CASE LAW DRAFT NO. 12/2024 On Determining the Purpose of Capital Contribution to a Company (Please note that this image is not related to the specific case being discussed).

CASE LAW DRAFT NO. 12/2024

On Determining the Purpose of Capital Contribution to a Company

Approved by the Judges’ Council of the Supreme People’s Court on [date] [month] 2024 and published under Decision No. [number]/QĐ-CA on [date] [month] 2024 by the Chief Justice of the Supreme People’s Court.

Source of the Case Law:

The Cassation Decision No. 17/2022/KDTM-GĐT dated December 13^th, 2022, by the Judges’ Council of the Supreme People’s Court regarding the case “Dispute between a company member and the company” between the plaintiff, Mr. Trần Mạnh H, and the defendant, Đ Co., Ltd.

Location of the Case Law’s Content:

Paragraphs 4, 5 and 7 of the “Court’s Opinion” section.

Summary of the Case Law:

– Factual Background:

The company was established, and the Enterprise Registration Certificate indicated the contributing members and the charter capital. Subsequently, the contributing member and the company agreed on capital contribution and profit-sharing but did not agree on increasing the company’s charter capital. The Enterprise Registration Certificate did not reflect an increase in charter capital.

– Legal Resolution:

In this case, the Court must determine that the capital contribution was for business purposes, not for increasing the company’s charter capital.

Relevant Legal Provisions:

Clause 13, Article 4 of the Enterprise Law 2014 (corresponding to Clause 18, Article 4 of the Enterprise Law 2020).

Keywords:

“Capital contribution”; “No agreement on charter capital contribution”; “Capital contribution for business purposes.”

CASE DETAILS

According to the complaint dated February 2^nd, 2019, and the statements made during the proceedings, the plaintiff, Mr. Trần Mạnh H (represented by Mr. Lại Ngọc T1, his authorized representative), presented the following:

Prior to 2001, Mr. Trần V (brother-in-law of Mr. Nguyễn Văn T) and Mr. T (brother-in-law of both Mr. V and Mr. H) jointly established Đ Partnership, which later transformed into Đ Electrical Equipment Manufacturing and Installation Company (referred to hereafter as Đ Company), holding Business Registration Certificate No. 0102001784 dated January 9^th, 2001, issued by the Hà Nội Department of Planning and Investment’s Business Registration Office.

The company leased a production site at Q Mechanical Factory in Hà Nội, with its registered headquarters at Mr. T’s residence, 104 B4, B Ward, H District (now M District), Hà Nội. However, upon the expiration of the lease, the company faced operational challenges due to the lack of a production site.

Mr. V and Mr. T then approached Mr. H, who was conducting business in the Czech Republic, urging him to return to Vietnam and invest idle capital in Đ Company to facilitate business operations. Mr. H agreed to contribute capital alongside Mr. V and Mr. T.

In early 2001 (around Lunar New Year), a gathering was held at Mr. Nguyễn Văn T’s residence at 104 B4, B Ward, attended by Mrs. Nguyễn Thị H1, Mr. Trần Mạnh H, Mr. Trần V and his wife Mrs. Nguyễn Thị Bích T2, Mr. Nguyễn Văn T and his wife Mrs. Trần Thị Ngọc B. During this meeting, Mr. H, Mr. V, and Mr. T discussed and agreed to admit Mr. H as a new member of Đ Company, each holding a one-third capital share to expand operations jointly. Mr. T was appointed the company’s Director and legal representative.

Despite these agreements, the business registration continued to list only Mr. V and Mr. T as members due to Mr. H’s lack of a Vietnamese ID card and the inconvenience posed by his frequent international travel for signing documents.

Mr. H contributed an additional VND 500,000,000 due to his absence from Vietnam and non-participation in business operations. Mr. T and Mr. V each contributed VND 2,251,000,000, while Mr. H contributed VND 2,751,218,000.

