VCCI – VIAC workshop                                                               Hanoi, January-2013    

Trương Thanh Đức

Lawyer, Arbitrator VIAC

There remain in the Bankruptcy Law many impossible terms with hassle and complicated procedures, which are one of causes creating the situation that companies are declared bankruptcy with a huge amount of debts and unable to pay even the smallest debt. Therefore, in practice the Bankruptcy Law is only useful to “bury the dead company”, but hardly achieve its main purpose, which is to solve debts and restore the business under a special procedure.

1. General assessment:[1]

• In terms of both legal as well as actual aspects, a series of problems have arisen while processing bankruptcy requirements. Procedures are extremely annoying and cost a significant amount of money and time from those involved. It takes years to pursue a bankruptcy case (according to some statistics, the average duration is five years, two times longer than that in other countries of the region). However, results are not based on the rationality, but completely depend on the “health” of bankrupt enterprises. Many provisions of the Bankruptcy Law are either unclear, illogical or rational but very difficult to comply. For example, due to failing in receivable recovery and being unable to repay debts, companies should go bankrupt, but the bankruptcy is recognized only if receivables are fully settled. Or, if companies do not strictly follow financial and accounting regimes, there is not sufficient ground to declare bankruptcy. As a result, companies are not declared to be bankrupt, although they are actually bankrupt.
• But to be fair, if it is too simple to remove the payment responsibility of debtors, they might be encouraged to abuse the bankruptcy law aiming at legally escaping from paying debts. Then, creditors and employees are to unjustly suffer from severe consequences of bankrupt companies. Thus, it is very difficulty for the law to balance between two conflicting issues.

2. Bankrupt entities:

• The current law only regulates the bankruptcy of enterprises and cooperatives. It is time to regulate also the bankruptcy of individuals doing business, which is an objective phenomenon with the same nature, frequently occurring and cannot be ignored.
• Bankruptcy means the forgiveness of liability for insolvent enterprises, which is a legitimate debt write off. However, the law has separate provisions for private enterprises, in which the write off is only temporary and debtors are to fulfill their debt obligations whenever having new assets. This regulation needs to be reviewed, as it denies the nature of bankruptcy.

3. Request to declare bankruptcy:[2]

• While the company falling into bankruptcy, employees and creditors (except secured creditors) has the right to request bankruptcy procedure opening. But choosing bankruptcy, in most cases, the parties usually loss more than delaying “the funeral declaration” of the debtor. The company managers are afraid of losing their managing positions, employees fear losing their jobs and creditors fear losing their money.
• Under the Bankruptcy Law, while realizing their business falling into bankruptcy, the business owners or their legal representatives shall be obliged to apply for bankruptcy procedures. The advantage is that creditors will no longer hunt them day and night after being declared bankrupt. Nonetheless, for the business owners there is more ham than good. Chairmen, directors of bankrupt enterprises are not allowed to establish new businesses and forbidden to take management positions from 1 to 3 years (except for bankruptcy due to force majeure). Thus, they usually try to land safely such as retirement, job transfer, leaving mountains of debt to others. Then, they can avoid the bad reputation as “business killer”, “going to the gogs”. Whatever is said, the Bankruptcy Law recognizes a business failure.
• When the business goes bankrupt, employees lose their jobs. Businesses have not money to pay them the meager wage, which is hardly to be touched if the business is bankrupt. There is more or less some hope if the company is “half-dead”. Applying for bankruptcy might give it a “highly toxic dose” bringing it to death faster.
• Creditors are not interested in requesting bankruptcy, because there is very little hope to recover their loans through bankruptcy procedures. If there remains ability to pay, debts are collected by normal procedures. Debtors are falling into tragic tragedy: their vault is empty, there is no goods in stores, assets are mortgaged everywhere. Therefore, bankruptcy requirements are useless. They are even quickly blamed for the loss of money from related transactions, due to irrecoverable debts after the debtor get bankrupt.
• Shareholders of joint-stock companies and partners of partnership companies also have the right to request for the bankruptcy of their company, but the right is useless. Their responsibility is limited by their shares, and there is nothing to hope.
• The authorities also fear the bankruptcy process with all sorts of reasons, somehow like fallacies such as: debtors take advantage of bankruptcy to legalize their acts of corruption, to avoid debt payment; bankruptcy series; losing achievements of the industry and local authorities, etc. So the authorities has quietly watched the debtor “having a close brush with death” or taken illegal actions to dissolve the enterprise aiming at debt poodles instead to declaring bankruptcy due to insolvency.

