Insolvency 2021

Last Updated November 23, 2021

Vietnam

Law and Practice

Authors



Mayer Brown has more than 40 lawyers in its global restructuring practice, operating in jurisdictions across the Americas, Asia and Europe, enabling the firm to provide comprehensive assistance to clients around the world. It represents corporate debtors, company directors, lenders (throughout the capital structure), bondholders, liquidators, receivers, administrators, trustees, debtor-in-possession (DIP) loan providers, insurers, pension fund trustees, special servicers and landlords on all aspects of restructuring, bankruptcy and insolvency. The firm's experience in a broad array of industries enables it to quickly identify the proper context for the business and legal issues that can arise during the course of an out-of-court restructuring or an in-court insolvency proceeding. The team has extensive experience in cross-border and formal insolvencies, working closely with colleagues in other regional offices on multi-jurisdictional matters. It is able to provide clients with comprehensive and innovative solutions that serve their business needs.

The current economic conditions in Vietnam resulting from the COVID-19 pandemic have tested the regulatory framework on restructuring and insolvency.

According to statistics available on the National Portal, 17,464 companies completed dissolution proceedings in 2020 (up from 16,840 in 2019), and 47,459 suspended operations (up from 33,649 in 2019). This trend has continued in 2021, with 12,802 companies having completed dissolution proceedings and 45,611 having suspended operations as of September 2021. There are no official statistics indicating the number of court proceedings under Vietnam's Bankruptcy Law. In general, however, companies prefer to avoid formal proceedings in favour of negotiations with creditors and, ultimately, corporate dissolution.

Media reports indicate that the strongest impact has been in the tourism and hospitality sector, with Vietnam Airlines recently reported to be on the verge of bankruptcy and negotiating a credit package with three domestic banks.

The legal framework for bankruptcy proceedings has not changed in response, although the government of Vietnam has provided other relief. For example, the State Bank of Vietnam (SBV) released Circular No 01/2020/TT-NHNN on 13 March 2020, directing banks and credit institutions in Vietnam to restructure onshore debt if the borrower is unable to pay debt or interest because of reduced turnover resulting from the impact of COVID-19. Banks may also waive or reduce interest and fees, in compliance with their internal policies.

The Law on Bankruptcy No 51/2014/QH13 (Bankruptcy Law) came into effect on 1 January 2015, and revised the key features of the previous regulatory regime. The relevant implementing legislation includes Decree No 22/2015/ND-CP (16 February 2015) (Decree 22).

Other than with respect to credit institutions, the Bankruptcy Law applies a uniform process to debtors in all industries, unlike the earlier regulatory regime, which applied special rules for insurance companies, national security and state-owned enterprises or public utilities (known as "Special Companies"). Although the concept of Special Companies no longer exists in the Bankruptcy Law, as a practical matter courts may still informally refer to older legislation (to the extent it has not been repealed) when hearing cases that involve Special Companies for guidance on matters not specifically covered by the Bankruptcy Law.

Bankruptcy proceedings that involve credit institutions are subject to separate regulations imposed by the SBV, in addition to the Bankruptcy Law procedures.

The Ministry of Justice, the Supreme People's Court of Vietnam and the Supreme People's Procuracy released Joint Circular No 07/2018/TTLT-BTP-VKSNDTC-TANDTC (JC 07) on 12 June 2018, which regulates co-operation on enforcement procedures between the civil judgment enforcement agency and the court. The joint circular provides timelines and guidance for the temporary suspension of the enforcement of judgments against the assets of an insolvent company, and for the disposal of the company's assets in the course of the bankruptcy proceedings.

Decree 82/2020/ND-CP (15 July 2020) sets out sanctions for administrative violations relevant to bankruptcy proceedings.

Apart from the Bankruptcy Law, the Law on Enterprises No 59/2020/QH14 (1 January 2021) (the Enterprise Law) provides guidance on voluntary corporate dissolution procedures that occur outside the bankruptcy regime.

Within proceedings that occur under the Bankruptcy Law, there are no significant distinctions between voluntary and involuntary insolvency or restructuring. The requirements for initiating a petition for bankruptcy and the procedures for undertaking a insolvency or restructuring process are largely the same in each case. The most significant difference is whether the petition is made by the company's management or ownership or is brought externally by a creditor.

A petition for bankruptcy may be lodged by an unsecured or partially secured creditor, an employee of the debtor, or its shareholders upon becoming aware that the company is insolvent.

Certain management personnel are required to file a petition for bankruptcy upon becoming aware that the company is insolvent. These include the debtor's legal representative, the owner (in the case of a single member limited liability company), the chairman of the board (in the case of a joint stock company) and the chairman of the members' council (in the case of a multiple member limited liability company).

