Voluntary bankruptcy, a perspective on the case of Parkson Vietnam

Lawyer Nguyen Van Phuc and Lawyer Nguyen Nhat Duong (from HM&P Law Firm) wrote the article titled: "Voluntary Bankruptcy, A Perspective On The Case Of Parkson Vietnam". This article was published in The Saigon Times newspaper no. 24-2023 on June 15th, 2023. Below is the English version:

Bankruptcy is a special legal procedure for insolvent enterprises, therefore, many enterprises are reluctant to discuss this procedure. Normally, when an enterprise becomes insolvent, creditors are the ones who file for bankruptcy. However, according to the law, in addition to creditors who are entitled to request the initiation of bankruptcy proceedings, many other special subjects may file a request for the initiation of bankruptcy proceedings, including the owner of  single-member limited liability companies and also the legal representative of enterprises[1].

If any of the above parties file a bankruptcy petition, the enterprise is considered to have filed for voluntary bankruptcy. Recently, Parkson Vietnam Limited Liability Company (“Parkson Vietnam”) has officially announced that it has filed the petition for voluntary bankruptcy with the Ho Chi Minh City People’s Court, ending its 18 years of operation in Vietnam[2]. This move by Parkson Vietnam raises many questions for the public about the issues surrounding the voluntary bankruptcy process of this enterprise.

1. The benefits of initiating voluntary bankruptcy

Parkson Vietnam was incorporateed on 01 November 2007 as a single member limited liability company with Parkson Retail Asia (“PRA'”) holding 100% of the capital contribution[3]. According to Parkson Holdings Berhad, which is the parent company and owns 67.69% of the shares of PRA, in its 2022 financial report, Parkson Vietnam is currently subject to the award of the Vietnam International Arbitration Center (“VIAC”) dated 10 December 2021[4]. Accordingly, by the end of 31 December 2022, Parkson Vietnam still has to negotiate to pay a debt of VND 42.2 billion to its landlord, arising from Parkson Vietnam’s lease of a property in Da Nang City. It is clear that Parkson Vietnam’s business operations have faced many difficulties in recent years, due to the competitive pressure from competitors as well as the difficulties caused by the Covid-19 pandemic. Therefore, the above debt may only be a glimpse of a “cloudy” business picture of this company. From the perspective of Parkson Vietnam’s interests, voluntary bankruptcy may lead to some positive benefits.

(Sources: https://thesaigontimes.vn/)

1.1 Avoiding the pressure of litigation

Disputes in commercial leases are not uncommon especially when the lessee’s business activities are affected, and the closure of Parkson Cantavil, Parkson Hung Vuong… may seriously affect Parkson Vietnam’s business activities during this period. These disputes may arise with landlords, such as in Da Nang City, or with sub-tenants in shopping malls. Dealing with multiple lawsuits directly affects Parkson Vietnam’s business activities, which are already facing significant difficulties. According to Clause 2, Article 41 of the Law on Bankruptcy 2014, within 05 working days from the date the People’s Court accepts the bankruptcy case, the People’s Court or arbitration must temporarily suspend the settlement of civil, business, commercial, and labor cases related to property obligations to which the enterprise is a party. This provision means  that from the date of the Ho Chi Minh City People’s Court accepts the bankruptcy case, all cases in which Parkson Vietnam is involved and has property obligations will be temporarily suspended.

Furthermore, Clause 2, Article 71 of the Law on Bankruptcy 2014 states that if the People’s Court issues a decision to initiate bankruptcy proceedings, the court that issued the temporary suspension decision must issue a permanent suspension decision and transfer the case file to the court conducting the bankruptcy proceedings. Therefore, if the Ho Chi Minh City People’s Court decides to initiate bankruptcy proceedings for Parkson Vietnam, all lawsuits involving Parkson Vietnam’s liabilities and assets must be permanently suspended. From Parkson Vietnam’s perspective, the acceptance of the bankruptcy case by the Ho Chi Minh City People’s Court provides some relief as it allows the company to conserve resources by not participating in these lawsuits.

1.2 Facilitating business recovery if Parkson Vietnam wishes to continue operating

Although it may not be Parkson Vietnam’s ultimate goal, this is a positive aspect of the voluntary bankruptcy procedure. According to the  2014 Law on Bankruptcy, once the bankruptcy procedures are initiated, the relevant parties will attend a creditors’ meeting. At this meeting, the insolvent enterprise may request the recovery of its business operations[5]. If the request is approved, the enterprise will then draw up a plan to recover its operations[6]. If the plan is further approval by the creditors’ meeting, the insolvent enterprise will have the opportunity to implement the business recovery plan. The purpose of this option is to give enterprises more time to improve their operations and look for ways to pay back creditors’ loans. A positive aspect is that the insolvent enterprise has the chance to gain sympathy of creditors by presenting to them with a well-defined and viable business plan. While Parkson Vietnam may not necessarily pursue this option, as it may be planning to exit the Vietnamese market, it still presents an opportunity to negotiate and arrange debt payments with each creditor, as they will all be “gather” at the creditors’ meeting.

