DETERMINING THE DEBT REPAYMENT OBLIGATION UPON A CHANGE OF OWNER IN A SINGLE-MEMBER LIMITED LIABILITY COMPANY
| Abstract: On the basis of Judgment No. 14/2025/KDTM-PT of the People’s Court of Dak Lak Province, this article clarifies two legal issues relating to a change of owner of a single-member limited liability company (“LLC”): (i) the party responsible for repaying the debt; and (ii) the transfer of the enterprise’s obligations to the owner. The article also sets out practical considerations for the transferee when participating in a capital transfer transaction. |
- Summary of the Basic Content of the Case
On 2 May, 2020, X Co., Ltd. (“Company X”) and E Co., Ltd. (“Company E”) entered into a contract for the construction of a factory with a total value of VND 2.xxx.xxx.xxx. Company X completed all works under the contract; the two parties carried out acceptance, handover and liquidation of the contract in 2021. In December 2021, the two parties prepared a debt reconciliation record confirming that Company E still owed VND 1.xxx.xxx.xxx; Company E subsequently paid a further VND 7xx.xxx.xxx.
On 12 May 2023, Mr. K, the owner and director of Company E, transferred all of his contributed capital and the factory project to Mr. Q1 for a value of VND 9.xxx.xxx.xxx. At the time of the transfer, all financial obligations relating to the construction contract with Company X were not reflected in the accounting records or financial statements of Company E, so that Mr. Q1 was unaware of the existence of this debt. The transfer contract contained a provision under which Mr. K undertook to pay all debts arising prior to the date of signing.
On 2 October 2023, after having transferred Company E, Mr. K nevertheless signed a second debt confirmation record with Company X in the amount of VND 1.xxx.xxx.xxx, at an interest rate of 1% per month, and directly paid part of the debt from his personal account; he also executed a written undertaking to repay the debt to Company X on 28 August 2024. As of 5 February 2024, the remaining principal was VND 9xx.xxx.xxx. As Company E did not continue to make payments, Company X brought a lawsuit requesting that Company E be ordered to pay a total of VND 1.xxx.xxx.xxx. 
Upon reviewing the case file, the first-instance court rejected Company X’s claim; the appellate court rejected the plaintiff’s appeal and the protest of the People’s Procuracy of Dak Lak Province, and upheld the first-instance judgment, adding the finding that Mr. K’s transfer of the company was in essence a change in the form of ownership of assets and did not extinguish his personal obligation in respect of the debt that had already arisen.
- Legal Issues Requiring Clarification from the Case
The courts at both levels inclined towards the view that Mr. K was obliged to repay the debt on three grounds: (i) the debt arose while Mr. K was still the owner; (ii) the transfer contract contained a provision under which Mr. K undertook to pay the prior debts; and (iii) Mr. K had in fact performed part of the obligation and acknowledged personal responsibility. In light of the circumstances of the case, the following issues can be identified as requiring clarification
- Regarding the determination of the party responsible for debt repayment
The disputed relationship arises from a construction contract signed between Company E and Company X, which are two independent legal entities. As the contracting party, Company E is also the party responsible for performing all obligations arising from that contract, including the obligation to pay the outstanding debt confirmed by the two parties through the debt reconciliation record. The issue to be clarified is whether Mr. K, in his capacity as the former owner, is automatically required to perform the obligation in place of Company E. Enterprise law recognizes the separation between the assets of the owner and the assets of the legal entity, whereby the owner of a single-member LLC is liable for the company’s debts only within the scope of the charter capital he or she has committed to contribute. On the other hand, this principle has an exception prescribed in Clause 4, Article 75 of the Law on Enterprises 2020 (“LE 2020”): the owner shall be liable with all of his or her assets for the company’s financial obligations where he or she fails to contribute, fails to contribute in full, or fails to contribute on time the charter capital. It is therefore necessary to determine clearly whether Mr. K falls within this exception before reaching a conclusion on the scope of his personal liability for Company E’s debt. In essence, a transfer of contributed capital is a transfer of owner status, not a conversion of the legal entity’s assets into personal assets. The argument that the transfer of the company constitutes a “change in the form of property ownership”, and that Mr. K shall therefore be liable for the debt arising before the date of transfer, conflates the obligations of the legal entity with the personal obligations of the owner, contrary to the principle of independence of the assets and liability of a legal entity.
However, it should also be recognized that the court’s approach in this case may derive from an assessment of the nature of the actual conduct: after the transfer, Mr. K still signed the debt confirmation record, made direct payments and undertook to repay the debt. The question is whether such conduct provides a sufficient legal basis to establish an independent obligation on the part of Mr. K when considered from the perspective of the provisions on the transfer of obligations under civil law.