As there is no statutory time limit for a required filing, other than the three-month insolvency test timeframe described in 2.5 Requirement for Insolvency, management entities with a reporting obligation must use some discretion in order to assess the overall financial health of the company in conjunction with their fiduciary duties to act in compliance with the law and in the best interests of the company and its shareholders. While Vietnamese law does not provide for duties owed by managers in insolvent companies to external creditors, to the extent any transactions are invalidated during the look-back period, management may be vulnerable to personal liability for losses incurred if they approved such transactions in an effort to disperse assets, or if they approve prohibited transactions during the bankruptcy process.

Management personnel who are required to file a petition for bankruptcy but do not do so upon becoming aware that the company is insolvent may be subject to a small administrative fine.

Management may be subject to personal liability to compensate for loss or damages incurred by the company for breach of fiduciary duties. Individuals may also be subject to administrative fines or, in some cases, may be held criminally liable; they may also be barred from holding management positions in other companies in future.

A petition for bankruptcy may be lodged by an unsecured or partially secured creditor, an employee of the debtor, or its shareholders upon becoming aware that the company is insolvent.

The process of filing a petition for bankruptcy is the same whether it is lodged by the company's management personnel, employees or shareholders, or by external creditors. If a petition for bankruptcy is lodged by a company's management, the dossier must include more detailed financial information than if the petition is made by a creditor. The expanded dossier must include financial statements, details about the location and valuation of any assets and a report of any efforts made to mitigate the insolvent condition of the enterprise.

In order to commence voluntary or involuntary proceedings under the Bankruptcy Law, the enterprise must be deemed to be insolvent. The Bankruptcy Law defines an insolvent enterprise as one that fails to repay an unsecured or partially secured undisputed mature debt within three months following the due date of the debt.

A claim by a creditor for repayment is not required in order for a company to be considered insolvent. However, the petition to commence bankruptcy proceedings must indicate the basis for the request and provide supporting documents showing the overdue debts. A three-month time limit may allow a debtor to repay a single creditor before proceedings are initiated, but does not address the underlying weakness of the debtor.

There is no minimum amount of debt required to meet the insolvency requirement, so even a small amount of debt may be sufficient to satisfy the test. Therefore, the parties seeking insolvency have some discretion with respect to weighing the overall financial health of the company in light of the overdue debts.

The Bankruptcy Law removed the concept of Special Companies, such as state-owned enterprises, that were subject to separate proceedings that involved a recovery process under the oversight of the relevant state agency. A uniform process now applies to all sectors, other than credit institutions. Before a court can accept a petition for the bankruptcy of a credit institution, said institution must first have undergone a special control mechanism under the oversight of the SBV. Once the SBV issues a decision on the outcome of the special control mechanism, the standard bankruptcy process may continue.

Companies tend to favour corporate insolvency proceedings outside the formal bankruptcy regime. The Bankruptcy Law and its implementing legislation remain largely untested, and companies hesitate to rely on the process, instead preferring the relative efficiency and flexibility of insolvency pursuant to the Enterprise Law, the provisions of the corporate charter and, if necessary, contractual or commercial remedies. The Bankruptcy Law may not be flexible enough to accommodate the needs of companies with complicated offshore holding structures or significant cross-border assets, particularly in the context of the pressure created by the COVID-19 pandemic.

Lenders generally tend to be amenable to informal debt restructuring or refinancing schemes, although credit institution lenders have discretion in opting to restructure debt. There are distinctions between restructuring an onshore loan and an offshore loan, whether by extending the term of the loan or amending the repayment schedule, as the registration of an offshore loan with the SBV may need to be amended to reflect the revised agreement. Vietnamese law more strictly regulates a borrower's ability to refinance onshore and offshore loans, although complex refinancing transactions are becoming more common.

While debtors tend to eschew the Bankruptcy Law framework, the regulation accommodates negotiation between the company and the creditors at key points in the process. Nevertheless, companies often avoid the more formal process in favour of out-of-court workarounds. If a company proceeds with insolvency under the Enterprise Law, it may create an ad hoc restructuring plan by negotiating one-on-one with creditors, pursuing remedies under contract rights or refinancing its debts.

Opportunities for consensual restructuring negotiations before the commencement of the formal bankruptcy process are built into the regulations. In the time between a petition to initiate bankruptcy proceedings being filed and the court issuing a decision to open bankruptcy proceedings, the company has the option to initiate negotiations (for up to 20 days) with its creditors in order to avoid the bankruptcy process entirely. If the parties reach an agreement, the proceedings with be cancelled. If the parties fail to reach an agreement within 20 days, the proceedings will automatically recommence.

In addition, once the bankruptcy proceedings begin, a creditors' meeting must be convened. Creditors must submit a notice requesting payment of debts within 30 days of the court commencing bankruptcy procedures. The receiver then has 15 days to produce a list of creditors. The court must convene a creditors' meeting within 20 days of the list of creditors being finalised.

