How to manage debt upon the dissolution of an enterprise

So how to manage debt when dissolving the enterprise? Who will pay the debt for the enterprise upon dissolution?

Debt management upon business dissolution

1. Legal provisions on debts payment obligations upon the dissolution of an enterprise

When dissolving an enterprise, the owner is obliged to pay debts for related parties including customers, partners, employees in the enterprise, and State Management Agencies by the provisions of Law.

Clause 2, Article 207 of the Law on Enterprises 2020 stipulates the obligation the debt payment obligation upon enterprise dissolution as follows:

“An enterprise may only be dissolved after all of its debts and liabilities are fully paid and it is not involved in any dispute at the court or arbitration. Relevant executives and the enterprise mentioned in Point d Clause 1 of this Article are jointly responsible for the enterprise’s debts.”

Upon the dissolution of an enterprise, the debts of the enterprise are paid in the following order:

According to Clause 5, Article 208 of Law on Enterprises 2020, an enterprise’s debts shall be paid in the following order of priority:

• Firstly, unpaid salaries, severance pay, social insurance, health insurance, unemployment insurance and other benefits of employees under the Collective Bargaining Agreement and concluded employment contracts

• Secondly, tax debts.

• Third, other debts.

• Finally, after the dissolution costs and debts have been fully paid, the remainder shall be divided among the owner, partners, shareholders in proportion to their shares.

2. Liabilities to pay debts of the enterprise upon dissolution

The determination of liability to pay debts of an enterprise will depend on each type of enterprise, specifically:

• For a joint-stock company, upon the dissolution of the enterprise, the debts will be paid by the shareholders but only within the limit of capital contributed to the enterprise, based on Point c, Clause 1, Article 111 of Law on Enterprise 2020: “A shareholder’s liability for the company’s debts and liabilities is equal to the amount of capital contributed to the company by the shareholder”.

• For a sole proprietorship, the owner directly pays the debt upon the dissolution of the company, according to Clause 1, Article 188 of the Law on Enterprises 2020: “A sole proprietorship is an enterprise owned by a single individual whose liability for its entire operation is equal to his/her total assets”.

• For a partnership, the general partner must be responsible with all his assets for the company's obligations, based on Point b, Clause 1, Article 177 of the Law on Enterprises 2020: “A general partner shall be an individual whose liability for the company’s obligations is equal to all of his/her assets”.

• For a single-member limited liability company, the company owner is responsible for the company's debts and other property obligations to the extent of the company's charter capital, based on Clause 1, Article 74 of the Law. Enterprise 2020: “A single-member limited liability company is an enterprise owned by a single organization or individual. The owner’s liability for the company’s debts and other liabilities shall be equal to the company’s charter capital”

• For a limited liability company with two or more members, the members are responsible for the debts and other property obligations of the enterprise within the amount of capital contributed to the enterprise, based on Clause 1, Article 46 of Law on Enterprises 2020: “A member’s liability for the enterprise’s debts and other liabilities shall be equal to the amount of capital that member contributed to the enterprise, except for the cases specified in Clause 4 Article 47 of this Law.”.

• Furthermore, for an enterprise with two or more members or an organization that is an owners of a one-member limited liability company, the relevant manager and the enterprise was dissolved due to the revocation of the Enterprise Registration Certificate prescribed in Clause 1, Article 207 of Law on Enterprises 2020 are jointly and severally liable for the debts of the enterprise.