Dispute Of Capital Contribution Contract And Notes When Disputing At Court

In the current era of economic development and booming business activities, capital contribution is a familiar activity that takes place commonly in daily life among individuals and enterprises. Parties can contribute capital for the purpose of purchasing property, establishing an enterprise, cooperating in business or investment. Through this article, Phuoc and Partners would like to provide with basic legal knowledge related to capital contribution contract disputes and notes when disputing at Court.

1. Capital Contribution Agreement

The prevailing law does not have specific provisions on what capital contribution agreements are, however, a capital contribution contract can be understood as an agreement between two or more parties, in which the parties will jointly contribute capital to perform any certain work in order for mutual benefit and joint responsibility according to the agreement and the provisions of law.

Accordingly, the properties contributed as capital by the parties can be Vietnamese dong, freely convertible foreign currency, gold, land use rights, intellectual property rights, technology, know-how, other properties which can be appraised in Vietnamese dong. If the property contributed as capital is the land use right, the agreement on capital contribution with the land use right must be notarised,  authenticated according to the provisions of Clause 3 Article 167 of Law on Land 2013 and the parties must register the change at the office of land registration according to the provisions of Clause 3 Article 188 of Law on Land 2013.

In fact, nowadays, parties sign capital contribution agreements for many different purposes such as contributing capital to establish an enterprise, contributing capital for business cooperation without establishing an economic organisation, contributing capital to invest. Depending on the nature of the agreement and the purpose of capital contribution, the capital contribution agreement is governed by different laws such as the Civil Code, Law on Enterprise, Law on Investment, Law on Land, etc. and other subordinate legislation.

2. Dispute of capital contribution agreement and notes when disputing at Court

From practice, it can be seen that disputes related to capital contribution agreements at Court often revolve around the following issues:

• Subject entered into the agreement in contravention of the law

The subject of the capital contribution agreement can be an individual or an organisation. For the subject being an individual, he/she must have full civil legal capacity and civil act. For the subject being an organisation, the person signing the contract must be the legal representative or persons duly authorised by the legal representative.

When a dispute occurs at Court, the fact that the parties entering into the capital contribution agreement are not competent subjects as prescribed by law will lead to legal consequences that the Court has the authority to declare the contract to be invalid, completely or partially invalidated depending on the specific situation and will seriously affect the legitimate rights and interests of the remaining parties.

Hence, before entering into a capital contribution agreement, the parties need to consider and check the other party’s signing authority through the Business Registration Certificate, Enterprise Registration Certificate, Power of Attorney or other documents with equivalent legal validity to avoid disputes arising later.

• Parties fail to properly perform their capital contribution obligations

The capital contribution agreement will stipulate the clauses on the capital contribution obligations of the parties such as properties to be contributed as capital, value of properties to be contributed as capital, time limit for capital contribution, etc. However, the Court recorded many cases of capital contribution agreement dispute in which the parties fail to properly perform their capital contribution obligations under the agreement due to various objective and subjective reasons such as the properties contributed as capital being the disputed properties. Please note that the delay in capital contribution may give rise to the obligation to pay interest and compensate for damage of one party in case the remaining parties in the capital contribution agreement initiate a lawsuit at a competent Court.

• Issue of profit distribution and disposition of properties used for capital contribution.

As mentioned above, the parties to the capital contribution agreement are all aiming for the common goal of profit, so when the contract does not clearly stipulate the rate of profit distribution, how to divide profits as well as the responsibility of each party to bear the risk, it is very easy to arise disputes, to cause conflicts and disagreements between the parties. The parties should discuss and agree the above contents and clearly specify them in the capital contribution agreement so that the parties have a basis for implementation and as a basis for the Court to settle in case of disputes.

Moreover, having more than one “owner” with different thoughts, orientations, and plans also easily creates conflicts in the unification of how to use common properties as well as how to carry out mutual works, investment and business cooperation.

• Issue of withdrawing contributed capital, unilaterally terminating the contract

In the process of investment and business cooperation under a capital contribution agreement, there will be cases where one party requests to withdraw the contributed capital or to unilaterally terminate the capital contribution agreement. The sudden withdrawal of a part of contributed capital will greatly affect cooperation activities and easily cause damage. For capital contribution to establish an enterprise, the parties are only allowed to withdraw contributed capital in certain cases according to the provisions of the Law on Enterprises 2020, while for other types of capital contribution agreement, the withdrawal of a part of the capital contribution has not been specified. Therefore, the parties should clearly stipulate the specific cases in which the capital contributor has the right to withdraw the contributed capital or to unilaterally terminate the agreement, as well as the responsibilities and obligations of the parties arising from the capital withdrawal or unilateral termination of the contract as a basis for the Court to settle in case of a dispute.

Phuoc & Partners is a consulting firm established in Vietnam and currently has nearly 100 members working in three offices in Ho Chi Minh City, Hanoi and Danang. Phuoc & Partners is also rated as one of the leading consulting firms in business law in Vietnam that has leading practice areas in the legal market such as Labour and Employment, Taxation, Merger and acquisition, Litigation. We are confident in providing customers with optimal and effective service.