At the initial meeting, the creditors may determine that the debtor is not yet insolvent and request the suspension of the insolvency proceedings, or ask the company to prepare a recovery plan, or request to proceed with a decision of bankruptcy. If the creditors pass a resolution to undertake recovery measures, the debtor has 30 days to develop a recovery plan setting out a proposal to raise capital, modify the company's business activities, dispose of assets, or restructure its shareholding.

Consensual liquidation of a company may proceed either as a corporate insolvency process in accordance with the Enterprise Law and the company's charter, or within the framework of the Bankruptcy Law.

If the owner or board of directors of a Vietnamese company wish to liquidate the company, they must first pass a decision on liquidation in accordance with the company's charter. The decision must indicate the reason for dissolution, the plan for the liquidation of commercial contracts and payment of debts, and a proposal for settling obligations related to employees. The company must submit the decision to the licensing authorities and to its creditors, and the company's owners or board must carry out the approved plan for the liquidation and dissolution of the company.

The company's charter may provide further details on the process. For example, it may require the owner or board to convene a liquidation committee to oversee the process, or to appoint auditors or other advisers.

The debts must be paid in a particular order, beginning with salaries and social insurance obligations and taxes. Only then can other debts be paid, and any balance remaining may be distributed to the owners.

After completing the liquidation plan, the company must submit an application for dissolution to the licensing authority, which will deregister the company from the national corporate registry within five business days of receiving the application for dissolution (or if an application for dissolution is not submitted, within 180 days of receiving the initial corporate decision on liquidation, unless an appeal is lodged).

The Bankruptcy Law also provides an opportunity to develop a consensual restructuring plan. Once the bankruptcy proceedings begin, a creditors' meeting must be convened. Creditors must submit a notice requesting payment of debts within 30 days of the court commencing bankruptcy procedures. The receiver then has 15 days to produce a list of creditors. The court must convene a creditors' meeting within 20 days of the list of creditors being finalised.

The creditors may determine that the debtor is not yet insolvent and request the suspension of the insolvency proceedings, or ask the company to prepare a recovery plan, or request to proceed with a decision of bankruptcy. If the creditors pass a resolution to undertake recovery measures, the debtor has 30 days to develop a recovery plan setting out a proposal to raise capital, modify the company's business activities, dispose of assets, or restructure its shareholding.

While there are no standard approaches, restructuring using new money contributions may be incorporated into the rehabilitation plan prepared by the debtor pursuant to the creditors' meeting.

Vietnamese law does not impose special duties on creditors or the company in the specific context of out-of-court restructuring or consensual workouts, other than the general requirements arising under the Civil Code or pursuant to the Enterprise Law.

With respect to a liquidation under the Enterprise Law, the corporate decision or resolution must be passed by the owners or management of the company in accordance with its standard voting process. Minority shareholders do not have special statutory rights in this context, unless special rights have been negotiated in the company's charter or in a shareholders' agreement. Creditors of the company would not have direct input in the corporate decision and development of the liquidation plan, although they are required to receive notice of the plan once it is approved.

In the context of a restructuring plan developed at the request of the creditors' committee under the Bankruptcy Law, the plan proposed by the debtor must first be approved by the judge. The plan is also circulated to the creditors and the receiver for comments, and must then be approved by the creditors’ committee.

All creditors included on the list of creditors have the right to attend meetings of the creditors' committee. A quorum of creditors representing at least 51% of the total value of unsecured debt must be present in order to convene a meeting. A resolution of the creditors’ committee, including regarding the recovery plan, must be approved by a simple majority of those in attendance, representing at least 65% of the total unsecured debt.

The receiver and the creditors' committee will then oversee the implementation of the recovery plan.

Secured creditors may take mortgages over buildings, land use rights, equity, movable property, bank accounts, intellectual property and contractual rights. However, offshore creditors may not take mortgages over land use rights.

It is possible for a secured creditor to enforce security without filing a claim in court. The secured party must first deliver an enforcement notice. As a practical matter, the process of enforcement varies depending on the nature of the collateral. If the securing party is not co-operative, it may be necessary to resort to obtaining a court judgment.

This is not applicable here.

A fully secured creditor is not entitled to file a bankruptcy petition nor vote in the creditors’ committee; only unsecured and partially secured creditors may seek to initiate bankruptcy proceedings and vote in the creditors' committee meetings.

Please see 6.13 Non-debtor Parties.

Please see 5.1 Differing Rights and Priorities.

The receiver or an unsecured creditor may petition the court to provide interim relief during the bankruptcy proceedings, including attachment of the company's assets, freezing bank accounts, or permission for the sale of perishable goods.

