Legal Advice: Distinguishing between dissolution and bankruptcy
Legal Advice: Distinguishing between dissolution and bankruptcy
While dissolution and bankruptcy both lead to the termination of a company’s activities, their causes, settlement procedures, legal consequences, and liabilities of the proprietor after the two events are very different.
According to the Law on Enterprises (2005), there are many reasons that lead to the dissolution of an enterprise, namely:
(i) The operation duration stated in the company charter has expired, yet there is no extension decision;
(ii) The owner of a private enterprise, all of the general partners of a partnership, the council members and the proprietor of a limited liability company, or the General meeting of shareholders of a joint stock company decide on the dissolution;
(iii) The enterprise fails to maintain the minimum number of members as prescribed by law for 06 consecutive months;
(iv) The enterprise’s Business Registration Certificate is revoked.
However, it is important to know that an enterprise is only permitted to be dissolved once all of its debts and other liabilities are guaranteed to be fully paid.
Meanwhile, competent courts can have an enterprise declared bankrupt as provided for by law once its ability to pay for the due debts and those requested by the creditor is lost.
Second: Settlement procedures
During dissolution, the enterprise is required to issue a written decision including all the contents prescribed by law.
The decision must be sent to the business registration office; all creditors; persons with relevant rights, obligations and benefits; and its employees.
In addition, it is mandatory that such decision is publicly displayed at the headquarters and branches of the enterprise.
Furthermore, within seven working days commencing from the date of payment of all debts, the enterprise must file the dissolution dossiers with the business registration office to erase its name from the business registration book.
In case the Business Registration Certificate is revoked, the enterprise must be dissolved within six months from the date of revocation of such Certificate.
As for bankruptcy, once becoming aware of the fact that an enterprise is falling into the state of bankruptcy, the creditors, rightful employees and/or the lawful representative of such enterprise are obliged to submit a petition for commencement of bankruptcy proceedings for the enterprise.
When there are grounds to prove that the enterprise is falling into bankruptcy, the Court will decide on the commencement of bankruptcy proceedings and announce to the enterprise along with its creditors and debtors.
Such decision will be published in local and central newspapers. Depending on the actual situation of the enterprise, the Court may decide to apply recovery procedures to the enterprise’s business activities or skip them in case of the enterprise’s inability to recover, and if unnecessary, move onto the phase of liquidation of assets. The distribution of corporate assets is carried out in the following order: bankruptcy fees; unpaid wages, severance allowances and social insurance; and unsecured debts. After being divided, the value of the remaining assets will belong to the owner of a private enterprise, or members and shareholders of other entities. Finally, the judge will decide to declare an enterprise bankrupt after applying fully or partially the bankruptcy proceedings as described above.
Third: Legal consequences
While dissolution leads to business cessation, bankruptcy does not lead to complete termination of an enterprise’s activities if it is able to recover business activities after filing a request to declare bankruptcy.
Fourth: The right to establish and/or administer another business
The owner of a dissolved enterprise may continue to establish and administer another enterprise after fulfilling his asset obligations.
On the contrary, both the owner and manager of a bankrupt enterprise are prohibited by law from establishing and administering a new enterprise within the period of 1 to 3 years, except for cases of bankruptcy due to force majeure and beyond the control of the enterprise, (for instance fire, war, natural disasters, epidemics, riots, strikes, economic crisis, when the State of Vietnam changes its legal policies where the enterprise carries out business cooperation modifies its policies, etc.), leading it to experience serious losses, unable to maintain operation and is thus required to proceed the procedures for bankruptcy declaration.
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