4. Signals of companies falling into bankruptcy:

• Clause 1, Article 13, “Creditors’ right to submit applications for opening of bankruptcy procedures” Bankruptcy Law regulates “Enterprises, cooperatives, which are incapable of repaying their due debts at creditors’ requests, shall be regarded as falling into the state of bankruptcy.” Point a, Item 2.1, Section 2, Part I, Resolution No. 03/2005/NQ-HDTP dated April 28, 2005, of the Council of Judges of the Supreme People’s Court guiding the implementation of some provisions in the Bankruptcy Law also confirmed two conditions, which are “having due debts”, which are secured ot partially secured, and “Creditors have asked for payment, but businesses, cooperatives can not afford the payment.” Thus, the conditions for the request for bankruptcy declaration are extremely simple and easy. The creditor needs only prove three following things: He/she is a creditor, the debt is due and the debtor fails to pay after being requested. If so, the creditor can ask debtor to be bankrupt with a VND1,000 debt, which is overdue for one day, because this case fully meets the requirements of “falling into bankruptcy.”[3]
• However, this is absolutely not the case in practice. Because the law is not specified, the applicant fears to violate Clause 2, Article 19 “Obligations and responsibilities of applicants for opening of bankruptcy procedures”, and the Court do not have clear ground to receive or return the application as prescribed in Clause 4, Article 24, “Return of applications for opening of bankruptcy procedures” in the case “the submission of applications for opening of bankruptcy procedures has, due to unobjectiveness, caused adverse impacts on the honor, prestige and/or business operation of the enterprises or cooperatives.” These unclear provisions lead to the situation that enterprises with some fund easily to be seen to repay creditors are almost not considered to be declared bankruptcy, and those are allowed to declare bankruptcy hardly have money to repay creditors. Therefore, creditors pay very little attention to their right in requiring bankruptcy declaration. And this has contributed to the deteriorating business environment, as there exist too many enterprises “having a close brush with death” or already dead still not buried.

5. Bankruptcy filing documents:

• Clause 4, Article 15, “Obligation to submit applications for opening of bankruptcy procedures of the enterprises or cooperatives which fall into the state of bankruptcy” regulates: “The following papers and documents must be submitted together with the applications for opening of the bankruptcy procedures:

1. a) The report on business activities of the enterprise or cooperative, which clearly explains the causes and circumstances related to the state of insolvency; if the enterprise is a joint-stock company for which the law requires the audit, its financial statement must be certified by an independent auditing organization;
2. b) The report on measures already taken by the enterprise or cooperative, which, however, have not redressed the state of its incapability of repaying due debts;
3. c) The detailed list of assets of the enterprise or cooperative and the locations of visible assets;
4. d) The list of creditors of the enterprise or cooperative, with their names and addresses clearly inscribed; the banks where the creditors open their accounts; the secured and unsecured due debts; the secured and unsecured immature debts;
5. dd) The list of debtors of the enterprise or cooperative, with their names and addresses clearly inscribed; the banks where they open their accounts; the secured and unsecured due debts; the secured and unsecured immature debts;
6. e) The list clearly inscribing the names and addresses of members of the company being the indebted enterprise, who jointly bear responsibility for the debts owed by the enterprise;
7. g) Other documents to be supplied by the enterprise or cooperative at the court’s request under law provisions.”

• Basically, there is no problem to require the enterprise submitting the above-mentioned documents. However, Articles 16, 17, 18 and 19 define rights, which are also obligations of the applicants for opening of bankruptcy proceedings as creditors, employees, business owners of state-owned enterprises, shareholders in joint stock companies, partnership members to “have the obligation to provide fully and timely the documents” mentioned above are not reasonable and feasible.
• In addition, all applicants have to face a big problem with the requirement that “if the enterprise is a joint-stock company for which the law requires the audit, its financial statement must be certified by an independent auditing organization“. Most businesses falling into bankruptcy cannot afford a large amount for the audit, nor is there a mechanism to encourage and protect creditors and other applicants, who can afford to hire auditors.

6. Eligibility to involve in transactions of the Property Managing and Liquidating Team:

Point b, Clause 1, Article 11 “Tasks, powers and responsibilities of the Property Managing and Liquidating Team Leader” stipulates that the Leader should “open accounts at banks to deposit money amounts collected from debtors and from the auction of properties of the enterprises and/or cooperatives subject to the application of liquidation procedures in necessary cases.” This is an organization. Do they need a seal while processing account transactions and if so, should they use the seal of the court or any other agency?

7. The bankruptcy of special enterprises:

Clause 2, Article 4, “Effect of Bankruptcy Law,” regulates that “Where there appears the difference between the provisions of the Bankruptcy Law and the provisions of other laws on the same matters, the provisions of the Bankruptcy Law shall apply.” Clause 1, Article 30,”Business activities of enterprises, cooperatives after the issuance of decisions to open the bankruptcy procedures” prescribes “All business activities of enterprises, cooperatives after the issuance of decisions to open the bankruptcy procedures shall be carried out as usual, but must be subject to the supervision and inspection by judges and asset managing and liquidating teams.” But, Clause 1, Article 155 “Bankruptcy of a credit institution”, the Credit Institutions Law stipulates that “After the State Bank has issued a dispatch on terminating the special control or dispatch on terminating the application of measures or dispatch on not applying measures for recovering solvency, but the credit institution still goes bankrupt, that credit institution shall submit an application to the Court for opening procedures of declaring bankruptcy in accordance with provisions of laws on bankruptcy.” That means, the court cannot start hearing the case declaring bankruptcy, if it has not been processed by the State Bank. And after the State Bank “let them go”, credit institutions going bankrupt will not be able to have the recovery phase or conduct their normal business. Similarly, the Bankruptcy Law did not forecast a number of other special forms and cases.

