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An effective framework for resolving bad debts
Vietnam’s new Law on Bankruptcy becomes effective on January 1, 2015. Pleasingly it incorporates new concepts such as the appointment of an external insolvency administrator (trustee) from the private sector to help manage, liquidate and rehabilitate insolvent enterprises. This is but one of the reforms, which will help to better protect the rights of creditors and provide a functioning mechanism to redistribute and redeploy resources away from flagging businesses to more productive firms.
However, there is no point in having a well drafted and conceptually good law if it is not consistently used in practice to address insolvency related issues in a timely manner. The existing Law on Bankruptcy which came into effect in October 2004, and which will be replaced by the new law, has generally failed in this regard.
Bankruptcy procedures were applied by the courts under the existing law a mere 236 times during the period from October 15, 2004 to September 30, 2012. This number pales into insignificance compared to the number of distressed businesses that have ceased operations in recent years or when one reads about the levels of non-performing loans weighing down the banking sector or the some VND51 trillion of loans transferred to the Vietnam Asset Management Company (VAMC) since its establishment in July 2013.
Going forward, the application of the new law and rapid adoption of supporting regulations would facilitate consistent outcomes for stakeholders of insolvent enterprises. KPMG’s experience suggests that one benefit from this is that potential foreign investors typically ascribe value to countries with strong insolvency regimes (i.e. they are more willing to invest in or lend to businesses) where they can be confident of being treated fairly in an insolvency scenario and at least extract some or fair value from their debt or equity investment.
Insolvency definition provides a financial restructuring window
Under the new law an enterprise or co-operative is considered to be insolvent when it fails to pay its debt for three months following the date the debt becomes due. While somewhat unusual, this three-month grace period provides a clear and limited window for debtors in financial stress or distress to work with their creditors, including banks and suppliers, to financially restructure and avoid petitions for bankruptcy proceedings to be filed against them with the courts.
A financial restructuring is the process whereby a business seeks to re-organise its financial liabilities (i.e. agree to a variation of debt terms) in order to improve its financial stability and provide a stable financial platform for future operations. A consensual financial or debt restructuring process involves negotiation between the debtor and creditor(s) in order to reach a revised contractual agreement. The ability of debtors to achieve consensual restructuring agreements is dependent on factors including the process undertaken, cash position and forecasts, level of stress faced, cause of the problems, stakeholders involved, management integrity and the business sector position and outlook.
Our experience in assisting debtors and creditors (banks) to restructure debts in Vietnam, suggests that this three-month window may practically not be long enough for debtors to complete a financial restructuring if the debtor waits until after a payment default before starting the process. Reasons for this include i) debtors often lack reliable financial and operational information which takes time to obtain and assess ii) lack of clearly defined business plans and financial forecasts iii) Banks often focus on collateral enforcement rather than financial restructuring options, and iv) no out-of-court restructuring framework exists in Vietnam. Accordingly, debtors should consider commencing a restructuring process prior to a default occurring.
The new law on bankruptcy should ease administrative headaches that have characterised insolvencies,
Photo: Le Toan
Piercing the corporate veil - beware of insolvent trading!
The new law seeks to make certain individuals who act on behalf of, or who own, insolvent enterprises and co-operatives personally liable for damages in respect of the debts incurred by the businesses after becoming insolvent. Such ‘insolvent trading’ provisions are designed to encourage those people to themselves submit petitions to seek protection under the Law on Bankruptcy. They may also provide a level of financial protection to creditors of businesses that continue to trade and incur more debt while they are unable to pay their existing debts.
Even though it is a little unclear how the provisions will operate in practice, the inclusion of the ‘insolvent trading’ provision in Article 28.5 of the new law is a positive move and it should promote more responsible decision making and behaviour.
Those individuals that may be made liable to pay compensation for ‘insolvent trading’ is broadly defined in the new law and includes i) the legal representative ii) owners of private enterprises, iii) owners of one-member limited liability companies iv) the chairman of the board of directors of joint-stock companies, v) the chairman of the members’ council of limited liability companies with two or more members vi) partners in partnerships.
Similar ‘insolvent trading’ provisions in the insolvency laws of other countries have been used as an effective deterrent to directors and officers of companies continuing to incur debts and promote the application of insolvency laws. Not all countries and jurisdictions have such ‘insolvent trading’ provisions in their bankruptcy laws and, in this regard, the new law in Vietnam may be seen as a step ahead.
Clearly, the insolvent trading provisions will need to be enforced in practice to remain a credible threat and to encourage a change in behaviour.
New law paves the way for the birth of a new profession
Under the new law an external insolvency administrator (referred to as a ‘trustee’ if an individual and ‘property management and liquidation enterprise’ if a firm) may be appointed to help manage, liquidate and rehabilitate insolvent enterprises. Creditors and other parties applying to open bankruptcy proceedings will be able to nominate a particular trustee or property management and liquidation enterprise for the court’s consideration.
A trustee will require a trustee certificate issued by the government. Individuals who will be eligible to receive a trustee certificate will include i) lawyers, ii) auditors, and iii) people who have a bachelors degree in law, economics, accounting, finance, banking and have over five years experience in their field of training. It is understood that the regulations and approach for issuing such certificates and any associated training programmes will be released in the near future.
Internationally, specialist insolvency professionals are typically from both the accounting and legal professions. However, in many jurisdictions external administrator appointments are taken only by accountants who then engage lawyers to provide legal advice, as and when required, to support them carrying out their duties. Many of the duties of the trustee set out in the new law would benefit from strong financial and commercial skills and experience that those in the accounting profession have. Accountants are also well suited to considering business operation restoration plans under the new law.
To ensure that Vietnam is in a position to start implementing the new law in 2015, significant preparation needs to be undertaken. A sufficient number of appropriately-skilled and experienced trustees need to be identified and prepared to act, the business community needs to understand the new law’s key concepts and the judiciary needs to be in a position to appropriately handle matters under the new law.
Globally, KPMG partners and directors are regularly appointed as external administrators (i.e. including as liquidators, provisional liquidators and administrators of insolvent companies) in other countries and jurisdictions. KPMG’s restructuring and insolvency team in Vietnam is excited by the prospect of preparing for and later helping to implement the provisions of Vietnam’s new Law on Bankruptcy.n
The views expressed by the authors here do not necessarily represent the views and opinions of KPMG Vietnam.