DVD scandal a landmark case

Jumping into bankruptcy proceedings can leave plenty of headaches

Bankruptcy is normal in developed countries, but rare in Vietnam though the Bankruptcy Law was launched seven years ago and amended in 2004.

Under Article 14 of the law, in cases where an enterprise is not able to pay salaries and other debts to its employees, with the votes of half of those labourers, their representative can ask the court to open bankruptcy proceedings against the enterprise.

A group of shareholders owning more than 20 per cent of common shares for six consecutive years, under Article 17, can also file such a petition. However, employees and shareholders rarely do so as they would be the first to suffer if their company was liquidated.

Meanwhile, unsecured creditors bear the highest risks since their debt repayment opportunity only appears after other debt obligations of the liquidated enterprise such as collaterised debts, bankruptcy fees, salaries and social insurance are fulfiled.

Secured creditors, mainly commercial banks, are not entitled to ask the court to open bankruptcy procedures against their debtor as they have collateral assets. On the other hand, banks often extend lending equivalent to only 60-80 per cent of the collateral assets.

Information in the media and DVD’s financial reports do not show whether DVD’s debt to ANZ was collaterised or not. But from the local Bankruptcy Law’s perspective, we can be sure that the pharmaceutical firm’s debt to the foreign bank was not collateralised or just partially collateralised. That’s the reason why the court accepted ANZ’s bankruptcy filing petition against DVD. It is very likely that ANZ extended credit to DVD without collateral, thus crossing lending safety lines.
Under the law, five days after the court receives a bankruptcy filing petition, it shall inform the enterprise in question. Within 15 days upon the notification, if the enterprise wants the court to reject the petition, it must prove that it is not bankrupt. If the enterprise fails to do so, 30 days after the court receives the petition, the court shall decide to open bankruptcy proceedings or not.
However, DVD has been silent on whether it is trying to prove it is bankrupt or not or trying to protect its interests.

Under Article 29 of the 2004 amended Bankruptcy Law, within seven days from the court deciding to open bankruptcy procedures, such a decision must be informed to the enterprise, creditors, debtors and the procuracy and be published in the local press. In the DVD case, it was 90 days from the time the Ho Chi Minh City court received ANZ’s petition on May 10, 2011 to the time the court issued its decision to open bankruptcy procedures on August 5, 2011. However, DVD’s shareholders, creditors and stock market investors did not have any idea of ANZ’s petition.

The news only came when the Ho Chi Minh Stock Exchange announced it had received a letter from ANZ. Here a question has arisen over the responsibility of concerned state agencies in information disclosure, especially in the Ho Chi Minh City court. Under Article 20 of the Bankruptcy Law, having realised an enterprise is bankrupt, the court, the procuracy and the auditing body have an obligation to announce in written form what an enterprise’s situation is so others can ask to open bankruptcy procedures.

This means the State Securities Commission’s inspectorate and the Ho Chi Minh Stock Exchange, which are responsible for managing public firms and securities trading and examining listed enterprises’ information disclosures, did not fulfill their responsibilities. They delisted DVD only after they received ANZ’s letter and thus caused losses to DVD’s shareholders and the stock market.
But, here lurks a bigger concern. The fact that the court agreed to open bankruptcy procedures against DVD upon ANZ’s petition signals a new trend. From now on, loss-making enterprises and those owing salaries to their employees shall face increased risks of unsecured creditors, shareholders or employees asking the court to open bankruptcy procedures. If this trend is to continue, the volatile local stock market will be even more spicy.