Conditions and legal consequences of bankruptcy

Business activities of enterprises are always risky. Many enterprises have suffered from losses, insolvency or business suspension and therefore, are forced to leave the market. One of methods of leaving from the market is bankruptcy.

In this article, Bizlawyer will help readers understand some provisions of the law related to conditions and legal consequences of bankruptcy.

1. Conditions of bankruptcy:

According to Clause 2 Article 4 of Law on Bankruptcy 2014, “bankruptcy is a situation of an enterprise or cooperative that is insolvent and declared bankrupt by a court.”

Therefore, to be bankrupt, enterprises must meet the two following conditions:

a. Firstly, the enterprise is insolvent

According to Clause 1, Article 4 of Law on Bankruptcy 2014, “an insolvent enterprise means that the enterprise does not pay its debt within 3 months from the payment due date”. Therefore, when an enterprise breaches its payment obligations for 3 months or more, it is considered to be insolvent. The law gives the enterprise more time to arrange payment of debts and limits the creditors abuse their right to propose opening the bankruptcy procedures, putting pressure on the struggling enterprise.

b. Secondly, the enterprise is declared bankrupt by a court

A process for the Court to declare the enterprise bankruptcy must go through many steps, each step is the basis for the following steps, specifically:

Step 1: Propose to open the bankruptcy procedure;

Step 2: Review and accept the proposal on open the bankruptcy procedure;

Step 3: Open bankruptcy procedure;

Step 4: Organize creditors’ meeting; and

Step 5: Recover the enterprise or declare the enterprise to be bankrupt.


– The decision to open the bankruptcy procedure of the Court will depend on the insolvency of the enterprise and the proposal to open the bankruptcy procedure of those who have the rights and obligations to apply under the law (Article 5, Law on Bankruptcy 2014).

– The insolvency of the enterprise is not definitely leading to the opening of the bankruptcy procedure. In the period from the time of submitting the proposal to open the bankruptcy procedure until the Court officially issues the decision to open or not open the bankruptcy procedure, if the enterprise can remedy its insolvency (such as byhaving a revenue source, being granted a new credit), the enterprise still has the opportunity to negotiate with creditors about the withdrawal of the proposal to open the bankruptcy procedure (Article 37, Law on Bankruptcy 2014).

– In the period from the date the Court issues the decision to open the bankruptcy procedure to the date the court issues the decision to declare the enterprise bankruptcy, if the enterprise is no longer in a statús of insolvency, the bankruptcy procedure will be terminated (Article 86, Law on Bankruptcy 2014).

2. Legal consequences of bankruptcy (Article 109, 110, and 130 of Law on Bankruptcy 2014):

– Enterprise officially terminates its legal existence. (cần hết sức lưu ý sự khác biệt giữa its và it’s).

– The court sends the decision of enterprise bankruptcy to the business registration office in order to delete that enterprise’s name from the business registration book.

– Although the name has been deleted from the business registration book, the bankrupt enterprise has not yet been completely released from its property obligations. If the bankrupt enterprise is a private enterprise or a partnership, the owner of the private enterprise or the unlimited liability partners shall not be exempted from the outstanding property obligations to the creditors, except for otherwised agreeed by the parties or under the laws.

– The prohibition of holding titles after the enterprise bankruptcy:

Holders of titles such as Chairperson, General Director, Director, members of the Board of Directors in a 100% state-owned enterprise declared bankruptcy shall not be allowed to hold such titles in any other state-owned enterprises.

The representative of the State’s capital in the bankrupt enterprise shall not be allowed to hold management titles in any other State-owned enterprises.

Managers of the bankrupt enterprise violating the provisions of Clause 1 Article 18, Clause 5 Article 28 and Clause 1 Article 48 of Law on Bankruptcy 2014 will not be entitled to establish enterprises or cooperatives and not be allowed to hold management titles in enterprises or cooperatives in 3 years from the date the Court issues a decision to declare enterprise bankruptcy.

(Note: These provisions are not applicable in case of bankruptcy due to force majeure reasons).

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