Law on Bankruptcy of Enterprises 2004

Law on Bankruptcy of Enterprises 2004:

Recommendations in Terms of B a n k r u p t c y of Banks Nguyen Tuyet Duong

Tran Van Anh Nguyen Huu Giap *

Abstract

Throughout 20 years of legislation of bankrupt, there is still not an effective regime of bankruptcy of enterprises (including credit institutions/ in Vietnam. In terms of bankruptcy of credit institutions, we do not have a basic background of a special bankrupt rules until the year 2004. and it is admitted that the issuance of Decree 05/2010/ND-CP dated 18 January 2010 of the Vietnamese Government on application of Law on Bankruptcy of Enterprises to credit institutions, although was the first special, in somehow, regime of bankruptcy of credit institutions in Vieinam. is not an effective and appropriate legal framework to deal with an insolvent credit institution.

The weaknesses of legal framework of bankruptcy of credit institutions may be caused by some inappropriate regulations of conditions for determining that a subject has become insolvent and procedures of bankruptcy of credit institutions. These regulations are difficult to enforce and even may bring some negative consequences lo not only subjects directly relating to bankruptcy procedures but also Viemamese economy in total. These problems should be handled in the process of amending the Law on Bankruptcy of Enterprises 2004 by regulating short, clear and practical conditions determining that a subject has become insolvent and that procedures of recovery of fad credit institutions should be not stipulated in this Law. the bankruptcy procedures of credit institutions should include the only procedures of declaration of credit

institutions being insolvent and liquidation of its assets and liabilities.

Key Words: iow on Bankruptcy of Enterprises 2004. Law on Credit Institutions 2010,insolvency

• Vs,,,™ Tuye, Duong. .\H ; Tran Van Anh. MA: Nguyen Huu Cap: Stale Bank of Viemam

36

\. Introduction

It is convinced that bankruptcy is the most important part of any economy. It is the plumbing of economics. It allows the market to flush away the inefficient businesses and reallocate capital to efficient businesses.' Thus, bankruptcy plays a crucial role in undergirding the mobility of assets to their highest and best use; it is an essential component of any market-based economic system, and hence an important element to enhance policies for economic growth and economic recovery.^

Following with the development of the market economy, bankruptcy of enterprise is the inevitable result of competition. It is the dudes of any nations to create an efTectively legal framework for corporations to be bankrupted equally in order to not only to provide a safe and sound business environment for every business entitles but also help failure companies recover their normal activides or withdraw legally from the market.

In Vietnam, generally, bankruptcy of business entities is not a brand new stoiy- The first Vietnamese law on bankruptcy of enterprises which is considered to be not efficient even exposed so many shortcomings which has caused some bad effects to trade activities\ was issued in the year of 1993, 20 years ago. This law was replaced by the Law on bankruptcy of enterprises 2004. However, the 2004 law is also not an effecdve law and contains many unreasonable contents. There have been a few enterprises go to bankruptcy for the long period of nine years."" For these reasons, this law is being amended and the new law is projected to be issued on the next year, 2014.

Being in the same situation with other business entities, Vietnamese credit Institutions have faced to many difficulties when finding the way to go to bankruptcy. With the assumption that if a credit institution goes to bankruptcy the Deposit Insurance of Vietnam has to pay deposit insurance for the depositors, for the ten year period fi-om 1999' to 2009, there only 37 credit institutions which their depositors was paid deposit insurance.^ One of vital reasons which leads to this circumstance is the lack of appropriate legal framework for bankruptcy of credit

' William Gamble. Significance of Bankruptcy and Economic Growth, 4 March 2010, available at http://seekingalpha.com/article/191890-significance-of-bankruptcy-and-economic-growth

" Thomas H. Jackson (University of Rochester) and David A. Skeel Jr. (University of Pennsylvania), Bankruptcy and Economic Recovery, 7 January 2013, available at

http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=I475&context=faculty_scholarship.

"* See Tran Anh Tu (Faculty of Law, VietnamNationalUniversity, Hanoi), Law on bankruptcy of enterprises: some opinions contribute for the supplementation and amendment at http://www.lrc.ctu.edu.vn/pdoc/3I/3-lfasan.htm.

•' Supreme Court of Vietnam, Report No. 44/BC-TANDTC on enforcement of law on bankruptcy of enterprises 2004. dated 09 September 2013.