- Regarding compliance with legal provisions in the transfer of obligations
One of the grounds for the court’s ruling was Mr. K’s undertaking, in the capital transfer contract, to pay all debts of Company E arising prior to the time of signing. In essence, this may be understood as an agreement to transfer the obligation from Company E to Mr. K personally, and it shall be considered from the perspective of the provisions of civil law on the transfer of obligations. Under Article 370 of the Civil Code 2015 (“CC 2015”), the consent of the obligee is a prerequisite for the transfer of an obligation, because a change in the party performing the obligation directly affects the interests of the obligee, specifically, in this situation, the ability to recover the debt.
With respect to this case, Company X only learned of the capital transfer transaction between Mr. K and Mr. Q1 upon receiving the court summons, which shows that Company X was entirely deprived of the opportunity to express its opinion on the change of the party performing the obligation. In that context, the provision on the transfer of obligations between Mr. K and Mr. Q1 is binding only between the signing parties and is not a sufficient legal basis to take effect against Company X, as the condition relating to the consent of the obligee under the CC 2015 has not been satisfied. Likewise, Mr. K’s written undertaking to repay the debt dated 28 August 2024 is merely a unilateral undertaking without the approval of Company X in its capacity as obligee, and therefore does not provide sufficient grounds to determine that a lawful transfer of obligations has taken place.
Nevertheless, it should also be considered whether Company X’s actual receipt of payments from Mr. K’s personal account constitutes implied consent to the transfer of the obligation. Article 370 of the CC 2015 does not prescribe a mandatory form for the obligee’s consent; accordingly, there is no basis to completely exclude the possibility that consent may be expressed through actual conduct. However, in order to establish consent in this manner, it is necessary to clarify Company X’s awareness of the party actually behind the payments. Specifically, when receiving debt payments from Mr. K, did Company X understand that Mr. K was paying in the name of Company E (performing the obligation on behalf of another pursuant to Article 283 of the CC 2015, which does not change the party bearing the obligation), or in his personal name (accepting Mr. K as a new obligor replacing Company E pursuant to Article 370 of the CC 2015)? This distinction is legally decisive: only where Company X clearly understood that Mr. K was paying in his personal name and nevertheless agreed to accept payment in that capacity would there be a basis to establish consent to the transfer of the obligation by conduct. Clarifying this awareness is significant not only for resolving the specific dispute but also for ensuring consistency in the application of the law and full protection of the rights and interests of the relevant parties.
- Practical Recommendations for the Transferee
From the developments and resolution of the case, it can be seen that, in many cases, debts or contingent obligations that are not fully recorded in the accounting system may still give rise to disputes after the transaction is completed and directly affect the interests of the parties. The case therefore raises a number of important practical issues for a transferee participating in similar transactions. Specifically:
- Conduct legal due diligence before signing the contract: Before signing a capital transfer contract, the transferee should conduct comprehensive legal due diligence on the target enterprise in order to fully assess its legal and financial status and potential risks. Due diligence should not be limited to reviewing enterprise registration records or financial statements, but should extend to high-value transactions, property obligations, and existing or potential disputes. In practice, many debts or contingent obligations are not fully reflected in financial statements but may nevertheless give rise to payment liability on the part of the enterprise after the transfer is completed
- Include clear protective provisions in the transfer contract: The capital transfer contract should clearly stipulate the transferor’s representations regarding the financial condition and liabilities of the company, and the transferor’s obligation to pay or reimburse the transferee for debts, obligations and losses arising from events existing prior to completion of the transaction but not disclosed. In addition, to enhance the security of performance of obligations, the parties may agree on an escrow mechanism or retain a portion of the transfer price in a blocked account, to be disbursed only after a specified period has elapsed without any additional financial obligations or related disputes arising.
- Verify the status of charter capital contribution: Under Article 75.4 of the LE 2020, the owner of a single-member LLC may be liable with all of his or her assets for the company’s financial obligations if the charter capital is not contributed in full or on time. Accordingly, the transferee should thoroughly examine the documents evidencing the actual capital contribution rather than relying solely on enterprise registration information. Where the enterprise’s charter capital has not been fully contributed, the transferee, after taking over, may face the risk of incurring property liability exceeding the scope of contributed capital under the unlimited liability mechanism.
- Address the legal consequences of the transfer of the debt repayment obligation: Where the transferor has assumed the obligation and lawfully paid the debt on behalf of the target company, the transferee should pay particular attention to legal and accounting issues such as: from the time the party assuming the obligation completes payment to the creditor, how will the debt recorded in the company’s books be treated, and does the company have a sufficient legal basis to write down or write off this payable? Does payment by an independent third party on the company’s behalf, without a request for reimbursement, generate actual economic benefit for the company, and if so, would that benefit be regarded as “other income” under current law? On that basis, the company shall also determine how to reflect this debt reduction in its accounting books, financial records and tax declarations, so as to ensure lawfulness, accuracy and the ability to provide explanations to tax authorities or inspection authorities where necessary.
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