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Legal Update

Draft Law on Bankruptcy – A More Practical Bankruptcy Regime for Vietnam?

22 November 2013
Mayer Brown JSM Legal Update

On 8 October 2013, the Supreme Court of Vietnam released the most recent draft of the new Law on Bankruptcy ("Draft Bankruptcy Law"). The Draft Bankruptcy Law is now open for comments and, once passed by the National Assembly, will replace the current Law on Bankruptcy 2004 ("Current Bankruptcy Law").

The Draft Bankruptcy Law appears generally to be a positive step in Vietnam's efforts to improve the efficiency of the bankruptcy process and efforts to enhance the credibility of the legal framework for restructuring.

Conduct of Bankruptcy Proceedings

The Current Bankruptcy Law stipulates that bankruptcy proceedings will be managed by a Bankruptcy Committee consisting of a court officer, a representative of creditors, a judgment enforcer, the company's legal representative and possibly an employee representative. In contrast, the Draft Bankruptcy Law proposes that the management of the bankruptcy proceedings will be conducted by a bankruptcy executor with possible assistance of professional advisors.

Upon the decision to commence bankruptcy proceedings, the executor will independently undertake key steps under the bankruptcy law such as organising creditor meetings, collecting information relating to the enterprise's financial status, managing the assets of the enterprise, proposing emergency measures, supervising the company's business restoration and other activities to ensure a smooth and orderly bankruptcy proceedings. Depending on the complexity of the case, up to three judges may be appointed to monitor the proceedings and make legal decisions based on the proposals of the bankruptcy executor. Decisions made by the judge(s) during the bankruptcy proceedings such as emergency measures or liquidating the bankrupt enterprise's assets will then be enforced by the bankruptcy enforcer, who will likely be selected from the Judgment Enforcement Agency.

Rights to Initiate Proceedings

Creditors

Under the Current Bankruptcy Law, unsecured or under-secured creditors may file a bankruptcy petition upon observing that an entity has become insolvent. The Draft Bankruptcy Law proposes two options for the National Assembly's consideration that would modify the conditions under which creditors may file petitions. The first option would enable creditors to file a petition when an enterprise is unable to pay due debt worth at least VND200 million (approximately US$9,500) within three months from the date the creditor demands repayment. The second option would be when an enterprise is unable to pay due debt within three months from the date the creditor demands repayment.

Shareholders

Unless otherwise set out in the charter or in a resolution of shareholders, a group of shareholders owning more than 10 percent of ordinary shares for a period of six consecutive months is entitled to submit a bankruptcy petition upon observing that the enterprise has become insolvent. Note that under the Current Bankruptcy Law, the relevant shareholder threshold is 20 percent. If implemented, the Draft Bankruptcy Law would facilitate the ability of shareholders to file a bankruptcy petition.

Employees

Under the Draft Bankruptcy Law, the enterprise's failure to pay wages for three consecutive months will trigger the right of employees (acting through a representative or union) to submit a bankruptcy petition. The Current Bankruptcy Law simply provides that employees are entitled to submit a petition upon the entity's failure to pay wages.

Amendment of Preference Period

Another important change proposed by the Draft Bankruptcy Law is the removal of the three-month time limit attached to the preference period. Accordingly, the invalidation of a transaction conducted prior to the opening of a bankruptcy proceedings will not depend on when it was conducted, but rather will focus solely on the purpose of the transaction in question. In addition to transactions that may already be invalid under the Civil Code (such as fraud, misrepresentation), the possible bases for invalidating a transaction include transactions that are aimed at dispersing assets of the bankrupt enterprise, transactions in which the price or value of the transaction is lower than the market price, or transactions aimed at unequal treatments among creditors.

By eliminating a three-month window to determine whether a transaction constitutes a preference, this adds considerable judicial discretion to the process as, in the absence of established judicial precedents, it is not clear how a judge would interpret these provisions. For instance, determining whether a transaction value is lower than market price may be difficult to establish. Moreover, certain transactions priced under market price may have legitimate corporate purposes, for instance convertible loan agreements where the conversion price is under market price at the time the conversion is exercised.

Timing of Entry of a Bankruptcy Order

Another proposed change to be introduced by the Draft Bankruptcy Law is the timing of when a bankruptcy order can be entered. Under the Current Bankruptcy Law, entry of an order of bankruptcy is the final stage of the proceedings. Under the Draft Bankruptcy Law, the entry of a decision of bankruptcy will precede the liquidation of assets and settlement of obligations. This appears to be a positive change since in practice, the liquidation of some assets may take a considerable period of time, or may be impracticable while pending the decision of bankruptcy.

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