Franchise Consulting Service

Franchising has always been considered one of the business models having high socio-economic value. This activity not only brings enormous benefits to franchising owners, but also provides a way to effectively share a business opportunity with many others, especially in developing countries such as Vietnam, helping individuals and organizations who are insufficient sources to self-build a business from zero.

In addition to the reputation of their service and product’s quality to build a truly effective franchise system, franchisors must also keep in mind legal issues involved in this activity. In fact, franchising covers a wide range of issues such as entering a contract, franchise contract registration, intellectual property, technology transfer, confidential information, raw materials supply, and operating franchise stores… Especially when franchisors want to expand their business worldwide, this activity will be governed by at least two different legal systems.

Therefore, Apolat Legal, with lawyers and associates advised and assisedt in the implementation of many complicated franchise transactions, will help customers orient and understand the legal issues surrounding this operating model thoroughly. Specifically, the scope of our services includes:

  • General consulting in relevant legal policies;
  • Drafting or reviewing exclusive franchise and sub-franchise agreements;
  • Drafting or reviewing other documents and agreements related to the system’s operation to ensure consistency with franchise agreements and regulatory compliance;
  • Consulting the compliance with laws and contracts during the franchising term;
  • On behalf of the franchisor or the franchisee to negotiate and enter into a franchise agreement;
  • Registering the Franchise system to competent authorities;
  • Other relevant legal services upon clients’ request;
  • On behalf of the franchisor or franchisee resolves disputes related to franchise activities.

Apolat Legal believes that the range of services we provide will fulfil all the requirements of our customers and act as a support link to help clients keep up with the development in the field of franchising.

KEY CONTACT

Dinh Quang Long

Managing Partner

Pham Thi Thoa

Senior Partner

RELATED ARTICLES

Apolat Legal_Legal retainer service

Business activities of enterprises are always dependent on and regulated by relevant laws. For effective operation, enterprises need to well control legal risks arising from their operations. Large enterprises tend to build a legal team with good lawyers to help them apply for permits, provide legal advice and resolve labour disputes during their operation.

However, not all businesses have the financial resources to build their own legal department. For businesses that do not have their own legal team, legal retainer service of separate law firms will be the smart choice.

Understanding this issue, Apolat Legal offers businesses a comprehensive legal consulting service at a reasonable fee. Each business choosing the legal retainer service of Apolat Legal will be supported by a consistent team during the time of using service. By this way, Apolat Legal can clearly understand the clients and help the clients save time and avoid providing duplicated information. In addition, businesses only have to pay a fixed monthly fee to receive helpful advice from Apolat Legal for all day-to-day legal needs of business.

Legal retainer service of Apolat Legal includes but not limited to the followings works:

  • Answering, consulting on provisions, and policies of law and giving legal solutions for each specific matter according to the Client’s requirements in multiple practice areas such as investment, construction, real estate, bidding, enterprise administration, banking, security, insurance, commerce, labor, sales and other areas relating to the Client’s business operation (excluding financial and tax advice).
  • Examining, reviewing and confirming the legality of documentations which the Client have drafted or implemented in respect of business operation, giving legal advice for such documentations as required by the Client.
  • Supporting the Client in preparation of all documentation for contract negotiations or parleys (if requires).
  • Supporting the Client in drafting documentations relating to business transactions between the Client and any third party.
  • Consulting with the Client about business discussions, negotiations, parleys, claims, disputes or lawsuits with any third party or any competent State agency relating to the Client’s business operation. (Scope of consultancy excludes representing for the Client in implementation of specific matters or of claims at competent State agencies or of litigation procedures at Court or Arbitration).
  • Consulting with the Client about general solutions relating to each specific claim, dispute or lawsuit.
  • In case any Client’s partner needs our legal support, then, as the Client’s request or that of such partner, we shall consider whether providing our legal services for such partner or not; and if we choose providing, we shall be committed to not causing any damage to the Client or any conflict of rights and legal interests between the Client and such partner.
  • Supporting and consulting the Client on drafting the Charter, Internal Working Regulation, regulations relating to enterprise organization, management and administration and other essential documents during Client’s business operation.

By professional services, thoroughness and experiences in various legal fields, Apolat Legal is the trusted partner of all businesses.

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Potential risk of the company receiving and paying the franchise agreement fee via personal account

A franchise is currently no longer an uncommon term for investors in particular. The Vietnamese market, in general, is regarded as one of the most successful business models in the past 100 years. This is also a mode to dominate market share quickly and still ensure profits for the franchisor. Therefore, the parties are intensely focused on each detail’s content in the franchise agreement when entering into this agreement. However, when performing the contract, the parties mostly “ignore” crucial regulations on the method of royalty payment.

