Restructuring and Insolvency in Vietnam

Company merger

Definition

Under the Enterprise Law 2014,[1] one or more companies (Original Cos) may be merged (sáp nhập) into another company (the Surviving Co), by way of transfer of all lawful assets, rights, obligations and interests to the Surviving Co and, at the same time, terminate the existence of the Original Cos. It is possible to merger companies of different corporate form.

Both the Enterprise Law 2014 and the Enterprise Law 2005 remain silent as to whether it is possible to conduct a cash-out merger[2] whereby one or more shareholders or members of the Original Cos will receive cash (instead of shares or capital contribution) from the Surviving Co and will not become a shareholder in the Surviving Co. Article 195.2(a) of the Enterprise Law 2014 provides that a merger contract should include provisions regarding conversion of shares of the merging company to shares of the merged company. This may suggest that the regulations on merger under the Enterprise Law 2014 are intended for a stock-for-stock merger but not a cash-out merger. In addition, by referring to the transfer of “all assets and liabilities”, it seems that the Enterprise Law 2014 does not contemplate any leakage of value in case of a company merger.

Procedures

The procedures for implementing a company merger under the Enterprise Law 2014 are as follows:

Merger contract: Original Cos and the Surviving Co enter into a merger contract (Merger Contract) covering at least statutory details.[3]

Charter of Surviving Co after merger: Original Cos and the Surviving Co must also agree on the charter of the Surviving Co after the merger (Surviving Co Charter);[4]

Corporate approval: owners of the Original Co and the Surviving Co must approve the Merger Contract and Surviving Co Charter.[5] While it is not clear, it appears that if the Surviving Co owns more than 65% charter capital or voting rights of any Original Co, then it is not necessary for such Original Co to obtain a corporate approval.[6] It is not clear why the Enterprise Law 2014 introduces this new exception. This is because:

(a)        the exception has effectively removed the right of minority shareholders or members in the relevant Original Co to approve the Merger Contract which may constitute a related party transaction between the Original Co and Surviving Co; and

(b)        if the reason for introducing the exception is that 65% voting rights gives the Surviving Co supermajority voting right which is required to approve a merger, then such reason is only correct for an Original Co being a JSC (see Nguyen Quang Vu – Principles of Vietnam’s Enterprise Law (Vol.1) – Section 85.28). For an Original Co being an LLC, the supermajority voting required to approve a merger is 75% (see Nguyen Quang Vu – Principles of Vietnam’s Enterprise Law (Vol.1) – Section 33.9).

Creditor notification: Each of the Original Cos and the Surviving Co must send the Merger Contract to all creditors and notified to employees within 15 days from the date of its approval.[7] It is not clear why the whole Merger Contract must be sent to the Original Co’s creditors given that a Merger Contract may contain many confidential commercial terms between the Original Cos and the Surviving Co.

Business registration:  The Surviving Co will carry out procedures to amend its Enterprise Certificate to record the merger.[8] The application for amending the Enterprise Certificate of the Surviving Co must include the Merger Contract, Surviving Co Charter and necessary corporate approvals of the Merger Contract.

Post licensing: After the amendment of Surviving Co’s Enterprise Certificate is issued,

(a)        all Original Cos will cease to exist, and the Surviving Co will assume the lawful rights and interest and be liable for unpaid debts, labor contracts and other property obligations of the Original Co;[9] and

(b)        the Business Registration Authority will update the legal status of Original Cos in the National Database. If the Original Co is located outside the province where the Surviving Co is located, the Business Registration Authority in charge of Surviving Co must notify the Business Registration Authority in charge of the Original Cos in order for the latter to update the legal status of the Original Cos in the National Database.[10]

The company merger procedures are much more complicated than procedures for setting up a new company as they involve simultaneous liquidation of more than one company (i.e., Original Cos) and modification to another company (i.e., the Surviving Co). Therefore, unless the Government provides more detailed guidance on company merger, it would remain difficult to implement a company merger in practice.

