Facing mounting debts and a struggling balance sheet can put any business on the brink of collapse and without a clear understanding of the legal landscape, companies risk worsening their financial exposure. In Vietnam, navigating corporate insolvency is not only a matter of compliance, but a critical factor in determining whether a company restructures or is forced into liquidation.

This article provides essential insights into Vietnam’s insolvency laws, the formal steps involved in insolvency proceedings, and how business owners, directors, and creditors can protect their interests while navigating financial distress.

What is Corporate Insolvency under Vietnamese Law?

Corporate insolvency in Vietnam is defined as a situation where an enterprise is unable to meet its debt obligations when they become due.

The primary legislation governing corporate bankruptcy is the Law on Insolvency No. 51/2014/QH13, which came into effect on January 1, 2015.

It is important to distinguish between three related concepts:

• Insolvency: A financial condition, not a legal status, indicating a company’s inability to pay debts.
• Restructuring (business recovery): A legal process that allows a financially troubled company to recover operations.
• Bankruptcy: A formal legal status declared by a court after determining the company is insolvent and recovery is not feasible.

Legal Grounds for Initiating Bankruptcy Proceedings

Under Article 5 of the Law on Bankruptcy, a company is deemed insolvent if it fails to pay a due debt within 3 months from the payment deadline. Bankruptcy proceedings can be initiated by:

• The debtor enterprise itself (voluntary bankruptcy)
• A creditor
• Employees or their representatives (e.g. trade unions)
• Procuracies (in some public interest cases)

Importantly, before submitting a petition to court, parties must attempt to settle the debt. If no resolution is reached, the case may proceed to bankruptcy court.

The Corporate Bankruptcy Procedure in Vietnam

The bankruptcy process is initiated by filing a petition with the People’s Court in the locality where the business is headquartered. The procedure generally includes the following stages:

1. Court Acceptance: If the petition meets legal requirements, the court issues a notice of acceptance.
2. Appointment of Asset Manager (Trustee): A licensed individual or organization is assigned to manage the company’s assets.
3. Business Recovery Negotiation: Before declaring bankruptcy, the parties may discuss a recovery plan within 30 days of creditor meeting.
4. Declaration of Bankruptcy: If recovery fails, the court issues a bankruptcy decision and liquidation begins.

The court plays a central role in supervising the process, including asset handling, creditor meetings, and approving recovery or liquidation plans.

Director & Management Responsibilities During Insolvency

When a company enters financial distress, directors and senior managers must exercise heightened legal care to avoid personal liability and ensure full compliance with Vietnam’s insolvency regulations. The Law on Bankruptcy imposes specific fiduciary duties on management throughout the insolvency process.

• Timely Disclosure: Executives are required to recognize when the company becomes insolvent and must not delay filing for bankruptcy if the legal conditions are met. Failing to act promptly may be interpreted as an attempt to conceal insolvency and could trigger legal consequences.
• Preservation of Assets: Once insolvency is apparent or bankruptcy proceedings are initiated, directors are prohibited from transferring, concealing, or disposing of company assets. This duty helps protect creditor interests and prevents fraudulent dissipation of value.
• Duty to Creditors: Directors must act in the best interest of the collective creditor pool. This includes avoiding preferential treatment for selected creditors and refraining from transactions that unfairly disadvantage others.
• Record-Keeping and Cooperation: Company leadership is expected to maintain accurate financial and operational records. Full cooperation with court-appointed asset managers (trustees) and the People’s Court is essential throughout the proceedings.

Non-compliance with these obligations can result in civil penalties, personal financial liability, or even criminal prosecution, particularly in cases involving fraud or gross negligence. Engaging experienced legal counsel early in the process can help management navigate compliance obligations, avoid missteps, and uphold their responsibilities with transparency.

What Happens to Creditors and Shareholders During Insolvency?

In the event of corporate insolvency, creditors are among the first stakeholders to take action, and their involvement significantly shapes the outcome of the process. Once the court accepts a bankruptcy case, creditors must submit their claims to the court-appointed asset manager within the designated timeframe. These claims are then reviewed, validated, and prioritized according to the order established in the Law on Bankruptcy.