'* The year of 1999 is the time of establishment of Deposit Insurance of Viemam when the Prime Minister of Vietnamese Govemment issued the Decision 218/1999/QD-TTg.

' Deposit Insurance of Vietnam, Report on operations in ten years and operational plan in the next period of Deposit Insurance of Vietnam, dated 10 December 2009.

Finance - Banking

institutions in Vietnam. Before the date of 15 March 2010 (the effective date of Decree No.

05/2010/ND-CP dated 18 January 2010 of the Vietnamese Government on application of Law on Bankruptcy of Enterprises to credit institutions), just about 3 years ago, there was not a separate legislation for bankruptcy of credit institutions. Credit institution, with a lot of different features which will be discussed in the next part of this article, had to be applied the same bankruptcy framework with common business entities. Evenly, after that date. Decree No.

05/2010/ND-CP does not create an obviously adequate legislation for bankruptcy of credit institutions.

For the above mentioned reasons, this article will discuss about the reasons why banks should be accorded special treatment in Insolvency, the current situation of Vietnamese credit Institutions in terms of bankruptcy and find out some recommendations to handle the problems.

2. Reasons for an indispensable special treatment in credit institution insolvency Why should credit institutions be accorded special treatment in insolvency? The common answer is that credit institutions play a special role In a country's economy,^ in that, collectively.

their functions are so Important as to constitute a sort of public service.^ In order to justify this special attention, reference is commonly made to three characteristic functions of credit institutions:'

First, credit institutions typically hold highly liquid liabilities in the form of deposits that are repayable at par on demand. On the asset side, they generally hold long-term loans that may be difficult to sell or borrow against on short notice.'" Under normal circumstances, this mismatch of maturity does not pose a major problem: whereas withdrawals are subject to the law of large numbers, loans will be held until maturity

Set', e g.. Edward W. Kelley Jr., Are Banks still special'', m Banking Soundness and Monetary Policy 263 (Charles Enoch. John H Green, eds. 1997): E GerMComgan, Are Banlis special, in Federal Reserve Bank of Minneapolis Annual Report 1982. 5-7 (1982). also available via the Internet at http://minneapolisfed.org/pubs/ar/arI982a.html.

In its message to Parliament recommending the adoption of the Swiss Banking Act of 1934, the Swiss Federal Council stated that the significant influence of those who dominate the financial market and grant grants is not contestable and that therefore banking had become a form of public service ("Der unbeschrankbare EinOuss derer. die den Geldmarkt beherrschen und den Kredit verteilen isl unbestreitbar einer der grossen Machtfaktoren der Gegenwart. Bel diesen VerhSltnissen ist die Banktattgkeit erne Art effentlicher Dienst geworden "). BBl 1934 I 171 /172.

' ^.^™°noleVtT(%96r" ' ^ ' ' " ' ' ""^ '^'"^''^ '' ^ ' ' ' ' ^'""^ ^ ° " " ' ^ " ' ' ' '"'^ Macroeconomic Policy.

'''blltfs7f„T ''"*°;;' ^'"'^'' ^"f"'^ ' ' ' "''^'' '"'^'^"*'°" ^"^ '^^fi"^^ ^' "'^" undertaking whose Marcli 20011 r,l,rin. ,„ ,t , , ""^=«™=f"™' 12'EC of the European Parliamenl and Council of 20 Om a U o u m a r r F " """ " " " " ' "^ "-= business of credit institutions. 26.5.2000 L 126/1 Ullic al Joumal of he European Communities, available on the Internet at

http.//e„ropa.eu.int/e„rlex/pri/en/oj/dat/2000/l_126/l_12620000526enOOOI0059.pdf 38

and repaid at face value. A credit institution's required capitalization covers the risk of loan loss, and a cushion of liquid assets ensures its ability to cover withdrawals in normal times. If, however, something happens to disturb confidence in the credit institution's ability to meet its payment obligations, massive withdrawals of deposits risk causing liquidity problems and may threaten the credit institution's solvency.

• Second, credit institutions perform financial services that are fundamental to the functioning of an economy, such as the extension of credit, the taking of deposits, and the processing of payments. Despite the complementary role of capital markets in the credit Intermediation process and their capacity to mobilize capital, credit Institutions remain the primary source of liquidity for most financial and non-financial institufions.

