In the course of business operations, many enterprises choose to access loans from various sources to expand their business. In addition to loans from commercial banks, enterprises also give priority to mobilizing capital from loans from current owners, shareholders or other individuals and organizations because these loans are often negotiable in provisions of interest rates, repayment methods and other terms that are more favorable than those provisions of borrowing from commercial banks. One of the repayment methods often negotiated by Vietnamese companies (which are 100% Vietnamese capital, established and operating under Vietnamese law) or the borrower is to convert the entire loan, interest loans (depending on the agreement of the parties) into contributed capital or shares of the lender into the Vietnamese Company after the loan term expired to reduce financial pressure on loan repayment. Accordingly, in order to borrow and convert loans into contributed capital in accordance with the laws, enterprises need to comprehend the regulations on borrowing and converting loans into contributed capital and shares.
1. The regulations on loans need to be complied with
Pursuant to the provisions of the current Civil Code, a contract for loan of property is an agreement between parties whereby the lender hands over the property to the borrower; when it is due, the borrower must return to the lender property of the same category in the correct quantity and quality and only pay interest if so agreed or prescribed by law.1 Correspondingly, the fact that Vietnamese Companies conduct borrowing capital from individuals and organizations is not contrary to the laws of Vietnam.
1.1. For loans to lenders who are domestic individuals or organizations (“domestic loans”)
Vietnamese companies need to take heed that the loan must be made by transfer through the bank account of the parties in accordance with the Government’s regulations on payment in financial transactions of enterprises.
1.2. For loans to lenders who are Foreign Investors
They will be considered foreign loans because it is a lending relationship between residents and non-residents. Accordingly, Vietnamese Companies and Foreign Investors should take heed of complying with the following regulations when making foreign loans:
– Loan registration: The Vietnamese company will not have to carry out the procedures to register for a foreign loan if the short-term loan has a loan term of less than one (01) year. The Vietnamese company is obliged to register a loan with the State Bank in the following cases of (i) medium and long-term loans (with a term of more than one (01) year); or (ii) an extended short-term loan with a total term of more than 01 (one) year; or (iii) a short-term loan without an extension contract but retaining outstanding debt at the end of 01 (one) year from the date of first capital withdrawal, unless the Borrower completes loan repayment within a period of 10 (ten) days from the round of 01 (one) year from the date of first capital withdrawal.
– Opening and using loan accunts: Vietnamese Companies are not foreign-invested enterprises, so they are required to open a foreign loan and repayment account at a bank providing account services to perform transactions of money transfer related to foreign loans (withdrawal of capital, repayment of principal, debt of interest). Each foreign loan can only be implemented through 01 (one) account service provider. A Vietnamese company can use one (01) account for one (01) or more foreign loans. However, in case the borrower is an enterprise owning foreign direct investment, the borrower can use the direct investment capital account to receive foreign loans.
– Report on the situation of loan performance: On a monthly basis, no later than the 05th of the month following the reporting period, the Vietnamese companies must report online on the performance of short, medium and long-term loans at the Website. In case the Website encounters a technical error and cannot send a report, the borrower sends a report to the State Bank branch where the Vietnamese company is located to report on the performance of short loans, medium and long term.
2. Regulations on converting the contributed capital into contributed capital
Loan transaction is the borrowing relationship between the borrower and the Vietnamese Company. Therefore, the transaction of converting loans into contributed capital or shares is actually the Vietnamese Company’s implementation of increasing charter capital, issuing new shares to pay for the loan from the borrower, not receiving the transfer of capital contribution, shares from current members and shareholders (hereinafter referred to as “Converting Loans into Traditional Contributed Capital”). This transaction of converting loans into contributed capital and shares will not affect the current contributed capital and shares of current members and shareholders.
The repayment of loans by shares or contributed capital in the enterprise is specified in Clause 2, Article 34 of Circular No. 12/2022/TT-NHNN:
– Paying debts by means of providing goods or services for the borrower;
– Paying debts in the form that the creditor and the borrower agree to convert the outstanding debt into shares or contributed capital of the borrower;
– Paying debts in the form that the creditor and the borrower agree to swap the outstanding debt into shares or contributed capital owned by the borrower;
– Paying debts incurred from mid-term or long-term loans through settling or clearing against direct receivables with the borrower;
– Paying debts through the account that the borrower opens abroad (in case the borrower is allowed to open accounts abroad for the arrangement of foreign loans).
Through offsetting the loan with the payment to buy the contributed capital, additional shares issued at the Vietnamese Companies, in fact, there will be no cash flow of acquiring the contributed capital or shares transferred to the Vietnamese companies from members, shareholders who are new owners (lenders). Therefore, it should be noted that the Business Registration Authority and the competent tax authority may require members, shareholders who are new owners (lenders) and Vietnamese companies to clearly explain their cash flows of purchasing contributed capital, shares, the most important of which are the loan contract and the contract for conversion of loans into shares.
However, in terms of expanding the method of converting loans into traditional contributed capital, in order to transform the lender’s loan into contributed capital, shares of the Vietnamese Company which are derived from the current contributed capital and shares for the present members and shareholders, the parties need to transfer debt repayment obligations from the Vietnamese Company to existing members and shareholders (hereinafter referred to as “Converting Loans into Extended Capital Contribution”). For this purpose, the parties need to contract the following 02 basic agreements:
– A tripartite agreement on the transfer of loan repayment obligations from the Vietnamese Company to present members and shareholders, in which it is recognized that existing members and shareholders will use their contributed capital and shares at the Vietnam Company to repay the loan that the lender has granted to the Vietnamese Company.
– Agreement to transfer capital contributions and shares from existing members and shareholders to the lender, in which existing members and shareholders will use their own capital contributions and shares to repay for the loans received from the Vietnamese Company.
Accordingly, depending on the conversion method, whether the category of the Vietnamese Company and the lender is a foreign investor or domestic one, the process of converting into contributed capital may be different. In general, the conversion of loans into contributed capital includes the following stages:
|Content of implementation
|Discuss, negotiate and draft an agreement to convert the loan into contributed capital (including the content of the agreement on the ratio of ownership shares when converting).
In terms of the method of Converting Loans into Extended Capital Contribution. After completing the above step, the Parties can begin to sign an agreement on the transfer of contributed capital, shares of existing members and shareholders.
|Registration for approval for the Foreign Investor to acquire the capital contribution/ add more the capital to the Vietnamese Company.
This is a prerequisite procedure for Foreign Investors to invest in Vietnam. In this procedure, the competent authority will conduct an appraisal of the conditions related to business lines applicable to foreign investors.
Note: If the lender is a Vietnamese individual or organization, this stage is not required.
Register to change charter capital (if any) and update members and shareholders being lenders on the Enterprise Registration Certificate.
For the method of Converting Loans into Extended Capital Contribution, the determination of the time to complete the transfer of contributed capital or shares shall be agreed upon by the parties.
|Notice on transform the loan into contributed capital with the State Bank.
The conversion of loans into contributed capital of enterprises is a right permitted by law. However, with the characteristics of each different transaction, which may have different contents, the method of converting loans into capital may be subject to various domestic and foreign legal regulations. When converting loans into contributed capital, enterprises should consult with lawyers, accountants, banks to ensure that the transaction is executed in accordance with the law.
This article is for general information only and is not a substitute for legal advice. Apolat Legal is a Vietnamese law firm with experience and capacity to advise on matters related to Investment. Please click here to learn more about our services and contact our lawyers in Vietnam for advice via email email@example.com.