Topic
Enterprise dissolution – current status and recommendations
Do Tien Thinh
Director, Business Registration Support Center, Agency for Business Registration
During its life cycle, when facing difficulties, an enterprise may suspend its operation for a certain period of time. This is a form of temporary withdrawal from the market. However, in case an enterprise cannot continue its business activities, it must withdraw completely from the market in the form of dissolution or bankruptcy.
1. Overview of the legal framework on enterprise dissolution
Dissolution is the termination of an enterprise’s existence upon the will of its owner(s) or appropriate authority with the condition of resolving all debts and other equity obligations. Article 157 of the Enterprise Law stipulates cases of enterprise dissolution, including:
(a) The duration of operation stated in the Company Charter expires and there is no decision to extend;
(b) As decided by the enterprise owner(s);
(c) The company does not have the minimum number of members stipulated in this Law for a period of six consecutive months;
(d) The business registration certificate is revoked.
Concurrently, the Enterprise Law stipulates that an enterprise shall only be allowed to be dissolved when it guarantees to resolve all debts and other equity obligations.
Process and Procedure for enterprise dissolution are regulated in Article 158 of the Enterprise Law. Accordingly, within seven working days after all debts are fully paid, the legal representative of the enterprise submits enterprise dissolution dossier e to the business registration office or competent authority in investment management. Within seven working days from the date of receipt of all valid documents, the business registration office removes the name of the enterprise from the business register.
When the business registration certificate of an enterprise is revoked, the enterprise must be dissolved within six months from the date of revocation of the business registration certificate. The procedure for dissolution is in accordance with the above-mentioned provisions. After the six-month period, if the business registration office does not receive enterprise dissolution dossier, the enterprise is considered dissolved and the business registration office removes the name of the enterprise from the business register.
Figure: Enterprise dissolution procedure
In general, the current legal framework on enterprise dissolution is clear and transparent. Therefore, based on the results of administrative procedures review, on December 27, 2010, the Government promulgated Resolution No. 70/NQ-CP on simplifying administrative procedures within management functions of the Ministry of Planning and Investment; in which, the plan to simplify business dissolution procedure approved by the Government is focused on two contents: (i) the number of dissolution dossier is clearly regulated as “01 dossier” and (ii) the notice of dissolution decision shall be “posted in a centralized or a certain number of newspapers, including electronic media and business registration portal operated by state management agency in planning and investment”.
2. Status of enterprise dissolution in recent years
In the global economic crisis, Vietnam's economy has to cope with many difficulties, which crucially affects the operation of enterprises. Since 2010, there has been a sharp rise in the number of dissolution and suspension. In 2011, 53.9 thousand enterprises were dissolved or temporarily suspended of operation, an increase of 24.8% compared to 2010; in which, 7.6 thousand enterprises were officially dissolved, a rise of nearly 15% than that of 2010. In 2013, 60.7 thousand enterprises were dissolved or temporarily suspended of operation (in which, 9.8 thousand enterprises completed dissolution procedures, 50.9 thousand enterprises faced difficulties and temporarily suspended of operation, 11.9% higher than that of 2012).
Table: Number of new registration, dissolution and suspension.
Unit: thousand enterprises
From quantitative approach, these figures illustrate a concerning issue related to enterprise dissolution: the “storage” of numerous enterprises those suspended operation. The compliance rate of enterprise dissolution according to enterprise dissolution and bankruptcy regulations is only 14% to 17%. This ratio is rather modest. Therefore, there is a great number of enterprises (around 140 thousand) those have suspended operations but have not completed dissolution or bankruptcy procedures, leading to various problems such as tax losses, violation of labor rights, etc. and inaccurate statistics on enterprises, affecting the transparency of the business environment. Especially, there are enterprises those have suspended operations, leaving lingering consequences such as enterprises with foreign owners renting state-owned land, owing tax debt, customer debt and salary debt,etc. but enterprise owners fled the country so there is no responsible person to complete dissolution or bankruptcy procedures according to regulations.
3. Evaluation and recommendations
There are various reasons for the difficulties and obstacles in enterprise dissolution. However, legal framework on dissolution dossier, process and procedure are not the main challenges. The situation of enterprises being “afraid” of completing dissolution procedure is not new but emerged at the same time as the implementation of Enterprise Law 1999. Following are main reasons for this problem:
Firstly, limited understanding of legal provisions on dissolution and bankruptcy, and negative attitude to comply;
Secondly, sanctions imposed on business owners and legal representatives who refuse to comply with dissolution and bankruptcy regulations are too weak to prevent violations. Consequently, many business owners and legal representatives ignore dissolution and bankruptcy obligations;
Thirdly, there are inadequacies in legal framework on enterprise bankruptcy. Therefore, it is difficult for entrepreneurs to comply. Among the 140 thousand enterprises those have suspended operation, a large proportion are in the condition of bankruptcy (unable to repay their debts), meaning that the dissolution procedure is not applicable. However, it takes 3 to 5 years for them to perform bankruptcy procedures regulated in the Law on Bankruptcy. As a result, the ratio of enterprises those have been or are in the procedure of filing for bankruptcy is rather meaningless;
Fourthly, in many cases, the guidance, support, and facilitation provided by local agencies for enterprises to complete administrative procedures related to dissolution is insufficient; especially, tax procedures related to dissolution are time consuming and complicated. Many cases revealed that when enterprises want to “be over with”, they must still hire “illicit facilitators”.
To solve above difficulties and problems related to enterprise dissolution, following are some possible solutions:
Firstly, continue to simplify administrative procedures prior to the submission of dissolution dossier to business registration office, in which, focus on simplifying procedures related to tax clarification and finalization after dissolution decision.
Secondly, promote information and communication activities related to state management of enterprises, legal provisions and sanctions on dissolution and bankruptcy in order to promote understanding and attitude towards compliance.
Thirdly, ministries and sectors implement effectively and thoroughly tasks assigned by the Prime Minister in Decision No. 419/QD-TTg dated 11/4/2012 by the Prime Minister approving the proposal for innovation of state management of enterprises after the registration; in which, main focuses are:
- Amend Enterprise Law and Investment Law towards differentiating state management of enterprises and state management of investment projects; amend, supplement and complete provisions on enterprise dissolution; provisions on enterprise management according to the market economy.
- Review and recommend strong and dissuasive sanctions imposed on enterprises and related individuals such as legal representatives, enterprise’s members who do not comply with dissolution obligations.
- Complete mechanisms, policies, and information technology platform so that The National Business Registration System retains the central role in providing legal information on business registration, thereby, enabling easy access for all organizations and individuals to accurate information on legal status of enterprises; promoting social monitoring of enterprises.
(Source: Agency for Business Registration, Ministry of Planning and Investment)