Solution for reducing issued capital of joint stock company

Law on Enterprise 2014 was promulgated on 26th November 2014 and takes effect since 1st July 2015. After one year of execution, in reality, a lot of enterprise, specially joint stock Company, are confusing about regulations regarding decreasing charter capital due to issuance of shares under the real contributed status.

From the shortcomings related to the plan of handling with capital under the rate of real contributed capital as regulated by the Law on Enterprise 2005

Under the provisions of the Law on Enterprise 2005, the founding shareholders must pay fully for the shares registered to buy within 90 days from the date on which the enterprise is granted the Business Registration Certificate. In case founding shareholders fail to pay in full the shares registered to buy within 90 days and the rest of shares cannot be handled under the plans mentioned in Article 84.3, the enterprise is only entitled to handle such shares under Article 84.4 as follows: “In case founding shareholders do not register to buy for all the shares offered for sale, the remaining shares must be offered for sale and sold out within three years from the date of issuance of the business registration certificate”.
In other words, the Law on Enterprise 2005 does not allow joint stock company to register for decreasing the charter capital within 03 years from the date of establishment if the shareholders cannot pay in full the shares registered to buy, even when all measures set forth in Article 84.3 have been carried out. However, in fact, many enterprises want to decrease their charter capital with proper reasons but there are no legal grounds to carry out. For example:

• The shareholders fail to contribute in full the capital within 3 years, but after a certain time of operation, that enterprise does not have the need for that amount of capital and expects to register for reducing legal capital; or
• The shareholders do not have enough financial capacity to contribute in full the committed capital or unilaterally want to waive their right to contribute the capital for setting up the company while but the remaining shareholders do not have enough capacity and the need to register to buy such share; or the Company has called on, mobilized the third party to contribute in full the shares but it was not successful.

In the aforesaid examples, the lack of provisions guiding for handling the shares not yet fully contributed under Law on Enterprise 2005 becomes a barrier so that companies cannot exactly recognize the really contributed value of shareholders, and accept to continue maintaining “virtual capital” even when they have proper need to decrease the charter capital, and this problem makes the capital declaration becoming uncontrolled and not transparent.

… to the expectations on eliminating the barrier thanks to Law on Enterprise 2014 and the story “lack of the implementation guiding”

To solve the aforesaid shortcomings, Law on Enterprise 2014 has new provisions on recognizing the percentage of the really contributed capital and handling the number of shares not yet fully paid under the percentage registered to buy as stated in Article 112 as follows: Paragraph d, section 3 under Article 112 provides that: “The company shall register an adjustment to charter capital to the total face value of shares paid fully and change of founding shareholders within 30 days from the deadline for paying for registered shares to buy…”.

In case of violating the above-mentioned provision, the company may be subject to an administrative fine under the provision stated in Article 21 of the Decree No. 155/2013/ND-CP dated 11 November 2013 of the Government on punishing administrative violations in the fields of Planning and Investment for a fine between VND 1,000,000 and VND 2,000,000, and the fine shall be increase to between VND 1,000,000 and VND 15,000,000 depending on the time of overdue for registering of amendment in accordance with Decree No. 60/2016/ND-CP which replaced for Decree No. 155/2013/ND-CP. Simultaneously, enterprise shall be forced to register changes in enterprise registration content in accordance with regulations.

The aforesaid provisions show the effort of legislative officials in creating legal framework so that the Company can recognize exactly the contributed capital value, prevent from declaring and using virtual capital of so many joint stock companies. However, such effort does not seem to achieve its aim because companies cannot implement the procedure on decreasing the charter capital due to “lack of detailed guidance”.

The reality in Business Registrars in provinces and cities shows that the officers always return the application dossier on decreasing issued capital due to the reason: Article 112 is only applied to the case under which the shareholders failed to contribute fully the shares registered to buy at the moment of registering the company establishment under the provision state in Article 111; and in the case under which the Company has already issued further shares but shareholders fail to pay in full the shares registered, it is unable to decrease the charter capital under Article 112 because of lack of detailed guidance. Meanwhile, if the Company does not decrease its capital under the really re-contributed value, the Company may be punished by an administrative fine under the provision as stated in the Decree No. 155/2013/ND-CP and be also forced to register amendment in business registration contents under the regulations.

Solutions for companies

The need to decrease the charter capital of the joint stock company, even in the case where the shares registered to buy for the first time were not fully contributed or the issued shares were not fully paid, if having proper reason, it is important to have mechanism for implementing in order to ensure the transparence and equality in business environment and ensure the social order.

At present, the Ministry of Planning and Investment still recognizes and allows enterprises to decrease their charter capital in accordance with the really contributed value, regardless of the charter capital at the moment of registering the company establishment or the issued shares. Therefore, in order to ensure the lawful need of companies, in case that the joint stock company would like to decrease charter capital under further issued shares in incompliance with the really contributed value, the company still may refer to legal grounds mentioned in Article 112 in order to request the Business Registration Authority to accept the capital decreasing. Accordingly, the regulations on “paying shares registered to subscribe when registering to establish the company” must be understood in the way of including the payment of shares “registered to set up new company” and “registered for amending the business registration contents”.

As expert in consulting on enterprises’ capital contribution, PhD, Lawyer Le Dinh Vinh, Director of Vietthink Law Firm said: “The fact that the Law on Enterprise 2014 allows joint stock companies to decrease capital in incompliance with the really contributed capital is suitable to the reality and also ensures the transparence and equality in business environment. To solve problems in favor of enterprises, the Ministry of Planning and Investment is giving detailed guidance for every case of reducing the company’s charter capital. However, it is important to have further regulations on the company’s legal responsibility and the liability of its shareholders in proportion to the percentage of the shares since the registration of increasing capital until the downward revision of shares which were further issued, in order to avoid undesired consequences for the society and third parties”.

The need to decrease the capital of joint stock company is a real and proper need of the company, arising in the business, investment activities. Based on our experience in advising and supporting companies to implement procedures for registering their investment, business, Vietthink is ready to advise and accompany with enterprises in solving, dealing with problems related to corporations’ contributed capital.

THANH HA - NGOC QUANG