Company consolidation

Definition

Under the Enterprise Law 2014,[11] two or more companies (Original Cos) may be consolidated (hợp nhất) into a new company (New Co), and at the same time, terminate the existence of Original Cos. The Enterprise Law 2014 does not clearly define how a company consolidation is carried out.

That said, in essence, a company consolidation should be treated in the same manner as a company merger except that a New Co is established as a result of a company consolidation instead of a Surviving Co in the context of a company merger.

Procedures

The procedures for implementing a company merger under the Enterprise Law 2014 are as follows:

Consolidation contract: all Original Cos will enter into a consolidation contract (Consolidation Contract) covering at least statutory details.[12]

Charter of New Co: Original Cos must also agree on the charter of the New Co after the consolidation (New Co Charter);[13]

Corporate approval: Owners of the Original Co must approve the Consolidation Contract and New Co Charter and appoint enterprise officers of New Co.[14]

Creditor notification: Each of Original Cos must send the Consolidation Contract to all creditors and notified to employees within 15 days from the date of its approval.[15] It is not clear why the whole Consolidation Contract must be sent to Original Co’s creditors given that a Consolidation Contract may contain many confidential commercial terms between Original Cos.

Business registration:  Owners of Original Cos will carry out procedures to incorporate New Co to record the consolidation.[16] The application for amending the Enterprise Certificate of the New Co must include the Consolidation Contract, New Co Charter and necessary corporate approvals of the Consolidation Contract.[17]

Post-licensing: After the amendment of New Co’s Enterprise Certificate is issued,

(a)        all Original Cos will cease to exist, and New Co will assume the lawful rights and interest and be liable for unpaid debts, labor contracts and other property obligations of the Original Co;[18] and

(b)        the Business Registration Authority will update the legal status of Original Cos in the National Database. If the Original Co is located outside the province where theNew Co is located, the Business Registration Authority in charge of the New Co must notify the Business Registration Authority in charge of the Original Cos in order for the latter to update the legal status of the Original Cos in the National Database.[19]

The company consolidation procedures are much more complicated than procedures for setting up a new company as they involve simultaneous liquidation of more than one company (i.e., Original Cos) and incorporation of another company (i.e., New Co). Therefore, unless the Government provides more detailed guidance on company merger, it would remain difficult to implement a company merger in practice.

Corporate form conversion

Definition

Article 4.25 of the Enterprise Law 2014 provides that “corporate form conversion” (chuyển đổi loại hình doanh nghiệp) is a method of company restructuring. There is no further clarification of what a corporate form conversion means. However, since the Enterprise Law 2014 adds the word “form” in the description,[20] it is reasonable to say that corporate form conversion means a change of corporate governance structure of a company (the Original Co) such that the Original Co will be organised as a company of different form (the Converted Co). The Converted Co will operate in accordance with a set of provisions under the Enterprise Law 2014 different from those applicable to Original Co.

The Enterprise Law 2014 now contains procedures for converting:

 a JSC into a Single LLC;[21]

 a JSC into a Multiple LLC;[22]

 a Single LLC or a Multiple LLC into a JSC;[23] and

 a private enterprise into a Single LLC or a Multiple LLC.[24]

Procedures

Under the Enterprise Law 2014, the procedures for converting an Original Co into a Converted Co are generally as follows:

Corporate/transfer action: a corporate form conversion is usually triggered by a voluntary action by the Original Co or by a transfer of shares or capital contribution among shareholders or members of Original Co. For example, if a shareholder in an Original Co being a JSC buys out the shares held by all other shareholders then the Original Co will become a Single LLC which in turn triggers a corporate form conversion process.[25]

Business registration: Original Co must apply to register a corporate form conversion with the Business Registration Authority within 15 days after the conversion is complete.[26] The Business Registration Authority has five business days to register the conversion and issue a replacement Enterprise Certificate presumably to record the incorporation of the Converted Co.[27]

Other specific requirements: If a JSC becomes a Single LLC due to a transfer of shares, then the transfer must occur at market price or at a valuation based on assets methods, discount cash flow method or other valuation method.[28]

Status of Converted Co

In all cases except for the case where Original Co is a private enterprise, the Enterprise Law 2014 requires the Converted Co to automatically assume all lawful rights and interests of the Original Co and be responsible for debts, including tax debts, labour contracts and other obligations of the Original Co.[29]

However, it is unusual that under both the Enterprise Law 2014 and the Enterprise Law 2005, when a company (i.e., the Original Co) converts into another corporate form, then such company ceases to exist and the Converted Co is a new company inheriting all assets or liabilities of the first company. This is because other than corporate form, there is no change to the assets and liabilities of the Original Co. On the other hand, the legal termination of Original Co may have an adverse impact on many contracts (e.g., credit agreements) currently performed by such company.

