both winding up and restructuring cases. Under this law, an enterprise is at risk of bankruptcy when it has become “insolvent,” i.e. when it fails to repay the debt within three months from the maturity date. Article 5 enables bankruptcy to be initiated by the enterprise’s managers, the unsecured or partially secured creditor(s), employees, a single shareholder, or any group of shareholders owning at least 20% of the ordinary shares for at least six consecutive months.
A bankruptcy proceeding begins with the meeting of creditors and ends with the recovery of business operations.
The insolvent entity is prohibited from providing certain creditors with more favorable terms, for instance, converting unsecured debts into secured debts. The court may also declare a transaction invalid if such transaction occurs within six months before the commencement of the bankruptcy and gives preference to a particular creditor.
A creditors’ meeting is held before the court initiates formal bankruptcy proceedings. For this purpose, a quorum of creditors representing at least 51% of total unsecured debts must be present.
RECOVERY PLAN
If the meeting of creditors so resolves, a plan for the recovery of business operations may be formulated within 30 days. Such plan typically includes raising new capital; changing lines of production, business or technology; restructuring of management; selling of shares or assets and other measures) and a plan for the settlement of debts. This recovery plan will then be subject to review from the creditors, the asset management firm and the court before it is presented to another meeting of creditors for approval. Since the Bankruptcy Law stresses the role of unsecured creditors, a secured creditor must be mindful that it may be subject to delays and pressure to restructure its loans.
ENFORCEMENT
In unusual cases, the court may also issue a decision declaring that an enterprise is bankrupt when the meeting of creditors fails to convene, fails to reach a resolution, or when the recovery plan fails, or pursuant to the resolution of the meeting of creditors. When the decision is issued, the court distributes the assets in accordance with the legal priority, including bankruptcy costs, labor-related liabilities, debts arising after the commencement of the bankruptcy proceedings due to business recovery and financial obligations to the State before other unsecured debts. [C]
Additoinal writing by Nguyen Hoang Kim Oanh and Vo Thuy Vy of Baker & McKenzie