They provide direct and standby sources of credit and liquidity to the economy of a country, either by supplying money in the form of loans, or by providing guarantees in the form of loan commitments.

Third, credit institutions constitute the transmission belt for monetary policy, that is.

the linkage between the monetary policy process and the economy."

What makes credit institutions most special is their vulnerability to the loss of public confidence. As a consequence, a "bad credit institution" that enjoys the public's confidence may operate in peace (at least for a little while) whereas a "good credit institution" can risk failure if it becomes subject to a bank run and all its deposits are withdrawn on short notice. Depositors are not generally in a position to monitor and assess the financial condition of their credit institution on a continuous basis. Thus, any suggestion, even a rumor, that a particular credit institution Is no longer in a position to meet its liabilities is likely to lead to a "bank run".'*

Depositors will withdraw their deposits as quickly as possible because they believe that those who do so will sustain the least loss. Moreover, any suggestion that one credit institution is in trouble may be taken (reasonably or unreasonably) as evidence that other credit institutions are likely to face similar problems.

See E. Gerald Corrigan, Are banks special? A revisitation. in The Region, Special Issue 2000. Federal Reserve Bank of Minneapolis 2000, also available via the Intemet at

http:''/www.minneapo!isfed,org/pubs/region/00-03/corrigan.html (stating that it remains highly unlikely that non banks can provide very large amounts pf liquidity on short notice).

'^ The existence of deposit insurance may to a certain extent moderate such effect. If customers know that their deposits are protected, they will be unlikely to withdraw their funds. Yet, evidence suggests that the general public is often not aware of the scope and extent of deposit protection. Andrew Campbell and Peter

Carlwright, Deposit Insurance. Consumer Protection. Bank Safety and Moral Hazard, European Business Law Review (1999), however, argue that knowledge that deposits are partially protected may not be enough to prevent a bank run.

" Following the Barings collapse, a number of small to medium-sized investment banks in London and elsewhere reported to have suffered deposit withdrawals, even though there was nothing to suggest that they

Finance - Banking

Globalization and technological progress have increased access to information and the speed by which it spreads. Hence, news of a credit institution's problem can spread faster than ever. This may not only precipitate an overreaction on the part of a credit institution's customers, but also - and more significanfly - trigger a market reaction that will make it even more difficult and cosdy for the affected credit institution to obtain funding in the markets. Due to this dependence on public confidence a credit institution failure involves the potendal for damaging repercussions on the economic system as a whole.'" The risk of contagion is further increased by inter-bank exposures arising from any one credit institution's role in the payment system.'*

Recent crises in financial systems worldwide have demonstrated the close linkages between financial stability and the health of the real economy. Economists therefore consider financial stability a public good'*, warranting the attention of naflonal legislatures. The public good is clearly served by lowering the probability of credit insfitutlon failures." Nevertheless, despite the best efforts of pmdenfial regulation and oversight, credit insfltufion failures can and do happen. Mismanagement, fraudulent activides, excessive risk-taking or adverse market conditions can cause serious or even fatal financial problems.'^ Thus, the regulatoty framework must deal not only with the ex ante problem of how to prevent credit insfitutlon failures, but also with failing credit institutions and those on the road to failure.

Moreover, the purpose of bankruptcy of credit institutions which is clearly different from the purpose of bankruptcy of common enterprises is to safeguard the stability of the financial system, which includes: (i) the smooth functioning of payment and settlement systems; (ii) the

had incun-ed losses similar to Barings, see Andrew Crockett, Whyis Financial Slabiliiy a Goal of Public Po/jcj'.^, Federal Reserve Bank ofKansas City Economic Review, Fourth Quarter 1997,5, 11 (1997).

" On contagion among banks, see Benton E Gup, Bank Failures in the Major Trading Countries 6 (1998) (with further references)

SeeE.A. J. George. .4re Banks still special^, in Banking Soundness and Monetary Policy 253 (Charles Enoch, John H.Green, eds, 1997).

"• See Charles Wyplosz, Intemational Financial Instability, in Global Public Good (Inge Kaul, Isabelle Grunberg, and Marc A Stem eds.) New York, Oxford University Press 1999, and also Andrew Crockett, Why IS financial siability a goal of public policy?, in Federal Reserve Bank of Kansas City. Economic Review Fourth Quarter 1997 5,9 (1997).

