New Laws on Investment and Enterprise Come Into Effect from Midnight

As you now all know, the new Law on Enterprise (LOE) and Law on Investment (LOI) will take effect from 0.00AM tomorrow, 1 July 2015 promising to bring many positive changes to Vietnam business environment. 

What enterprises and investors are all now waiting for are the Decrees implementing the LOE and LOI, which have not been issued yet.

While the final draft of the decrees are now being circulated, and the vacatio legis by law would be 45 days after promulgation by the Government, the Ministry of Planning of Investment (MPI) sent and urgent Official Letter No. 4211/BKHĐT-ĐKKD dated 26 June 2015 (OL 4211) on business registration, implementing LOE (please click here to download).

Another Official Letter implementing the LOI are expected to be circulated anytime from now until Midnight (we have been informed that this Official Letter No 4326/BKHĐT-ĐTNN dated 30 June 2015 implementing LOI was issued, and will provide you with updates in the next legal alert).

Under OL4211, notable changes are as follows:

  1. Application of ERC for current foreign invested enterprise (FIE): for enterprises operating under an Investment Certificate (IC) or an Investment License (IL), when amending  the IC or IL, they will apply for the Enterprise Registration Certificate (ERC). The ERC dossier will be similar to the dossier for applying a new ERC, attached with the current IC or IL.
  1. Simplified ERC registration process: Art 24 LOE only requires applicants to file, among others, scope of business, and not the HS Code or CPC to the registration request or establishing an enterprise, be it a limited liability company (LLC) or a joint stock company (JSC). The form under Art 24 LOE is now being drafted by the local department of planning and investment (DPI) and to be released soon.  The CPC will be filled in by the DPI, and there is still a risk that the CPC/HS Code filled by the DPI are not matched by the CPC/HS Code of products to be imported by the enterprise. However, the enterprise’s application will no longer be rejected because the CPC/HS Code is not found or unfit.   Please note that with respect to FIEs, the filing of HS Code and CPC would still be required under form MĐ-6 of Circular 08/2013/TT-BCT dated 22 April 2013 of (Circular 08) of Ministry of Industry and Trade (MOIT).  This requirement is still valid until 1 July 2016, at the latest (LOI, Art 74.3).
  1. Place of business to be notified, not registered: the notice shall be sent within 10 days to the local DPI from the date of the decision to open a new place of business. This regulation does not affect requirements to have specific license for each type of business (e.g. a supermarket license, warehouse license, school license etc).
  1. A change of the scope of business, a JSC private placement, and entry of foreign shareholders to be notified, not registered: these changes are notified at the local DPI, who will then reconfirm within 3 working days from receipt of notice. The DPI reserves the right to reject the notice if the conditions for foreign investors’ entry under WTO assessments or other local laws are not met (for “conditional projects”). Therefore it is advisable that the scope of business of an enterprise must be “clean” from conditions, before a notice of foreign shareholders are sent. After foreign shareholders have been duly notified, the enterprise may change its scope of business. This change may still be subject to scrutiny, but the conditions will be strictly by law (e.g., percentage of foreign shareholding) rather by the authorities’ discretion.
  1. Enterprises can make more than one seals by notice. The new seals will be published on the National Business Registration Portal (NBRP).
  1. Liquidation process to be simplified: the enterprise’s liquidation shall be made within 6 months from the passing of the resolution for its liquidation. Within that 6 months, the tax authority should confirm the enterprise’s fulfillment of tax obligations. Unless the tax authority send a notice of objection, the liquidation process will complete within that time period and the enterprise will be deleted from the NBRP.

 

Some issues are still unclear under OL4211:

  1. Whether enterprises operating under an IC or IL must surrender its original IC or IL when receiving the ERC, and if so, what would be their new Investment Registration Certificate (IRC) under the new LOI, and what would be the In Principle Approval (IPA), should an IPA be required under the new LOI.
  1. Must a foreign shareholder have a “project” when it acquires shares (i.e., indirect investment) in a local company? It is likely that it is not required, but we might need to confirm this by an official letter implementing the LOI (ad hoc regulation pending Decrees implementing LOI).
  2. What is the real difference between “registration” and “notice” if DPI may have the right to send a negative opinion on a notice filed?

For more information about this article, please contact the author: Dr. Le Net at the email: Net.le@LNTpartners.com

By Vietnam Law Insight (LNT & Partners)

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com

Key considerations for the revised draft bankruptcy law

As investor interest in Vietnam continues to grow amidst the government’s liberalisation of the country’s market, it has become crucial that its commercial laws have their bundles of red tape slashed, including procedures concerning insolvency and bankruptcy.

For the last decade the Law on Bankruptcy has governed such matters in Vietnam. However, the law has also been criticised for years for certain procedural inefficiencies and its failure to address important issues faced by businesses.

In response to this call for greater efficiency and business protection, the government recently circulated a draft Law on Bankruptcy to replace the current law which dates back to 2004. The changes introduced by this draft are substantial – setting out new procedures and clarifying some of the ambiguities that plague the current law.

Three key additions to the draft are worth mentioning:

Mandatory mediation

The draft now introduces mandatory mediation procedures which must be conducted before a Vietnamese court will accept a company’s application to commence bankruptcy proceedings. Mediation will allow parties to discuss numerous issues, including matters concerning business restructuring and recovery, in an amicable and neutral setting.

The mandatory mediation provisions in the draft are a welcome change, not least because they reflect the government’s recognition of the advantages that mediation carries, including cost and time savings. Mandatory mediation is also expected to considerably lighten court workloads.