The assets of the debtor are distributed in the following order:

  • costs and expenses related to the bankruptcy proceeding;
  • unpaid wages, social insurance and employee benefits;
  • debts arising after the beginning of bankruptcy proceedings, as part of the business recovery plan;
  • financial obligations to the state, including taxes;
  • unsecured debts payable to creditors; and
  • any secured debts that were not fully repaid because the value of the secured assets was not sufficient.

Any remaining assets will be distributed to the shareholders.

Please see 7.1 Types of Voluntary/Involuntary Proceedings.

Claims against the Company

Within five business days of the court accepting the bankruptcy petition, certain enforcement actions will be suspended, including:

  • enforcement of a court or arbitral judgment against assets of the company (other than enforcement of a judgment for compensation related to life, health or honour, or to pay wages to employees);
  • civil, commercial or employment proceedings to which the debtor is a party; and
  • the enforcement of security over assets of the insolvent company by secured creditors (other than assets that may be destroyed).

The moratorium on these actions will be lifted if the court does not issue a decision beginning bankruptcy proceedings, or if bankruptcy proceedings commence once the recovery plan terminates.

JC 07 further regulates co-operation on enforcement procedures between the civil judgment enforcement agency and the court. The joint circular provides timelines and guidance for the temporary suspension of the enforcement of judgments against the assets of an insolvent company.

Doing Business and Borrowing Money

Once the court issues a decision beginning bankruptcy proceedings, the company will continue to operate its normal business under the supervision of the court and the receiver, and subject to certain limitations. These limitations may be modified by the requirement of any recovery plan approved by the creditors' committee.

The company may not:

  • dispose of or donate assets;
  • pay any unsecured debts (unless they arise after bankruptcy proceedings have begun, in which case permission from the receiver is necessary);
  • abandon any claims; or
  • convert unsecured debts into debts that are secured by the company's assets.

The company must obtain consent from the receiver before:

  • mortgaging, purchasing or selling any assets;
  • selling or converting any equity;
  • terminating a contract;
  • paying debts that arise after bankruptcy proceedings have begun; or
  • paying employee salaries.

Once the creditors’ committee has approved a recovery plan, the company must carry out its business in accordance with the plan, under the supervision of the receiver and the creditors' committee. The debtor may incur secured or unsecured debt in accordance with the scope of the recovery plan and with the oversight of the receiver.

The company must provide the receiver with a detailed summary on the status of the recovery plan every six months.

Management

The company's directors and management, including its legal representative, will remain in place in order to manage the business under the oversight of the receiver and the court. The creditors' committee has the right to request the court to replace the company's legal representative.

Please see 7.3 Organisation of Creditors or Committees.

Please see 7.3 Organisation of Creditors or Committees.

There is no clear basis in the Bankruptcy Law to permit the trading of claims against a debtor. Furthermore, the list of creditors is established early in the bankruptcy process, and any amendments to the list pursuant to a claim would require the approval of the court. Enforcement of any such trades may need to occur outside the context of the bankruptcy proceedings.

Please see 6.2 Position of the Company.

Please see 6.2 Position of the Company.

The receiver must approve any sale of assets after the bankruptcy proceedings begin. However, if the company's recovery plan includes a sale of assets, such sales may proceed once approved by the creditors' committee, pursuant to the approved plan and subject to the oversight of the receiver. The Bankruptcy Law provides flexibility to the debtor in developing the plan.

The court is authorised to determine the disposition of secured assets, including enforcement or sale, based on the report of the receiver.

If the secured assets are not necessary to implement the business recovery plan, enforcement will then be subject to the terms of the security agreement. Otherwise, the creditors' meeting will issue a resolution addressing the treatment of the secured assets.

Please see 6.2 Position of the Company.

Each creditor must send a claim for debts to the receiver within 30 days of the decision to initiate a bankruptcy proceeding.

The value of the claims before bankruptcy proceedings begin is determined when the court issues its decision to begin the bankruptcy proceedings. The value of the claims is updated when the court issues a decision declaring the company bankrupt.

If the creditors’ committee approves a recovery plan but the debtor does not implement the plan, the court will issue a decision declaring the company bankrupt.

The court may temporarily suspend the implementation of a contract, or invalidate a transaction during the look-back period, thereby releasing a non-debtor party from liability.

The court must review any suspended contracts within five business days of issuing a decision to begin the bankruptcy proceeding, in order to determine whether resuming performance of the contract will damage the company. If the court orders termination of the contract, the counterparty may claim damages as an unsecured creditor in the bankruptcy proceedings.

A creditor may agree with the debtor to offset obligations arising out of contracts entered into before the court issued a decision to begin bankruptcy proceedings, subject to the approval of the receiver.

There is some risk that a set-off may ultimately be held invalid if it is deemed to be a payment obligation that has not yet come due. Such a payment is prohibited during the six months prior to the initiation of bankruptcy proceedings.