8. Processing pledged or mortgaged assets:

• Article 35 “Handling of debts secured with mortgaged or pledged assets” Bankruptcy Law requires that “Where the judges issue decisions to open the liquidation procedures for enterprises or cooperatives, the debts secured with properties mortgaged or pledged before the courts receive the applications for opening of bankruptcy procedures shall be prioritized with repayment by such properties; if the value of the mortgaged or pledged property is not enough for debt repayment, the outstanding debts shall be repaid in the course of liquidating the properties of the enterprises or cooperatives; if the value of the mortgaged or pledged properties is bigger than the debts, the difference shall be added to the value of the remaining properties of the enterprises or cooperatives“. Thus, in order to liquidate the assets, the pledged or mortgaged assets must be processed. In fact the handling of the pledged collaterals may take a few years. In particular, there is a dispute about the pledged collaterals, it cannot be solved by them, but by the court. Meanwhile, Article 57 “Suspension of civil judgment execution or case settlement” defines:

“1. As from the date the courts issue decisions to open the bankruptcy procedures, the execution of civil judgments regarding property in which the enterprises or cooperatives in the state of bankruptcy are judgment debtors must be suspended.

The judgment creditors may file their applications to courts requesting to be paid from the properties of the enterprises or cooperatives as unguaranteed creditors or guaranteed creditors, if the courts’ judgments or decisions to distrain properties of the enterprises or cooperatives to secure the judgment execution have taken legal effect.

2. As from the date the courts issue decisions to open the bankruptcy procedures, the settlement of cases related to property obligations in which the enterprises or cooperatives constitute an involved party must be suspended. The courts which decide to suspend the settlement of such cases must transfer the case dossiers to the courts which are carrying out the bankruptcy procedures for settlement.”

• Thus both the case settlement and the execution of judgments are suspended. So the settlement of disputes over the pledged property, and the enforcement of debt repayment related to pledged or mortgaged assets will be suspended, because they are neither included in the bankruptcy case nor settled independently. This will lead to a deadlock in this case. To overcome this, the Law should have provisions to open the deadlock to regulate that the disposal of pledged or mortgaged assets should be processed in conjunction with the bankruptcy case so as to accelerate the progress. The critical point is the timing of finalizing the debt amount and the share among creditors, rather than requiring collaterals fully processed before starting with other assets.
• In addition, the Bankruptcy Law stipulates the settlement of pledged or mortgaged assets only and misses other security transactions.

9. Priority order of payments:

The law does not contain provisions referring to the handling of special loans regulated by provisions in the Law on Credit Institutions. Meanwhile, Article 96 “Special loans”, the Law on Credit Institutions in 1997 as well as Clause 2, Article 151 “Special loans”, the Law on Credit Institutions in 2010 now provides that “The special loan shall be prioritized in repayment to any other loans, including secured loans of the credit institution“.[4]

10. Conclusion:[5]

• The implementation of the Bankruptcy Law 2004 shows that the Law is “bankrupt” for the second time, after the Corporate Bankruptcy Law 1993. It adds a proof that the law is necessary but not put into practice. It is time to urgently amend this law to “treat” and handle businesses temporarily losing their ability to pay, rather than to liquidate and destroy completely dead businesses, at the same time to rescue businesses falling into a spiral of debt in the economy, especially in the crisis period.
• Businesses are born legally by law and should be treated kindly and thoughtfully by the law to meet requirements of life: Enterprises are “prevented” while being healthy, “cured” while sick, “let go” while in danger and “buried” while dead.

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Contact address:

Mr. Trương Thanh Đức, Lawyer

ANVI Law Firm, 44 Tràng Tiền, Hoàn Kiếm, Hà Nội

duc.tt@anvilaw.com

090.345.9070

[1]     See “Companies are more difficult “to die” than “to be born” – Trương Thanh Đức, Lawyer, The Manager Journal, No. 71/5-2009.

[2]     See “Enterprises are more difficult “to die” than “to be born” – Trương Thanh Đức, Lawyer, The Manager Journal, No. 71/5-2009.

[3]     See “Enterprises are more difficult “to die” than “to be born” – Trương Thanh Đức, Lawyer, The Manager Journal, No. 71/5-2009.

[4]     See “Priority order of payment in corporate bankruptcy cases” – Truong Thanh Duc, Lawyer, Journal of Banking No. 02/2001.

[5]     See “Enterprises are more difficult “to die” than “to be born” – Truong Thanh Duc, Lawyer, Journal of The Manager, No. 71/5-2009.