Part 2. Some notes on the right to withdraw contributed capital out of an enterprise and the practices of related dispute resolution

Right to withdraw the contributed capital

In part 1 of this article, BLawyers Vietnam presented the provisions of Vietnamese law related to methods of capital withdrawal out of an enterprise. It can be seen that capital-contributing members or shareholders of a company can only withdraw capital in an indirect manner by applying methods as prescribed by law, but cannot directly and freely withdraw capital as desired or agreed upon, whether in whole or in part.

The practices of dispute resolution in Vietnam show that lawsuits claiming capital withdrawal or refund of contributed capital in enterprises have been increasingly common, with the main reason that individuals and organizations do not clearly understand the nature of and legal regulations about capital withdrawal.

Below are 02 main dispute situations and BLawyers Vietnam’s notes on dispute settlement practices by the Court in Vietnam:

1. Situation 1: A capital-contributing member or shareholder claim for the return of contributed capital by a company based on an agreement on capital withdrawal between the member and the company

The company and a capital-contributing member or shareholder signed an agreement that the company would allow the capital-contributing member or shareholder to withdraw capital and would refund the value of capital to such member and shareholder. The company’s failure to pay the full amount as agreed to the member or shareholder led to the dispute. The capital-contributing member initiated a lawsuit against the company to request the company to pay the capital amount. For this dispute, the competent Court determined that the capital withdrawal agreement entered into by the parties was not legally valid since such capital withdrawal did not comply with the order and procedures prescribed by law. The rights and obligations of the parties set out in the capital withdrawal agreement could not be considered as well; therefore, the Court did not accept the request of the capital-contributing member (Refer to the Judgment No. 05/2014/KDTM-ST dated August 08 September 2014 of the People’s Court of Dong Nai Province).

Regarding the above case, even if the two parties had not disputed the implementation of the signed capital withdrawal agreement, one of the issues and risks that the company must be concerned about is how to account for the amount paid to members ensuring compliance with accounting law.

2. Situation 2: A capital-contributing member or shareholder claim for the return of contributed capital by a company under different reasons without legal grounds as prescribed by law

Capital-contributing members and shareholders also often sue the company at judicial authorities to reclaim their contributed capital based on many different grounds, which may arise from their actual contributed capital being greater than the capital officially recorded on company books; disagreements in management, administration, and division of company’s profits and losses; or the amount of the initial capital contribution. And, usually, requests to withdraw capital or refund capital in these cases shall not be accepted since there are no grounds under the law.

For example, an LLC received money and assets contributed by a member at the time of formation as well as during its operation. When the company was established, such member was recognized as a capital-contributing member owning 20%, equivalent to 05 billion VND of the company’s capital under the company’s Business Registration Certificate. During operation, this member additionally contributed many assets to the company. However, the company had not issued a certificate of capital contribution, had not shared business profits, and had not provided information of operational status to this capital-contributing member. This member initiated a lawsuit at the Court to request capital withdrawal and force the company to return all contributed capital. Accordingly, the first-instance level Court and the appeal-level Court both opined that the reasons for the request to withdraw capital given by the capital-contributing member did not fall into the cases of capital withdrawal prescribed by law, and, as a result, there was no basis to accept it. The Court also instructed that this member had the right to request the company to re-determine his/her capital contribution ratio or sue the liability of the company manager under another case (Refer to Judgment 112/2023 /KDTM-PT dated 08 November 2023 of the High People’s Court in Ho Chi Minh City).

In addition, determining the legal nature of money amount or assets transferred by a member to the company is extremely important to resolve disputes relating to a reclaim for contributed capital and assets. If it is a capital contribution, in principle, such member shall not be allowed to freely and directly withdraw capital as mentioned above. However, if the amounts or assets transferred are not for the purpose of a capital contribution but are considered a loan or other financial transaction, then forcing the company to repay it is totally subject to the ability to prove and provide evidence.

According to the provisions of Vietnamese law and dispute resolution practices, it can be seen that capital withdrawal not carried out under methods prescribed by law shall be considered illegal, regardless of the consensus on capital withdrawal between the members and the company or any other reason.

Organizations and individuals engaged in capital contribution for business need to learn about the law and consult a lawyer to help choose an appropriate plan for capital withdrawal, ensuring both the purpose of and compliance with the law.

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

Date: 22 February 2024

Writer: Trinh Nguyen

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