Case study 6:

JKL Co is a shareholding company. On 1 February the board of management met

to consider the company’s trading difficulties. The company was faced with a cash
flow crisis. Although the company’s financial position was a cause for serious
concern, the board agreed that there was a genuine prospect of recovery if cash
could be raised quickly.

They therefore agreed to sell a warehouse belonging to the company for this
purpose. Despite the warehouse having an estimated value of 225 million dong, the
highest offer to the real estate agency was 120 million. The board reluctantly
accepted this figure and the property was sold on 1 May.

On 1 June the company’s cash flow had improved and the board of directors
decided to repay a loan of 300 million dong ahead of the scheduled repayment
date. The loan had been backed by a guarantee given by Vinh, a member of the
board of management.

On 1 August the company was declared bankrupt by the court.

Required:
(a) Explain whether there will be any legal consequences to the board of
management of the decision to sell the warehouse.
(b) Explain whether there will be any consequences to the board of
management or to Vinh personally of the decision to repay the loan ahead of
schedule.

Answer:

a.

-According to clause 1, article 59- Invalid transactions, Law on Bankruptcy 2014,

we have:

1. A transaction of the insolvent entity which is made within 06 months prior to the
day on which the People’s Court gives the Decision on the initiation of the
bankruptcy process shall be considered invalid in the following cases:
a) The asset transfer does not apply market prices;

In this case, the management sold the warehouse with an estimated value of VND
225 million (market price) for only VND 120 million to the real estate agency on
May 1. Also, On 1 August the company was declared bankrupt by the court.

=> Therefore, the transaction of this enterprise is considered invalid.

*Legal consequences to the board of management of the decision to sell the

warehouse:

-According to Article 131- Legal consequences of invalid civil transactions, Civil

code 2015:

1. An invalid civil transaction shall not give rise to, change or terminate any civil
rights and obligations of the parties from the time the transaction is entered into.

2. When a civil transaction is invalid, the parties shall restore everything to its
original state and shall return to each other what they have received. If the
restitution is not able to make in kind, it may pay in money.

3. A bona fide person in receiving yield and/or income is not required to return
such yield and/or income.

4. The party at fault which caused the damage must compensate therefore.

5. The settlement of consequences of invalid civil transactions regarding personal

rights shall be prescribed in this Code and relevant laws.

=> The management board will have to return the money to the real estate
company. And if the real estate company suffers damage after this decision, the
board of directors will have to compensate.

b.

-According to Article 55- Financial obligations in cases of joint responsibility or

guarantees, Law on Bankruptcy 2014:

2. In case a guarantor is insolvent, the guarantee is handled as follows:

a) The guarantor must fulfill every obligation to the guarantee that arises. If the
guarantor does not pay sufficiently in the range of guarantee, the creditor may
request the guarantee obtainer to pay the deficiency;

b) If the obligation to the guarantee is not occurring yet, the guarantee obtainer
must find another measure for the guarantee, except the guarantee obtainer has
other agreements with the creditor.

3. If the guarantee obtainer or both the guarantor and the guarantee obtainer are
insolvent, the guarantor shall take the liability of the guarantee obtainer according
to the regulation of the Law.

-From Article 131 of the 2015 Civil Code and Clauses 2 and 3, Article 55 of the
Bankruptcy Law, Vinh doesn’t have anything to do with because the debt was
repaid before being undue, the board management was the one who repaid for the
debt and the transaction is invalid so Vinh still guarantees for this undue debt.

-Moreover, the company is insolvent (bankruptcy), so Vinh will be responsible for

a debt of 300 million dongs according to the law.

-If after the board of management pays 300 million dongs, Vinh will get his money
back (because Vinh has already paid for the board of management), the debt is
unpaid.