Contribution of capital using the efforts of company members - Legal issues to be clarified

This article was written by Lawyer Nguyen Van Phuc and Lawyer Nguyen Nhat Duong (from HM&P) published in the Legal Electronic Magazine on October 30th, 2023. Below is the English version:

Currently, the situation where companies are established with intangible charter capital is becoming more and more common. This not only brings risks to partners and customers in dealing with these companies, but also leads to many disputes among company members or between company members and other third parties in capital transfer transactions. Recently, the High People’s Court in Ho Chi Minh City issued the Appellate Judgment No. 09/2023/KDTM-PT dated February 23, 2023 (“Judgment”) to resolve the dispute over the capital contribution transfer contract between the plaintiff, Ms. Lam Van A (“Ms. A”) and the defendants are Mr. Tran Phuc H (“Mr. H”) and Ms. Le Ngoc Duyen A1 (Mr. H’s wife)[1].

Although the judgment has become final, we believe that there are still many issues in this dispute that have not been satisfactorily resolved. In this article, we will present some remaining legal issues in the case and complex legal questions that have not been answered, hoping to provide a clearer and more comprehensive view of these issues.

Source: https://phaply.net.vn

According to the content of the Judgment, on August 10, 2016, L Gaming Company Limited (“Company L”) was established with a charter capital of 10 billion VND, and consisted of two members, Ms. A (who committed to contribute 7 billion VND, accounting for 70% of Company L’s charter capital) and Mr. H (who committed to contribute 03 billion VND, accounting for 30% Company L’s charter capital). On August 30, 2016, Company L held a meeting of the Board of Members, and then prepared a Meeting Minutes of the Board of Members No. 08/2016/BB with all signatures of the members of Company L, which included the content: “Mr. H has contributed 03 billion VND (30%), Ms. Lam Van A has not contributed 07 billion VND (70%); The capital contribution belongs to Mr. H and Mr. H is the one who has the right to decide and manage this amount of 03 billion VND. Mr. H has the right to transfer the capital contribution at the agreed price to the remaining member or to other persons outside the company; Mr. H is obliged to keep books, papers, seals... monthly tax reports, annual financial reports... of the company”. On the same day, August 30, 2016, Mr. H, as the legal representative of Company L, issued capital contribution certificate No. 01/2016/GCN and the register of members in accordance with the law, indicating that Mr. H had contributed the capital of VND03 billion and Ms. A had not yet contributed the capital.

On June 4, 2018, Mr. H and Ms. A signed a capital contribution transfer contract, according to which Mr. H transferred all of his capital in Company L to Ms. A with a value of 02 billion VND. Also on that day, Company L had a board of directors' meeting minutes with all the members' signatures, showing the content: "Actually up to now the members are Mr. Tran Phuc H and Ms. Lam Van A have not yet contributed capital to the company, but together recognize the establishment and changes of the company, storage of seals, documents, tax/financial reports, customer and partner search, transaction costs, headquarters allocation... recently has been Mr. H's efforts and expenses, so Ms. A agreed to buy Mr. H's capital for 2,000,000,000 VND. The capital contribution, capital transfer and client transfer... are based on voluntary agreement...". On June 8, 2018, Ms. A received the Enterprise Registration Certificate from the Department of Planning and Investment of Ho Chi Minh City, recognizing her as the owner of Company L. The payment of the Capital Contribution Purchase Agreement was also completed, however, Ms. A filed a lawsuit demanding that Mr. H pay Ms. A the amount of 03 billion VND as capital contribution, as Mr. H did not contribute capital, which is a violation of the member's obligations and seriously affects her legal rights and interests. The court of first instance did not accept this claim. Subsequently, Ms. A appealed and changed the request, forcing Mr. H to hand over to her the assets of Company L, the amount of 03 billion VND, which Mr. H contributed to Company L according to Capital Contribution Certificate No. 01/2016/GCN. However, the Court of Appeals also rejected this request, thereby upholding the announced verdict of the first instance.