So how to pay the royalty in case the parties enter into the transaction are Vietnamese enterprises? We shall analyze in detail this matter in the following article.

Currently, there is no precise regulation on the payment method in a franchise agreement. Therefore, the choice of the form and payment method entirely depends on the agreement of the parties. Depending on the situation, the parties shall make agreements on the most suitable form and payment method. The most common payment method currently applied by the parties is payment via account by transfer for the contract value of over VND 20,000,000.

So how to perform this payment method? Is it compulsory for the parties to receive and pay via the organization accounts? Or they may receive and pay via personal accounts? 

In this regard, the parties may find that the payment of the franchise agreement shall incur taxes, including corporate income tax and value added tax. Therefore, when the parties sign an agreement and choose the payment method via an account, that account is required to be the account of the contracting company.

However, in several exceptional situations, the payment may not be made via the account of the company involved in the transaction, it may be made with the account of the third party – the authorized party, or a third party designated by the seller to receive the money, and is specified in the written contract. This third party may be a legal entity or a person operating under the law.

So, is there any potential risk when Vietnamese enterprises pay franchise fees via individual accounts? And how to handle the solution?

1. For individuals receiving the royalty fee and the franchisor:

  • Individuals receiving the royalty:

Suppose the royalty is paid to the individual account. In that case, this may be considered regular income of this individual, depending on the content of the bank transfer to determine if this income is taxable and required individuals to declare personal income tax (PIT) or not. Besides, according to Article 30.2 of Decree No. 126/2020/ND-CP, banks are obliged to provide information related to individual accounts when tax authorities request for inspection and examination of payment obligations. Therefore, if the tax agency determines that this is a compulsory PIT that the individual cannot explain, prove, and do not declare according to the regulations, an administratively sanctioned may be applied with the lowest penalty is warning if there is an extenuating circumstance, the highest fine is VND 12,500,000, and the PIT shall be retrospectively collected

  • Franchisor

The royalty payment under the franchise agreement is considered the revenue of the franchisor. In this case, the franchisor faces the risk of being prosecuted for tax evasion if it is not fully declared because this revenue is the taxable income of the company. Accordingly, the company is responsible for declaring and paying income tax incurred from this income.

For the tax evasion, according to Article 17 of Decree No. 125/2020/ND-CP, the lowest administrative sanction is 01 times the amount of tax evasion if there is at least one extenuating circumstance specified in the Law on the handling of administrative violations and up to 03 times the amount of tax evasion if there are three or more aggravating circumstances, is forced to overcome the consequences, collect the evaded tax amount. In case the company’s tax evasion is from VND 200,000,000 or more, it shall constitute a criminal offense under Clause 5, Article 200 of the Penal Code 2015 (amended in 2017). Accordingly, the lowest fine bracket is from VND 300,000,000 – 1,000,000,000 and the highest is VND 3,000,000,000 – 10,000,000,000 or suspended from operation from 06 months to 03 years.

2. For the franchisee:

Franchisee: royalty payment via this personal account may not be deductible when determining taxable income (especially expenses over 20 million without transfer to the company account ).

In addition, in the event that the parties have a dispute, it shall not be easy to prove the franchisee’s payment obligations. Therefore, the parties need to make a written confirmation of the debt, confirming that the franchisee has fulfilled the payment obligations as agreed by the parties.

So what is the solution to limit the risk and win-win for both parties?

For the royalty amounts below VND 20,000,000, the parties can apply the accounting solution by cash collection. In the case of over VND 20,000,000, the franchisee is obliged to pay this amount from the franchisee’s account to the franchisor’s account to ensure benefits and avoid tax risks. Therefore, the parties should consider and contact a reputable legal consultant to advise on the best protection of rights and interests in each case.

The above are some of the potential risks when the company receives and pays royalties through individual accounts in contravention of the law. We hope through this article, the parties, when implementing a franchise agreement, should pay more attention to the payment method and comply with the law.

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.

This article is for general information only and is not a substitute for legal advice.

 

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The abuse of legal entity and limited liabilities of a company

Nowadays, there is a capital-raising activity performed by luring investors with the promise of tremendous interest to invest in a business model perfectly created. Subsequently, funds from the more recent investors would be collected then used for giving the return to the earlier ones until the case is unraveled. This sort of activity is happening continuously in Vietnam, which is usually known as “multi-level marketing in disguise” or “Ponzi Scheme” named after a man called Charles Ponzi[1]. It has been nearly 100 years since 1920 up to present but this Ponzi scheme is still developing and being operated all over the world, in which some investors are drawn to pour money into this like moths to the flame.

