by Steve Jacob, Indochine Counsel
In our last Talking Law column, we discussed The World Bank s Doing Business 2010 report and its annual ranking of the business climate in 183 economies worldwide, with a specific focus on tax policies. In this column, we look at how Viet Nam s laws on business insolvency and bankruptcy affect the rankings. This was one of the worst features of Viet Nam s business climate, with the nation ranked only 127th in the world based on this criterion.
To determine the rankings, Doing Business 2010 took a hypothetical limited liability company with 51-per-cent domestic ownership. The company operates a hotel in the nation s largest city, has 200 employees and contracts fifty suppliers. Until recently, it has operated in the black, but now finds itself unable to pay its debts or suppliers. It does not foresee a return to profitability within the next two years.
To analyse this scenario, Doing Business 2010 looked at three criteria: (1) time required to complete insolvency proceedings; (2) cost of proceedings as a portion of the estate; and (3) the recovery rate "recorded as cents on the dollar recouped by creditors through the proceedings."
Viet Nam only beat the averages in one area. Under Viet Nam s bankruptcy law, the cost of proceedings came to 15 per cent of the estate compared to an average of 23.2 per cent in the Asia-Pacific and 8.4 per cent in OECD countries. It took five years to fully wind-up the company in Viet Nam, almost twice as long as the Asia-Pacific average of 2.7 years. OECD countries averaged 1.7 years.
Creditors also fared worse in Viet Nam, recouping only 18 cents on the dollar instead of the much higher 28.4 cents in the Asia-Pacific and a whopping 68.6 cents in OECD countries.
Under Vietnamese law, full bankruptcy proceedings take place in five stages: (1) the filing of a petition and decision to commence bankruptcy proceedings; (2) dealing with assets and obligations; (3) recovery of business operations; (4) liquidation of assets and debts; and (5) declaration of bankruptcy.
Involuntary bankruptcy procedures are instituted when an enterprise becomes insolvent, or unable to pay its due debts upon request of a creditor. When an enterprise becomes insolvent, several parties can file the initial petition for bankruptcy: unsecured and partially secured creditors, employees with past due paychecks, and the owner or legal representative of the enterprise itself.
A brief review of the timing for one of these steps provides some insight into why full bankruptcy proceedings in Viet Nam take five years. From the date a petition is filed, the court has five days to notify the enterprise of the petition. The enterprise then has 15 days to file a raft of documentation requested by the court. At both steps there are possible delays for amendment and correction. Once the court receives the documentation from the enterprise, the court has 30 days to issue its decision to commence proceedings. It has an additional seven days to notify the enterprise of its decision. Assuming the maximum allowed time, it could take up to three months from the initial petition for the enterprise to be notified that bankruptcy proceedings are in fact commenced.
Once a court has declared the commencement of proceedings, several actions must transpire to identify and preserve the assets of the enterprise and to identify and classify the nature of the enterprise s financial obligations. Under the direction of a court-appointed committee, the enterprise must inventory its assets. In order to preserve those assets, the court may order the invalidation of certain transactions if entered into during the three months prior to receipt of the petition for bankruptcy. The enterprise must also do everything it can to clear other obligations outstanding.
When the court issues its decision to commence bankruptcy proceedings, it orders a public notice printed in a local newspaper. This notice alerts creditors of the enterprise s financial straits. Creditors have 60 days from the date of public notice to submit their petitions for payment to the court. Those creditors are then incorporated into a list of creditors and classified according to the type of debt owed. This classification dictates the creditors priority of payment upon liquidation of the assets of the enterprise.
Before any assets are distributed, however, creditors must hold a meeting with the owner of the enterprise and the head of the court-appointed committee to determine if it is at all possible to recover the business operations of the enterprise. Negotiations and deals may occur during this meeting in an attempt to reschedule debt payments, divvy up shares of ownership, or otherwise salvage the enterprise. The results of this meeting determine the next step in the process.
If the meeting of creditors so decides, the business has three years to recover its business operations and return to the black. Immediately after the approval of the meeting of creditors, the enterprise must draw up a plan for recovery including its intention to raise capital and restructure its operations to ensure profitability. Both creditors and the court may be involved in supervision of this process. If the enterprise successfully returns to profitability within three years, the court will declare the enterprise solvent and suspend bankruptcy proceedings.
If the enterprise fails to sufficiently recover its operations, the court, with the approval of the creditors meeting, may liquidate the assets of the enterprise and order the enterprise into wind-up proceedings. Under the administration of the court-appointed committee, the assets of the enterprise are sold and the profits are distributed to creditors according to their debt priority.
Secured debts, or those debts guaranteed by property or assets, have priority. After secured debts, bankruptcy fees are paid. Unpaid wages, severance allowances, and social insurance are then settled according to law and labor contracts. Any unsecured debts are paid in proportion to their share of the total value of unsecured debt owed by the enterprise. Finally, if any assets remain, they are split between the members and owners of the enterprise.
Once the scheduled asset distribution plan is completed, or the assets of an enterprise prove insufficient to satisfy the obligations of the enterprise, the court suspends the liquidation process and declares the enterprise bankrupt. Depending on the nature of the business organisation involved, this declaration may be the end of the process. If the type of business organisation allows for pass-through liability to its owners, such as a partnership or sole proprietorship, then creditors may pursue the owners for any additional debts owed.