As a result, over the span of 12 years (2003 to 2015), Mr. Trần Mạnh H received approximately VND 7,000,000,000 in profit distributions from Đ Company, facilitated by Mr. T. During this period, Mr. T deposited funds into three savings books under his name, with one managed by Mrs. T2 (Mr. V’s wife) on behalf of Mr. H, given his overseas residence. Mrs. T2 was authorized by Mr. T to withdraw funds from the bank on Mr. H’s behalf, a fact corroborated by Mrs. T2.

On March 22^nd, 2017, during the capital-contributing members’ meeting of Đ Company, which included Mr. H, the members listed in the amended business registration (last amended on May 9, 2012) affirmed their respective contributions to the company as follows:

Mr. T contributed VND 2,251,218,000, constituting 31% of the company’s charter capital;

Mr. V contributed VND 2,251,218,000, constituting 31% of the company’s charter capital;

Mr. H contributed VND 2,751,218,000, constituting 38% of the company’s charter capital.

It was recorded that Mr. H’s contribution exceeded that of the other two members by VND 500,000,000. Despite his higher capital share, due to his non-involvement in the company’s management, all profits, including proceeds from asset liquidation, were to be equally distributed among all three members, each receiving 33.33% (one-third).

However, since then, Mr. T has failed to amend the business registration to officially recognize Mr. H as a member of Đ Company. Furthermore, Mr. T neglected to convene the members’ council meetings as required by the Enterprise Law to approve financial statements for the years 2015, 2016, 2017, and 2018, and to distribute profits among the capital-contributing members.

Since September 2008, following Mr. H’s acquisition of household registration and an identity card in Vietnam, he repeatedly communicated his desire to be formally included in the company to Mr. T. However, Mr. T did not consent to Mr. H’s inclusion.

Mr. H initiated a lawsuit seeking the court’s intervention to address the following issues:

1. Recognition of Mr. H as a capital-contributing member of Đ Company, acknowledging his specific capital contribution within the company.
2. Requesting Đ Company to officially recognize Mr. H as a member, reflecting his actual capital contribution.
3. Urging Đ Company to convene a members’ council meeting to approve the financial statements for the years 2015, 2016, 2017, and 2018, as stipulated by the 2014 Enterprise Law.

During the court proceedings, the plaintiff amended his initial request, withdrawing a portion of his lawsuit and instead requested the court to decide on the following:

1. Recognition of Mr. Trần Mạnh H’s capital contribution in Đ Company amounting to VND 2,751,218,000, as documented in the minutes dated March 22, 2017. However, he sought recognition of his proportional ownership as one-third, considering that the additional VND 500,000,000 contributed by Mr. H over the other two members was voluntarily agreed to be equally distributed among all three, resulting in Mr. T and Mr. V each holding 33.4%, and Mr. H holding 33.2%.
2. Requesting Đ Company to undertake necessary procedures with the competent authority to officially acknowledge Mr. Trần Mạnh H as a member of the company based on his capital contribution. In the event of Đ Company’s failure to comply, Mr. H reserved the right to initiate procedures independently with the competent authority to secure his membership status in Đ Company.

The defendant, Đ Co., Ltd (represented by Mr. Nguyễn Văn T), presented the following arguments:

Before 2001, Mr. V and Mr. T jointly established Đ Partnership, which later evolved into Đ Electrical Equipment Manufacturing and Installation Company, as evidenced by Business Registration Certificate No. 0102001784 issued on January 9^th, 2001, by the Business Registration Office of the Hà Nội Department of Planning and Investment.

Between late 2001 and 2003, Mr. H transferred a total of VND 2,751,000,000 directly to Mr. T multiple times. Mr. T clarified that these transfers were not intended as capital contributions to the company but rather for investment purposes, with profits shared based on business outcomes, not fixed amounts.