By using the IRC[2] scheme, which is organized impeccably and legitimately, Charles Ponzi successfully convinced a few investors to fund for him with 50% interest within 45 days. Initially, no one accepted his offer since he had no reputation or strong finance condition. The Ponzi scheme was not started until Charles Ponzi paid off 10% agency commission per person with any investment funds from investors. In his autobiography, he told that: “People gambled with me as I thought they would. They gave me ten dollars as a lark. When they received fifteen at the end of 45 days, all sense of caution left them. They plunged in for all they were worth. They brought their friends along. The legion of my investors grew by leaps and bounds”[3]. By that way, there were 30.219 people buying his company’s bonds amounting then to about $15,000,000[4], at appropriately $150,000,000 at present. Although Ponzi had the confidence that his idea was perfect, the scheme could not be operated as planned before. In the meanwhile, funds of investors were still pouring rapidly into his pocket when he himself believed that he had to protect his investors by paying back their initial investment and interest[5]. If it stopped, everything would be collapsed and not only his life but also the lives of investors would be over as well. Again, he had to continuously receive the investment from others then used it for finding more possible resources or at least, he could maintain the running system.  

Apart from Charles Ponzi establishing a company for legitimate business purposes at first then deforming those business activities into fraudulent behaviors[6], some people in Vietnam use this scheme for self-seeking incentive right at the beginning. They first find ways to eliminate their criminal and civil responsibilities after reaching their goals. From that they find a subject of civil law relations which is Company – an independent legal entity, a juridical person. They abuse this company’s characteristic to exercise rights, receive money and properties of others. At time, they feel enough and again abuse the limited liabilities of the company to flee with those properties while these liabilities are totally separated from their individuals. These people or group of people here will be called as Abuser.

By analyzing Vietnamese law regulations about two legal personalities and limited liabilities of company and comparing with practical cases happening, proper solution should be given to address this negative phenomena.

1/ Legal personality of juridical persons and limited liabilities of a company in the law of Vietnam

An organization shall be recognized as a juridical person since the day of receiving an Enterprise Registration Certificate[7]. Since the company is established under the Law on Enterprises and has an organizational structure through an executive body prescribed in company’s charter, which is registered at the time of incorporation, this company has property independent from other natural and juridical persons and bears liability by resource to its property[8].

The independence of a company’s property are showed by the act of shareholders must transfer the right to ownership of assets contributed as capital when establishing the company[9]. Company is a juridical person which is always put alongside an individual in many fundamental principles of civil law[10] where: “1. Every person shall be equal in civil relations, may not use any reason for unequal treatment to others, and enjoy the same protection policies of law regarding moral rights and economic rights”[11] “2. Each person establishes, exercises/fulfills and terminates his/her civil rights and obligations on the basis of freely and voluntarily entering into commitments and/or agreements”[12] “5. Each person shall be liable for his/her failure to fulfill or the incorrect fulfillment of any such civil obligations”[13].

As a legal person created by laws, the company could only execute civil transactions by a representative who could be the legal representative or other person authorized by the legal representative[14].

Besides, with legal personality, the company has the right to establish other company[15] to build groups of companies, parent company and subsidiaries, company owning capital charter of other company[16]. However, these are independent in properties and limited liabilities.

With the legal personality, company’s property is guaranteed to paying for its creditors[17]. Following that, owners must not withdraw arbitrarily the capital from the company[18] yet ensure that after this activity, the company are still capable of paying all the debt and other property obligations[19]. In other case when the company not only distribute its profit or pay dividends but also satisfy these following conditions: 1. its business operation is profitable, tax liability; 2.Other financial obligations are fulfilled in accordance with law; 3. Debts and other liabilities can be paid after profit distribution.[20]

When the company is establish, along with its legal personality, limited liabilities also could be seen by the way in which members are liable for debts and other liabilities of the enterprise up to the value of capital they contribute to the enterprise[21]. Therefore, “creditors of the company does not have the right to request to be paid from the private property of the shareholders[22] in any cases, even when the company does not have property to pay for debt obligations.

2/ Behaviors of a company’s legal personality abuse

Currently, many individuals facing a criminal prosecution when applying Ponzi Scheme might include the case of Nguyen Thai Luyen (Alibaba Real Estate JSC)[23], Le Xuan Giang (Viet Link Company)[24] with obtaining property by fraud. The amount of money these people obtained is up to thousand billions. Although it is possible to prosecute individuals, the property of the company and individuals themselves are not enough to pay back the aggrieved person.

