Contributing capital to a company without licensing registration: consequences to be noted

The above issue arises from a recent dispute considered by our lawyer. In which: (a) A, B and C agreed to jointly contribute capital by establishing an enterprise in limited liability company named D according to the ratio of 33.3% per individual; (b) due to mutual trust, all three did not make a written agreement and C did not participate in the enterprise registration from the beginning because C was abroad at that time, so only A and B are named on the Enterprise Registration Certificate (“ERC”) of company D, and the capital contribution of A and B recorded in the documents includes C’s capital contribution; (c) During 3 years of operation since the date of establishment, each year, A and B allocated an amount equivalent to 1/3 of company D’s profits to C. Now C wants to request his membership right in company D.

So, how will C’s rights in company D be protected by law? BLawyers Vietnam outlines some key points for this case by answering the 3 questions below.

1. Is C considered an official capital contributor of company D?

1. The Law on Enterprises 2020 stipulates that:
   • ‘Capital contribution’ means the contribution of capital as charter capital to establish a new company or contribution of additional capital to an existing company and a ‘Founder’ means the individual or organization that establishes or contributes capital to establish an enterprise.
   • To register the establishment of an LLC like company D, A and B must submit a registration dossier to the competent agency, including the information of the capital-contributing members along with the company’s Charter. The company’s Charter contains the content of charter capital, capital contribution and value of each member’s capital contribution along with the rights and obligations of the capital contributors.
   • After registration and issuance of the ERC, company D must proceed to establish a member’s registry immediately after being issued the ERC.
2. With the above regulations, there is no basis to determine C’s membership rights in company D. Therefore, C does not have the corresponding rights and related obligations stipulated by the Law on Enterprises 2020, which include:
   • The right to dispose of his capital contribution;
   • The right to be distributed the remaining value of the company’s assets in proportion to his capital contribution when the company dissolves or goes bankrupt; and other rights as prescribed by the Law on Enterprises.
3. Another issue that needs to be considered is the amount of money that C received during 3 years of operation of company D. When both the legal documents and the accounting records of company D do not record C’s capital contribution, this amount that C received can only be considered as money A and B paid to C (possibly from the profits A and B received from company D), and cannot be considered as company D’s distribution of profits corresponding to C’s capital contribution after company D has fully paid taxes and fulfilled other financial obligations as prescribed by law.

2. If the answer to question 1 is ‘No’, which law protects C’s rights?

The relationship between A, B, and C can only be considered a civil transaction between individuals, regulated by Civil Code 2015. However, the lack of a written agreement between the parties also complicates the protection of C’s rights.

3. What consequences can be drawn, and what lessons need to be learned?

1. Understanding and complying with the regulations of the Law on Enterprises 2020 when registering capital contributions: Before registering the capital contribution, the capital contributor needs to thoroughly understand the legal regulations to properly register their capital contributions, ensuring the capital contribution has been recorded by the company and that membership status is recognized, thereby granting legal rights according to the law.
2. Signing an agreement with business partners: A contract clearly specifies the information of the capital contributor, the amount of capital contributed, and the schedule/plan for capital contribution, and registering with the State authorities, rights and obligations of the parties, etc. is essential for the parties to comply properly and mitigate the risk of potential disputes.
3. Ensuring the capital contribution has been officially recorded: The capital contributor has the full right to request that the company fulfill the obligations of recording the capital contribution as prescribed by law, such as issuing a certificate of capital contribution, updating information in the shareholder register, and supplementing information in the company registry and the company’s charter.

The above is not official advice from BLawyers Vietnam. If you have any questions or suggestions about the above, please contact us at info@blawyersvn.com. BLawyers Vietnam would love to hear from you.

Date: 05 December 2024

Writer: Bao Pham