The law classifies creditor claims into the following order of priority:

1. Bankruptcy-related expenses and court costs
2. Unpaid wages, severance allowances, and social insurance obligations owed to employees
3. Secured creditors, limited to the value of the secured assets
4. Outstanding tax liabilities owed to the State
5. Unsecured creditors

Creditors in the highest priority classes are more likely to recover a portion of what they are owed, whereas lower-tier creditors often receive only partial repayments or, in some cases, none at all.

For shareholders, the outlook is more challenging. Because equity holders are considered residual claimants, they are only entitled to any remaining assets after all creditor claims have been satisfied. In most insolvency cases, especially those involving significant liabilities, there is little or no residual value left for shareholders. As a result, they often face a total loss of their investment.

Business Restructuring as an Alternative to Bankruptcy

Vietnamese law encourages business recovery solutions as a proactive measure to avoid formal insolvency proceedings. These options are particularly suitable for companies that are financially distressed but still fundamentally viable. Common restructuring strategies include:

• Renegotiation of existing debt obligations
• Divestment of non-core or underperforming assets
• Conversion of debt into equity to ease immediate financial pressure.

Under the Law on Bankruptcy, either the company or its creditors can submit a recovery plan to the court during the early stages of the process. If the plan is deemed feasible and receives sufficient approval from the creditor committee and the court, the business may continue operations and gradually return to solvency.

This pathway is not only beneficial for the company but also protects the interests of creditors and employees by avoiding asset liquidation and business dissolution. For companies with strong underlying operations but temporary liquidity issues, restructuring can be a strategic and reputationally safer alternative to insolvency.

Cross-Border Insolvency Considerations

For multinational corporations and foreign creditors, engaging in insolvency matters in Vietnam involves a distinct set of legal and procedural complexities:

• Participation of Foreign Creditors: Foreign entities are permitted to initiate and participate in insolvency proceedings, provided they comply with Vietnam’s legal procedures and deadlines.
• Recognition of Arbitral Awards vs. Court Judgments: Vietnam is a signatory to the New York Convention, which allows for the recognition and enforcement of foreign arbitral awards. However, Vietnam does not formally recognize foreign insolvency judgments, limiting the enforceability of court rulings from other jurisdictions.
• Enforcement Challenges: Pursuing cross-border claims often requires coordination with Vietnamese courts. Common obstacles include differences in legal systems, delays, and administrative procedures that can complicate asset recovery.
• Legal and Strategic Planning: Issues such as asset tracing, overlapping creditor claims, and regulatory inconsistencies make it essential to engage experienced local counsel early in the process. This is particularly important in cases involving subsidiaries, joint ventures, or complex cross-border ownership structures.

Given these complexities, foreign stakeholders should approach insolvency matters in Vietnam with a comprehensive strategy that accounts for both international and Vietnamese legal frameworks.

Common Challenges and Risks in Insolvency Proceedings

Despite having a legal framework in place, corporate insolvency in Vietnam is often hindered by:

• Procedural delays due to court backlog
• Inconsistent judicial interpretation
• Limited coordination among creditors
• Complexities in asset valuation and liquidation

Furthermore, bankruptcy carries significant reputational risks, particularly for companies with government ties or international investors. It is advisable for companies to evaluate restructuring and other viable solutions before entering into formal insolvency proceedings.

Conclusion

Corporate insolvency in Vietnam involves complex legal and operational considerations. While the Law on Bankruptcy provides a structured process, businesses should act early, assess recovery options, and understand the implications for management, creditors, and stakeholders.

Le & Tran is a top-tier law firm recognized by AmCham Vietnam, the US Consulate, and Chambers & Partners for its expertise in corporate restructuring and insolvency. Whether your business is exploring recovery options or facing formal bankruptcy proceedings, our team provides clear, strategic guidance through every phase of the process.

For expert legal advice on corporate insolvency in Vietnam, contact us at info@letranlaw.com.