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(The judgment No. 17/2017 / KDTM-ST dated 29/9/2017 on “Disputes between person who are not members of the company but have transactions on the assignment of capital contribution to the company and Company’s members” )

Investment in Vietnam contains the contribution of capital or purchase of shares to the companies operating in Vietnam. The investment process may occur many risks. The following case releases the risk in the process of contributing capital to the Company.

1. In 2015, Mr. Cho Gun W (hereinafter referred to as “Cho Gun W”) intends to buy shares of TC Co.,Ltd. Both parties agreed that by August 31, 2015, Cho Gun W will contribute capital in the amount of USD 200,000, equivalent to VND 4,000,000,000 (four billion) for the purpose of: expanding production and business to produce and export wood pallets with the expected output: 10,000 sheets/month. In return, the Company will transfer to 30% shares and profit of the Company to Cho Gun W.

2. For performance of the agreement, Cho Gun W transferred the money to the Company in two phases: The amount of VND 2,000,000,000 has contributed on 10 August 2015. The amount of VND 1,000,000,000 has contributed on September 24, 2015. Total amount of contributed capital is VND 3,000,000,000 as of September 24, 2015.

3. However, from the moment of capital contribution, Cho Gun W has not received any benefits from the Company. Also, the Company has not yet fully implemented commitments to transfer shares and management rights to Mr. Cho Gun W.

4. In addition, the Company did not use the contributed capital to produce wood pallets as agreed, but investing in other projects such as producing cutting boards, nests of wood, sawdust, charcoal. Therefore, Cho Gun W brought the case to court to force the Company to return the contributed amount of VND 3,000,000,000.

5. The court decided for Cho Gun W win.

Lesson learnt is that foreign investors in Vietnam when conducting capital contribution and share purchase of companies operating in Vietnam should pay attention to the followings

1. To request a third party to certify the documentary evidence of violation of breaking party

The certified documentary evidence offered by a bailiff (a organization licensed by the State) shall be an evidence source in order for the Court to consider for a lawsuit settlement and a basis for legal transactions as prescribed in regulations of law.

In this case, the Court based on “acknowledged by Lee Hye G in the recording translation offered by a bailiff (pages 81 and 88, pages 91 and 92)” to prove violation act of the defendant: “consider that the violated obligations of the Company in the implementation of the signed capital contribution agreement have ground. Therefore, the Trial Court needs to accept the plaintiff’s claim to force TC Co.,Ltd to return the amount of VND 3,000,000,000 contributed to the Company”.

2. To notify immediately the violating party of the remedies that you use

Under the provisions of the Vietnam Commercial Code (article 292), we can use one or a number of different remedies:

 Specific performance of contracts.
 Fines for breaches.
 Forcible payment of damages.
 Suspension of performance of contracts.
 Stoppage of performance of contracts.
 Cancellation of contracts.
 Other remedies agreed upon by involved parties which are not contrary to the fundamental principles of Vietnamese law, treaties to which the Socialist Republic of Vietnam is a contracting party and international commercial practices.

The notification is aimed to confirm that we suspend the performance of the contract because of the other party’s violation, reject the violating party’s argument that” The Company argues that Mr. Cho Gun W broke the commitment that by August 3, 2015 the defendant must contribute capital of 4,000,000,000 VND, it is possibility to suffer a loss for Company. Therefore, requirement for the Company to returns the money of Cho Gun W is completely groundless “.

3. To keep records of damages for claims

Under Article 302 of Commercial Trade, damages that can be covered includes:

 The value of the material and direct loss;
 The direct profit which the aggrieved party would have earned if such breach had not been committed. Because the damages claiming party shall bear the burden of proof of the loss (article 304), the plaintiff should keep proper records of damages for claims. In this case, the foreign investors can claim for compensation for the direct profit from pallet wood sale contract signed with customers, if the Company use the capital contribution for the right purpose (producing pallet woods).

In summary, during the investment in Vietnam, foreign investors in Vietnam should carefully supervise the joint venture agreement.

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