See David T. Llewellyn, The optimum regulatory environment. Paper presented at de Nederlandsche Bank conference "Banking Supervision at the Cross Roads", Amsterdam, April 25, 2002. The paper can be downloaded from the Intemet at htlp://www.dnb.nl/english/eJoezicht/index.htm.

"rrrQirl- '° ^ '"f"' "'"'^ "^""^ '^'"'"' ^"'•"^ ^^""^^ of Financial Innovation (CSFl) "Banana Skins 2002 I he Lb^l s annual survey on the risks facing banks", a survey that identifies major threats facing banks over the next few years credit risk is much the strongest concem because of the likelihood of severe loan losses resulting not just from recessionary forces, but from what are seen as poor lending decisions in the 1990s.

The survey can be downloaded at http://www.csfi.fsnet.co.uk.

40

protection of the depositing public; and (ili) the preservation of the credit intermediation function.'^

A credit institudon failure can produce a much wider spectmm of negative consequences than the failure of a non-financial enterprise. A credit institution's inability to execute payment instrucfions may disrupt the operation of payment and securities settlement systems. It may be a direct source of significant losses to other market participants and may negatively affect the interbank market and liquidity in the banking system. Moreover, most credit institution's liabilities are owed to a large group of depositors, many of whom are individuals who are unable to mitigate the risk or to bear the loss. Although a deposit insurance scheme may help protect depositors, it transfers the underlying costs to the deposit insurer and. Indirectly, either to the state treasury or to the rest of the banking industry Finally, the interruption of transactions, the transmission of losses to counterparties and the resuldng loss of public confidence in the banking sector that a credit Institution failure can produce may all converge to trigger a systemic crisis, jeopardizing otherwise healthy credit institutions and disrupting the intermediation functions of the financial system.^"

To sum up, intemational good practice recommends that credit institutions should not be subject to the general bankruptcy law, given the nature of obligation of credit institutions. A separate credit institutions bankruptcy procedure is often mandated.

3. Bankruptcy of credit institutions According to Vietnamese Current Laws i. /. Law on Bankruptcy of Enterprises 2004

The Law on Bankruptcy of Enterprises 2004 remarks a significant shift in the legal framework of bankruptcy of credit institufions in Vietnam. With the regulation of "The Government shall provide specific regulations on a list of special enterprises and on the applicability of this Law to such special enterprises directly servicing national defense and security: and to enterprises and co-operatives operating in the sectors of finance, banking and insurance and In other sectors which supply regularly and directly essential public utility products and services."'", this IS the first and foremost background of a special legal framework of bankruptcy of enterprises and co-operatives operating in the sectors of finance, banking (credit institutions).""

''' An Overview of the Legal, Institutional, and Regulatory Framework for Bank Insolvency, Prepared by Ihe Staffs of the International Monetary Fund and the World Bank, approved by Sean Hagan and Christopher Towe, 17 April 2009.

'" The principles governing the framework for bank insolvency may be compared to those relevant for coi porate insolvency. For the latter, see: UNCITRAL Legislative Guide on Insolvency Law; "Principles for Effective Insolvency and Creditor Rights Systems'", World Bank. WashinglonD.C, April 2001; and "Orderly and Effective Insolvency Procedures—Key Issues", Legal Department, IMF, Washington, D.C, 1999.

^' Article 2.2 Law on Bankruptcy of Enterprises 2004.

" Although, there is a regulation on bankruptcy of credit institutions in Law on Credit Institutions 1997 amended 2004 which stated that "if after the State Bank has issued a written document declaring not

F i n a n c e - Banking

We cannot refuse the significant contribution of legislators who drafted the Law on Bankruptcy of Enterprises 2004 In fact, the regulatoty background of a special bankruptcy regime of credil institutions have lo wait until the year of 2010 to be presented under a more detail legal document, the Decree No. 05/2010/ND-CP dated 18 January 2010 of the Viemamese Govemment on application of Law on Bankruptcy of Enterprises to credit institutions, in short, from the year 1993 when there was the first legal framework for bankruptcy undl the year of 20 i 0 (17 years later), in terms of bankruptcy, credit institutions were treated as common enterprises.

