Using Bankruptcy Proceedings for Debt Collection in Vietnam: Legal Risks and Strategic Points Japanese Companies Should Know

This is essential reading for any Japanese company struggling with debt collection in Vietnam! This article comprehensively explains how to strategically use bankruptcy petitions, actual court cases (DLG and Coteccons), the requirements for filing, the legal risks, the documents to prepare, and negotiation tactics — providing concrete practical guidance for successful debt recovery.

01 - The Economic Downturn and the Practical Challenges of Debt Collection

In light of recent economic conditions, many companies in Vietnam are struggling with cash flow, and late payments and defaults have increased. Against this backdrop, creditors — including Japanese companies operating in Vietnam — are, in practice, struggling to collect on debts that have already fallen due.

In recent years, some creditors have begun using a "bankruptcy petition" as a form of leverage — a notable development in Vietnamese practice.

02 - Bankruptcy Petitions as a Debt-Collection Tool: A Comparison with Traditional Methods and Case Examples

【Traditional Debt-Collection Methods and Their Limits】

As a general debt-collection approach in Vietnam, creditors typically follow these steps first:

✅ Negotiating a grace period or repayment rescheduling

✅ Sending a formal demand letter (by registered/notarized mail)

✅ Using a debt-collection agency (※ note that debt-collection services are, by law, a prohibited business activity)

✅ Filing a civil lawsuit or commercial arbitration (where provided for in the contract)

✅ Enforcement following judgment

However, these methods can be time-consuming, and recovery may prove impossible if the debtor has no real assets.

【Escalation】as a Strong-Arm Measure: Using Bankruptcy Proceedings

Accordingly, an approach that has drawn increasing attention in recent years is using a bankruptcy petition as a form of pressure.

📌 Under Vietnam's 2014 Bankruptcy Law, if a debt remains unpaid for three months past its due date, a creditor may petition the court to commence bankruptcy proceedings. This is because a prolonged failure to pay is legally treated as evidence that the debtor is in a state of "insolvency."

Once the court accepts the petition, the debtor may face serious consequences — such as asset freezes, restrictions on business operations, and reputational damage — which can also produce the effect of prompting "voluntary payment" in line with the creditor's intent.

✅ Practical Lessons and Criteria for Creditor Decision-Making

As the two case examples above illustrate, whether a bankruptcy petition will be effective depends heavily on whether the debtor has genuine ability to pay.

💡 As with DLG, bankruptcy proceedings are unlikely to be applied against a company where there is some indication of willingness and ability to repay
💡 As with Coteccons, filing a bankruptcy petition against a financially healthy large company can actually backfire as a litigation strategy

A bankruptcy petition should be treated strictly as a "last resort," to be used cautiously only where the debtor is genuinely experiencing cash-flow difficulties.

03 - Legal Risks of Filing a Bankruptcy Petition and Practical Advice for Japanese Companies

① Legal Hurdles and Screening Risk

Under the Bankruptcy Law, a creditor has the legal right to file a bankruptcy petition, but this does not mean every petition will be accepted.

To be treated as bankrupt, the debtor must have **an unpaid debt of three months or more** and be **in a state of insolvency**.
For companies like DLG and Coteccons that have some repayment track record or a solid financial base, courts often find that the requirements for bankruptcy are not met.

② The Risk of Dismissal and Its Consequences

If the court dismisses the petition, the following risks arise:

❌ Loss of costs and time (litigation costs, attorney fees, etc.)
❌ Reduced pressure effect on the counterparty
❌ Being viewed as a "failed strategy," potentially weakening one's position in future negotiations

③ Caution Regarding the Possibility of a Legal Counterattack

If a bankruptcy petition is found to be unwarranted or an abuse of process, the debtor may in turn seek damages from the creditor.

📌 Example: The chairman of DLG filed suit against Lilama 45.3, the company that had filed the bankruptcy petition, seeking damages for defamation and business harm (※ the outcome remains undecided).

➡ For a creditor, a bankruptcy petition is a double-edged sword that requires careful judgment before use, and local counsel should always be consulted beforehand.

04 - Practical Advice for Japanese Companies: Strategic Debt Collection

While M&A procedures are relatively clearly defined under the law, in practice, legal interpretation and operation often vary by region and by the individual official handling the matter, and foreign investors — including Japanese companies — frequently encounter practical confusion as a result.
Below are some of the key practical challenges to watch for, along with corresponding countermeasures.

① Divergence Between the Regulations and Local Practice

Even for transactions that, under the law, do not require M&A approval, some local authorities may nonetheless require "prior approval."