The Court’s opinion in this case is expressed uniformly through two levels of trial, specifically, the Court commented that based on the contents expressed in the Meeting Minutes of the Board of Members of Company L and the Capital Contribution Purchase Agreement, showing that Mr. H and Ms. A both clearly knew that neither of them had contributed capital to Company L. The Court considers Ms. A’s receipt of capital as the receipt of Mr. H’s efforts in the costs in transactions and sourcing customers and partners.

Source: https://phaply.net.vn

1. Can individuals contribute capital to the company through their efforts?

In this case, one of the important points that the Court did not clearly explain is whether an individual can contribute capital to a company through his or her own efforts? Can Mr. H contribute capital to Company L through his efforts?

According to the Law on Enterprises on types of assets used for capital contribution, the parties have the right to contribute capital with assets under their legal ownership/use for the types of assets are Vietnam Dong, freely convertible foreign currency, gold, land use rights, intellectual property rights, technology, technical know-how, and other assets can be valued in Vietnam Dong[2].

It can be seen that effort is not a type of asset listed among the assets that can be used to contribute capital, but the contributor will argue that effort can be considered as another asset and can be valued in Vietnam Dong. Therefore, the contributors can claim that their efforts are legal assets to contribute to the enterprise.

In our opinion, the nature of the capital contribution to establish a company is an agreement between the contributors. The use of any assets that are legitimate and not contrary to the provisions of the law should be recognized. In addition, as many companies today still do and declare, the efforts contributed by members can be valued by them in Vietnamese Dong. Therefore, effort can still be a type of capital contribution asset, however, capital contribution through effort requires a Minutes of handover of contributed assets and contents to evaluate this type of asset, because, in any way, this is also a special type of asset used to contribute capital.

However, returning to the case under analysis, in the Meeting Minutes of the Board of Members No. 08/2016/BB dated August 30, 2016, members of Company L recorded that “Mr. H has contributed 03 billion VND (30%), Ms. Lam Van A has not contributed 07 billion VND (70%); The capital contribution belongs to Mr. H and Mr. H is the person who has the right to decide and manage this amount of 03 billion VND.” This content does not mention Mr. H’s contribution of efforts, even if read separately, it could lead to the misunderstanding that Mr. H has contributed capital to Company L in Vietnam Dong, because the content mentions “capital contribution” and “this amount of 03 billion VND”. Next, in the Meeting Minutes of the Board of Members dated June 4, 2018, the members of Company L noted that neither Mr. H nor Ms. A had contributed capital to Company L, but acknowledged Mr. H’s efforts in a number of tasks to serve the establishment and operation of Company L. It should be noted that in this Meeting Minutes, the members recorded that Mr. H and Ms. A have not contributed capital, therefore, there had been no capital contribution by Mr. H’s efforts to Company L in any way, or at least in terms of compliance with the regulations set by the Law on Enterprises when contributing capital in this form, which is to have a Minutes of handover of the contributed assets. At the same time, the recognition of Mr. H’s efforts in a number of tasks serving the establishment and operation of Company L does not mean that this Meeting Minute is valid as a Minute of handover of the contributed assets, because it does not ensure the contents specified in the Law on Enterprises[3]. Thus, it can be seen that, from the beginning of the establishment of Company L until the transfer of efforts to Ms. A and the time of the dispute, there was no document showing that Mr. H contributed in efforts to Company L.

2. The legal status of the company if not all members contribute capital

According to the provisions of the Law on Enterprises, if a member does not contribute the full amount of capital as committed within 90 days from the date of issuance of the Enterprise Registration Certificate, the member who has not contributed capital as committed is automatically ineligible to be a member of the company[4]. Therefore, in this case, if the Court finds that Mr. H does not contribute capital in money and other assets and also did not contribute capital with effort as analyzed above, it can be affirmed that Mr. H fails to contribute capital as committed, and therefore, Mr. H is no longer a member of Company L. Therefore, it is clear that the transfer of Mr. H's capital to Ms. A is against the law because Mr. H is no longer a member of Company L so he does not have the right to transfer the capital equivalent to 03 billion VND that he committed to contribute to Company L[5]. However, in this case, the Court did not argue that Mr. H is no longer a member of Company L, and also did not clearly determine the form of Mr. H’s transfer of his efforts to Ms. A.and what is Mr. H’s role in Company L.