1.3 Mitigating the risks for subjects who are required to file forbankruptcy proceedings

As mentioned above, the legal representative of enterprises and the owner of a single-member limited liability company must file for bankruptcy if the enterprise becomes insolvent. These individuals bear legal responsibility for failing to file for bankruptcy when the enterprise becomes insolvent, including compensation for any damages that may arise from failing to file for bankruptcy in a timely manner after the enterprise becomes insolvent[7]. In addition, according to Clause 3, Article 130 of the  2014 Law on Bankruptcy, individuals holding managerial positions in an enterprise who intentionally violates the provisions on filing for bankruptcy when the enterprise is insolvent may face consequences such as being considered by judges to be deny  the right to establish a new enterprise or act as a manager of an enterprise for 3 years from the date the court issues the decision on declaring bankruptcy. In the case of a single-member limited liability company such as Parkson Vietnam, the management position includes the chairman of the members’ council, members of the members' council, the president of the company (depending on the organizational structure), the director or general director, and other individuals holding management positions as specified in this enterprise’s charter[8]. Therefore, for Parkson Vietnam, opting for voluntary bankruptcy when the enterprise is insolvent can potentially helps the legal representative of Parkson Vietnam and its owner, PRA, to avoid legal responsibilities such as compensation for damages incurred. In dddition, it may help individuals in managment positions at Parkson Vietnam to mitigate the risk of not being able to establish or manage an enterprise within the time period specified by the laws on bankruptcy.

2. The disadvantages of voluntary bankruptcy

While Parkson Vietnam may perceive certain benefits in initiatiting voluntary bankruptcy proceedings, it is important to acknowledge that this procedure has its limitations from the perspective of creditors.

2.1 Impact on the ability to collect debts arising from judgments/decisions already being enforced

In the case of Parkson Vietnam, not only will ongoing litigations involving Parkson Vietnam be temporarily suspended/permanently suspended, but also the enforcement of judgments/decisions where Parkson Vietnam is the judgment debtor will also be temporarily /permanently suspended by the enforcement body. This includes the foregoing award by VIAC. According to the latest report, the landlord in Da Nang City still needs to collect a debt of VND 42.2 billion from Parkson Vietnam. However, once the Ho Chi Minh City People’s Court accepts the bankruptcy case, the enforcement of this debt must be temporarily suspended[9] and then subsequently permanently suspended if the court initiates bankruptcy proceedings[10]. Furthermore, if there is no decision to seize Parkson Vietnam’s property for enforcement, the landlord will be treated as an unsecured creditor[11]. This means that the landlord will have to wait for payment until after Parkson Vietnam fulfills its other payment obligations[12], just like other unsecured creditors who may not yet have to initiate any legal proceedings.

On the other hand, if Parkson Vietnam’s property has been attached to ensure enforcement, the landlord in Da Nang City will be considered a secured creditor[13]. However, the payment process for this debt can be complex and will depend on the decisions made during the creditors’ meeting, especially if the collateral is involved in the business recovery procedure[14].

In summary, the initiation of voluntary bankruptcy procedure also affects the ability to collect debts for which judgments/decisions are being enforced. This unintentionally renders the pursuit of lawsuits by these creditors meaningless.

2.2 Effect on creditors’ claim arising after the initiation of bankruptcy proceedings

According to the regulations, once the decision to initiate bankruptcy proceedings is made, the enterprise is allowed to continue its operations but under the supervision of the judge and the liquidator or asset management enterprises (generally referred to as the “liquidator”)[15]. This supervision requires enterprises to report to the liquidator before making payments on debts incurred after the commencement of bankruptcy proceedings. The liquidator is obliged to respond to the enterprise’s report within 03 working days, indicating whether or not the payment activities may be carried out. If the enterprise proceeds with a payment without the liquidator’s approval, the payment will be suspended and then returned[16]. In the case of Parkson Vietnam, the enterprise continues to operate its premised at Le Thanh Ton Street, in District 1, Ho Chi Minh City. If it continues to do so, there is a risk of incurring further debts related to lease payments for the premises after the initiation of bankruptcy proceedings. In such situations, Parkson Vietnam is required to report to the liquidator and obtain their approval before making payments to the landlord. The 2014 Law on Bankruptcy  does not provide any specific criteria for the liquidator to approve or disapprove such payments. In additio, it does not clarify whether Parkson Vietnam has the right to proceed with the payment to the landlord if the liquidator does not respond within the aforementioned three working days. This legal legal omission could potentially affect the landlord with respect to debts accumulated after the commencement of bankruptcy proceedings.

2.3 Direct impact on the business activities of sub-lessees

As is well know, Parkson Vietnam’s business operation involves sub-leasing premises to well-know brands. Therefore, the initiation of voluntary bankruptcy proceedings by Parkson Vietnam has a direct impact on the execution of these lease contracts. In such cases, the brands will have to invest substantial resources to negotiate with both the landlord and Parkson Vietnam to transfer Parkson Vietnam’s rights and obligations under these lease contracts to the landlord if the landlord and the brands agree to lease the premises. On the other hand, if no agreement can be reached on  the continuation of the lease the brands are “forced” to become creditors of Parkson Vietnam, as they have the right to reclaim the deposited amount and to seek fines/other damages (if any).

In general, it is understandable that Parkson Vietnam has chosen to file for bankruptcy, given its prolonged business challenges. In essence, this procedure is not significantly different from the standard bankruptcy procedure. While it may be difficult to argue that bankruptcy is beneficial to the enterprise itself, there are undeniably some positive aspects for Parkson Vietnam in pursuing voluntary bankruptcy. However, the decision taken by Parkson Vietnam may have an impact on the rights and interests of creditors with ongoing judgments/decisions being enforced, creditors with debts arising after the initiation of bankruptcy procedure, and even sub-lessees involved in sub-leasing agreements.

 Read the article in Vietnamese at: https://thesaigontimes.vn/pha-san-tu-nguyen-nhin-tu-vu-viec-parkson-viet-nam/