Vietnam’s new bankruptcy law (“Bankruptcy Law 2014“)1 takes effect on 1 January 2015. The new law replaces the previous bankruptcy law (“Bankruptcy Law 2004“) and makes substantial changes to Vietnam’s bankruptcy regime.
Bankruptcy Law 2014 expressly provides that an enterprise or cooperative is deemed to be bankrupt only after the court has determined that the entity is insolvent and has issued a decision declaring it bankrupt. Insolvency status is now defined as “the inability to pay overdue debt for three months”, as opposed to “the inability to pay a due debt on demand by a creditor”, as under Bankruptcy Law 2004.
Who Can File a Petition to Commence Bankruptcy Procedures?
Bankruptcy Law 2014 expands the categories of persons who have the right to file a petition to commence bankruptcy proceedings against an insolvent enterprise or cooperative.
Under Bankruptcy Law 2004, employees must submit their petition through an
elected or union representative. However, under the new Bankruptcy Law 2014, employees will be entitled to file a petition without a representative in cases where wages and debts owed by the employer are more than three months overdue. This provision may be broadly interpreted to allow a single employee to file a petition.
Bankruptcy Law 2004 regulates that a shareholder (or group of shareholders) holding more than 20% of the ordinary shares of a company for a period of no less than six months shall have the right to file a petition to commence bankruptcy proceedings. Under Bankruptcy Law 2014, in addition to these shareholder(s), a shareholder (or group of shareholders) holding less than 20% of the ordinary shares in a company for a period of no less than six months also has the right to file a petition if the company charter contains such a provision.
Negotiations regarding the Withdrawal of a Petition to Commence Bankruptcy Proceedings
Bankruptcy Law 2014 introduces new regulations on possible negotiations regarding the withdrawal of a petition to commence bankruptcy proceedings, which may be conducted between creditors who filed the petition and the company or cooperative that is unable to pay overdue debt. The relevant parties may submit a written request to the court regarding their intent to negotiate within
three working days after the court receives the petition.
Liquidators and Companies for Management and Liquidation of Assets
Under Bankruptcy Law 2004, the bankruptcy process is managed directly by the court through a committee formed to manage the liquidation of assets. Bankruptcy Law 2014 replaces this committee with a liquidator or company that is appointed by the court and specializes in the management and liquidation of assets.
Bankruptcy Law 2014 provides that financial obligations owed to the Government have the same liquidation preference as other unsecured creditors. Debts arising from a business recovery plan have a higher liquidation preference than other unsecured creditors.
Interest on Overdue Debts
Under the old Bankruptcy Law 2004, interest on debts ceases to accrue as soon as the decision to commence a bankruptcy process is issued by the court. Under Bankruptcy Law 2014, interest will continue to accrue from the commencement of a bankruptcy proceeding to the date of the court’s decision to declare bankruptcy. The new provision is more protective of creditors, as the bankruptcy process may last for a couple of years.
Dealing with Secured Assets
If secured assets need to be used for a business recovery plan, the plan must be approved not only by unsecured creditors representing 65% or more of the total overdue unsecured debts, but also by the affected secured creditor. If secured assets are unnecessary to execute a business recovery plan or there is no business recovery procedure enacted for the company, the secured assets will be used for paying the debts they secure.
Greater Focus on Asset Preservation
Both the old and new Bankruptcy Laws allow a court to invalidate transactions conducted before the commencement of bankruptcy proceedings if they set out to disperse a company’s property, were not conducted at market price, or were outside the scope of the company’s business. Under Bankruptcy Law 2004, this claw-back period was only three months. Bankruptcy Law 2014 extends the period to six months or, in the case of related persons (e.g., parent company or subsidiaries), 18 months.
Banks where the company has active accounts are expressly prohibited from paying debts unless approved by the court or civil judgment enforcement agencies.
Specific Procedures for Bankruptcy of Credit Institutions
Procedures for credit institutions declaring bankruptcy are set out in Bankruptcy Law 2014 for the first time. Notably, procedures for the recovery of business operations under Bankruptcy Law 2014 do not apply to insolvent credit institutions.
By setting out new procedures and clarifying some of the ambiguities under the previous bankruptcy law, Vietnam’s new bankruptcy law has the potential to reduce the costs of bankruptcy and increase returns to creditors.
- Law on Bankruptcy No. 51/2014/QH13, passed by the National Assembly on 19 June 2014, effective on 01 January 2015.