Also according to the content of the Judgment, since Ms. A did not make any capital contributions, as stated above, Ms. A is no longer a member of Company L. At the same time, since Mr. H also did not make any capital contributions as analyzed above, therefore, both members of Company L (at the time of the enterprise registration) are no longer members of Company L.

The Law on Enterprises provides for a number of cases in which a company is dissolved, including the case where “the company does not have the minimum number of members stipulated in the Law on Enterprises for a period of 06 consecutive months and does not carry out the procedures to change the legal form of the company”[6] and “the Enterprise Registration Certificate is revoked or according to the decision of Court”[7]. 

Source: https://phaply.net.vn

In the case where the company does not have the minimum number of members stipulated in the Law on Enterprises for a period of 06 consecutive months and does not conduct procedures to convert the form of the company, it can be clearly seen that Company L is allowed to establish itself as a limited liability company with two or more members, where two members are Mr. H and Ms. A. However, both of them did not contribute capital to Company L as committed and from the time of the issuance of the Enterprise Registration Certificate to the time of the dispute, which was more than 6 months. Therefore, it can be assumed that Company L no longer has the minimum number of members required by the Law on Enterprises. However, according to the law, the dissolution of a company when there are not enough members depends on the will of the memners of the company, because the documents and procedures for dissolution must include the participation of the members of company[8]. Therefore, the dissolution of the company in this case would not be appropriate if applied to Company L, because there are no more qualified members to carry out the procedures for dissolving of the company according to the regulations.

Regarding the case of dissolution of the enterprise due to revocation of the Enterprise Registration Certificate or by a decision of the Court, both the Law on Enterprises 2014 and the Law on Enterprises 2020 mention this case in a special article, separated from the other dissolution cases. However, both legal documents do not clearly specify when the Court will issue a decision to dissolve the enterprise and on what basis the Court will make this decision. In particular in the case of revocation of the Enterprise Registration Certificate, the Law on Enterprises stipulates that enterprises shall have their Enterprise Registration Certificate revoked in certain cases, including the case where “the declared content in the application for enterprise registration is fake”[9].

In the above case, Mr. H and Ms. A both clearly acknowledged that Mr. H did not contribute capital to Company L, which mean that Mr. H was not a member of the company and did not have the right to transfer the capital equivalent to 03 billion VND that he committed to contribute but still implemented the Capital Contribution Purchase Agreement, which is violated the Law on Enterprises. In other words, in this case, Mr. H and Ms. A committed fraud in applying for enterprise registration so that Company L could obtained an Enterprise Registration Certificate to change from a two-member or more limited liability company to a single-member limited liability company owned by Ms. A because Ms. A has received the transfer of Mr. H’s capital. It is possible that the Department of Planning and Investment of Ho Chi Minh City will not verify this information at the time of processing the file, but when the case was tried by the Court, the Court was fully aware of this falsification through the documents and evidence provided by the parties. Therefore, according to the provisions of the current Law on Enterprises, the Court has the right to request the Business Registration Office to revoke the Enterprise Registration Certificate of Company L[10]. However, in this case, the Court did not take any action to determine the legal status of Company L at the time of dispute resolution.

However, if the Department of Planning and Investment has verified the falsification of enterprise registration documents and decided to revoke the Enterprise Registration Certificate, the company still must convene a meeting to make a decision on dissolution[11]. This is really unreasonable for Company L, because at this time both Mr. H and Ms. A do not have the status of members of Company L, so how can the meeting be convened?

Thus, if the nature of the case is that whether the capital contribution of Mr. H is legitimate under the current law is not yet clarified, it is inevitable that the legal status of Company L is not clearly determined. Therefore, it can be seen that this Judgment not only has unclear contents that have not been clarified by the judicial authority but also contains many complex legal issues that require the competent authorities to comprehensively review the provisions of the Law on Enterprises in order to promptly issue appropriate instructions and adjustments, especially recognizing the capital contribution by the efforts of the company members, a legal issue that regularly occurs in reality.

Read the article in Vietnamese at: Góp vốn bằng công sức của thành viên công ty - Những vấn đề pháp lý cần làm rõ

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