What is bankruptcy – business bankruptcy procedures

The financial difficult time usually led to the business no longer being able to maintain operations or even no longer able to repay debt. It is the moment that the business owner may declare bankruptcy or be declared bankruptcy by the creditors.

Bankruptcy is a situation in which an enterprise is unable to pay and is declared bankrupt by the People’s Court.

Participants in bankruptcy procedures include Creditors, owner of the insolvent enterprise.

Relevant legal documents:

1. Bankruptcy Law 2014
2. Enterprise Law 2020

Rights and obligations to file a request to open bankruptcy proceedings:

Right to apply:

1. Creditor: At the end of 03 months from the due date of the debt but the enterprise does not fulfill its payment obligation.
2. Filing obligations: Legal representative of the enterprise, Owner of a private enterprise, Chairman of the Board of Directors (joint stock company), Chairman of the Board of Members (limited company with two or more members), owner of a one-member LLC, general partner (partnership company).

Notice of enterprise insolvency:

Individuals, agencies, and organizations are responsible for:

1. Notify in writing those who have the right and obligation to file a request to open bankruptcy procedures according to regulations.
2. Must ensure the accuracy of the notification.
3. In case of intentional false notification leading to damage to the business, the one who notifying will have to compensate for the damage and be faced legal responsibility.

The Court’s jurisdiction to resolve bankruptcy:

1.  Provincial People’s Courts have jurisdiction in resolve bankruptcy in the following cases:
   • Bankruptcy cases involving assets abroad/ people participating in bankruptcy procedures are abroad.
   • Insolvent enterprises have branches, representative offices, and real estate in many different districts, towns, and provinces.
   • The bankruptcy case falls under the jurisdiction of the District Court but after that it is taken up by the Provincial People’s Court to resolve due to the complex nature of the case.
2. District People’s Court: Has jurisdiction to resolve bankruptcy over: Enterprises with headquarters in districts, towns, and cities in that province (except for cases falling under the jurisdiction of the Provincial People’s Court).

Application to open bankruptcy proceedings:

1. For creditors: the petition will include the following information: information of the applicant; information of the enterprise required to be bankruptcy; Due debt; Evidence to prove the debt is due.
2. For insolvent enterprises: The petition will include the following information: information of the enterprise and the applicant; Reason you request to open bankruptcy procedures and enclosing the following papers and documents:
   • Financial statements of the enterprise within the lastest 03 years (in case of operation for less than 03 years, attach the financial report of the enterprise for the entire operating period);
   • An explanation of the cause of insolvency; Report on the results of implementing business recovery measures but still unable to overcome the insolvency situation;
   • A detailed list of assets and locations of the enterprise’s assets
   • List of creditors, list of debtors, which must clearly state the names and addresses of creditors, debtors, debts, secured, unsecured, and partially secured loans, due or not yet due;
   • Papers and documents related to business establishment
   • Results of remaining asset valuation (if any).
3. In case there is a proposal to appoint: The liquidator. If the enterprise desires liquidating of assets, the petition must clearly state the name and address of the liquidator of the enterprise.
   Note that if the business owner does not file a request to open bankruptcy proceedings when the business becomes insolvent, he must be responsible before the law. If any damage arises after the time the enterprise becomes insolvent due to failure to file a claim, compensation must be made.

Responsibilities of enterprises after opening bankruptcy procedures

Enterprises must report to the liquidator, asset management and liquidation enterprise before carrying out the following activities:

1. Activities related to borrowing, pledging, mortgaging, guaranteeing, buying, selling, transferring, and leasing assets.
2. Selling and converting shares.
3. Transfer of property ownership.
4. Termination of effective contract performance.
5. Payment of debts arising after opening bankruptcy procedures.
6. Pay salaries to employees in the enterprise.

Within 03 working days from the date of receiving the enterprise’s report: The liquidator and asset management and liquidation enterprise will respond on whether or not to carry out the above activities and must Report to the Judge about the content of your answer.

If the above activities are carried out without the consent of the Administrator or asset management and liquidation enterprise, the implementation will be suspended, the original state restored and the consequences resolved according to regulations. under the law.

Handling of enterprise assets after opening bankruptcy procedures:

1. Determine interest on debt:
   • From the date of decision to open bankruptcy proceedings: Debts continue to have interest calculated as agreed but interest payments are temporarily suspended.
   • For new debts arising after opening bankruptcy procedures until the time the enterprise is declared bankrupt, the interest on that debt is determined according to the agreement and based on provisions of law.
   • From the date of the decision to declare bankruptcy: The debt will not continue to incur interest.
2. Handling secured debt: After opening bankruptcy proceedings, the liquidator or the liquidated asset enterprise can propose to the Judge to handle the debt that has been temporarily suspended according to regulations. The judge specifically considers and handles the following cases:
   • In case security assets are used to carry out business recovery procedures: Handled according to the Resolution of the Meeting of Creditors;
   • In case business recovery procedures are not carried out/collateral assets are not necessary for carrying out the procedure: Handle according to the time limit specified in the contract (for secured contracts matured).
   • For undue secured contracts: Before declaring the enterprise bankrupt, the People’s Court suspends the contract and handles secured debts according to regulations.
3. Order of asset division:
   • Bankruptcy costs.
   • Salary arrears, severance pay, social insurance, health insurance for employees, and other benefits according to the labor contract and signed collective labor agreement;
   • Debts arising after opening bankruptcy procedures for the purpose of restoring business activities of enterprises and cooperatives.
   • Financial obligations to the State; Unsecured debt must be paid to creditors; The secured debt has not been paid because the value of the secured assets is not enough to pay the debt.
   • In case the asset value after fully paying the prescribed amounts still remains: The remainder belongs to: The owner of the private enterprise; Owner of a one-member limited liability company; Member of a limited liability company with two or more members, shareholder of a joint stock company; Member of the Partnership Company.
   • If the asset value is not enough to pay: Each subject in the same priority order is paid according to the percentage corresponding to the debt amount.

After opening bankruptcy proceedings, there are 2 situations could be happened

1. Recovering the enterprise’s business operations: the enterprise implements a plan to restore production and business, escape the state of insolvency and return to normal operating status.
2. Declare the enterprise bankrupt.

If you still have questions, or need assistance, please do not hesitate to contact An Luat Vietnam for advice and support.