If the debtor does not comply with the terms of the recovery plan to the satisfaction of the creditors' committee and the receiver, the court will issue a decision declaring the company bankrupt.

Please see 5.5 Priority Claims in Restructuring and Insolvency Proceedings.

The processes for voluntary and involuntary proceedings under the Bankruptcy Law 2014 are largely the same.

  • An interested party files a petition for bankruptcy. This may be lodged by the legal representative of the company or externally by an unsecured or partly secured creditor.
  • The court must accept the petition for bankruptcy and notify the company and the creditors. The company has an opportunity to seek postponement of the acceptance in order to negotiate with its creditors to withdraw the petition for bankruptcy. This is the first significant opportunity for a negotiated resolution.
  • If the parties do not seek a postponement and the court considers that there is a basis to proceed, the court will issue a decision beginning bankruptcy proceedings.
  • Within 30 days of the court issuing a decision beginning bankruptcy proceedings, the company must make an inventory of its assets, and creditors must send their claims to the receiver. The receiver must prepare and publicise a list of creditors within 15 days of the creditors lodging their claims.
  • The court must convene the first meeting of the creditors' committee. All creditors named on the list of creditors have the right to attend the meeting. However, a quorum representing at least 51% of the total value of unsecured debt must be present in order to convene a meeting. Resolutions can be approved by a majority of unsecured creditors in attendance, representing at least 65% of the total unsecured debt.
  • The creditors' committee must begin by determining whether to suspend the proceedings if the debtor does not meet the qualification for insolvency, ask the debtor to prepare a recovery plan, or petition the court to proceed directly to a declaration of bankruptcy.
  • If the creditors' committee requests the debtor to prepare a recovery plan, the company has 30 days to prepare a proposal for review and comment by the judge and the receiver. The plan is then submitted to the creditors' committee for approval. The plan must be implemented within three years of its approval by the creditors' committee (or within another time limit selected by the creditors).
  • If the initial creditors' committee meeting immediately sought a declaration of bankruptcy, or if the creditors' committee did not approve the recovery plan, or if the debtor did not implement the plan within the time limit, the judge will issue a decision declaring the company bankrupt.
  • The assets of the company are then liquidated and distributed in accordance with the priority set out in the Bankruptcy Law.

Please see 6.2 Position of the Company.

Once the bankruptcy proceedings begin, a creditors' meeting must be convened. Creditors must submit a notice requesting payment of debts within 30 days of the court commencing bankruptcy proceedings. The receiver then has 15 days to produce a list of creditors. The court must convene a meeting of the creditors' committee within 20 days of the list of creditors being finalised.

At the initial meeting, the creditors may:

  • determine that the debtor is not yet insolvent and request the suspension of the insolvency proceedings;
  • ask the company to prepare a recovery plan; or
  • request to proceed with a decision of bankruptcy.

If the creditors pass a resolution to undertake recovery measures, the debtor has 30 days to develop a recovery plan setting out a proposal to raise capital, modify the company's business activities, dispose of assets or restructure its shareholding.

All creditors included on the list of creditors have the right to attend meetings of the creditors' committee. A quorum of creditors representing at least 51% of the total value of unsecured debt must be present in order to convene a meeting. A resolution of the creditors’ committee, including regarding the recovery plan, must be approved by a simple majority of those in attendance, representing at least 65% of the total unsecured debt.

The creditors' committee works with the receiver to review the ongoing financial situation of the company and the process of inventorying and distributing assets.

The Bankruptcy Law acknowledges the possibility of foreign court judgments that impact assets in Vietnam or a Vietnamese corporate debtor, and provides that the recognition and enforcement in Vietnam of a judgment rendered by a foreign court regarding the assets of a company incorporated in Vietnam must proceed in accordance with the general principles of Vietnamese law on the enforcement of foreign judgments. While this indicates a growing recognition of the global context of bankruptcy proceedings, the practical difficulties of executing a foreign court award in Vietnam remain nearly insurmountable.

Vietnam has signed Mutual Legal Assistance Treaties with 11 countries, including the UK, France, China and Korea, but the scope of such treaties may be limited. For example, the Mutual Legal Assistance Treaty with the UK is limited to criminal matters.

In the absence of such a treaty, the judgments of foreign courts are not enforceable against assets in Vietnam. Any proceeding or action for relief in Vietnam (such as enforcement against a specific asset) would need to be independently undertaken in Vietnam – eg, by seeking contractual remedies or a civil injunction.

There is no legal basis for Vietnamese courts to co-operate with foreign jurisdictions in cross-border bankruptcy cases, or to otherwise co-ordinate proceedings.

Vietnamese laws do not contemplate the application of decisions or rulings by a foreign jurisdiction within Vietnam, and Vietnamese courts would not make a determination as to the precedence of foreign law in the context of a bankruptcy proceeding.

