Bankruptcy law needs revising

Ministry of Planning and Investment statistics show more than one fourth of over 600,000 operational businesses remain unaware of their legality. The General Department of Taxation reports nearly one third of those businesses have stopped paying taxes.

Bankrupt or not?

At the recent mid-term Vietnam Business Forum 2013, the Vietnam Chamber of Commerce and Industry (VCCI) painted business bankruptcy in a gloomy light.

Many businesses are struggling to weather the storm despite state support

According to VCCI, the revised 2004 Bankruptcy Law, which was intended to address the shortcomings of its 1993 original, has yet to live up to public expectations. Courts and relevant agencies have proposed at least half of its articles require further amending to keep up with recent market developments.

Article 3 stipulates that any businesses or cooperatives unable to pay debts by a specific due date should be considered as threatened by bankruptcy.

In reality, most businesses and cooperatives are both creditors and debtors. In some cases, businesses and cooperatives with credits much higher than their own overdue debts are still forced to declare bankruptcy.

Filing for bankruptcy is also a preventatively complex process. Article 22 says once a court receives a business’s official request to file, it can ask for any further information it deems relevant to be submitted within 10 days.

Hanoi People’s Court Judge Pham Tuan Anh says the impractical deadline ignores the fact businesses find it difficult to collate the request evidence themselves, not to mention the widespread unwillingness to cooperate with the court.

Out of Hanoi’s hundreds of thousands of businesses covering all sizes and industries, tens of thousands could be teetering on the edge of bankruptcy or dissolution. Anh notes that none of them, however, have been officially declared bankrupt so far.

State businesses’ bankruptcy declarations are themselves delayed by the requirement for approval in writing for their ministry or provincial People Committee governing bodies.

Law revision needed

The economic slowdown has prompted legal experts have propose another revision of the 2004 Bankruptcy Law, arguing the courts’ failure to properly deal with insolvent businesses is impacting economic relations.

These “zombie” businesses are forced to halt their operations while courts consider their decisions, wasting resources and damaging other healthy businesses.

The Zombie phenomenon creates illusions that could fuel long-term problems. Banks often respond to profit losses with rollovers or by injecting more capital into insolvent businesses, eventually threatening the integrity of the banking system as a whole.

The State’s business governing bodies sometimes drag their feet admitting the extent of their responsibility’s troubles for fear that bankruptcy will affect their reputation and performance assessments. They claim bankruptcy’s repercussions, like rising unemployment and welfare system burdens, are the real reasons behind the delay.

There is no doubt that the nation’s business environment will be healthier when insolvent businesses are officially declared bankrupt as soon as possible. The declarations free up funds once earmarked for moribund businesses, allowing reallocation to the wider restructuring process that will create entities better able to compete in the current economic context.

Hanoi Industrial and Economics College Dr Duong Duc Chinh notes business bankruptcies are a normal part of a functioning economy. He says eliminating inefficient businesses and cooperatives is even more imperative in a market economy to ease their burden on the State budget.

Experts say the Bankruptcy Law needs revision to simplify bankruptcy filings for inefficient businesses. Bankruptcy’s winnowing effect should be considered a valuable impetus driving economic development.