Contrary to the plaintiff’s claim of receiving VND 7,000,000,000 from 2003 to 2015, Mr. T asserted that Mr. H actually received VND 11,000,000,000 during this period. Payments were made through a savings book under Mr. T’s name, authorized for withdrawal by Ms. T2 for Mr. H’s benefit, direct transfers, or undocumented direct disbursements.

Regarding the March 22^nd, 2017 document, Mr. T acknowledged that it bore signatures from himself, Mr. V, and Mr. H, but disputed its accuracy. He explained that the document, initiated by Mr. V and Mr. H, aimed to illustrate Mr. H’s financial capability for his family’s relocation from the Czech Republic to Australia, referencing the VND 2,751,000,000 transferred to him between 2001 and 2003. Despite inaccuracies in its content, Mr. T signed the document.

Concerning Mr. H’s application to join the company submitted on March 16^th, 2018, Mr. T acknowledged receiving it but declined to pursue it further, citing disagreement with Mr. H’s inclusion. Mr. T, acting as Đ Company’s legal representative, thus rejected the plaintiff’s lawsuit requests.

In the First-instance Business and Commercial Judgment No. 49/2019/KDTM-ST dated November 11^th, 2019, the People’s Court of Hà Nội made the following decisions:

1. The court accepted Mr. Trần Mạnh H’s lawsuit against Đ Co., Ltd (formerly Đ Electrical Equipment Manufacturing and Installation Company).
2. Mr. Trần Mạnh H, born in 1966, with ID No. 011420517 issued on September 20, 2008, by the Police of Hà Nội City, was recognized as a member of Đ Co., Ltd with a capital contribution ratio of one-third (33.2%).
3. Đ Co., Ltd was ordered to complete the necessary procedures at the Business Registration Office – Hà Nội Department of Planning and Investment to officially include Mr. Trần Mạnh H as a member of the company, acknowledging his capital contribution ratio of 33.2%. If Đ Co., Ltd failed to fulfill this requirement, Mr. Trần Mạnh H had the right, as per Clause 21, Article 1 of Decree No. 108/2018/NĐ-CP dated August 23^rd, 2018, to independently complete enterprise registration procedures to register himself as a member with the specified capital contribution.
4. The court dismissed Mr. Trần Mạnh H’s request for Đ Co., Ltd to convene a members’ council meeting and approve the financial statements for the years 2015, 2016, 2017, and 2018, as the plaintiff withdrew this part of the claim.

Additionally, the first-instance court addressed court fees and outlined the right to appeal.

On November 24^th, 2019, Đ Co., Ltd filed an appeal against this judgment.

In the Appellate Business and Commercial Judgment No. 15/2020/KDTM-PT dated July 10^th, 2020, the High People’s Court in Hà Nội rendered the following decisions:

The appeal filed by Đ Co., Ltd was not accepted, and the rulings of the First-instance Business and Commercial Judgment No. 49/2019/KDTM-ST dated November 11^th, 2019, issued by the People’s Court of Hà Nội, were upheld.

Additionally, the appellate court addressed matters concerning court fees and outlined the enforceability of the judgment.

On September 28^th, 2021, Đ Co., Ltd filed a request for a cassation review of the aforementioned Appellate Business and Commercial Judgment.

In the Cassation Appeal Decision No. 12/2022/KN-KDTM dated September 22^nd, 2022, the Chief Justice of the Supreme People’s Court appealed against the Appellate Business and Commercial Judgment No. 15/2020/KDTM-PT dated July 10^th, 2020, of the High People’s Court in Hà Nội.

The Chief Justice requested the Judges’ Council of the Supreme People’s Court to conduct a cassation trial, vacate the aforementioned Appellate Business and Commercial Judgment, and vacate the First-instance Business and Commercial Judgment No. 49/2019/KDTM-ST dated November 11^th, 2019, of the People’s Court of Hà Nội.

The case file was to be remanded to the People’s Court of Hà Nội for retrial according to first-instance procedures in accordance with the law.

