Aversion to bankruptcy ensures more waste from dying firms

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Workers at a private blanket factory outside Hanoi. Vietnam gives troubled companies the option to file for bankruptcy protection but many companies do not want to go down that path, experts say.

A culture of shame and cumbersome legal proceedings are keeping insolvent Vietnamese firms from declaring bankruptcy, a development that could end up dragging the economy down big time.

As many as 2,200 companies registered to dissolve in the first quarter of this year, while over 9,700 others registered to halt business operations, or stop paying taxes, according to the Ministry of Planning and Investment.

Prior to the economic downturn in 2009, some 5,000-7,000 companies announced bankruptcy, dissolved, or suspended business each year. In 2011, the figure reached over 10,000 in each quarter, according to the Vietnam Chamber of Commerce and Industry. Among them, only a few declared bankruptcy.

Bankruptcy is not rare in many countries because there is "bankruptcy protection" which postpones a firm's obligations to its creditors, giving it time to reorganize its debts or sell parts of the business.

But in Vietnam, things are different.

"Our society still has negative view of bankruptcy," said attorney Pham Thanh Binh from Hanoi law firm Hong Ha.

He said Vietnam gives troubled companies the option to file for bankruptcy protection, which allows them to extend payment deadlines or delay the foreclosure process.

"But company owners do not want to file for bankruptcy, as it will hurt their prestige and their future business. Meanwhile, cumbersome procedures and impractical regulations have made bankruptcy difficult to declare," he said.

Binh said seafood company Binh An in the Mekong Delta had debts on fish purchases totaling VND1.54 trillion (US$73.3 million) that it couldn't repay to banks and a number of farmers.

In such a case, banks and creditors have the option of initiating bankruptcy proceedings with the company in court. However, banks have not done so in this case.

Binh explained that according to the Bankruptcy Law, creditors will be paid back only after legal fees, wage debts, severance allowances and social insurance debts are paid off. Therefore, banks and other creditors are the last on the list and do not want to ask the firm to declare bankruptcy, because they worry they'll never be able to take back their money after their debtor pays off all its other debts.

Thus, creditors often look for ways to reclaim their loans by pressuring firms' owners via social relations. Some commercial banks even offer new loans to repay maturing debts, especially those in the real estate sector, instead of distraining assets or asking debtors to declare bankruptcy.

Binh said trade unions or workers could theoretically take their employers to bankruptcy court, but they face legal barriers. The law requires them to demonstrate that their enterprises have fallen into bankruptcy, but workers have no way of knowing their company's debts, or losses.

"The regulation is infeasible. Thus, the Bankruptcy Law is one of the least-applied laws," he said.

Cumbersome proceedings

Economist Vu Xuan Thuyen from the Ministry of Planning and Investment said Vietnam should amend the Bankruptcy Law to ensure that bankruptcy is a more common activity in the economy.

"Bankruptcy proceedings take much time, and are difficult to implement. In most cases, the proceedings last for years. Meanwhile, the market for trading debts has not yet developed, causing obstacles to dealing with debts when firms go bankrupt," Thuyen said.

He said some owners of enterprises do not want to declare bankruptcy because the law considers them offenders. According to the law, heads of state-owned enterprises that declare bankruptcy are banned from holding such posts in the future.

Meanwhile, owners of private enterprises that declare bankruptcy shall not be allowed to set up enterprises or cooperatives, or work as managers of enterprises or cooperatives, for one to three years from the date the enterprises or cooperatives are declared bankrupt, Thuyen added.

Bankruptcy declaration is also difficult at state-owned enterprises because many of them hold monopolies in important sectors of the economy.

"Vinashin is a symbolic example. It should be declared bankrupt, instead of being restructured as now," Thuyen said. The state-owned shipbuilding group almost collapsed in 2010 with debts of over $4 billion.

The impossibility of declaring firms bankrupt can negatively affect the economy in terms of wastefulness. Experts say a bankrupt firm that continues operations will cut back on production, so its equipment and workshops are not used effectively.

The situation can also lead to bad investment or lending practices. Many firms have no way to turn their business around, but still receive loans.

"This is a wrong investment, causing a big waste of capital, putting more pressure on capital resources, and creating more bad debts at banks," said an economist who requested anonymity. "It is very dangerous, especially in the context of a bank capital shortage."

Gloomy forecast

Economist Nguyen Minh Phong of the Hanoi Socioeconomic Research Institute said bankruptcy is quite common in a market economy. "Bankruptcy opens a new opportunity for firms to change their management and ownership model. The development policy of many firms is no longer suitable for the current economy."

"In the coming time, bankruptcy, and mergers and acquisitions will continue to happen. This is an unavoidable trend because of low competitiveness of Vietnamese firms. Enterprises with modern technology and equipment account for only one-third of the total number."

Echoing Phong, Cao Sy Kiem, chairman of the Vietnam Association of Small- and Medium-Sized Enterprises, said business and production has been worse this year amid a stagnant economy.

"Existing problems in the Vietnamese economy have not been solved effectively and this is likely to affect businesses strongly this year. Their difficulties in 2012 continue to be limited capital and increased production costs due to rising prices of imported goods such as gasoline and raw materials," he said. "Although we are trying to reduce interest rates, they still stand high, resulting in higher production costs and lower sales in the domestic market. These will exert added pressure on firms."

The central bank cut interest rates in April for the second time in less than a month. The refinancing rate was reduced by 1 percentage point to 13 percent, and the discount rate by the same amount to 11 percent. It also lowered the dong deposit cap for terms of one month and above to 12 percent from 13 percent.

The policy rate cuts have been followed by commercial banks reducing their lending rates.

Although some banks have loosened lending to investors, many firms are not very interested in borrowing. Due to low purchasing power, enterprises don't have the demand for borrowing to continue production and business. In addition to interest rate cuts, the state should also implement other policies to support firms and spur local consumption, economists have said.

"We should not belittle the social impacts of bankruptcy and halted production at many enterprises. If firms' difficulties are not solved, Vietnam will fall into a dangerous situation as more firms may go bankrupt, raising the number of unemployed workers, and slowing down economic growth," said economist Le Dang Doanh.

The International Monetary Fund cut Vietnam's 2012 growth forecast to 5.6 percent from 6.3 percent in its world outlook report in April.

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