Request for initiation of bankruptcy proceedings to recover Corporate Debt

The request for initiation of bankruptcy proceedings to recover corporate debt is one of the legal measures available to creditors when a debtor enterprise is insolvent. Unlike other debt recovery methods, bankruptcy proceedings place the enterprise under a strict judicial and procedural supervision, while allowing creditors to recover their claims through distribution of the liquidation value of the insolvent enterprise’s assets. The following article by TNTP outlines the applicable regulations concerning the filing of petitions for the initiation of bankruptcy proceedings to recover corporate debt. 

1. The creditor’s right to request the initiation of bankruptcy proceedings

In cases where an enterprise becomes insolvent, the creditor can invoke bankruptcy proceedings as a legal mechanism to safeguard its rights and recover outstanding receivables. According to Article 214 of the Law on Enterprises 2020, the bankruptcy of an enterprise is governed by the provisions of the law on bankruptcy.

Under Article 5 of the Law on Bankruptcy 2014, both unsecured and partially secured creditors are entitled to file a petition for the initiation of bankruptcy proceedings.

• According to Clause 4, Article 4 of the Law on Bankruptcy 2014, an unsecured creditor (refers to any individual, agency, or organization) is entitled to request an enterprise or cooperative to fulfill an obligation for repayment of a debt not secured by assets of the debtor or of any third party.
• According to Clause 6, Article 4 of the Law on Bankruptcy 2014, a partially secured creditor (refers to any individual, agency, or organization) is entitled to request an enterprise or cooperative to fulfill an obligation for repayment of a debt partially secured by assets of the debtor or of any third party, where the value of the security is less than the total amount of the debt.

According to Clause 1, Article 5 of the Law on Bankruptcy 2014, an unsecured or partially secured creditor has the right to file a petition for bankruptcy proceedings after three (03) months from the due date of the debt, provided the debtor has failed to perform the obligation, regardless of the amount of the debt.

As provided, the creditor is empowered by law to determine whether to pursue a debtor’s obligations through the bankruptcy process. In practice, bankruptcy petitions are often used as a lawful pressure tactic in the course of debt settlement negotiations – particularly in cases where the debtor intentionally delays payment or displays signs of asset dissipation. If the enterprise is declared bankrupt, the remaining assets shall be distributed following the order of priority specified in Article 54 of the Law on Bankruptcy 2014.

2. Advantages and risks of debt recovery through bankruptcy proceedings

2.1 Advantages of debt recovery through bankruptc

The recovery of debt through bankruptcy proceedings may yield the following advantages:

• Firstly, the bankruptcy process provides a structured mechanism for creditor protection, wherein the rights of creditors are prioritized following the order outlined in Article 54 of the Law on Bankruptcy 2014. Upon a declaration of bankruptcy by the Court, the debtor’s remaining assets shall be administered and liquidated transparently under the supervision of a Bankruptcy Trustee or Asset Management and Liquidation Enterprise, thereby reducing the risk of asset dissipation and ensuring equitable distribution among creditors.
• Secondly, the submission of a bankruptcy petition may serve as a lawful pressure mechanism during debt negotiation. Pursuant to Article 37 of the Law on Bankruptcy 2014, within three (03) days from receipt of a valid petition by the Court, the creditor may submit a written request to initiate negotiations for withdrawal of the petition. Many enterprises may proactively repay or negotiate debt settlement to avoid reputational damage or a bankruptcy declaration.
• Thirdly, creditors may request the appointment of a Bankruptcy Trustee to oversee the debtor’s management and use of assets during the period of judicial review. This allows creditors to mitigate the risk of asset depletion prior to an official decision by the Court.

2.2 Risks

Alongside its benefits, debt recovery through bankruptcy proceedings also entails the following risks:

• Bankruptcy proceedings may be prolonged due to the complexity of litigation and the involvement of multiple parties (e.g., creditors, employees, tax authorities, shareholders, etc.). Proving insolvency under the Law on Bankruptcy requires specific supporting evidence, such as financial statements, debt confirmations, audit reports, or conclusions from competent authorities.
• Creditors may be unable to recover the full amount of their debt if the value of liquidated assets is unable to pay all the obligations in the order of priority. According to Article 54 of the Law on Bankruptcy 2014, payments shall be made in the following sequence: (i) bankruptcy expenses, (ii) obligations to the State, (iii) employee wages and benefits, and (iv) unsecured and secured debts.

3. Regulations on filing a petition for initiation of bankruptcy proceedings

3.1 Drafting the petition for bankruptcy proceedings

According to Article 26 of the Law on Bankruptcy 2014, the creditor must prepare and submit a petition to the competent People’s Court requesting the initiation of bankruptcy proceedings. The creditor’s petition must contain the following mandatory information

• Date of petition;
• Name of the competent People’s Court;
• Name and address of the petitioner;
• Name and address of the enterprise/cooperative against whom the petition is filed;
• Description of the overdue debt and supporting documentation such as contracts, invoices, payment records, judgments, or other legal instruments evidencing the debtor’s financial obligation.

If the creditor proposes the appointment of a Bankruptcy Trustee or an asset management and liquidation firm, the petition must clearly state their name and address. The debt must be substantiated with valid documentation to avoid requests for revision, supplementation, or outright rejection by the court.

3.2 Processing the petition for bankruptcy proceedings

Once the creditor has prepared all necessary documents, they must submit the petition and attachments to the competent People’s Court. According to Article 32 of the Law on Bankruptcy 2014, upon receiving the petition, the assigned Judge must review and process it within three (03) working days, as follows:

• If the petition is valid, the Judge issues a notice requesting payment of the bankruptcy filing fee and an advance on case-related expenses. The petitioner must fulfill this requirement within fifteen (15) days of receiving the notice.
• If the petition lacks required content, the Judge will notify the petitioner and request revisions or supplementation.
• If the matter falls under another court’s jurisdiction, the petition will be transferred accordingly.
• If the petition is inadmissible, it will be returned.

It is important to note that the Court officially accepts the petition only upon receipt of the receipts for payment of the bankruptcy fee and advance on bankruptcy expenses. Failure to make timely payment will result in the petition being rejected. Thus, timely payment is a mandatory condition for the Court to proceed with the case.

According to Article 37 of the Law on Bankruptcy 2014, within three (03) days of the Court’s receipt of a valid petition, the parties may negotiate the withdrawal of the petition. Such negotiations may continue for a maximum period of twenty (20) days from the date of receipt of the valid petition. If a settlement is reached, the Court shall return the petition.

The foregoing constitutes TNTP’s article on “Filing a Petition for Initiation of Bankruptcy Proceedings to Recover Corporate Debt.” We hope the above information proves useful to our esteemed readers. Should you require further assistance, please do not hesitate to contact us.

Best regards,