Anyway, the criminal indictment could help revoke the company’s properties and also individual’s one obtaining from his or her illegal behavior. Meanwhile, if this is just a civil case, the owner cannot do anything to the properties of those abusers but suing the company because of the limited liabilities. 

Example 1: 

The abuser establishes a joint stock company to run the retail restaurants first then this joint stock company (known as JSC) signs a cooperative business contract raising capitals from investors to launch the project with ideal interest, at 5% per month (60% per year) and guaranteed article of paying back the capital after 18 months (BCC contract). Subsequently, the JSC establishes other Single member limited company (SLLC) in which the JSC owns 100% charter capital and the abuser continues to sell each part of SLLC’s capital to other individuals. By this way, the abuser can raise more than ten billions to his or her JSC.

Summarize:

Joint Stock Company Limited Liability Company
Possession Abuser: 100% JSC: 100%
Property 1 billion in cash (the capital of the abuser) 20 billion in cash (the capital of JSC)
Debt 20 billion in cash (BCC contract with investors) + 5% interest per month (1 billion per month), the duration of capital withdrawal is 18 months (18 billion)

First month:

The LLC invests in 15 billion to open franchise retail restaurants. The abuser uses the image of retail restaurants as well as a perfect business strategy in which capitals shall be sold for other investors to take part in that project with a commitment to be distributed the fantastic interest, at 5% per month. As a result, the JSC sells 50% capital in LLC for smaller investors with a transfer pricing up to 50 billion. Meanwhile, the abuser will pay 1 billion for investors according to BCC contract. Result:

Joint Stock Company (JSC) Limited Liability Company (LLC)
Possession Abuser: 100% JSC: 50%

Investors: 50%

Property 1 billion in cash (the abuser’s capital)

49 billion in cash (capital transfer contract )

(The abuser paid the interest within 1 month: 1 billion)

5 billion in cash

15 billion invested in restaurants

Debt 20 billion in cash (BCC contract with investors) + 5% interest per month (1 billion per month), the duration of capital withdrawal is 17 months (17 billion) The commitment of interest for investors, at 5% per month, is 2.5 billion per month 

 

Second month:

The abuser withdraws 28 billion in cash from JSC by paying dividend. 15 billion invested in restaurant is transferred to another company of the abuser via a contract about franchise activity, the construction and operation of restaurant…The abuser pays investors 1 billion according to BCC contract and pays many investors buying LLC’s capitals 2.5 billion. Result:

Joint Stock Company Limited Liability Company
Possession Abuser: 100% JSC: 50%

Investors: 50%

Property 1 billion in cash (the abuser’s capital)

20 billion in cash (capital transfer contract)

(The abuser received 28 billion of dividend)

(The abuser paid 2-month interest: 2 billion)

 

2.5 billion in cash

15 billion invested in restaurants

(The abuser distributed interest to investors buying one-month capital: 2.5 billion)

Debt 20 billion in cash (BCC contract with investors) + 5% interest per month (1 billion per month), the duration of capital withdrawal is 16 months (16 billion) The commitment of interest for investors, at 5% per month, is 2.5 billion per month 

 

Third month:

JSC contributes 10 billion to LCC to raise charter capital. Result:

Joint Stock Company (JSC) Limited Liability Company (LLC)
Possession Abuser: 100% JSC: 66,7%

Investors: 33,3%

Property 1 billion in cash (the abuser’s capital)

9 billion in cash (capital transfer contract)

(The abuser received 28 billion of dividend)

(The abuser paid 3-month interest: 3 billion)

 

10 billion in cash

15 billion invested in restaurants

(The abuser distributed interest to investors buying two-month capital: 2.5 billion)

Debt 20 billion in cash (BCC contract with investors) + 5% interest per month (1 billion per month), the duration of capital withdrawal is 15 months (15 billion) The commitment of interest for investors, at 5% per month (50 billion), is 2.5 billion per month 

 

After:

JSC sells 16.6% capital contribution at LCC with 30 billion and pay shareholders the dividend from JSC with 30 billion. Result:

Joint Stock Company (JSC) Limited Liability Company (LLC)
Possession Abuser: 100% JSC: 50%

Investors: 50%

Property 1 billion in cash (the abuser’s capital)

9 billion in cash (capital transfer contract)

(The abuser received 28 billion of dividend)

(The abuser received 28 billion of dividend second time: 30 billion)

(The abuser paid 3-month interest: 3 billion)

 

10 billion in cash

15 billion invested in restaurants

(The abuser distributed interest to investors buying two-month capital: 5 billion)

Debt 20 billion in cash (BCC contract with investors) + 5% interest per month, the duration of capital withdrawal is 15 months (15 billion)

The sale of capital contribution, profit distribution, dividend distribution are rotating in and happening till the LCC loses the ability to pay interest to investors. Another scenario is if the expiry of contract is over while one investor cannot take his or her funds back, the project would fail to run. This limited liability could be another joint stock company and there is no point that JSC does not establish more and more such companies like that so that abusers could wipe the inherent consciousness of investors away. It is too difficult for some people to resist the temptation of money when all neighbors around them can receive their giant interest from a little capital at the beginning. As Charles Ponzi said: “All sense of caution left them”.