Foreign-owned entities or offshore creditors are handled no differently from Vietnamese entities in bankruptcy proceedings in Vietnam. The Bankruptcy Law applies to a foreign invested entity licensed and operating in Vietnam, and foreign creditors would participate in the claims process in the same manner as Vietnamese creditors.

If Vietnamese bankruptcy proceedings involve offshore assets or obligations, the Vietnamese courts will address such claims under the terms of a Mutual Legal Assistance Treaty or, if one is not available, under the Civil Code and the general principles of reciprocity.

As a practical matter, judicial interactions with foreign courts are rare and procedurally complex to initiate. Without a Mutual Legal Assistance Treaty, enforcing a foreign judgment in Vietnam is not practical.

An asset management officer (or an asset management firm) must be appointed to act as a receiver and manage the process, prepare the list of creditors, and prepare the inventory of assets. The receiver reports to the creditors' committee on the status of the bankruptcy process.

The asset manager must hold a valid certificate as an asset management officer, and may be a lawyer, auditor or otherwise experienced in finance.

The individual filing a petition for bankruptcy may propose an asset manager, but the appointment is ultimately made by the court.

The creditors' committee acts on behalf of the unsecured creditors, and is authorised to assemble a representative board to oversee the committee's activities and liaise with the court and the receiver.

The asset manager is responsible for collecting and verifying the documents necessary for the operation of the debtor during the bankruptcy process. He or she must prepare the asset inventory and list of creditors.

Once the bankruptcy process begins, the asset manager supervises the company's assets and oversees the recovery, management and distribution of assets.

The asset manager also reports to the court or the creditors' committee on the operations of the debtor.

The creditors' committee acts on behalf of the unsecured creditors, and is authorised to assemble a representative board to oversee the committee's activities and liaise with the court and the receiver.

Please see 9.2 Statutory Roles, Rights and Responsibilities of Officers.

Vietnamese law does not require a special duty of care to creditors as a company approaches insolvency. Once a company is undergoing the bankruptcy process, however, management personnel may be liable for losses resulting from approving or permitting the company to undertake transactions that are prohibited by the Bankruptcy Law or that have not been approved by the receiver.

Management personnel can be held personally liable for damages incurred by the company if they breach their fiduciary duties or violate the law. In addition, there may be disciplinary action once the bankruptcy process is complete. For example, a director or officer may be disqualified from holding future management positions within a company.

Vietnamese law is not clear as to whether creditors may assert claims directly against management personnel for breach of fiduciary duties to perform obligations arising under the Bankruptcy Law. A creditor would likely need to seek recourse through a claim under the Civil Code.

The court will invalidate the following transactions conducted during the six months prior to the initiation of insolvency proceedings in order to preserve the assets of the company:

  • asset sales that are not made at market price;
  • the conversion of unsecured debt into debt that is secured by the company's assets;
  • the payment of a debt that has not yet become due, or a payment that is larger than the amount of debt due, or setting off an obligation in favour of a creditor;
  • donations of assets;
  • transactions outside the normal business scope of the company; and
  • other transactions made in order to dispose of corporate assets.

In addition, if the company is in the process of carrying out any contracts at the time insolvency proceedings are initiated, the court may temporarily suspend further implementation of those contracts in order to mitigate the loss of funds or resources.

Transactions made within the six months before the court begins insolvency proceedings may be set aside. If the transaction involves a related party of the debtor, this timeframe is expanded to 18 months.

Related parties include the following:

  • the parent company or a subsidiary of the debtor;
  • management personnel at the debtor or at the debtor's parent company;
  • one or a group of individuals with operational control of the debtor; or
  • a direct family member of a manager at the debtor or of a controlling shareholder of the debtor.

Once the court has declared a transaction invalid, any recovered assets must be accounted for in the total assets of the debtor within ten business days.

The Bankruptcy Law permits individual creditors, as well as the receiver and even the debtor itself, to petition the court to set aside a transaction that meets the look-back requirements. The court itself also has discretion to determine whether a transaction ought to be set aside.

Mayer Brown

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Ho Chi Minh City
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Trends and Developments


Authors



Mayer Brown has more than 40 lawyers in its global restructuring practice, operating in jurisdictions across the Americas, Asia and Europe, enabling the firm to provide comprehensive assistance to clients around the world. It represents corporate debtors, company directors, lenders (throughout the capital structure), bondholders, liquidators, receivers, administrators, trustees, debtor-in-possession (DIP) loan providers, insurers, pension fund trustees, special servicers and landlords on all aspects of restructuring, bankruptcy and insolvency. The firm's experience in a broad array of industries enables it to quickly identify the proper context for the business and legal issues that can arise during the course of an out-of-court restructuring or an in-court insolvency proceeding. The team has extensive experience in cross-border and formal insolvencies, working closely with colleagues in other regional offices on multi-jurisdictional matters. It is able to provide clients with comprehensive and innovative solutions that serve their business needs.