3.2. Decree 0S/2010/ND-CP

Decree No. 05/2010/ND-CP on application of Law on Bankruptcy of Enterprises to credit institutions was issued by the Vietnamese Government on 18 January 2010 and was of full force and effect as from 15 March 2010. This Decree regulates application of the Law on Bankruptcy of Enterprises 2004 to credit institutions regarding conditions for and filing of petitions to commence bankruptcy proceedings; determining asset obligations and measures for ensuring safety of assets during bankruptcy proceedings; conditions and procedures for recovery of the business operation; procedures for liquidation of assets and for declaration of bankruptcy;

rights, obligations and responsibilities of petitioners, of a credit institution the subject of a petition for declaration,of bankruptcy, and of entities participating In resolution of such petitions."

Bankruptcy procedures applicable to a credit institution which has become insolvent comprise:

(a) Filing a petition and commencement of bankruptcy procedures; (b) Recovery of the business operation; (c) Liquidation of assets and debts; and (d) Declaration that the credit institution is bankrupt;^^ except in the cases that the State Bank of Vietnam has already provided a letter terminating special control or a letter terminafing application of measures to recover solvency of the credit institution. In those exception cases, after the commencement of bankruptcy procedures, the judge shall issue a decision applying procedures for liquidation of assets and debts and shall declare the credit institution bankrupt but shall not apply procedures for recovery of the business operation.^^

applying or terminating the application of the measures to restore the solvency of the credit institution, thai credit institution still defaults on the payment due, the court may commence the proceedings to declare the credit institution bankrupt in accordance with the law on bankruptcy of enterprises" (Article 98); however.

this regulation is not enough clear and detail to dealt with a failure credit institution, and, evenly, refers to the

^^Law on Bankruptcy 1993 which did not have any special regulation for bankruptcy of credit institutions.

Article 1.1 Decree No. 05/2010/ND-CP dated 18 January 2010 ofthe Vietnamese Govemment on application of law on bankruptcy of enterprises to credit institutions.

" Article 2.1 Decree No. 05/2010/ND-CP dated 18 January 2010 ofthe Vietnamese Govemment on application ot law on bankruptcy of enterprises to credit institutions.

'' Article 2.2 Decree No. 05/2010/ND-CP dated 18 January 2010 of the Vietnamese Govemment on application ot law on bankruptcy of enterprises to credit institutions.

42

It is obvious that, according to this Decree, bankruptcy of credit institutions is classified into two group. The first group includes the credit institutions have met requirements of applying special control in accordance with the Law on Credit Institutions; however, the State Bank of Vietnam has issue a written document declaring not applying special control or measures to recover solvency, and then those credit institutions still have become insolvent. The second group includes the credit institutions have met requirements of applying special control in accordance with the Law on Credit Institutions and the State Bank of Vietnam has applied special control or measures to recover solvency; however, because those credit institutions cannot recover solvency, the State Bank of Vietnam has issue a written document terminating special control or a written document terminating application of measures to recover solvency;

and then those credit institutions still have become insolvent.

In addition to, condifions for determining that a credit institution has become insolvent is that any credit institution which is unable to pay its due debts on request by creditors, after the State Bank has provided a letter either not applying or terminating application of measures to recover solvency or terminafing application of special control, shall be deemed to have become insolvent.'^

The first group shall be treated like a normal enterprise; thereby, applying the common bankruptcy rules which include the procedure of recovery ofthe business operation. In fact, the second group shall be treated under a special regime which does not include the procedure of recovery ofthe business operation.

3.3. Law on Credit Institutions 2010

Any credit institution which remains Insolvent after the State Bank has provided a document terminating special control or terminating or not applying measures to recover solvency shall submit a petition to the court to commence procedures to resolve an application for a declaration of bankruptcy In accordance with laws on bankruptcy. '

Upon receipt ofthe application from the credit institution as above, the court shall commence procedures for resolution ofthe application for declaration of bankruptcy and shall immediately apply measures to liquidate the assets of the credit institudon in accordance with laws on bankruptcy.'*

This regulation ofthe Law on Credit Institutions 2010 has eliminated the classification of bankrupt credit institutions into two groups which is presented in Decree 05/2010/ND-CP. From the date of 01 January 2011 (the effective date ofthe Law on Credit Institufions 2010), all bankrupt credit institutions will be treated in a unique regime which does not Include the

"" Article 4 Decree No. 05/2010/ND-CP dated 18 January 2010 ofthe Vietnamese Government on application of law on bankruptcy of enterprises to credit institutions.