At the cassation trial, the representative of the Supreme People’s Procuracy concurred with the Cassation Appeal Decision of the Chief Justice of the Supreme People’s Court.

COURT’S OPINION:

[1] Mr. Trần Mạnh H (the plaintiff) aimed to substantiate his lawsuit claim concerning the determination of capital contribution to Đ Company and affirm his status as a member.

To support his claim, Mr. H needed to provide various documents and evidence, including: an agreement on the company’s establishment, signatures on the list of founding shareholders (if applicable for joint-stock companies), inclusion of his name in the company charter and business registration list, possession of a capital contribution certificate reflecting the value contributed, registration in the member roster, and actions demonstrating participation in the management and operation of the company’s members’ council.

However, Mr. H did not furnish these necessary documents and evidence to support his lawsuit claim.

[2] The parties acknowledged that Mr. H contributed VND 2,751,000,000 to Đ Company as per the minutes of the capital-contributing members’ meeting dated March 22, 2017, totaling VND 7,253,656,000 when combined with contributions from Mr. Trần V and Mr. Nguyễn Văn T.

According to these minutes, it was agreed that all profits and income from asset liquidation would be evenly divided among the three members, each receiving 33.33% (one-third). Despite voluntarily contributing an additional VND 500,000,000, Mr. H did not involve himself in managing the company’s operations. The signed minutes served as evidence of capital contribution and profit-sharing, yet did not explicitly recognize or designate Mr. H as a company member.

[3] According to Clause 13, Article 4 of the 2014 Enterprise Law, “Capital contribution” denotes the contribution of assets to establish or increase the charter capital of a company.

[4] Đ Company was indeed founded in 2001 with two initial members, Mr. Nguyễn Văn T and Mr. Trần V, with a registered charter capital of VND 1,000,000,000. Subsequent amendments to the business registration (second, third, fourth, and fifth amendments in 2006, 2010, and 2012) indicated that the company continued with two members, Mr. T and Mr. V, and increased its registered charter capital to VND 6,000,000,000.

[5] The minutes of the company’s members’ council meeting on March 22^nd, 2017, revealed that while acknowledging capital contributions, there was no explicit statement regarding whether these contributions were intended to establish the company or increase its charter capital in accordance with regulations.

The parties focused solely on profit and income sharing, with each member receiving 33.33%, without specifying corresponding obligations and responsibilities for debts and other financial commitments as stipulated in the company charter.

Additionally, Mr. H himself declared non-involvement in managing the company’s operations. If these contributions were intended to increase the company’s charter capital from VND 6,000,000,000 to VND 7,253,656,000 as agreed upon by the parties, this increase was not officially recognized through registration or issuance of a business registration certificate, as required by the Enterprise Law.

[6] Furthermore, on March 16^th, 2018, Mr. H submitted an application to join both Đ Company and E Company, seeking formal recognition of his contributed capital share at 33.3%. However, Mr. T declined to proceed with the necessary formalities to officially recognize Mr. H as a member of the companies, acknowledging only Mr. H’s capital contribution for joint business and profit-sharing based on the contributed business capital ratio.

[7] According to regulations, charter capital and contributions for business purposes are distinct matters. The parties did not mutually agree upon or register an increase in charter capital to VND 7,253,656,000, of which Mr. H purportedly contributed VND 2,751,000,000. The court’s determination that Mr. H contributed 33.3% of the charter capital lacks sufficient basis.

In reality, following the company’s establishment in 2001, due to insufficient capital, Mr. V and Mr. T sought additional funding from Mr. H to lease 42,970m² of land for expanding the production facility in Hưng Yên (as per the plaintiff’s representative’s statement).

Therefore, it is reasonable to conclude that Mr. H’s contribution was toward business capital, not aimed at increasing the company’s charter capital. Consequently, the first-instance and appellate courts’ acceptance of Mr. H’s lawsuit, recognizing him as a member of Đ Company with a one-third capital contribution ratio, contradicts the facts presented. Upon retrial, should no additional evidence be presented, the plaintiff’s lawsuit should be dismissed.