Temporary suspension of operation

Under the Enterprise Law 2014,

 an enterprise may temporarily suspend its business but must notify the business registration office in writing of the point of time and period of temporary suspension or resumption of its business no later than fifteen days before the date of temporary suspension or resumption of its business prior to the notified time-limit;[30] or

 the authority may require an enterprise to suspend its business temporarily in any line of conditional business when the authority discovers that the enterprise fails to satisfy all of the conditions stipulated by law.[31]

During the temporary suspension period, the relevant enterprise must pay in full any outstanding amount of tax, continue to pay debts and finalise the performance of contracts signed with customers and employees, unless otherwise agreed by the enterprise, creditors, customers, and employees.[32]

The provisions regarding temporary suspension of operation of a company under the Enterprise Law 2014 are similar to those under the Enterprise Law 2005. While the Enterprise Law 2014 is silent, under Decree 78/2015, the temporary suspension period should not exceed one year.[33]

Voluntary liquidation

Triggers and conditions

Under the Enterprise Law 2014, a company must be liquidated in the following cases:[34]

 the duration of operation stipulated in the charter of the company expires;

 the owners, members or shareholders of the company decide to liquidate the company; or

 the company does not have the minimum number of members or shareholders for a period of six consecutive months and do not conduct procedures for corporate form conversion.

Under the Enterprise Law 2014, a company can only be liquidated if:

 it is certain that it can settle all debts and other property obligations of the company; and

 there is no pending a dispute involved the company at a court or arbitration. This is a new requirement under the Enterprise Law 2014.

The requirements for a voluntary liquidation are quite strict. This is because only a minor dispute between the relevant company with its counterparty during the liquidation (e.g., dispute with an unhappy employee) can delay the whole process. Therefore, a company under a voluntary liquidation process will tend to settle all disputes arising during the liquidation process to avoid delay.

Liquidation Decision[35]

A voluntary liquidation process will be initiated by a Liquidation Decision.[36] The Liquidation Decision must include, among other things, the following information:

(a)        reason for liquidation;

(b)        time-limit and procedures for contract liquidation and debt settlement; and

(c)        plan for the settlement of liabilities arising out of labour contracts.[37]

Within seven business days since the date of the Liquidation Decision, the company must:

 send the Liquidation Decision to its employees, the Business Registration Authority, and tax authorities;

 publish the Liquidation Decision on the National Portal together with a plan for the settlement of debt by the dissolving company, if any;[38]

 display the Liquidation Decision at the head office, branch(es), and representative office(s) of the company;[39] and

 send the Liquidation Decision to the company’s creditors and other relevant parties, if there are any outstanding financial liabilities.[40]

Establishment of asset liquidation organisation

Under the Enterprise Law 2014, the sale of assets of a company under liquidated may be directly organised and conducted by the owner, Members’ Council or the Board of the company, as the case may be. Alternatively, the company may have a separate asset liquidation organisation (tổ chức thanh lý) if the company’s charter allows so.[41] As the charter of a company already has detailed provisions on how a Members’ Council or a Board should operate, having a separate liquidation organisation appears to be redundant.

Asset liquidation, contract liquidation, and liability settlement

Based on the Liquidation Decision, the plan for debt settlement and agreement with the counter-parties under relevant contracts, the dissolving company will liquidate its assets, contracts and settle its all liabilities within six months after the date of the Liquidation Decision.[42] There is no general requirement for a public auction of the dissolving company. However, the Tendering Law 2013 may apply if the dissolving company is a State-owned enterprise.