"'Article 155.1 Law on Credit Institutions 2010.

"' Article 155.2 Law on Credit Institutions 2010.

43

Finance - Banking

procedure of recovery of the business operation. This is considered that a significant improvement of the Law on Credit Institutions 2010 in terms of bankruptcy of credit institutions. Because, for the first group according to Decree 05/2010/ND-CP, it is not practical when allow creditors of bankrupt credit institutions perform the procedures of recovery ofthe business operation in the case that the State Bank of Vietnam, the most powerful authority which has effective administrative instruments has decided to not apply measures to recover solvency of those credit institutions.

Moreover, according to the concept ofthe Law on Credit Institutions 2010, it is able to assume that the only subject who has the right, and regulatory obligation, to file petition to commence bankruptcy procedures is the bankrupt credit institutions. This assumption, if being confirmed, creates a better regime of bankruptcy of credit institutions in compared with the regime stipulated in Decree 05/2010/ND-CP which allows a wide range of subjects to file petition to commence bankruptcy procedures including creditors, employees, etc. Because bankruptcy of credit institutions is special which bases mainly on management activities ofthe State Bank of Vietnam (i.e. its written documents), the State Bank of Vietnam should control the way a credit institution going to bankruptcy.

<H \RT I; Rr>IH.l I MlMir » \n,Kn ( KHIIT IVi-l ITI T MKTNWIKSKI

:;:r;;r;r

ini

'l'!'o!7l, 1

IlK-CliiK-rjialu jnirtlwrfllAnii Cts

."T

•..lubii.-duiili ,

r'

r h . J i p , > . . , ™ . n « [U'.> the prcKuum Jcp-Kiuio (Amcl l)cix.iiL ln,uiniHV

• " • ' - ' - ' I ' '

• 0 , f » „ . 1 , . n a [ t K i ( h u r c d

2T' L I U .>n 1 1 ; U i i h i n IK .h> M 1 \ '

LAW ON DEPOSIT INSURANCE 2012

LAWS ON BANKRUPTCY

T k applnal p r u c n l u n Jcclarali,.

™ „ , ^ . , v . , . „ d e x . m , ™ : , J . . ! o n j n d rk-ciiln l o begin ihc ' c l i l m i i '

rtflhctcquc.1 f m a C r , h j n l . r i i p m , A i l , d . - i i l ) c - > . r . x l l S . : m i l M ) U ' ) j

The liquulilmn iif \ .ivstl«rUic( I I Hh.i|in-if>l>n.-iw —•!

44

4. Weaknesses of Current Legal Framework of Bankruptcy of Credit Institutions 4.1. Conditions for determining that a subject has become insolvent

One of key elements of bankrupt rules is condidons for determining that a subject has become insolvent. However, this element in Vietnamese current laws on bankruptcy of credit mstitutions is weak and complicated. There are (i) conditions for placing a credit institution under special control and (ii) two groups of different conditions for determining that a subject has become insolvent.

For the former (i), the State Bank of Vietnam shall consider placing a credit institution under special control when the credit institution falls into any one of the following cases: (a) The credit institution is in danger of becoming insolvent; (b) There is a danger that irrecoverable debts may result in the credit institution becoming insolvent; (c) Accumulated losses of the credit institution exceed fifty (50) per cent of the actual value of charter capital and reserves funds as recorded in its most recent audited financial statements; (d) The credit institution has been ranked as poor for two consecutive years in accordance with State Bank regulations; (dd) The credit institution fails to maintain the minimum capital adequacy ratio specified in Article 130.1(b) ofthe Law on Credit Institutions 2010^^ throughout one consecutive year, or its minimum capital adequacy ratio Is less than 4% for a period of six consecutive months.""' If a credit institution falls into any one ofthe above cases, the State Bank of Vietnam may apply special control or measures to recover solvency of that credit insdtution. This "lender of last resort" function of the State Bank of Vietnam may lead to any one of three following consequences: normal operation of the credit institution has been resumed^' or the credit institution merged or consolidated with another credit institution'^ or the credit institution is unable to recover solvency'^'.

