1. Overview of capital contribution by members of a limited liability company
According to Article 4.18 of Law on Enterprise 2020, “Contribution of capital” is the contribution of assets to form the charter capital of the company, including capital contribution to establish the company or additional contribution to the charter capital of the established company and Article 4.27 stipulates that “Contributed capital” is the total value of assets of a member who has contributed or committed to contribute to a limited liability company or partnership. The ratio of contributed capital is the ratio between the contributed capital of a member and the charter capital of a limited liability company or a partnership.
1.1 Accordingly, members must contribute sufficient capital and exact types of assets as committed within the statutory term
Specifically, Article 47 of Law on Enterprise 2020 provides for the capital contribution to establish a limited liability company with two or more members as follows:
“Article 47. Capital contribution to establish a company and issuance of the capital contribution certificate.
- The members shall contribute sufficient and correct assets as promised when applying for enterprise registration within 90 days from the issuance date of the Enterprise Registration Certificate, excluding the time needed to transport or import the contributed assets and for completing ownership transfer procedures. During this period, the members shall have rights and obligations that are proportional to their promised contribution. The members may only contribute assets that are different from the promised ones if the change is approved by more than 50% of the remaining members.
- In case a member fails to contribute or fully contribute capital as committed by the expiration of the period mentioned in Clause 2 of this Article:
a) The member that has not contributed capital as committed is obviously no longer a member of the company;
b) The member that has not fully contributed capital will have the rights that are proportional to the contributed capital;
c) Uncontributed capital of members are offered for sale in accordance with resolutions and decisions of the Members’ Council.”
According to the above-mentioned provision, within 90 days, members must contribute the full amount of capital as committed, if the member fails to contribute sufficient committed capital, the scope of the member’s rights to exercise will correspond to the actual contributed capital. Concurrently, the enterprise is responsible for adjusting the charter capital if any member fails to contribute sufficient committed capital.
1.2 Violations against regulations on enterprise establishment
In case the company fails to carry out procedures for registration of changes to the corresponding content on the Enterprise Registration Certificate within the prescribed term, the enterprise may be subjected to administrative violations in the form of fines and remedy arising consequences as in Article 46.3.a of Decree No. 122/2021 on sanctioning of administrative violations in the field of planning and investment:
“Article 46. Violations against regulations on enterprise establishment
- A fine ranging from VND 30,000,000 to VND 50,000,000 shall be imposed for any of the following violations:
a) Failure to follow procedures for changing capital or changing members or founding shareholders as prescribed at the business registration authority upon expiry of the time limit for capital contribution and time limit for capital change because members or founding shareholders fail to fully contribute capital but there is not any member or founding shareholder that undertakes to contribute capital;
b) follow procedures for changing capital or members or founding shareholders if the violation specified in Point a Clause 3 of this Article is committed”
The Validity of the capital transfer transaction when members have not fully contributed
As analyzed above, it can be understood that when a member has fully contributed capital, that member is allowed to transfer all the member’s capital to another individual. If a member has not fully contributed the committed capital, the member is only allowed to transfer capital to a third party in proportion to the actual amount contributed. The amount of actual contributed capital is understood as the amount of capital transferred to the company account or actually paid in cash to the company, this capital is different from the capital recorded on the Enterprise Registration Certificate, the amount recognized on the Enterprise Registration Certificate is the committed capital.
In case the capital contribution transfer contract is agreed upon and signed when the member has not yet contributed the full amount of capital contribution as committed and recorded on the Enterprise Registration Certificate and the enterprise has agreed to update the name of the transferee to the list of members with the corresponding ownership ratio according to the transferred contributed capital, this is against the law and is the basis for the contract to be invalidated according to Article 123 of the Civil Code, specifically:
“Article 123. Invalidity of civil transaction due to breach of the prohibition of the law and against social ethics
Civil transactions with objectives and contents which breach the prohibition of the law, or which contravene social ethics shall be invalid.”
When the contract is void, the membership is not established. Considering the legal consequences of an invalid civil transaction, the parties shall restore everything to its original state and shall return to each other what they have received. The transferee fully has the right to request a refund of the paid transfer value of contributed capital and can request to carry out the procedures for registration of changes in business registration contents at the Department of Planning and Investment to cancel the member status in the company.
However, in order to have a basis for proceeding, the transferee should file a lawsuit to the competent People’s Court with the request to declare the capital transfer contract to be invalid and request the Department of Planning and Investment to record the cancellation of the membership of the transferee if the capital transfer contract is declared invalid.
Therefore, as an investor in the enterprise (especially for a 100% Vietnamese-owned enterprise where the capital contribution is not controlled through the direct investment capital account) in the form of transfer capital from an existing member, the investor should also pay attention to check the member’s eligibility to transfer contributed capital through documents such as the Enterprise Registration Certificate, Certificate of Capital Contribution, Financial Statements, etc. of the company to check the capital contribution progress of that member to limit the risk that the capital transfer contract will be invalid and the member’s status will not be established in case the transferor has not yet contributed capital or sufficiently contributed capital as committed in the license.