📌 Example: Where a wholly foreign-owned company transfers a 40% equity interest to another foreign investor, approval should, in principle, not be required, since the overall foreign ownership ratio does not change. In practice, however, some localities still require M&A registration.

② Misunderstanding Regarding Who Files the Application

Because Article 26(2) of the Investment Law states that "the foreign investor registers," it is often mistakenly assumed in practice that "the foreign investor itself is the applicant."

📌 The correct interpretation: Under Decree No. 31/2021/ND-CP, the applicant is "the Vietnamese company receiving the foreign capital contribution."
In other words, it is the Vietnamese target company that must file the application for approval of the foreign investor's capital contribution or share acquisition.

③ Practical Issues Regarding Document Format and the "Agreement in Principle"

The basic documents to be submitted include the application for capital contribution registration, corporate documents of each party, and agreement documents — but a gap can arise between what the authorities expect and actual practice regarding the format of the "M&A agreement" (the authorities in Hanoi and Ho Chi Minh City generally understand this well, but authorities in the provinces can be quite rigid).

📌 In one matter, the parties had already executed a definitive Share Purchase Agreement (SPA) and attempted to submit it as a supporting document, but the competent authority refused to accept it on the ground that "a formal contract is premature at this stage."

④ Challenges with the Review Period and Scheduling

By law, the review period is set at 15 business days, but in practice, many cases exceed this timeframe.

In particular, the review period tends to be extended where the authority conducts additional inquiries, such as in the following cases:

Where the target company holds land-use rights in a sensitive area (land in a zone significant to national defense or security)
Where the investment target falls within a conditional business sector

📌 In such cases, the competent authority may consult with the Ministry of Public Security or the Ministry of National Defense, and review may be suspended pending their response — resulting in some cases taking more than 20 business days.

※ In Da Nang and its surrounding provinces, M&A approval procedures invariably require the competent authority to submit documents to the public security authorities for scrutiny, with the M&A approval decided based on their findings. For this reason, ample scheduling margin should always be built in when seeking M&A approval in Da Nang and its surrounding provinces.

05 - Practical Advice for Japanese Companies: Successfully Navigating Vietnam's M&A Procedures

Position a bankruptcy petition as a "last resort"

A bankruptcy petition should be regarded as a final measure, to be pursued only after other options — negotiation, repayment grace periods, ordinary litigation, and the like — have been exhausted.
It is advisable to consider this option only where the debt amount is substantial and there are clear signs that the debtor is unable to pay.

Investigate the debtor's financial condition in advance

Before filing, gather as much financial and operational information as possible, including:

Whether the business is still operating, its revenue, asset size, and cash flow
Whether other creditors have filed suit
Signs of delayed bank financing or insolvency

➡ Filing a bankruptcy petition against a financially healthy company is likely to be dismissed by the court, so careful due diligence beforehand is essential.

Prepare the evidence and documents needed for the petition

✅ Records proving when the debt arose and that payment has been overdue for three months or more
✅ Written demands (formal notice letters, etc.)
✅ Evidence that no agreement on a repayment grace period or rescheduling exists
(※ if such an agreement exists, the court may find there is "willingness to repay")

➡ Also, where a damages claim is being considered, or where the creditor intends to participate in a creditors' meeting, the related documentation should be prepared as well.

Anticipate how the debtor may respond

A company subject to a petition may take actions such as:

✅ Making an urgent partial repayment to argue it is not insolvent
✅ Filing a countersuit alleging the petition is unwarranted (defamation, interference with business, etc.)

➡ Japanese companies should remain flexible — including being willing to withdraw the petition — where the counterparty presents a sincere repayment plan.
The goal is debt recovery, not winning the lawsuit itself.

How to respond if your own company becomes the respondent

If a Vietnamese local subsidiary is subject to a bankruptcy petition on grounds of financial distress, the following responses are important:

✅ Promptly repay part or all of the debt to demonstrate the ability to pay
✅ Work with legal counsel to submit a restructuring or fundraising plan
✅ Demonstrate to the court that the company does not meet the criteria for bankruptcy

➡ A prompt response and good-faith disclosure of information can help preserve long-term trust and creditworthiness.

A bankruptcy petition in Vietnam is a powerful tool for advancing debt collection, but it is also a complex process carrying legal and reputational risk.

✔️ A bankruptcy petition is effective only where the debtor is clearly insolvent
❌ Filing against a company that is a going concern can backfire and create litigation risk

📌 Japanese companies should work with lawyers and other specialists to pursue a debt-management strategy that balances overall benefit and risk.

➡ Sound legal judgment combined with practical action can achieve debt recovery while preserving trust and sustainable business growth locally.