For the latter (ii), firstly, there is the existence of a written document from the State Bank of Vietnam which declaring that (a) in the cases of a credit institution falls Into any one ofthe special control cases, the State Bank of Vietnam shall not apply special control or any measures to recover solvency of that credit institution or (b) in the cases of a credit institution falls into any one ofthe special control cases and the State Bank of Vietnam applied special control or measures to recover solvency of that credit institution and the credit institution is unable to recover solvency, the State Bank of Vietnam terminates special control or measures to recover solvency of that credit Institution, and, secondly, that credit Institution is unable to pay its due debts on request by creditors.

"Article 103.1(b) of Law on Credit Institutions 2010 stipulates a credit institution or foreign bank branch shall maintain the minimum capital adequacy ratio of eight per cent (8%) or a higher percentage as stipulated by the Slate Bank from time to time.

"* Article 146.3 Law on Credit Institutions 2010.

^' Article 152.1{a) Law on Credit Institutions 2010.

'"Article 152 1(b) Law on Credit Institutions 2010.

"Article 152.1(c) Law on Credit Institutions 2010.

Finance - Banking

To sum up, firstly, the State Bank of Vietnam, with the role of the management authority of credit institutions, is not the subject who has the right to decide a credit institution go lo bankruptcy or not and is not the subject who is the first person know about the insolvency status of a credit institution. This is totally irrational. The State Bank of Vietnam should control bankruptcy procedures of credit institutions. Secondly, there will be a unpredicted delay from the date that a credit institudon is unable to pay its due debt on request by creditors to the date that credit institution file petition to commence bankruptcy procedures which the State Bank of Vietnam cannot control tightly. The more this delay Is long, the more damage the credit institution, creditors, employees, etc. suffers.

4.2. Procedures of bankruptcy of credit institutions

If the Decree 05/20IO/'ND-CP is still applied totally for bankruptcy of credit institutions, there will be some weaknesses in procedures of bankruptcy of credit institutions.

Firstly, the recovery procedures, which includes, but without limitation, creditors' meeting, is not necessary With the role of a ministerial equivalent body ofthe Vietnamese Government and the central bank ofthe Social Republic of Vietnam''', the State Bank of Vietnam has adequate powerful equipment to recover a fail bank providing that this action shall benefit the Vietnamese banking system In particular and the Vietnamese economy in general. In the case that the State Bank of Vietnam decides not to recover a credit institution, this means no one can recover that credit institufions. Therefore, in this case, the recovery procedures are inefficient and not practical. On the one hand, this activity will not bring any profit to Ihe subjected credit institutions, and. on the other hand, this activity will prevent creditors from receive the maximized value of thelrcredlts; evenly lead them to lose worse.

Secondly, the right of filing petition to commence bankruptcy procedures of, apart from the fall credit Institutions, creditors, employees, etc. will lead to some unwilling consequences. Firstly, creditors, employees, etc. is not Ihe subject who know appropriately about banking operations which can lead to these people, with being afraid of doing a wrong activity and lose their money, are always ready to withdraw their money from credit institutions. This emotional phenomenon may cause a lot negative results for banking system. In addition to this, these subjects may not have enough Information to perform their right efficiently. Therefore, this right not only does not bring any benefit to them but also results In detrimental consequences.

5. Recommendations

First, the new law on bankrupt of enterprises should allocate a separate chapter to stipulate bankruptcy of credit institutions. This will ensure that the new law will treat obviously credit institutions under a special regime as their special features.

" Article 2.1 Law on State Bank of Vietnam 2010.

46

Second, conditions for determining that a subject has become insolvent should be clear and short. It is recommended that these conditions should be the written documents of the State Bank of Vietnam which includes, but without limitadons, a document terminating special control or terminating or not applying measures to recover solvency. For the above reasons, the confirmation of the State Bank of Vietnam is adequate to determine a credit institution being Insolvent, Moreover, because of being special, credit insdtutions should not be apply the same conditions for determining that a subject has become insolvent with a common enterprise.

Third, the only subject has the right to file petition to commence bankruptcy procedures should be credit institution after immediately receiving the above mentioned documents from the State Bank of Vietnam. This should be a regulatory obligation of credit institutions which, if credit institutions fail to compliance, shall lead to the compensation responsibilities ofthe leaders of those credit institutions.