According to the Enterprise Law 2014, the proceeds obtained from a voluntary liquidation will be allocated in accordance with the following waterfall:[43]

 first, to settle debts owed to employees such as salaries, severance allowance or social insurance;

 second, to settle taxes owed to the Government;

 third, to settle other liabilities including liquidation expenses; and

 fourth, to distribute the remaining proceeds among owners, members or shareholders of the dissolving company in proportion to their shareholding or capital contribution percentage.[44]

Unlike in the case of bankruptcy liquidation (see 9.22), under the Enterprise Law 2014, tax payment now has a higher priority in liquidation payment ranking than other liabilities of a company (except payment due to employees).[45] Under the Enterprise Law 2005, tax payment and other debts of a company have the same priority. This new change seems to create a major preference for the Government over other creditors in a voluntary liquidation of a company. Therefore, in practice, the Government may prefer to have a company to go through voluntary liquidation instead of bankruptcy liquidation.

The provisions on voluntary liquidation of the Enterprise Law 2014 do not distinguish potential different liquidation preference among shareholders of different classes in a JSC. Instead, the Enterprise Law 2014 simply provides that the remaining proceeds of a dissolving company will be distributed among shareholders according to their shareholding percentage. It is not clear if the charter of a JSC provides for a different liquidation preference, then the charter will prevail the provision of the Enterprise Law 2014.

Submission of the Liquidation Application

Within five business days from the date on which all liabilities of the dissolving company are settled, the legal representative of the dissolving company must submit a Liquidation Application (Liquidation Application) to the Business Registration Authority.[46] The Liquidation Application comprises of:[47]

 notice on the company liquidation;

 report on asset liquidation; list of creditors and debts (including tax, social insurance, employees’ benefits, etc.);

 seal and the seal registration (if any); and

 the Enterprise Certificate of the dissolving company.

Unlike Decree 102/2010,[48] the Enterprise Law 2014 does not require the Liquidation Application to include confirmation by tax authority that the dissolving company does not owe any tax. Instead, under Article 59.3 of Decree 78/2015, after receiving the Liquidation Application, the Business Registration Authority is required to send the information of registered dissolution to relevant tax authorities. Within two business days, the tax authorities must send their opinion on the liquidation to the Business Registration Authority. Article 59.4 of Decree 78/2015 further provides that within five business days after receiving the Liquidation Application the Business Registration Authority must update the legal status of the dissolving company on the National Portal with the status of “dissolved” if the Business Registration Authority has not received an objection opinion from the tax authorities. It is not clear whether the absence of a response from the tax authorities after two business days (after sending the information of registered dissolution)] could qualify as “no objection opinion”. In addition, the dissolving company must file a dossier regarding completion of tax liabilities and termination of tax code with the relevant tax authorities (and Custom General Department to clear import-export tax liabilities before filing the dossier with the tax authorities) before filing the Liquidation Application.

The Board directors, members of the Members’ Council, the owner (as the case may be), together with the General Director and the legal representative(s) of the dissolving company must be responsible for the accuracy and truthfulness of the Liquidation Application.[49] If there is any inaccuracy or falsity in the Liquidation Application, then for the period of five years after the Liquidation Application is submitted, the aforementioned persons must

 jointly and severally be responsible for any outstanding liability and debts of the dissolving company. It is not clear whether the liability under this provision is intended to be a strict liability which will apply to all relevant managers whether or not such managers do not know or do not approve the inaccuracy or falsity; and

 be individually responsible before law for any consequences arising from such inaccuracy and falsity.[50]

The provision on liability relating Liquidation Application under the Enterprise Law 2014 is similar to those under Decree 102/2010.[51]

Company status update

The Business Registration Authority will officially update the legal status of a dissolving company to be a dissolved company in the National Database:

 five business days after the Liquidation Application is submitted; or

 if earlier, 180 days after the Liquidation Decision is published in the National Portal provided that there is no objection to the Liquidation Decision during that 180-day period.[52]

Other notes - Prohibited acts

After the Liquidation Decision is issued, the dissolving company and its enterprise officers are not allowed to conducts various acts including:[53]

 hiding or dispersing assets;

 denouncing or reducing the debt-claiming rights;

 converting unsecured debts into secured debts with the company’s assets;

 signing new contracts except for those for the company liquidation purposes;

 pledging, mortgaging, donating or leasing assets;

 terminating the performance of already effective contracts; and

 mobilising capital in any forms.

