ORDER OF PRIORITY FOR DEBT REPAYMENT IN CORPORATE BANKRUPTCY

Pursuant to Article 54 of the 2014 Law on Bankruptcy, the assets of a bankrupt enterprise shall be distributed in the following order of priority:

1. Bankruptcy expenses: These are costs arising during the bankruptcy process, including court fees, charges, costs for asset management officers or asset management and liquidation enterprises, and other necessary expenses. Prioritizing these payments ensures that bankruptcy proceedings can be effectively carried out in practice.
2. Debts owed to employees: These include wages, severance allowances, social insurance, health insurance, and other benefits under labor contracts or collective labor agreements. This provision clearly reflects the State’s policy of protecting employees, who are considered the weaker party in economic relations.
3. Financial obligations to the State: Obligations such as taxes and other payments to the state budget are ranked after employee claims, demonstrating the law’s prioritization of social welfare considerations in cases of bankruptcy.
4. Unsecured debts and the unsecured portion of secured debts: This group of creditors is only paid if assets remain after fulfilling the above priority obligations. To fully understand this category, it must be considered in conjunction with the mechanism applicable to secured creditors. Pursuant to Article 53 of the 2014 Law on Bankruptcy, secured creditors are entitled to priority payment from their collateral, meaning their claims are satisfied before the general distribution of the enterprise’s assets. Only where the value of the secured assets is insufficient to fully satisfy the debt will the remaining unpaid portion be addressed during asset liquidation and included in the distribution order under Article 54 of this Law. Specifically, under Point d, Clause 1, Article 54 of the 2014 Law on Bankruptcy, only the unpaid portion of secured debts is ranked together with unsecured debts. Therefore, in principle, secured creditors are not directly subject to the general order of priority, but only participate in this order with respect to any unsecured portion of their claims. This ensures both the priority rights arising from secured transactions and a relative fairness among creditors when the enterprise’s assets are insufficient to cover all obligations.

What happens if the enterprise’s assets are insufficient to satisfy all claims within the same priority level? According to Clause 2, Article 54 of the 2014 Law on Bankruptcy, in such cases, creditors within the same priority rank shall be paid on a pro rata basis corresponding to the amount of their claims.

From these provisions, it can be seen that Vietnamese bankruptcy law establishes a relatively clear order of payment, prioritizing, in sequence, the functioning of bankruptcy proceedings, the rights of employees, obligations to the State, and finally ordinary creditors. However, in practice, most bankruptcy cases involve insufficient assets to reach the final group of creditors. This reality requires parties in business relations to proactively adopt security measures and enhance their awareness of legal risk management.