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Share of capital contribution: Undertaken contribution or actual contribution?

The article titled: “Share of capital contribution: Undertaken contribution or actual contribution?” from Lawyer Nguyen Van Quynh, is published on Sai Gon economic times, dated 26 May 2018.

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A real story:

In December 2010, Limited Liability Company X (briefly called as Company X) convened a members’ council meeting. With the reason as Mr. A had not fully paid the amount of capital that is has undertaken to contribute, the other capital contributing members reduced his votes. Legal basis provided by the company’s members was Article 18.3 of Decree 102/2010 dated 1 October 2010 providing detailed guidelines for implementation of a number of articles of the Law on Enterprises (Decree 102), accordingly “within the period in which capital as undertaken has not yet been contributed in full, a member shall have the quantity of votes and shall be entitled to profit distribution on a pro rata basis relative to the paid up capital, unless otherwise provided by the company charter”.

Mr. A did not accept the solution and insisted that even when he had not sufficiently paid for his capital contribution, he would have the same quantity of votes as when he had paid fully. Furthermore, when the company distributed the profit, he still received the dividend in proportion to his undertaken capital contribution, there is no reason why the company limited his rights.

Controversial regulations

According to provisions in Article 41 of the Law on Enterprises 2005, rights of capital contributing members in a limited liability company are based on the capital contribution of each member, namely the ratio of capital that members of the limited liability company contribute to the charter capital.

We can see that in both the Law on Enterprises 2005 and Decree 102 the notion of charter capital in a limited liability company with two or more members are consistently understood as actual capital contribution or undertaken capital contribution of the members in a specific time and recorded in the company charter.

Therefore, rights of capital contributing members in a limited liability company will be based on the proportion of the contribution to the capital recorded in the company’s charter.

An example: Limited Liability Company Y consists of two members, with registered charter capital as VND 200 billion, in which member B undertakes to contribute VND 100 billion and member C undertakes to contribute VND 100 billion. At the time of the members’ council meeting, B has contributed VND 40 billion and C has contributed VND 50 billion. Therefore, the contributed capital ratio of B and C may be determined as one of the two following options:

Option 1: B holds 40/200 (20%) and C holds 50/200 (25%); or

Option 2: B holds 100/200 (50%) and C holds 100/200 (50%).

The Law on Enterprises, when providing the notion of “share of capital contribution” as the basis for determination of rights of the members, does not stated clearly whether it is the actual capital contribution or undertaken capital contribution, but simply use one word “contribution”.  So, the ambiguity leading to different interpretations actually arises from the provisions of the Law on Enterprises before the promulgation of Decree 102. For this reason, under the writer’s own viewpoint, the provision in Decree 102 as “within the period in which capital as undertaken has not yet been contributed in full, the concerning member shall have the quantity of votes and shall be entitled to profit distribution on a pro rata basis relative to the paid up capital, unless otherwise provided by the company charter” is after all merely an interpretation as the option 1 above in determination of the share of capital contribution, and does not conflict with or oppose against the provision of the Law on Enterprises.

How to interpret correctly?

First, the capital contributing to a limited liability company should be counted as the undertaken contribution capital to the charter capital of the company, since according to equitable principle – rights and obligations shall be corresponding to each other, rights of a member in a limited liability company must be equivalent to his/her obligations.

Undertaking is in its nature the obligation of the member to the company. Charter capital of a limited liability company, contributed capital and contribution proportion of the members are stated in the company charter. The fact that the members contribute in one time or many times, in which how much will be contribute is only the matter of time and subject to the agreement among the members. Therefore, the un-contributed capital will be deemed as a debt of the member to the company in case that member does not contribute fully and timely the undertaken capital and such member shall be responsible in compensating the losses arising from insufficient and overdue contribution of the undertaken capital.

There is no reason why while a member of a limited liability company has to be responsible for debts and other property obligations of the enterprise within the amount of capital it has undertaken to contribute to the enterprise but only has the rights on a lesser capital due to insufficient contribution. If a member of a limited liability company only has the voting right based on its actual contribution capital – that means his/her decisiveness in discussion and voting for issues of the company is weaker, his/her responsibility for the operation of the company will be reduced. So why such member of the limited liability company has to take a greater responsibility for property than for practical action (voting) of members of limited liability company?

Secondly, the amount of contributed capital of members of a limited liability company should be counted as the undertaken contribution, since it will affect the regulations on conditions of convening meetings and passing decisions of members’ council of the company. If we consider the share of capital contribution as contributed capital, a lot of companies will have to wait until the second or third meeting to meet the condition of organization since it is very difficult for the members attending the first meeting to meet the condition of contributing 75% to the charter capital of the company. Similarly, for the case that decisions of members’ council may only be passed with supporting votes representing 65% or 75% of the aggregate capital of the attending members. If the members can only vote on the actual contribution capital, decisions of the members’ council may be difficult to be passed.

Thirdly, a characteristic of limited liability company is that it is a company combining harmoniously the pre-eminent features of the models of both company of persons and company of capital. Being influenced by the model of company of persons, members of a limited liability company are usually the persons with acquaintanceship, so the cooperation to establish the enterprise is based on trust, and for this reason the fact that one or all members “undertake” to contribute capital in a certain period will be easily accepted.

Law application in reality

Prior to the promulgation of Decree 102, people got used to the determination of contributed capital of members in the limited liability company basing on the undertaken capital ratio without minding that the Law on Enterprises neither provides in detail that amount of contributed capital is the “undertaken contribution capital”. Therefore, a lot of minutes of members’ council meetings recorded the quantity of votes according to the ratio of the undertaken contribution capital of the members, although those members actually had not contributed even one cent. Before 15 November 2010, this matter was common and in reality had not faced any obstruction from the business registration authorities. However, after the effective date of Decree 102, such meeting minutes deem not be accepted if Article 18.3 of Decree 102 is applied and if “the company’s charter does not otherwise provide”.

Therefore, in preparing the company’s charter, it is noted to the drafter to pay attention to whether the rights of voting and receiving dividend of members will be based on actual contribution capital according to Decree 102 or on undertaken contribution capital. This is totally within fingertips of the people preparing the company’s charter. However, the writer’s anxiousness is not in the way to deal with the regulations of Decree 102, but in the way to create a consistent interpretation on the share of capital contribution of members of a limited liability company. I should think that relevant authorities ought to issue appropriate instructions on this content in order to avoid complex conflict like the case of Company X.

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