Involuntary liquidation

Trigger

Under the Enterprise Law 2014,[54] a company’s Enterprise Certificate may be revoked in the following circumstances, among other things:

 the application for incorporation of the relevant company contains falsified information;

 the founding members/shareholders of the relevant company are those prohibited from establishing enterprises under the Enterprise Law 2014 (see Nguyen Quang Vu – Principles of Vietnam’s Enterprise Law (Vol.1) – Section 11);

 the relevant company suspends its business activities for one year without notifying the Business Registration Authority and the tax authority (see 6). The requirement for notifying the tax authority is a new requirement;

 the relevant company fails to send reports to the Business Registration Authority within six months from the expiry date of the period for sending reports or from the date of written request by the authority. This is new ground for terminating the Enterprise Certificate of a company under the Enterprise Law 2014; and

 other cases pursuant to decisions of courts.

Process

The procedures for implementing an involuntary liquidation are as follows:

(i) The Business Registration Authority or the court decides to revoke the Enterprise Certificate of the dissolving company (Liquidation Order);[55]

(ii) the Business Registration Authority will publish the Liquidation Order on the National Portal.[56] While the law is silent, presumably, the Liquidation Order must also be sent to the dissolving company;

(iii)  the dissolving company must issue a Liquidation Decision (see 7.4) within 10 days after receipt of the Liquidation Order.[57] If the dissolving company has unpaid financial obligations, it must also prepare a plan on settlement of debts (Debt Settlement Plan) including the name and address of the creditor; the amount of the debt, the time-limit, location and method of payment of such debt; the method and time-limit for dealing with complaints of creditors;[58]

 (iv) the Liquidation Decision, the Liquidation Order and, if applicable, Debt Settlement Plan must be sent to the Business Registration Authority, the tax authority, employees and creditors of the dissolving company. The Liquidation Decision and the Liquidation Order must also be displayed at the head office and branch offices of the dissolving company;[59]

(v) after Liquidation Decision, the Liquidation Order and, if applicable, Debt Settlement Plan is issued and displayed, the dissolving company will implement an involuntary liquidation in the same manner as a voluntary liquidation including distribution of liquidation proceeds;[60] and

 (vi) the Business Registration Authority will officially update the legal status of a dissolving company to be a dissolved company in the National Database:[61]

     (a) five business days after the Liquidation Application is submitted; or

     (b) if earlier, 180 days after the Liquidation Order is published in the National Portal provided that there is no objection to the Liquidation Order during that 180-day period.

Managers of a company which is liquidated pursuant to Liquidation Order are jointly and severally liable for their failure to liquidate the company in accordance with the Enterprise Law 2014 and the Liquidation Order.[62]

Bankruptcy

General observation

This article will not discuss in details the treatment of a company when it is insolvent. In general, the remaining paragraphs of this section 9 is a bankruptcy process according to the Bankruptcy Law 2014.[63]

Insolvency status

An enterprise is considered insolvent (mất khả năng thanh toán) if it “fails to pay the due debts within three months from the due date”.[64] Resolution 3/2005[65] 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 (this Resolution expired).[66] 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.[67] In addition, a shareholder or a group of shareholders holding 20% or more ordinary shares for at least 6 consecutive months may also file a petition for bankruptcy proceedings against such JSC if the JSC is in insolvent status.[68]

Negotiation: The company subject to a bankruptcy petition may negotiate with the claimant within 20 days from the date of receiving the valid petition by the Court. If the negotiation is successful, then the bankruptcy petition could be withdrawn.[69]

Court’s fee: The petitioner must make an advance of the bankruptcy fees determined by the court.[70]

