Currently, in a volatile market economy, with relatively large eliminations, the business losses lead to bankruptcy of many enterprises. On the basis of the State’s regulations on conditions and order of settlement of social relations related to bankruptcy, forming a legal system on bankruptcy scattered in different legal documents from legislation to sub-law documents. On the other hand, insolvency, a term for an individual or organization that can not meet its financial obligations to a lender when the debts come due, may confuse enterprises. So, to have a better understanding of the insolvency, please follow this article from LSX legal firm: “Meaning of Insolvency in Vietnam?”
Legal ground
- Law on Bankruptcy
Insolvency
Insolvency is a term when an individual or organization is no longer able to meet its financial obligations to a lender when the debts come due.
Before an insolvent company or person enters bankruptcy procedures, they will have informal agreements with creditors, such as alternative payment arrangements.
Besides, insolvency can arise from poor cash management, a sharp drop in cash flow, or inflated costs.
Characteristics of insolvency
Insolvency is a financial situation where a person or a company is unable to pay its bills.
Insolvency can lead to bankruptcy proceedings. Then, legal actions will be taken against the insolvent subject and the subject’s assets will be liquidated to pay the outstanding debts.
Business owners can contact creditors directly and restructure debts into smaller pieces that easier to manage. Indeed, creditors often agree to debt restructuring requests because they want the debtor to repay the debt even though the repayment period will take longer.
Contrary to popular belief, insolvency does not mean bankruptcy. If a business owner has a plan to restructure the company’s debt, he needs to create a plan that shows how his restructuring can reduce the company’s costs and keep the business running.
The owner must create a proposal detailing how to restructure the debt through cost reduction or other support plans for the creditors. So, they know the business can generate enough cash flow to operate profitably while still meeting its debt obligations.
Causes of Insolvency
Many possible reasons may lead to the insolvency of a person or a company. A company’s inappropriate hiring of accountants or ineffective human resource management can also contribute to the company’s insolvency.
For example, the head of the accounting department might manage the company’s budget in the wrong way, leading to overspending. Then, costs increase rapidly, cash outflow is too large and cash inflow is not enough to cover the gap, making the company insolvent.
Also, increased supplier costs also contributed to the company’s insolvency. When a business has to pay a higher price for goods and services, it passes the cost on to consumers by increasing the price of the product. In this case, consumers may choose to buy products from other businesses if they find it necessary to pay less for the same product or service. Then, the company loses customers and resulting in a loss of income, causing an inability to pay creditors.
Some other reasons such as goods and services provided by the company are not suitable for consumers’ tastes. Lawsuits with customers or business partners can also cause a company to become insolvent because of its bad reputation.
The company even had to pay a large amount of money for damages while unable to continue operating after the lawsuits.
The US Internal Revenue Service (IRS) defines an entity as insolvent when its total liabilities exceed its total assets.
Lastly, if a person or a company is insolvent for a long time, it can lead to bankruptcy.
Business insolvent
The Law on Bankruptcy applies only to enterprises, cooperatives, and cooperative relations (hereinafter collectively referred to as enterprises) established and operating in accordance with the law. Thus, according to this law, enterprises regardless of the form of ownership can be declared bankrupt. However, not all businesses are subject to this law, but only insolvent businesses.
According to Clause 1, Article 4 of the Law on Bankruptcy 2014:
“Insolvent enterprise or co-operative means an enterprise or cooperative failing to perform an obligation to repay a debt within three (3) months from the maturity date.”
Accordingly, an insolvent enterprise means an enterprise that includes the following signs:
- Firstly, the due debt that the enterprise cannot pay means an unsecured debt and a partially secured debt. Thus, if the enterprise fails to pay a secured debt not considered a sign of the enterprise’s insolvency.
- Secondly, insolvency does not mean that the enterprise has no assets to repay the debt. Although the enterprise has assets to repay the debt, it has failed to fulfill the obligation to repay the debt on time to the unsecured creditor and partially secured creditors.
- Thirdly, the Vietnamese legislation does not stipulate a specific level of debt to determine an insolvent business. Therefore, it is not possible to base on the amount of debt to determine the insolvent enterprise, but based on the time of debt repayment previously agreed by the parties. In particular, within 3 months from the payment due date.
- Fourthly, a debt that is considered insolvent is a debt that a business owner creates from his or her legitimate business.
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Related questions
Insolvency is a state of financial distress in which a business or person is unable to pay their bills. It can lead to insolvency proceedings, in which legal action will be taken against the insolvent person or entity, and assets may be liquidated to pay off outstanding debts.
Bankruptcy risk, or insolvency risk, is the likelihood that a company will be unable to meet its debt obligations. It is the probability of a firm becoming insolvent due to its inability to service its debt.
Improve cashflow
Bill promptly to ensure a steady flow of cash.
Avoid overtrading by only accepting orders you can fulfil.
Recover debts by chasing up debts owed to you.
Trim your inventory using a stock reduction plan.
Tenegotiate your credit limits and payment dates with suppliers.
Reduce overheads such as wage costs.
Contact LSX
Finally, hope this article is useful for you to answer the question about “Meaning of Insolvency in Vietnam?”. If you need any further information, please contact LSX Law firm: +84846175333 or Email: [email protected]
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