Of course, when abusers are confident enough to believe that they dodged the regulations fruitfully, those themselves made an announcement of bankruptcy of the company without letting the investors figure it out. In the meantime, shareholders of JSC are still rich or even richer than before. The company’s property is over, headquarter is closed and restaurant’s ground is taken back. About investors, they eventually have nothing.

These investors surely supposed that they were the aggrieved since their investment funds were too large to be consumed rapidly by such company like that. There is no doubt that shareholders, who ran the company’s business had abused their competence to appropriate company’s property for self-seeking purpose. Thus, the aggrieved denounced these abusers to police authorities but all they held were BCC contracts, Capital Transfer contracts, etc. However, those contracts with the JSC showed that the transactions between parties were based on their will. Besides, the nonpayment of capital and interest were unexpected as the company was on the edge of bankruptcy.

Therefore, in case the prosecution could not be made, creditors would have no way but initiating legal action for a civil case. However, if this were a civil case, JSC would be defendant as in the transaction of BCC contract or capital transfer contract JSC was the party signing in. With their legal entities, creditors only can sue JSC to be refunded. The problem was, JSC used the money of creditors to invest in LLC and took a loss. As a result, this JSC did not have any property left to pay its creditors back. On the other hand, creditors cannot initiate JSC’s shareholders to ask for refunding because of the limited responsibility.

Obviously, by abusing the legal personalities of a company, abusers put up a safe fence for themselves through the act of separating their property out of company’s one. Although abusers cannot withdraw all the capital from the company[25], they do not need to do this because their capital are too small compared to a giant amount of money that they received from investors. So if this JSC’s property is empty, can the existing property of that company be sold to revoke the money to some extent? Unfortunately, investors of BCC contract find out that JSC’s capital contributions in LLC was transferred to other investors. About investors buying LCC’s contributions, they discover that this LLC has not much property left to sell since its restaurants’ grounds were taken back by the owners. As for those abusers, they were ready to draft a commencement of bankruptcy procedures[26] and left creditors a valueless debtor.

With limited liabilities, abusers are only responsible for their initial capital contributions which are not significant. When the company are in bankrupt and unable to pay[27], creditors cannot demand the property of those abusers though they know that it is built up from investors’ money. 

Example 2: 

In real estate trading, investor’s company make a project in paperwork, which does not meet the capital-raising conditions as well as signs in deposit or sale contract. However if investor’s company establish another company to sign in the contract of counseling the purchase of ground project (called as Counseling company). Investor’s company and Counseling Company shall have the similar name that could be mistook like: QC Golf & Resort Company and QC Binh Dinh Golf and Resort Company. The value of this counseling contract is equivalent to the value of an apartment, ground and specific payment process. However these payment period is named as deposit money.

If investor’s company meet all conditions to sign in the sale contract, according to the counseling contract, this counseling company will transfer all of deposit money to investor so that the investor sign the sale contract with the buyer. In case the investor’s company cannot carry out at the expiry date, the buyer could do nothing but waiting for it. It is because once the counseling contract is conducted, there are some disadvantages which turn the buyer into the violator, including: 1. The contract states that the buyer agree to let the counseling company use those amount of deposit money for any purposes. 2. Although the contract stated the payment date of each deposit period, the counseling company only receives money till the third deposit period and does not request the buyer to pay for further periods.  3. Make the buyer mistake that the next deposit period is only paid when a new contract is signed. 4. The expiry of signing the sale contract starts after the fourth period of deposit payment.

Hence, the buyer cannot pay for the fourth deposit money at the right time. When investor’s company cannot sign the sale contract at the expiry date and the buyer request to refund their paid money, the counseling company requires the buyer to wait till investor’s company meets all the conditions or purchase another project with greater value. If the buyer initiates the counseling company, he or she would be the preceding violator and lose all of deposit money just because of the agreement in that counseling contract. It could be said that the counseling company are legally keeping the capital of buyer and has the right to decide how to use it. In case the buyer fortunately take the money back, it is also difficult for them to request an amount of interest.

By using the legal entity, the counseling company is the subject of the contract with buyer and the liabilities (if any) would be the liabilities of that company itself. About the investor’s company, it possesses the land use rights, real estates but not any liabilities with the buyer.

The source of money creating property which is the real estate of investor’s company might be from buyers themselves. However with the agreement of committing to allow the counseling company to use as any purposes and the independence of property and limited liabilities of juridical person, the buyer only can initiate legal action for requesting to refund and liquidate the property of counseling company instead of investor’s company. Investor’s company are not responsible for any risks relating to litigation or whether the project might be prohibited to transfer or locked down, etc. 

3/ Remedy

The abusers by their behaviours in which the ultimate purpose is obtaining the property of others without facing any personal liabilities by passing those to the company and then putting an end to a company through the bankruptcy procedures. The core issues are: 1. how abusers can gain the belief of others so that they can contribute capital to and buy products from the company; 2. how abusers can get property out of the company.

Look at the case of Nguyen Thai Luyen (Alibaba Joint Stock Company), Le Xuan Giang (Viet Link Company), in which they used deceptive information to raise capital contributions. Of course, this behavior is a violation of criminal law. Penalties of criminal law are the legal basis for limiting the acts of abusers. However, if abusers use practical business projects with positive scenarios  and business models, they will attract more than ten billion VND from investors, the buyer (called as Creditor) who voluntarily sign the contracts as the two situations above just within a small community. Therefore, only the precaution and understanding of the law can help them escape the trap set by those abusers.

When abusers try to transfer a company’s property into their private property, they will not commit a crime of embezzlement and become a criminal[28]. Instead, they choose the options to avoid liabilities as the two examples above or some other ways summarized as followed:

  1. Abusers divide dividend/ profit of the company from the transfer of capital contribution or shares of subsidiaries as in example 1.
  1. Abusers receive money directly from the transfer of capital contributions or shares of companies when fleeing because no one but them retains information when it is time to flee.
  2. Abusers use contracts with misleading or confusing terms; with companies of the same brand but are unrelated independent entities like example 2.
  1. Abusers use contracts and transactions with other companies owned by abusers with multiple parent company classes or nominal structures[29]. Although the civil law has regulations on invalid civil transactions due to fraud[30]. However, proving the fraud of civil transactions between these companies is extremely difficult for creditors – who stand outside the business activities. For example, another company whose an abuser used nominal structures, signed a franchise contract, built and managed a restaurant system worth VND 15 billion in example

Thus, only strong penalties of criminal law can bring deterrence to abusers. Nevertheless, as the Ponzi model, in the process of applying the law, is the investigation agency too afraid of the “criminalization of civil and economic transactions”[31], which leads to the neglect of criminals? Creditors cannot have information about the company’s cash flow, internal transactions to prove to the investigating authority as soon as their rights have been violated while this agency can completely carry out. Nguyen Thai Luyen and Le Xuan Giang may not be able to deceive so many people with such huge sums of money if the investigating authorities strongly handle the initial complaints or participate in the investigation from the beginning when suspicious signs appear. However, instead of accepting a complaint to conduct an investigation, this agency based on a contract of transactions between the parties and assumed that this was civil relations until the Ponzi model was large enough and collapsed.

Besides, the application of temporary emergency measures to blockade and ban property transfers should be easier and faster than this time. It can help to avoid abusers from dispersing property right when a lawsuit is filed by investors.

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.

This article is for general information only and is not a substitute for legal advice.

References 

  • Civil Code 2015 No. 91/2015/QH13 on 24/11/2015;
  • Criminal Code 2015 No. 100/2015/QH13 on 27/11/2015;
  • Law on Enterprises 2014 No. 68/2014/QH13 on 26/11/2014;
  • Law on Bankruptcy 2014 No. 51/2014/QH13 on 19/6/2014;
  • Charles Ponzi (Author), Nguyễn Hưởng và Nguyễn Hạo Nhiên translated (2019), “Sự trỗi dậy của siêu lừa Ponzi”, HCM Economic Publishing House;
  • PhD Trịnh Thục Hiền, SHD_KH192/2020 “Luật công ty là gì?”

