Although the matter “Whether businesses could offer a loan with their capital” has been raised and answered by various law firms, in this article, ATA Legal Services will not analyze the basic legal grounds to solve that matter, but will also provide in-depth and appropriate advice for businesses to minimize risks in the transaction implementation.
Question: The company, of which I am the Chairman of the Board of Directors and also the legal representative (Company A), currently has an idle capital of 2 billion VND. It is expected to be used in the next 6 months for the new shipment importation. Recently, my friend, the Director of Company B, suggested my company to lend Company B that amount of money for 6 months, and Company B will pay Company A at an interest rate equal to the interest rate of a 12-month term deposit + 3%. I would like to ask whether my company can lend the aforementioned amount of money to Company B? Could you please give advice on procedures and measures to reduce risks if my company is allowed to lend such amount of money.
Answer:
1. Initially, in response to the question “Whether businesses could offer a loan with their capital”, we affirm that, in principle, Vietnamese law does not prohibit the normal lending activity between organizations and individual.
To clarify what is considered a normal lending activity, we will find out the current legal regulations related to the prohibition and restriction of lending activities in Vietnam. Accordingly, there are 2 lending acts being prohibited in Vietnam, including:
Firstly, lending activities are prohibited under the Law on Credit Institutions (“LCI”):
LCI stipulates that lending is a form of banking operations, or specifically, a form of credit extension[1] and this activity could only be performed by credit institutions specified in this Law[2], whereby, “individuals and organizations other than credit institutions are prohibited from conducting banking operations, except escrow, purchase and sale of securities by securities companies”[3].
Article 4.12 of the 2010 LCI stipulates that “banking operations means the trading in and regular provision of one or several operations such as deposit taking, credit extension, via-account payment”. In other words, lending activities will be considered as banking operations when it is done for business purpose and is taken place on a regular basis.
Given the aforementioned regulations, it could be determined that the LCI prohibits organizations and individuals that are not banks, financial companies, securities companies or other credit institutions from performing lending activities on a regular basis, with different subjects, in order to derive benefit from them.
Secondly, lending activities are prohibited if the interest rate exceeds the that as prescribed by the Civil Code:
Under Article 468 of the 2015 Civil Code, the interest rate shall be agreed upon by the parties but “must not exceed 20%/year of the loan amount”.
As a result, in cases of loan offer with an interest rate exceeding 20%/year, the excess interest rate shall become ineffective.
At the same time, pursuant to Article 12.4 of Decree 144/2021/ND-CP on administrative sanctions for violations against regulations on social order, security and safety, the following lending acts in excess of interest rate specified in the Civil Code shall be fined from VND 10,000,000 to VND 20,000,000:
“d) Running a pawn business with the interest rate exceeds that specified in the Civil Code;
đ) Failure to apply for registration of the business line subject to security and order conditions that involves grant of secured loans with interest rate exceeds that specified in the Civil Code”.
Article 201 of the 2015 Criminal Code even stipulates that the act being considered committing a crime of “usury in civil transactions” is the act of offering a loan “at an interest rate that is five times higher than the maximum interest rate specified in the Civil Code” and might face a penalty of up to 03 years’ community sentence.
Therefore, it could be understood that, if not violating the above prohibited cases, organizations and individuals can lend their properties to other organizations and individuals provided that they comply with the relevant provisions of law, in particular:
- Regulations related to property loan contracts in the 2015 Civil Code.
- Regulations related to the authority to decide to borrow and lend assets of enterprises in the 2020 Law on Enterprises.
- Regulations related to the form of payment when borrowing/lending between enterprises specified in Article 6 of Decree No. 222/2013/ND-CP and Circular 09/2015/TT-BTC.
Applying to the case of Company A, according to the given information, we believe that Company A could lend its idle capital to Company B if the lending is not a regular business activity or involving professional elements and is not widely applied to different subjects. Company A is obliged to comply with relevant legal regulations for its lending.
2. Therefore, in order to be able to offer a loan and to minimize risks for such activity, Company A should pay attention to comply with and implement the following measures:
2.1. Complete the internal evaluation and approval procedures for lending:
In this case, not to mention the source of the capital, it can be understood that this capital has been determined to be used to import a new shipment for Company A. Therefore, even Company A has yet used this capital temporarily, the lending to another party has temporarily affected and changed Company A’s capital use plan. Therefore, in this account, the legal representative of Company A needs to carefully check the Charter, financial regulations and other regulations related to the authority to decide on the use of capital at the Company, in order to organize the risk assessment of the lending as well as to ask for the approval of the competent authorities for the lending plan.
Note: In case Company A is a public company under Article 32 of the 2019 Securities Law and Company B is a related person of Company A, the loan transaction of Company A may be restricted according to the Law on Securities and Article 293 of Decree 155/2020/ND-CP. In addition, in case of a public company, Company A also needs to comply with the obligation to disclose information about contracts and transactions if it falls into the prescribed cases.
2.2. Draft and organize the signature of the loan contract to ensure the legal rigor and safety for Company A
Some remarkable contents to be arranged in the Contract:
Firstly, carefully check the legal information of Company B to ensure the validity of the transaction, including the documents of the competent authority of Company B for the loan transaction;
Secondly, ensure that the loan contents are consistent with regulations and practices, especially the terms on disbursement, interest rate (within the limits specified in Article 468 of the 2015 Civil Code), loan period, interest payment term, interest and principal payment method, loan use purpose, penalty for violations and compensation for damage;
Thirdly, a security/guarantee measure for the loan is required: Company A could request Company B to provide a guarantee to pay for the loan from a bank designated by Company A;
Fourthly, the loan contract should contain a provision of premature debt recover. This is to ensure the flexibility in operation of Company A and the premature debt recover ability when necessary.
2.3. Appoint a clue to monitor and supervise the use of the loan and the recover of interest and debt from Company B to promptly handle arising risks.
The above are the consulting contents of ATA Legal Services. We believe that Valued Clients have partly envisioned the settlement direction in this issue.
If you have any enquiries on the operation risk management, please contact ATA Legal Services for support!
[1] Article 4.16 of the 2010 LCI: Lending means a form of credit extension under which the lender gives or commits to give the borrower a sum of money for use for a specific purpose in a certain period as agreed upon on the principle of payment of both principal and interest.
[2] Clause 1 to Clause 9 Article 4 of the 2010 LCI.
[3] Article 8.2 of the 2010 LCI.
Comment: