Open bankruptcy procedure for overdue business debt: claims are approved

In the context of economic recession in 2023, many companies have to face difficulties in their business operations. This greatly affects the cash flow and the company's payment and debt repayment schedule to its partners. If a company cannot pay its due debts, disputes will inevitably arise. The year 2023 witnessed many cases of large companies involved in bankruptcy filings to recover debts from creditors. However, not all creditors' claims are accepted by the relevant authorities.  

1.  Reasons why creditors must request the opening of business bankruptcy proceedings

There are other ways for creditors to get companies to pay due debts. These include negotiating with companies using business and commercial advantages for short-term overdue debts, or filing lawsuits in court or commercial arbitration for short-term overdue debts for bad debts. The creditor may even transfer the right to demand payment of the debt to another third party to exercise the right to collect the debt. However, each of the above methods has certain limitations that creditors can implement.

As for the method of negotiation and use of business and commercial advantages, the creditor is not always the party in a higher position in the business relationship to be able to use this method. In particular, for small creditors, who are only one of many links in the chain of business operations, it is almost very difficult to use their position to negotiate the company's debts, as they still have a dependent relationship with the companies. In the case of bad debts, if the creditor files a lawsuit in court or commercial arbitration, the lengthy procedure and enforcement process is a challenge for creditors. Meanwhile, if the creditor transfers the right to collect the debt to a third party, the loss of the debt is often quite large, depending on the "difficulty to collect" of the debt, not to mention the legal risks if a third party commits illegal acts during the debt collection process. Therefore, the above methods are not always effective solutions for creditors to collect debts from businesses.

Faced with this situation, many creditors are looking for the possibility of filing a petition to open bankruptcy proceedings against companies with overdue debts. This is considered to be a debt collection "skill" that creditors apply to companies. This comes from the provisions of the Bankruptcy Law of 2014, where creditors have the right to file a request to open bankruptcy proceedings at the end of 03 months from the due date of the debt and the enterprise fails to fulfill its obligations payment[1].

2.  What is the real effectiveness of this plan?

Creditors requesting the opening of bankruptcy proceedings for companies with overdue debts is not a new phenomenon. In fact, the number of bankruptcy cases that the court will accept and resolve in 2023 is lower than in 2022. However, this option has flourished recently as many large, well-known companies in the market have suddenly found themselves in need of bankruptcy. This begs the question, does this option really work?

On October 9, 2023, the People's Court of Gia Lai Province issued the decision to open bankruptcy case No. 01/2023/QD-MTTPS for Duc Long Gia Lai Group Joint Stock Company ("Duc Long Gia Lai"), which really shocked the shareholders and investors of this group, as no one thought that a large company in Gia Lai Province with multi-industry investments would one day be opened for bankruptcy. This decision was made by the court at the request of Lilama 45.3 Joint Stock Company. ("Lilama"). Accordingly, there is a debt of 17 billion VND between Lilama and Duc Long Gia Lai, which Duc Long Gia Lai has to pay. This debt has been declared by the Court of Appeals and is in the process of being enforced, but due to the length of the enforcement process, Lilama has requested the Gia Lai Province People's Court to open bankruptcy proceedings against Duc Long Gia Lai. After the court decided to open bankruptcy proceedings, Duc Long Gia Lai, under great pressure, paid VND4 billion to Lilama by November 8, 2023.  However, Duc Long Gia Lai applied to the Da Nang City Higher People's Court to review the decision. The High Court then decided to cancel the decision to open bankruptcy proceedings against Duc Long Gia Lai. Although it was not possible to open bankruptcy proceedings against Duc Long Gia Lai, with the above action, Lilama has recovered part of its debt and put pressure on Duc Long Gia Lai in the execution process, because now Duc Long Gia Lai's execution will receive more attention[2] .

Not long ago, on July 25, 2023, Coteccons Construction Joint Stock Company ("Coteccons") has announced information on the receipt of the Notice of Acceptance of Application for Opening Bankruptcy Proceedings No. 10/TB-TA dated July 4, 2023, from the City People's Court. Ho Chi Minh City. Accordingly, the party requesting the opening of bankruptcy proceedings against Coteccons is Ricons Construction Investment Joint Stock Company ("Ricons"). This announcement comes in the context that both Coteccons and Ricons are part of two joint ventures competing fiercely to win the Long Thanh Airport construction package. This case stems from the debt that Ricons believes Coteccons still owes it related to previous construction activities, but Coteccons also responded that there are existing mutual debts between the parties. and has not yet been settled. On September 29, 2023, the Ho Chi Minh City People's Ho Chi Minh City issued Decision No. 2112/2023/QD-KMTTPS not to open bankruptcy proceedings for Coteccons.  Now, Coteccons has still not taken any further steps related to this decision, which shows that this bankruptcy case is officially closed[3].

According to the current provisions of the Bankruptcy Law, the process of conducting bankruptcy proceedings for a company takes quite a long time; moreover, if the creditors' debts are not guaranteed, it will be very difficult to have a chance to recover them in order of priority if the company really goes bankrupt. Therefore, if the goal is to bankrupt companies in order to recover their debts, this is certainly not the optimal solution for creditors. However, due to the pressure and the enormous consequences that affect companies that have been placed under bankruptcy proceedings by the court, especially listed companies, creditors still have reasons to request the court to carry out this procedure. In the two cases mentioned above, Duc Long Gia Lai and Coteccons did not file for bankruptcy. However, it is difficult to say that Lilama and Ricons did not achieve their goals in asking the court to open bankruptcy proceedings for these companies.

3. Not all requests are approved

Although it is an option that many creditors hope to use, the Coteccons case shows that it is difficult for a request to open bankruptcy proceedings to be accepted by the court. According to the current regulations, creditors have the right to file a petition to open bankruptcy proceedings at the end of 03 months from the due date of the debt and the company fails to meet its payment obligations. However, this regulation still has many unclear points.

First, regarding the concept of creditor, if Duc Long Gia Lai's debt is clear because it has been sentenced by the court and is in the process of executing the judgment, then in the case of Coteccons, there is no basis to confirm that Ricons is a creditor of Coteccons. From the information provided by Coteccons, it can be seen that there is no document/decision between Coteccons and Ricons showing that Ricons is a creditor of Coteccons, perhaps a court decision or confirmation of debt between the two parties. Therefore, with vague regulations, the determination of whether the person requesting the opening of bankruptcy proceedings is a creditor of the company seems to play a very important role, which may result in the requesting party having to conduct legal proceedings to obtain a judgment/decision from the court before requesting the opening of bankruptcy proceedings. Next, the regulation of business bankruptcy is that the business does not fulfill its payment obligations after the expiration of 03 months from the due date of the debt, which is somewhat forced. This is a deadline set by law to limit the time a company has to pay its debts, and is not based on any assessment of the company's financial situation, business and other factors. Therefore, in reality, many businesses are still operating normally and have regular revenues, but still have bankruptcy proceedings opened, the case of Duc Long Gia Lai is an example. However, there are not many cases where competent authorities rely solely on the above regulations to open bankruptcy proceedings for enterprises, the Coteccons case is an example. We believe that evaluating an insolvent company is not easy. If it is only based on the current regulations, it will be difficult to decide to open bankruptcy proceedings for a company, especially for large companies. Meanwhile, for companies involved in bankruptcy, the best way for companies to protect themselves is to provide evidence to the court that the company is still in good financial condition, such as having fixed revenues, stable cash flow, large amounts of assets, and evidence that the company is still paying creditors on a regular basis.

As the request to open bankruptcy proceedings for businesses becomes more targeted by creditors to increase the pressure on businesses, we believe that courts need to consider each specific case more carefully, based on the reality of each business, to be able to most accurately assess the ability of the business to repay debts. At the same time, the rigid and mechanical application of legal rules should be avoided in order to minimize the negative impact that this process has on businesses in the course of carrying out their activities.

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