 

[1] Ponzi Scheme (Wikipedia), https://vi.wikipedia.org/wiki/Mô_hình_Ponzi> accessed on June 01st, 2020

[2] Charles Ponzi (Author), Nguyễn Hưởng and Nguyễn Hạo Nhiên translated (2019), “Sự trỗi dậy của siêu lừa Ponzi”, HCM Economic Publishing House, Page 99

[3] Charles Ponzi (Author), Nguyễn Hưởng và Nguyễn Hạo Nhiên translated (2019), “Sự trỗi dậy của siêu lừa Ponzi”, HCM Economic Publishing House, Page 114

[4] Charles Ponzi (Author), Nguyễn Hưởng và Nguyễn Hạo Nhiên translated (2019), “Sự trỗi dậy của siêu lừa Ponzi”, HCM Economic Publishing House, Page 223

[5] Charles Ponzi (Author), Nguyễn Hưởng và Nguyễn Hạo Nhiên translated (2019), “Sự trỗi dậy của siêu lừa Ponzi”, HCM Economic Publishing House, Page 162

[6] Ponzi Scheme (Wikipedia), https://vi.wikipedia.org/wiki/Mô_hình_Ponzi> accessed in June 01st, 2020

[7] Law on Enterprises 2014, Article 47, Clause 2 about Limited liability companies with two or more members; Article 73, Clause 2 about One member limited liability companies; Article 110, Clause 2 about Joint stock companies

[8] Civil Code 2015, Article 74, Clause 1

[9] Law on Enterprises 2014, Article 36, Clause 1

[10] Civil Code 2015, Article 3

[11] Civil Code 2015, Article 3, Clause 1

[12] Civil Code 2015, Article 3, Clause 2

[13] Civil Code 2015, Article 3, Clause 5

[14] Law on Enterprises 2014, Article 13

[15] Civil Code 2015, Article 74, Clause 2

[16] Law on Enterprises, Chapter VIII

[17] PhD Trịnh Thục Hiền, SHD_KH192/2020 “Luật công ty là gì?”

[18] PhD Trịnh Thục Hiền, SHD_KH192/2020 “Luật công ty là gì?”

[19] Law on Enterprises 2014, Article 68, Clause 3, Point a, Point b

[20] Law on Enterprises 2014, Article 69, Article 132

[21] Law on Enterprises 2014, Article 47, Clause 1, Point b; Clause 73, Point 1, Article 110, Clause 1, Point c

[22] PhD Trịnh Thục Hiền, SHD_KH192/2020 “Luật công ty là gì?”

[23]The board of Alibaba company was charged with Obtaining property by fraud: What are rights for customers? (Thanh niên online, 20/9/2019), <https://thanhnien.vn/thoi-su/lanh-dao-cong-ty-alibaba-bi-khoi-to-toi-lua-dao-chiem-doat-tai-san-quyen-loi-hang-ngan-khach-hang-ra-sao-1128190.html> accessed on June 1st, 2020

[24] Prosecute the lord of Viet Link Multi-level company cheating 68.000 people (Pháp luật thành phố Hồ Chí Minh, 29/8/2019), https://plo.vn/phap-luat/truy-to-ong-trum-da-cap-lien-ket-viet-lua-68000-nguoi-855120.html> accessed on June 1st, 2020

[25] Law on Enterprises 2014, Article 68, Clause 3, Point a, Point b và Article 69, Article 132

[26] Law on Bankruptcy 2014, Article 5, Clause 3, Clause 4, Clause 5

[27] Law on Bankruptcy 2014, Article 4, Clause 2

[28] Criminal Law 2015, Article 343

[29] Lê Tiến Đạt, “Investment through nominee structure in Vietnam” https://apolatlegal.com/vi/bai-viet/dau-tu-thong-qua-cau-truc-dung-ten-danh-nghia-tai-viet-nam.html?fbclid=IwAR3rFJ2BEbVj_8_JbObdHyTjzyqkCfztnGL8O5R2aVh2Yi68RLxGUmjXO-U> accessed on June 1st, 2020

[30] Civil Code 2015, Article 124, Clause 2

[31] Definition about criminalization of civil and economic transactions (Hanoi Procuracy University) <https://tks.edu.vn/thong-tin-khoa-hoc/chi-tiet/117/548> accessed on June 1st, 2020.

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Franchise in Vietnam is ” hot ” again

Supposed to be initiated since the 19th century by Singer Corporation, the franchise has increasingly developed all around the world with numerous brands. In Vietnam, franchise, especially in food and beverage (F&B) sector, is considered as one of the most lucrative but also greatly competitive market. In fact, only a few names, both international and local brands, attain and sustain their high position in the market over time. However, the franchise in Vietnam will possibly remain its leading trend in business with more brands in different sectors in the near future.