Court: The provincial court of the locality where the company in bankruptcy registered for its business is in charge of bankruptcy cases for companies with “foreign” elements, branches or real estates in different districts. The district-level court will be in charge of bankruptcy cases involving enterprises headquartered in the same district, except cases requiring settlement from provincial courts.[71]

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.[72] The claimant (and other creditors in the case of a decision to commence the bankruptcy proceedings) of the company are also entitled to being noticed of such decision.[73]

Commencement of bankruptcy proceedings

Appointment of a Receiver: Within three business days from the commencement of bankruptcy proceeding, the court will appoint a receiver (Receiver) (being either qualified individual or company).[74] 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.[75]

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.[76] In addition, disputes relating to the company’s assets will be suspended by the relevant court or arbitration.[77]

Limitation on operation: The company is also prohibited from:

 (i) disbursing and concealing assets,

 (ii) settling unsecured debts,

 (iii) waiving the right to claim, and

 (iv) turning unsecured loans to secured loans.[78]

Any material transaction by the company including material disposal or borrowing must be notified and approved by the Receiver.[79]

List of 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 and determine the value of such assets.[80] Such list of assets including the value of each asset as determined must be promptly sent to the Court.[81]

Preparation of the 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.[82] Within 15 days from the deadline of sending debt claims, the Receiver must prepare and publish a list of creditors with details of the debts thereof.[83]

Creditors meeting: Within 20 days after completion of the list of creditors or the list of company’s assets, whichever is later, the court will convene the 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.[84] 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.[85] A decision of the creditor meeting requires the consents of at least 65% of the unsecured debts which will bind all creditors.[86]

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.[87] 

Recovery of business activities

Within 30 days after the creditor meeting decides that the company’s business may be recoverable, a recovery plan will be prepared by the company and sent to the Court, the company’s creditors and the Receiver for their consideration.[88] 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 unless otherwise approved by the meeting of the company’s creditors.[89]

The court will then issue a decision in recognition of the creditors’ resolution on approval of the recovery plan. Once the creditors’ resolution takes effect, the company will be released from various operational restrictions imposed on the company discussed above.[90] However, the company is required to report on the implementation progress every six months.[91]

If the approved recovery is carried out successfully, then the court will terminate the process, and the company will escape bankruptcy.[92]

Declaration of bankruptcy

The court will declare the company’s bankruptcy in the following cases:

 (i) the creditors fail to convene the creditors meeting;[93]

 (ii) the creditors meeting fails to approve their resolution;[94]

 (iii) the company in bankruptcy has no money or other assets to pay the bankruptcy fee or advance the bankruptcy charges in case the petitioner is the company;[95]

 (v) after the acceptance of the petition for bankruptcy proceedings, the company is unable to pay for the bankruptcy charges;[96]

 (vi) no recovery plan is duly proposed or approved;[97]  or

 (vii) the company fails to implement the recovery plan.[98]

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.[99]

Discharge 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.[100]

 In general, a secured creditor will be given priority over unsecured creditors regarding certain assets of the bankrupt enterprise. However, under Vietnamese bankruptcy law, such priority comes with a cost. In particular:

 (i) if the creditors meeting (comprising of unsecured and partly-secured creditors) may decide to use a secured asset for business recovery plan of the bankrupt enterprise, then the secured creditor may not be able to enforce the secured assets until such time as decided by the creditors. Given a secured creditor is not entitled to vote at the creditors’ meeting, this may make secured creditors less advantageous than unsecured creditors;

 (ii) if a secured creditor completes enforcing the relevant secured assets and the value of the secured assets is still less than the amount owing to the secured creditor then logically, the secured creditor should be considered as an unsecured creditor for the bankrupt enterprise. However, there is no clear provision under the bankruptcy law which allows a secured creditor to be treated as unsecured creditor after enforcement of the relevant secured assets. The law allows partly secured creditor to join a creditors’ meeting. But classification of partly secured creditor seems to be made very early in the bankruptcy proceeding and there is no clear procedure for amendment of the list of creditors once enforcement of secured assets is complete; and

 (iii) A decision of the creditors’ meeting, which will bind all creditors, require (a) more than half of the unsecured creditors to present, and (b) the consents of unsecured creditors represent at least 65% of the unsecured debts. The wording suggests that partly unsecured creditors are not entitled to vote in a creditors’ meeting. It is not clear why the Bankruptcy Law 2014 has such a provision. Since the counting of vote in the creditors’ meeting should be based on the pool of unsecured debt rather than unsecured creditor.