Replacement of the liquidation committee with a property manager

The draft also proposes to replace the “liquidation committee” in the current law with a “property manager”. Currently, the liquidation committee comprises multiple individuals, including an executor of the judgment-executing agency, a court official, the creditor’s representative and the representative of the business being subject to the bankruptcy procedures. However, experience has shown that the liquidation committee does not always have the necessary corporate experience and often, the clash of heads sometimes leads to inefficiencies.

Hence, the property manager will seek to eliminate the lack of experience and efficiency that the liquidation committee currently carries.

This property manager will be an appointed individual with experience in corporate matters (e.g. an auditor or a lawyer). They will have broader rights over the management and withdrawal of a company’s property, including the right to collect information to enable them to distribute it equitably.

Greater focus on asset preservation

To better protect creditors, the draft allows the court to review all transactions carried out in the company’s most recent two-year period before applying for bankruptcy. Any transaction that sets out to disperse a company’s property will be considered invalid. Under current regulations, this period is only three months.

Nevertheless, while the draft is anticipated to be a general improvement over the current Law on Bankruptcy, it is far from perfect. Numerous shortcomings, some of which are listed below, will need to be resolved in order for it to achieve the government’s goals of optimal efficiency.

Omission of the definition of “insolvency”

Like the current Law on Bankruptcy, the draft fails to define what a “state of insolvency” entails. This is a vital omission, considering it is the very subject matter of the law.

In practice, the failure to define this term has affected when a company may commence bankruptcy proceedings. On multiple occasions, insolvency has been (erroneously) defined as a situation where a company’s outstanding debts are not paid. This contrasts the definition favoured by other developed jurisdictions: a situation where the company is unable to pay these outstanding debts.

The distinction is important because the former definition lets a company commence bankruptcy proceedings earlier than should be permitted and without allowing the involved parties to ascertain the company’s true financial position and capacity to repay its debt. The premature commencement of bankruptcy proceedings not only wastes time and costs of both the party and the courts, but it also results in a series of unnecessary bankruptcies.

Lack of means of obtaining crucial information

The ability to obtain information on the company’s financial status is important for all parties involved in bankruptcy proceedings because it assists in ascertaining the company’s ability to repay its debts. However, the draft fails to provide a sufficient mechanism for the collection of such information. While the proposed property manager will have certain rights to access information, this is not sufficiently comprehensive.

In practice, there have been instances where the liquidation committee was unable to access relevant documents concerning the insolvent company’s debts because it lacked sufficient legal authority to do so. This denial of access has ultimately led to an endless struggle between the liquidation committee and the court.

As a solution, we recommend the draft set out comprehensive procedures to allow information access. Having provisions that govern the rights of access, the extent of access and the use of obtained information will substantially diminish the current problem faced by parties.

Failure to close loopholes that lead to unethical practices

The draft fails to close substantial legal loopholes present in the Law on Bankruptcy. These loopholes have allowed business owners to escape liability by declaring bankruptcy with little or no repercussion. There are two prime examples of such practices:

The current laws state that a legal representative (often the owner) of a company declaring bankruptcy will be prohibited from directing a company for three years. However, the law allows business owners to switch to or appoint a new legal representative just days before bankruptcy proceedings are initiated. This allows them to simply “walk away” and maintain their right to operate another company in the future.

Another example is that all legal proceedings (at court, etc.) currently must be stayed when a court accepts a petition to initiate bankruptcy proceedings. Due to the ease in which a company may declare bankruptcy, a company can take advantage of the stay by applying for bankruptcy while legal proceedings are ongoing – even when an unfavourable judgment or award is forthcoming.

These loopholes arose as a result of the current law’s failure to tie up loose ends of multiple provisions. In the draft, we hope to see not only the above loopholes closed, but also lawmakers exercise thorough foresight when fine-tuning the draft and reviewing each provision. This will prevent further loopholes from being abused.

Inefficiencies concerning the property manager

While conceptually, having one property manager instead of a liquidation committee of multiple individuals may eliminate inefficiencies, this is not necessarily the case.

This is because the powers and responsibilities conferred on the property manager are exceedingly broad as he/she will have to assume the tasks (and more!) that were previously carried out by a group of individuals. The burden is further aggravated by the harsh penalties imposed on the property manager if they fail to fulfil their duties.

Their appointment is also counterproductive, as the requirements to become a property manager are not easy. Numerous hurdles (on credentials, etc.) must first be overcome and even if these are met, the fact that appointment is made by the requestor of bankruptcy proceedings opens up potential issues of bias – particularly when often, at least one party may have greater claims than the requestor themselves.

One requirement we believe should be included is for the property manager to be an officer of a civil judgment-execution authority. This ensures that the interests of the involved parties are equally considered, as well as facilitates greater management capabilities by the state. Alternatively, appointment of the property manager should be by agreement between all involved parties to ensure fairness across the board.

In conclusion, while the draft is expected to bring in a raft of new improvements to the Law on Bankruptcy, it is not without imperfections. Kinks still need to be ironed out in order for its enactment to be completely workable as Vietnam’s economy becomes increasingly globalised.

Currently, the draft is still in its circulation and has yet to be finalised. With no set date as to when it will be enacted, further commentary from corporate and legal professionals is anticipated. This could mean further tweaking to the current draft but, as things stand, we hope that the above shortcomings will be taken into consideration by lawmakers.

By Vietnam Law Insight, LNT & Partners.

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com