Simplifying legalities to halt hasty business exits

10:00 | 29/08/2019
In a talk with VIR’s Nguyen Huong about the troubles caused by businesses exiting from Vietnam, lawyer Truong Thanh Duc, chairman of BASICO law firm and member of the working group on implementing the Law on Enterprises and the Law on Investment, confirms that the country needs stricter legislation and criminal penalties to put a stop to this phenomenon.
simplifying legalities to halt hasty business exits
Truong Thanh Duc

The number of businesses fleeing the country without settling their bills has been making public concerns. How would you assess this situation and what possible legislation can Vietnam enact to put a stop to it?

This has been occurring for many years, across various cities and provinces of the country. Businesses fled or became impossible to contact while they were owing taxes, fees, and employees’ salaries. These could be domestic or foreign investors from any country.

However, the country has yet to make additional content on ­businesses running away to the Law on Enterprises. There has been ­Circular No.06/2009/TTLT-BLDTBXH-BTC dated ­February 27, 2009 of the Ministry of Labour, Invalids and ­Social Affairs and the ­Ministry of Finance guiding the implementation of the prime ­minister’s Decision No.30/2009/QD-TTg dated February 23, 2009 on support for labourers who are laid off by ­enterprises facing difficulties. Thereby, regulations on enterprises fleeing in the current legislation are left open, along with the process of liquidation of assets, offsetting employees’ salaries, as well as debts to banks or credit institutions, and contractual fees to business partners.

In addition, local ­authorities have not monitored the operations of these businesses closely enough – like paying taxes, social insurance for labourers, and fees of ­environmental protection – to identify and help these businesses before they leave.

What stands behind the flight of so many ­businesses? Is the law on business registration too easy-going or is the law on bankruptcy too complicated? Could the tides be reined in by better inspection and management post-establishment?

There are so many reasons behind the phenomenon of businesses running away, such as bad business results or all kinds of troubles.

Some of them are unethical businesses. They made some profit and then escaped. However, such businesses are in the minority.

The increase in the ­number of businesses running away may be caused by easy legislation allowing business establishment without demonstrating financial ability. The easier business registration gets, the higher the risk of bankruptcy and fleeing businesses will be.

Besides, procedures on corporate bankruptcy are so complicated that a lot of businesses simply cannot follow them. The Law on Bankruptcy has been amended three times but its implementation is still riddled with gaps.

How would you assess the damage to the state budget and to employees caused by the increasing number of businesses taking to their heels?

In my opinion, the state budget has not been dented too much because the ratio of businesses fleeing is still a very small portion of all operating businesses. However, the damage they cause to their partners and employees is serious.

Suppliers, especially small ones, may have spent a significant amount of their own resources on a project with the partner and can be neck-deep in trouble when a partner just disappears without paying.

Additionally, employees suffer the largest damage if a business owner escapes. Often hundreds or even thousands of workers are abandoned without receiving their salary or social insurance fees for several months – putting the lives of them and their families in jeopardy.

In order to mitigate the risks and damage while doing business, enterprises should anticipate risks, purchase insurance, and avoid putting all of their eggs in one basket.

What possible punishment would you ­recommend for businesses fleeing to minimise damage for the society and relevant parties, as well as stop ­businesses from running away?

In my view, the legislation should stress more on after-inspection work, as well as the collaboration between taxation authorities and ­business registration authorities in monitoring businesses’ operation. If businesses do not report to tax authorities or fail to pay tax in time, their names should be forwarded to the inspection authorities to keep a closer eye on them.

In addition, legislation should be complemented by some criminal penalties for businesses which are untrustworthy, scam others, or try to flee. Currently, there are no safeguards against business owners leaving the country for good. All Vietnamese authorities can do is to contact their home countries to settle matters – which is not very effective.

Instead, the owners of fleeing businesses should be restricted from leaving the country after being flagged by the local authorities as risk-cases – which is a common practice in other countries.

At the same time, it would be possible to make business dissolution and bankruptcy simpler, which could reduce the number of businesses in flight. In fact, businesses need several months or even a year to obtain confirmation from the tax authorities on the accomplishment of their tax obligations during the process of dissolution or bankruptcy, and many believed this is a major reason behind firms deciding to simply flee.

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