Protecting the Rights of Stakeholders in Business Bankruptcy

1. Overview of Business Bankruptcy in Vietnam

According to Clauses 1 and 2, Article 4 of the 2014 Bankruptcy Law, bankruptcy is the legal status of an enterprise or cooperative that is insolvent and has been declared bankrupt by a People’s Court.

An enterprise or cooperative is deemed insolvent if it fails to fulfill its debt obligations within three months from the due date.

Therefore, a business is considered bankrupt when it meets both of the following conditions:

• The enterprise has been unable to pay its debts for three months from the due date.

• The People’s Court has issued a decision declaring bankruptcy.

2. Employee Rights in Business Bankruptcy

Employees are the top priority for protection in the event of business bankruptcy. According to Clause 1, Article 54 of the 2014 Bankruptcy Law, wages, severance allowances, social insurance, health insurance, and other contractual entitlements must be paid before any other debts are settled.

3. Protecting the Rights of Creditors

3.1. Order of Debt Repayment

(i) If the judge issues a bankruptcy declaration, the enterprise’s assets shall be distributed in the following order:

1. Bankruptcy expenses.

2. Debts owed to employees, including wages, severance pay, social insurance, and health insurance, as well as other contractual benefits under labor contracts and collective labor agreements.

3. Debts incurred after bankruptcy proceedings were initiated to restore the company’s operations.

4. Financial obligations to the State; unsecured debts payable to creditors listed in the bankruptcy proceedings; secured debts that remain unpaid due to insufficient collateral value.

Note: If asset value is insufficient to cover all debts, each category of creditors within the same priority level will be paid proportionally to their respective claims.

(ii) If, after all the above debts have been settled, there are remaining assets, they shall belong to:

• The owner of a sole proprietorship.

• The owner of a single-member limited liability company (LLC).

• Members of multi-member LLCs and shareholders of joint-stock companies.

• Members of partnerships.

(Based on Article 54 of the 2014 Bankruptcy Law).

3.2. Creditors' Rights

Creditors have the following rights:

• Participate in creditors' meetings to determine the method of handling business bankruptcy (Article 77 of the 2014 Bankruptcy Law).

• Request an asset review and oversee the asset liquidation process (Article 82 of the 2014 Bankruptcy Law).

• Propose a recovery plan if the business has the potential to continue operations (Article 87 of the 2014 Bankruptcy Law).

4. Rights of Shareholders

Shareholders own shares in a company and have specific rights related to the company's assets and operations. However, their interests can be significantly affected during bankruptcy proceedings.

Shareholders face the greatest risks in bankruptcy. Their rights include (Article 115 of the Enterprise Law):

• Access to information to monitor the bankruptcy process.

• Participate in asset liquidation to protect their financial interests.

• Claim remaining assets (if any) after all debts have been settled.

• File lawsuits if their rights are violated.

• Request compensation in cases of mismanagement.

• Participate in business restructuring if the company has a recovery plan.

5. Resolving Disputes in Bankruptcy

5.1. Handling Asset Disputes Before a Bankruptcy Declaration

According to Article 114 of the 2014 Bankruptcy Law, if an asset dispute arises before a business is declared bankrupt, the People’s Court handling the bankruptcy case must separate the disputed asset and resolve it in a separate civil lawsuit.

• The disputed asset will not be included in the bankruptcy liquidation process until a final court ruling has been issued.

• If the dispute is resolved before the bankruptcy declaration, the asset is added to the company’s assets for liquidation.

• If the dispute is resolved after the bankruptcy declaration, the asset will be distributed according to the predetermined liquidation plan.

5.2. Handling Asset Disputes During the Bankruptcy Execution Process

According to Article 115 of the 2014 Bankruptcy Law, if asset disputes arise during bankruptcy execution or if asset liquidation is impossible, relevant parties can request the People’s Court to intervene.

Within 10 working days, the court must issue one of the following decisions:

1. Reject the request from the involved parties.

2. Forward the request to a higher authority for review of the bankruptcy declaration.

If stakeholders disagree with the court’s decision, they can appeal to a higher authority for a review.

5.3. Dispute Resolution Methods

Bankruptcy disputes can be resolved through the following mechanisms:

1. Negotiation: Parties may voluntarily reach an agreement to shorten the dispute resolution time.

2. Mediation at the court: If negotiations fail, the court may act as an intermediary.

3. Final ruling by a bankruptcy judge: If no resolution is reached, the bankruptcy judge issues a binding ruling.

A swift and transparent dispute resolution process helps protect stakeholders' rights and ensures compliance with legal regulations.

6. Role of the Bankruptcy Trustee

A bankruptcy trustee is an individual or organization appointed by the court to manage, supervise, and execute bankruptcy procedures. They play a critical role in ensuring transparency and fairness in the bankruptcy process.

6.1. Asset Management, Business Supervision, and Liquidation

• Collect and verify financial documents related to the business.

• Prepare an asset inventory, creditor list, and debtor list to ensure transparency.

• Preserve business assets, preventing unauthorized sales, transfers, or asset concealment.

• Supervise business activities to prevent asset losses before bankruptcy proceedings.

• Hire third-party experts to assist with asset management and liquidation.

• Recommend asset sales to cover bankruptcy expenses.

• Organize asset valuation and liquidation, report to enforcement agencies, and notify stakeholders.

• Deposit all collected funds into a designated court or enforcement agency bank account.

6.2. Legal Representation for the Business

• If the business lacks a legal representative, the trustee assumes this role in all legal proceedings.

6.3. Financial Reporting and Business Recovery Planning

(Article 87 of the 2014 Bankruptcy Law)

• Provide detailed reports on assets, liabilities, and operations.

• Develop business recovery plans if restructuring is possible instead of liquidation.

6.4. Proposing Measures to Protect Assets and Stakeholder Rights

(Article 70 of the 2014 Bankruptcy Law)

• Invalidate illegal transactions made before or during bankruptcy.

• Recover assets that were wrongfully transferred or sold.

• Recommend emergency measures to prevent asset loss.

• Suggest administrative penalties for violations.

• Refer cases to criminal authorities in cases of fraud or intentional asset mismanagement.

6.5. Accountability and Legal Compliance

• Trustees must report their activities to the court and enforcement agencies.

• They are legally liable for any misconduct in carrying out their duties.

7. Conclusion

Protecting the rights of stakeholders in business bankruptcy is a complex legal process requiring in-depth knowledge of bankruptcy laws and coordination among relevant parties.

• Employees should understand their rights regarding wages, severance, and legal claims.

• Creditors must be aware of the debt repayment hierarchy to secure their claims.

• Shareholders must closely monitor the bankruptcy process to safeguard their financial interests.

• Bankruptcy trustees play a key role in ensuring fairness in asset management and liquidation.

To fully protect their rights, stakeholders should seek legal counsel from specialized bankruptcy lawyers or experienced trustees.