Last but not least, the bankruptcy procedures at the courts should be done shortly This procedure will not include recovery steps.< At the best option, after receiving the full and appropriate file from credit institutions, the court should issue the decision of declaring those credit institutions being insolvent, and then, perform necessary procedures to liquidate their assets and liabilities./.

References

1. "An Overview ofthe Legal, Institutional, and Regulatory Framework for Bank Insolvency", Prepared by the Staffs ofthe Intemational Monetary Fund and the World Bank, approved by Sean Hagan and Christopher Towe, 17 April 2009.

2. Benton E. Gup, Bank "Failures in the Major Trading Countries 6" (1998) (with further references).

3. Carl-Johan Lindgren, Gillian Garcia, and Matthew I. Saal, "Bank Soundne.ss and Macroeconomic Policy", supra note I, at 6 (1996).

4. Charles Wyplosz, "International Financial Instability", in Global Public Good (Inge Kaul, Isabelle Grunberg, and Marc A Stem eds.) New York, Oxford University Press 1999, and also Andrew Crockett, "Why is financial stability a goal of public policy?", in Federal Reserve Bank of Kansas City, Economic Review Fourth Quarter 1997 5, 9 (1997).

5. David T. Llewellyn. The optimum regulatory environment. Paper presented at de Nededandsche Bank conference "Banking Supervision at the Cross Road.s", Amsterdam.

April 25, 2002. The paper can be downloaded from the Internet at http://www.dnb.nl/english/e_toezicht/index.htm.

6. Decree No. 05/2010/ND-CP dated 18 January 2010 of the Vietnamese Government on application of Law on Bankruptcy of Enterprises to credit institutions.

47

Finance - Banking

7. "Deposit Insurance of Viemam", Report on operations in ten years and operational plan in the next period of Deposit insurance of Vietnam, dated 10 December 2009.

8. E. Gerald Corrigan. "Are banks special? A revisitation", in The Region, Special Issue 2000, Federal Reserve Bank of Minneapolis 2000, also available via the Intemet at http://www.minneapolisfed.org/pubs/region/00-03/corrigan.html (stating that it remains highly unlikely that non banks can provide very large amounts of liquidity on short notice).

9. E.A. J. George, "Are Banks still special?", in Banking Soundness and Monetary Policy 253 (Charies Enoch, John H. Green, eds., 1997).

10. Edward W. Kelley Jr., Are Banks still special?, in Banking Soundness and Monetary Policy 263 (Charles Enoch, John H Green, eds. 1997); E. Gerald Corrigan, Are Banks special?, in Federal Reserve Bank of Minneapolis Annual Report 1982, 5-7 (1982), also available via the Intemet at hrip://minneapolisfed.org/pubs/ar/arl982a.html.

11. Eva Hupkes, Insolvency - "why a special regime for banks?". Forthcoming in Current Development in Monetary and Financial Law, Vol. 3 (Intemational Monetary Fund, WashingtonDC,2003), 21 January 2003.

12. Law on Bankruptcy of Enterprises 2004 13. Law on Credit Institutions 2010.

14. Law on Deposit Insurance 2012.

15. Law on State Bank of Vietnam 2010.

16. Supreme Court of .Vietnam, Report No. 44/BC-TANDTC on enforcement of law on - bankruptcy of enterprises 2004, dated 09 September 2013.

17. Thomas H. Jackson (University of Rochester) and David A. Skeel Jr. (University of Pennsylvania), Bankruptcy and Economic Recovery, 7 January 2013, available at http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1475&context=faculty_schol arship.

18. Tran Anh Tu (Faculty of Law, VietnamNationalUniversity, Hanoi), Law on bankruptcy of enterprises: some opinions contribute for the supplementation and amendment at http://wwwlrc.ctu.edu.vn/pdoc/31/3-Ifasan.htm.'

19. UNCITRAL Legislative Guide on Insolvency Law; "Principles for Effective Insolvency and Creditor Rights Systems", Worid Bank, WashingtonD.C, April 2001; and "Orderly and Effecnve Insolvency Procedures^Key Issues", Legal Department, IMF, Washington, 20. Williani Gamble, Significance of Bankruptcy and Economic Growth, 4 March 2010.

available at hur,-//..—i.: i._i , . economic-growth,

available at http://seekingalpha.com/article/l91890-signific"ance-of-bLnkmp^^^^

48