IS THE WITHDRAWAL OF CAPITAL FROM THE ENTERPRISE A PLOY TO EVADE DEBT REPAYMENT OBLIGATIONS?

Posted 14:34 Date 19/07/2023

*Question: Mr. Binh living in Hai Chau District, Da Nang City asked: In December 2020, my company and the X company signed a commodity trading contract. However, The X company did not perform the signed contracts’ obligation but seize our deposit blatantly. Therefore, in October 2021, we filed a lawsuit in The H Commercial Arbitration Center to force the X company to return the deposit, pay for the compensation for the actual damages incurred and the penalty of contract violation.

In January 2022, The H Comercial Arbitration Center issued an Arbitral Award which forced the X company to pay us 2,5 billion VND in total. After the Arbitral Award, our company filed a request for The Arbitral Award enforcement in the judgment enforcement agency.

In April 2022, Da Nang’s Department of civil judgment execution issued a judgment enforcement award related to the above Arbitral Award implementation. After receiving the judgment enforcement award, The X company removed their outdoor sign, not working in practice; simultaneously, in July 2022, The X company' s members withdrew 90% of the contributed capital (decreasing the charter capital from 50 billion VND to 5 billion VND). Since the granted Arbitral Award, The X company did not fulfill their payment obligation, and following the verification of the enforcement agency, The X company does not have any property to enforce the judgment.

The question I want to give is: Is the above action of The X company's members a breach of law? If it is, what should our company do to protect our rights?

*Mr. Dang Van Vuong (Lawyer) - Deputy Head of Phong&Partner Law Firm - Head of Cam Le Branch, answered:

1. Is the above action of The X company's members a breach of the law?

According to Clause 1 Article 46 of the Law on Enterprise 2020, members have liability for the debts and other property liabilities of the enterprise within the amount of capital contributed to the enterprise. According to Article 68 (3) of the Law on Enterprise 2020, a company may decrease its charter capital in the following cases: “The company returns part of the contributed capital to the members in proportion to their holdings in the company after the company has operated for at least 02 consecutive years from the enterprise registration date and the company is able to fully pay its debts and other liabilities after the return of capital”. Accordingly, it is obviously a violation of the law when a member withdraw of 90% of contributed capital (equivalent to 45 billion VND) out of The X company while this company does not fulfill its debt repayment obligation in accordance to the Arbitral Award and the judgment of Da Nang’s Department of civil judgment execution. It is clear that the members’ withdrawal of capital from the enterprise has the indication of the dispersal of assets (moving property from The X company to members leading to the inability to fulfill payment obligations for your company) to evade the obligation to execute the judgment of The X company for your company. This is one of the common tricks in the practice of many businesses that are in debt. Therefore, the capital withdrawal of the X company’s members while this company has a debt to pay for your company is an act that is contrary to the law, directly infringing upon your company’s legitimate rights and interests.

2. What should your company do to protect its rights?

Article 70 of The Enterprise Law 2020 stipulates that: “In case part of contributed capital is returned against the regulations of Clause 3 Article 68 of this Law or profit is distributed to members against regulations of Article 69 of this Law, the members shall return the money or assets they received from the company and are jointly responsible for the company’s debts and liabilities in proportion to the amount of assets that have not been returned until they are fully returned”. Accordingly, The X company’s members have the liability to return all of the money which was withdrawn from The X company; have to be jointly responsible for The X company’s debts in related your company. Therefore, to ensure your company’s legitimate rights and interests, it should implement the following legal solutions immediately:

- First, collecting documents and evidence related to the legal violation of The X company’s members;

- Secondly, filing a lawsuit to The competent people's court requesting The X company’s members to be jointly responsible for The X company’s debts in relation to your company.

*The article was published in the Da Nang police newspaper on 17/04/2023.

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