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:

(i) bankruptcy charges,

(ii) unpaid salary, severance allowances, social insurance, health insurance and other benefits of its employees,

(iii) the debts arising after the commencement of bankruptcy proceedings in order to recover the company’s business activities, and

(iv) due financial obligations to the State, unsecured debts payable to the creditors named in the list of creditors and secured debts which have not been settled since the value of the secured assets are not enough to pay the debts.[101]

(v) In addition, if the company in bankruptcy is a financial institution and has received financial support including special loan from the Government, then such Government support may take precedence over all other liabilities of such company.[102]

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.[103]

Voidable transactions[104]

Under the Bankruptcy Law 2014, 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:

(i) 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;

(ii) transactions relating to the asset transfers which are not based on the market price;

(iii) swapping the unsecured debts to secured debts or partly secured debts;

(iv) transactions out of business purposes of the company;

(v) donation of the assets; and

(vi) other transactions for the purpose of disposing of assets of the company.

An 18 month period applies to the above transactions with the related party of the company.[105]

Payment to shareholders/members in bankruptcy

Vietnamese law is not clear whether a shareholder or member could become a creditor of the relevant JSC or LLC in cases:

(i) the relevant JSC or LLC has declared to pay dividend to its members or shareholders but fail to pay; and

(ii) the shareholders or members exercise the right to require the relevant JSC or LLC to buy back or redeem its share or capital contribution pursuant to a redeemable preference shares or an involuntary buy-back decision (see Nguyen Quang Vu – Principles of Vietnam’s Enterprise Law (Vol.1) – Section 64 and from 79.13 to 79.15).

On the one hand, in the context described at 9.26, a shareholder or member may be considered as a “creditor” (chủ nợ) of the relevant JSC or LLC because:

(i) a creditor is defined to mean an individual or organisation who has the right to request the relevant JSC or LLC to pay a debt (khoản nợ);

(ii) under the Enterprise Law 2014, an ordinary shareholder of a JSC has the right to receive dividend as decided by the Shareholders Meeting.[106] A dividend preference shareholder has the right to receive dividend in accordance with the terms of the dividend preference shares.[107] Therefore, an ordinary shareholder or a dividend preference shareholder could arguably be considered as a creditor of the JSC since the shareholder has the right to require the JSC to pay dividend in accordance with decision of the Shareholders Meeting or the terms of the dividend preference shares;

(iii) under the Enterprise Law 2014, an ordinary shareholder of a JSC has the right to require the JSC to buy back its shares in certain circumstance (see Nguyen Quang Vu – Principles of Vietnam’s Enterprise Law (Vol.1) – Section 79) and a redeemable preference shareholder has the right to require the JSC to buy back its shares in accordance with the terms of the redeemable preference shares. Therefore, an ordinary shareholder or a redeemable preference shareholder could arguably be considered as a creditor of the JSC since the shareholder has the right to require the JSC to buy back its shares in certain circumstances; and

(iv) similar arguments can be made regarding members of an LLC.[108]

On the other hand, Article 54.2 of the Bankruptcy Law 2014 provides that after liquidating the assets of a bankrupt company, the assets, which remain after paying all creditors of the company in full, will belong to shareholders or members of the relevant JSC or LLC. One may rely on this provision to argue that all payments due to a shareholder or member will have a lower ranking than payments due to creditors of the company during a bankruptcy proceeding. However, this seems to be an unreasonable argument since there is nothing, which prohibits a person from being both shareholders and creditors of the company. In the case of JSCs, the Bankruptcy Law 2014 also does not distinguish the liquidation preference between (1) shareholders holding redeemable preference shares and (2) shareholders holding ordinary shares or other classes of shares or other creditors of the JSCs.

-----------------------

 

---