‘Bankruptcy’ means the status of an enterprise or cooperative which is insolvent and is declared bankrupt by the People’s Court. Bankruptcy proceeding shall commence from the time the Court issues the Decision to initiate bankruptcy proceeding. At that time, enterprises and cooperatives involved are subject to the management and supervision by judges, asset management officer, and asset management and liquidation enterprises.

One of the key issues in the process of conducting bankruptcy proceeding is to properly preserve assets and manage debts of enterprises and cooperatives that are subject to bankruptcy proceeding.  The reason is that when enterprises and cooperatives are initiated for bankruptcy proceeding, their outstanding obligations to creditors are the obligations to pay the debts and because of this obligations, enterprises and cooperative fall into bankruptcy proceeding.

Therefore, in order to preserve the assets of enterprises and cooperatives during bankruptcy proceeding, the Law on Bankruptcy 2014 provides a number of prohibited and restricted transactions.

What Transactions are Prohibited and Restricted during Bankruptcy Proceeding?

Transactions of enterprises or cooperatives which are conducted within 6 months before the Court issue decision to initiate bankruptcy proceeding are deemed invalid if falling into one of the following cases:

• They are involved in the transfer of assets not at market prices;
• They are to convert unsecured debts into ones secured or partially secured with assets of enterprises or cooperatives;
• They are payments or clearing beneficial for one creditor for an undue debt or larger than a due debt;
• They are donation of assets;
• They are not for business operation of enterprises or cooperatives;
• They are for the purpose of dispersing assets of enterprises or cooperatives

Within 18 months before the Court issue decision to initiate bankruptcy proceeding, the above transactions with the following affiliated persons are deemed invalid:

• Parent companies;
• Affiliated companies in relation to their parent companies;
• Persons or groups of persons that can influence the issuance of decisions by agencies managing enterprises regarding operation of such enterprises;
• Managers of enterprises; spouses, parents, children and siblings of managers of enterprises or shareholders holding controlling contributed capital or shares…

What is the purpose of this Regulation?

The purpose of this regulation is to avoid enterprises and cooperatives know in advance their business in the future and have acts of dispersing assets through the implementation of the above transactions and then actively file a petition to open bankruptcy proceeding.

After decision on initiation of bankruptcy proceeding is issued, the following transactions shall be prohibited and considered deemed invalid:

• Hiding, dispersing or donating their assets;
• Paying unsecured debts, except those arising after bankruptcy proceedings are initiated and salaries are paid to employees of enterprises;
• Waiving the right to claim debts; and
• Converting unsecured debts into debts secured or partially secured with assets of enterprises or cooperatives.

After decision on initiation of bankruptcy proceeding is issued, enterprises and cooperatives shall report to asset management officers or asset management and liquidation enterprise, if violate the above regulations, the transactions shall be suspended while the original state shall be restored, and consequences remedied in accordance with law:

• Conducting activities related to the borrowing, pledge, mortgage, guarantee, purchase, sale, transfer or lease of assets; sale or conversion of shares; transfer of asset ownership;
• Terminating the performance of valid contracts; and
• Paying debts arising after the bankruptcy procedures are initiated, paying salaries to their employees.

The purpose of these regulations is to avoid the situation that after decision on initiation of bankruptcy proceeding is issued, enterprises and cooperatives intentionally disperse assets in order to evade their obligations.

In fact, many enterprises and cooperatives, when initiation of bankruptcy proceeding, still deliberately find ways to disperse and hide assets or evade debt payment obligations through transferring assets to third parties who are not creditors but have close relationships with the related enterprises or cooperatives.

E.g., Enterprises and cooperatives subject to bankruptcy proceeding shall sign sale contracts at prices lower than market prices with its brothers, sisters, relatives as well as the owners of the enterprises or cooperatives, to disperse valuable assets, thereby avoiding the transfer of such assets into the hands of asset managers, asset management and liquidation enterprises for sale and liquidation in order to pay debts to creditors.

What are the Legal Consequences for Enterprise or Cooperative when Conducting Prohibited Acts?

Within 10 working days after the Asset management Officer or asset management and liquidation enterprise and participants in bankruptcy proceeding request declaration of an invalid transaction or a Court detects a transaction fall into one of the prohibited or restricted cases, the Court shall issue the decision to declare the transaction invalid, cancel security measures and remedy consequences of the invalid transaction in accordance with law.

Within 07 working days after receiving the above decision, the civil judgment enforcement agency shall issue the decision on suspending the registration, transfer of ownership, use and change of the current status of assets.

Although according to the regulations, the Court will issue a decision within 10 working days upon receiving the request of the Asset management Officer, asset management and liquidation enterprise, participants in bankruptcy proceeding, however, in practice, the above time is often longer than specified because the process of the Court processing and verifying the request will take time depending on the number of transactions, the complexity of the transaction as well as the type of assets that the enterprise performs in that transaction.

The delay in making the decision to declare invalid transactions may lead to difficulties in dealing with the consequences of invalid transactions, especially when the Civil Code 2015 has provisions to protect the interests of righteous third parties when civil transactions are invalid. For examples at below:

Company A, during its business operations, finds that there is a risk that its creditors will file a petition asking the Court to initiate bankruptcy proceeding, accordingly, before 06 months from the time the Court issues the Decision to initiate bankruptcy procedures, the company has sold its own real estate to Ms. B.  After that, Ms. B transfer real estate to Ms. C and Ms.C transfer this real estate to Mr. D.  Consequently, Ms. C is the righteous third parties and the above transactions are registered to transfer ownership at the competent state agency.  Under Article 133 of the Civil Code 2015, the transaction between Ms. C and Mr. D is not invalided.

Although the Law on Bankruptcy provides that when an enterprise conduct prohibited and restricted transactions; these transactions may be considered invalid, however, the actual processing of invalid transactions is still very difficult.  This can be considered as a loophole for enterprises to disperse assets and avoid they repayment of debt obligations.

Related Legal Practice: Bankruptcy & Restructuring

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