The current economic conditions in Vietnam resulting from the COVID-19 pandemic have tested the regulatory framework on restructuring and insolvency.

Vietnam managed the early stages of the pandemic well, with the economy growing by 2.9% in 2020. As COVID-19 slowed port logistics and terminal operations, and as manufacturing slowed, exports to the US (one of Vietnam's main trading partners) declined as well. Vietnam's manufacturing slowdown has been one of the focal points of the global supply chain disruption due to COVID-19.

While manufacturing is slowly recovering, the tourism and hospitality sectors are still struggling, with Vietnam Airlines recently reported to be on the verge of bankruptcy and negotiating a credit package with three domestic banks.

According to statistics available on the National Portal, 17,464 companies completed dissolution proceedings in 2020 (up from 16,840 in 2019), and 47,459 (up from 33,649 in 2019) suspended operations. This trend has continued in 2021, with 12,802 companies having completed dissolution proceedings and 45,611 having suspended operations as of September 2021.

Court records in Vietnam are not publicly available, so there are no available official statistics indicating the number of formal court proceedings under Vietnam's Bankruptcy Law. In general, however, companies prefer to avoid formal proceedings in favour of private negotiations with creditors and, ultimately, corporate dissolution. The Bankruptcy Law and its supporting regulations have not yet caught up to the practical reality of dissolving an enterprise. Furthermore, the regulations do not provide adequate guidance for bankruptcy proceedings for foreign invested companies with complex offshore structures.

Modernisation of the Bankruptcy Law

The current Law on Bankruptcy came into effect in 2014, and replaced a regulation that had not been updated since 2004. While the Law on Bankruptcy made several changes that streamlined the judicial process, many of the weaknesses in the regulatory framework persist.

The lack of implementing legislation to provide further guidance also makes companies reluctant to test the process. For example, the new law introduced the concept of a trustee, who must be a lawyer, an auditor or a professional with accounting or financial experience. The trustee replaced a bankruptcy committee composed of a court officer, a representative of the creditors, the company's legal representative, and an official from the Judgement Enforcement Agency. Although this change reflects a more centralised process that focuses on the creditors, the role of the trustee is not adequately developed. Vietnamese law generally does not have the concept of a "trust" or a "trustee" so this raises new questions. Moreover, the implementing legislation does not yet adequately clarify the rights and obligations of the trustee, nor the scope of the trustee's ability to make decisions on behalf of the debtor company. Developing professional certification requirements for the trustee has also delayed the availability of qualified and experienced individuals and companies to fill this role.

The Bankruptcy Law also co-exists with the regulations applicable to financial institutions, and reform of the bankruptcy regulations applicable to the banking sector – including guidance on the resolution of non-performing loans – will be essential to maintain sustainable credit flows.

In addition, the lack of an official mechanism for monitoring or verifying information about businesses in bankruptcy poses a continued challenge for due diligence and determining whether or not a company will be able to repay its debts.

Finally, the lack of specialised and experienced bankruptcy courts and judges and the unavailability of relevant case law will make companies reluctant to test the process. Companies will more likely continue to opt for corporate insolvency or refinancing.

Response to COVID-19

Although many helpful regulations were promulgated during the height of the pandemic to support the economy and sustain enterprises, the legal framework for bankruptcy proceedings remained the same. Relief came through more direct intervention. For example, the State Bank of Vietnam (SBV) released Circular No 01/2020/TT-NHNN on 13 March 2020, directing banks and credit institutions in Vietnam to restructure onshore debt if the borrower is unable to pay debt or interest because of reduced turnover resulting from the impact of COVID-19. Banks may also waive or reduce interest and fees, in compliance with their internal policies.

Refinancing

An increasing number of companies have opted to refinance their debt with loans, sourced both onshore and offshore. Vietnamese laws, however, regulate the ability of borrowers to refinance using new debt.

Onshore loans may be used to refinance existing debt before the current debt becomes due, provided that the new loan does not exceed the term of the current loan and the current debt has not previously been restructured. There are also limits on the scope of use of new debt.

The use of offshore loans is more limited: they may only be used to finance business plans or investment projects of the borrower or of companies in which the borrower has an ownership interest, which have been approved by the borrower's management, and to restructure the borrower's offshore loans without incurring further borrowing expenses. The regulations do not provide detailed guidance on how borrowing costs are calculated, and discussion with the SBV ahead of time is often necessary to ensure the new structure complies with the regulations.

Companies have also turned to bond structures to refinance onshore debt. The SBV has permitted issuers to use bond proceeds to fund an equity injection into a subsidiary. The subsidiary may then use the proceeds from the equity injection to refinance its debt obligations.

