Law amendments to end capital contribution conflicts

A draft of amendments the Enterprise Law looks to scale down litigation over capital contributions by requiring limited liability companies to finalise their obligations to submit chartered capital within 90 days, not the mandated three years, the Vietnam Investment Review (VIR) reported.

“The move is aimed at cleaning up chartered capital declarations of firms when they conduct business registration procedures. Alongside this regulation, to facilitate better operations, the procedures of hiking capital are also simplified in the draft,” said Phan Duc Hieu, deputy head of the Business Environment Department under the Central Institute for Economic Management, a member of the group that wrote the revised law.

For a long time the three year period to contribute chartered capital has resulted in numerous disputes. One example is the on-going lawsuit between the Vietnam Fumigation Joint Stock Company (VFC) and General Import Export Company 3 (Centrimex); the latter was merged to Fococev Foodstuff and Investment Company.

The companies pooled capital to found Hai Yen Company Limited in 2006 to build Novotel Nha Trang Hotel. The offspring had chartered capital of 60 billion VND (2.8 million USD); of this, 67 percent came from VFC and 33 percent from Centrimex.

The two also envisioned later raising Hai Yen’s chartered capital to 90 billion VND (4.2 million USD).

After the deadline for capital contribution, Centrimex only transferred 5.77 billion VND, 30 percent of its total obligation.

To avoid the hotel project from being revoked, the VFC pumped more capital into Hai Yen Limited, General Director Truong Cong Cu told the VIR.

The VFC then asked the Khanh Hoa provincial court to handle the case. The company has paid 93.6 percent of the funds needed for Hai Yen’s 90 billion VND chartered capital, well above its 67 percent commitment.

“The dispute has resulted in us impossible to count the profit from hotel business as VFC profit though the hotel has been operating since November 2008,” said Cu.

Also because of the dispute over capital contribution, Hai Yen has been unable to source bank loans surpassing its chartered capital.

This kind of case is quite common. Lawyer Cao Ba Khoat, Director of consulting firm K & Associates said the period of three years to complete capital contribution was too long and one of the main causes of legal disputes.

“In many cases, disputes are over one member not fulfilling their end of the bargain though the deadline is still pending. Companies are arguing that benefits and obligations are based on real input capital and not commitments,” said Khoat.

Khoat added that in other cases companies’ founding members were refusing their obligations, arguing that capital contributions have not been kept.

There have also been cases where firms intentionally exaggerated their capital contributions as business registration offices find it difficult to check these numbers since company members are solely responsible for keeping their commitments.

The current law poses great difficulties to ensuring companies’ chartered capital is what they announced it would be.