In light of the foregoing,

IT IS DECIDED:

Pursuant to point a, clause 2, Article 337, clause 3, Article 343, and Article 345 of the 2015 Civil Procedure Code:

1. The Cassation Appeal Decision No. 12/2022/KN-KDTM dated September 22^nd, 2022, of the Chief Justice of the Supreme People’s Court is accepted.
2. The Appellate Business and Commercial Judgment No. 15/2020/KDTM-PT dated July 10^th, 2020, of the High People’s Court in Hà Nội and the First-instance Business and Commercial Judgment No. 49/2019/KDTM-ST dated November 11^th, 2019, of the People’s Court of Hà NộiCityin the business and commercial case “Dispute between a company member and the company” between the plaintiff, Mr. Trần Mạnh H, and the defendant, Đ Co., Ltd, are to be vacated; the case file is to remanded to the People’s Court of Hà Nội City for retrial according to first-instance procedures.
3. This Cassation Decision takes effect from the date of its issuance.

CONTENT OF THE CASE LAW:

“[4] Đ Company was indeed founded in 2001 with two initial members, Mr. Nguyễn Văn T and Mr. Trần V, with a registered charter capital of VND 1,000,000,000. Subsequent amendments to the business registration (second, third, fourth, and fifth amendments in 2006, 2010, and 2012) indicated that the company continued with two members, Mr. T and Mr. V, and increased its registered charter capital to VND 6,000,000,000.

[5] The minutes of the company’s members’ council meeting on March 22^nd, 2017, revealed that while acknowledging capital contributions, there was no explicit statement regarding whether these contributions were intended to establish the company or increase its charter capital in accordance with regulations.

The parties focused solely on profit and income sharing, with each member receiving 33.33%, without specifying corresponding obligations and responsibilities for debts and other financial commitments as stipulated in the company charter.

Additionally, Mr. H himself declared non-involvement in managing the company’s operations. If these contributions were intended to increase the company’s charter capital from VND 6,000,000,000 to VND 7,253,656,000 as agreed upon by the parties, this increase was not officially recognized through registration or issuance of a business registration certificate, as required by the Enterprise Law.

…

[7] According to regulations, charter capital and contributions for business purposes are distinct matters. The parties did not mutually agree upon or register an increase in charter capital to VND 7,253,656,000, of which Mr. H purportedly contributed VND 2,751,000,000. The court’s determination that Mr. H contributed 33.3% of the charter capital lacks sufficient basis. I

n reality, following the company’s establishment in 2001, due to insufficient capital, Mr. V and Mr. T sought additional funding from Mr. H to lease 42,970m² of land for expanding the production facility in Hưng Yên (as per the plaintiff’s representative’s statement). Therefore, it is reasonable to conclude that Mr. H’s contribution was toward business capital, not aimed at increasing the company’s charter capital.

Consequently, the first-instance and appellate courts’ acceptance of Mr. H’s lawsuit, recognizing him as a member of Đ Company with a one-third capital contribution ratio, contradicts the facts presented. Upon retrial, should no additional evidence be presented, the plaintiff’s lawsuit should be dismissed.”

THE RATIONALE FOR THE CASE LAW DRAFT’S PROPOSAL

Capital contribution to become a company member (contributing capital to establish a company or to increase charter capital) is stipulated in the Enterprise Law.

However, the distinction between contributing capital to become a company member and contributing capital for business purposes is not clearly defined and lacks specific regulations, leading to disputes concerning capital contributions and the true intent behind such contributions—whether they are intended for membership/shareholding or for business and profit-sharing purposes.

The draft case law proposes clear criteria for distinguishing between these two types of capital contributions and provides a viable approach to resolving related disputes.

In practice, there have been no precedents in the field of enterprise law regarding these distinctions, thus the approval of the aforementioned draft also enhances the diversity of existing case law.

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