Investors that are struggling to address their onshore debt requirements but do not want to undergo the bankruptcy process may opt for restructuring workarounds. However, these types of refinancings must overcome their own set of regulatory challenges.

Corporate Insolvency

A general corporate restructuring may include replacing the management team, renegotiating commercial contracts and revising the company's business activities. Other applicable laws must be taken into account. For example, if a restructuring will necessitate layoffs, compliance with Vietnamese labour laws will be crucial. A company may need to revise its corporate licence if it alters its business activities. Depending on the business lines, this may be time-consuming and should be factored into the overall timeline.

Companies that need to dissolve their operations may pre-empt formal bankruptcy proceedings and undergo an internal insolvency process. As a practical matter, the ease of this process depends on the co-operation of the management team and the shareholders to expedite discussions with creditors and employees, and to secure the corporate and regulatory approvals necessary to liquidate the business.

From the point of view of creditors, the corporate insolvency process is less transparent than formal bankruptcy proceedings, and lacks the oversight of a trustee and, ultimately, the court. The company has more discretion in developing a plan and negotiating with creditors.

Bankruptcy Proceedings and Foreign Jurisdictions

More complicated proceedings involving a foreign jurisdiction may be difficult to manage in Vietnam. Enforcement of a foreign civil judgment in a Vietnamese court is only possible if the jurisdiction where the judgment was rendered has entered into an international treaty with Vietnam providing for the recognition and enforcement of civil judgments. Without such a treaty, it is very difficult to enforce a foreign judgment in Vietnam.

The process of obtaining recognition and enforcement is complex and time-consuming. A formal request must be lodged with the Ministry of Foreign Affairs in Vietnam. Assessment of the request is based on whether the recognition and enforcement will contravene Vietnamese laws, the need for legal assistance on the specific matter, and the requirements of Vietnam's foreign relations policies.

The Bankruptcy Law acknowledges the possibility of a foreign proceeding involving a Vietnamese subsidiary, creating a path for the recognition and enforcement within Vietnam of foreign bankruptcy proceedings if there is a relevant treaty in place. Nevertheless, the realities of enforcement may make the process too time-consuming to suit offshore creditors.

A foreign parent may instead initiate bankruptcy proceedings in Vietnam under the Bankruptcy Law and attempt to mirror the offshore reorganisation plan. However, the foreign parent may not be able to ensure that the outcome of the Vietnamese proceedings matches the goals of the offshore reorganisation plan, and may opt for a corporate insolvency instead.

Looking Ahead

The current focus is on developing regulations that will put the domestic economy on a recovery path. Nevertheless, the number of companies that have suspended or dissolved their operations indicates a need for a more formal and transparent process. In the long term, Vietnam will need to further develop clear and practical regulations that enable companies to implement a swift recovery plan but also provide transparency and comfort to creditors.

Mayer Brown

Suite 1705-1707, 17/F, Saigon Tower
29 Le Duan Street
District 1
Ho Chi Minh City
Vietnam

+84 28 3513 0300

hcmc.office@mayerbrown.com www.mayerbrown.com
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Law and Practice

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Mayer Brown has more than 40 lawyers in its global restructuring practice, operating in jurisdictions across the Americas, Asia and Europe, enabling the firm to provide comprehensive assistance to clients around the world. It represents corporate debtors, company directors, lenders (throughout the capital structure), bondholders, liquidators, receivers, administrators, trustees, debtor-in-possession (DIP) loan providers, insurers, pension fund trustees, special servicers and landlords on all aspects of restructuring, bankruptcy and insolvency. The firm's experience in a broad array of industries enables it to quickly identify the proper context for the business and legal issues that can arise during the course of an out-of-court restructuring or an in-court insolvency proceeding. The team has extensive experience in cross-border and formal insolvencies, working closely with colleagues in other regional offices on multi-jurisdictional matters. It is able to provide clients with comprehensive and innovative solutions that serve their business needs.

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Authors



Mayer Brown has more than 40 lawyers in its global restructuring practice, operating in jurisdictions across the Americas, Asia and Europe, enabling the firm to provide comprehensive assistance to clients around the world. It represents corporate debtors, company directors, lenders (throughout the capital structure), bondholders, liquidators, receivers, administrators, trustees, debtor-in-possession (DIP) loan providers, insurers, pension fund trustees, special servicers and landlords on all aspects of restructuring, bankruptcy and insolvency. The firm's experience in a broad array of industries enables it to quickly identify the proper context for the business and legal issues that can arise during the course of an out-of-court restructuring or an in-court insolvency proceeding. The team has extensive experience in cross-border and formal insolvencies, working closely with colleagues in other regional offices on multi-jurisdictional matters. It is able to provide clients with comprehensive and innovative solutions that serve their business needs.

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