As any commercial deal, a franchisee needs a written agreement between the franchisor and the franchisee. Indeed, a fair and reasonable contract plays a key role in the success of the deal. Yet, in a franchise deal, the gap in the market position of each party is very large, which is hard for both parties to reach a fair and reasonable agreement in the first round of negotiation. Normally, franchisors are global prestigious brands and, of course, they want to run the deal by their own rules, which sometimes cause unfairness. From the view of franchisees, they want to reduce costs and, in the long run, they also want to restrain the influence of the franchisor over their operation, which helps them to easily adapt the business to suit the Vietnamese market.

So, what should be noticed in a franchise agreement?

Governing laws 

Undoubtedly, this factor is an advantage for a domestic franchise deal because it is effortless for both local franchisors and franchisees to understand and work these things out. But for an overseas company, it may take time to research and consider before deciding to franchise its business.

Normally, a foreign franchisor prefers choosing its nation’s laws to govern a franchise agreement, except administrative procedures and legal issues which are compulsorily governed by the Vietnamese laws. The reason is that it helps the franchisor to ease the effort to control the performance of the franchisees under the franchise agreement. As a matter of fact, the franchisees, especially the giants of the domestic market, also want such rights, which also allows them to benefit from local laws and policies under which they are provided.

Due to the above fact, in a franchise deal of which a foreign company is a party, governing law provision is really essential because it may greatly limit or extend the performance capacity of the parties under the franchise agreement and, as a result, may bring advantages or disadvantages to them. Thus, such provision should be noticed and discussed in the first place to create a favorable but also fair basis for both franchisor and franchisee in negotiating other terms and conditions.

Legal conditions to franchise under Vietnamese law 

To franchise in Vietnam, the foreign franchisors must fulfill the legal conditions of such business under Vietnamese laws.

Firstly, according to the Decree No. 08/2018/ND-CP amended the Decree No. 35/2006/ND-CP, a franchisor shall only be entitled to the franchise if its business has already been operating for at least 1 year. Then, the franchise agreement shall be registered at the Ministry of Industry and Commerce, saving for franchising within Vietnamese territory or from Vietnam to overseas countries. It is necessary to be noted that the registration of the franchise agreement as mentioned shall be conducted by the franchisor.

Intellectual property rights 

The rights to use industrial property owned by a franchisor are transferred to franchisees through franchise agreements. According to the amendment of intellectual property law in 2019, such a transfer agreement is not required to be registered at the Intellectual Property Office of Vietnam as prescribed in the law of 2005.

Additionally, it is noteworthy that the franchisees have the right to improve any industrial property object transferred under the franchise agreements, except trademarks, and the franchisor shall not forbid the franchisees doing such right. Accordingly, the IP law prohibits the franchisor from compelling the franchisees transferring free of charge to the franchisor improvements of the industrial property object made by the franchisees or the right of industrial property registration or industrial property rights to such improvements.[1]

Technology transfer 

Technology transfer is a material subject matter of a franchise agreement and, along with intellectual property issues, strictly provided and managed by the franchisor. This is because these factors directly relate to the value and reputation of the franchisor’s brand. Hence, hardly ever can provision regarding these factors be negotiated and accepted to be changed by the franchisor.

Under the technology transfer law of Vietnam, technology includes a solution, process or know-how with or without accompanying instruments and facilities to convert resources into products.[2] Accordingly, in a franchise dealer of which the technology is brought from overseas into Vietnam for operating the business, the provisions in connection with technology transfer shall be registered at the Ministry of Science and Technology to be valid for the implementation in Vietnam. 

Terms of business operation and development 

In most cases, a franchisor wants his business system is operated in a consistent manner regardless of the geographical area. Therefore, provisions in regard to system operation and management are difficult to be changed and the franchisee is strictly required to seek approvals of the franchisor for almost all of their performance. This, from the franchisor’s perspective, is reasonable because it may ensure consistent quality in service and products, which results in the high reputation of his brand.

However, in the long run, it is believed that too rigorous in management may restrain the development of the business. The reason is that each area has its specific characteristics about customer’s behaviors, tastes, market shares… and, clearly as it may seem, the franchisee has a better sense of such factors than the franchisor. Thus, the franchisee should negotiate to reduce the control of the franchisor over the operation to some extent after a particular period, which may allow the franchisee to proactively adapt the business to suit the market as the case may be. 

The above points are noteworthy to review and consider before signing any franchise agreement. The franchisor and the franchisee should carefully discuss these matters to ensure the possibility of the agreement.

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.

This article is for general information only and is not a substitute for legal advice.

 

[1] Point a), Clause 2, Article 144 Intellectual Property Law 2005

[2] Clause 2, Article 2 Technology Transfer Law 2017

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