The Downside Of Trust
By Vu xuan Tien
The downfall of Kiet, chairman of KHB Joint Stock Co. (the names are changed), offers interesting insights into corporate governance in Vietnam
In early 2008, Kiet, Hoa, Binh and Dinh pooled capital to set up KHB, which specializes in design and technology transfer consultancy, event organization, training and advertising, the expertise of the founders, especially Kiet and Hoa, who are both doctorate holders. The company has total chartered capital of VND1 billion, including VND300 million from Kiet, VND300 million from Hoa, VND200 million from Binh and VND200 million from Dinh, Binh’s brother. Binh is elected as general director, the company’s legal representative, and Kiet as chairman.
In March 2008, capital pooling was accomplished. The company rented an office and commenced operation. However, the first problem arose. Dinh borrowed VND200 million from Kiet for the purpose of capital contribution and promised to repay the loan within 10 days. Kiet agreed, and Dinh was named as one of the founders, with a capital contribution of VND200 million. Unfortunately, Dinh failed to settle the loan despite incessant reminders from Kiet.
From May to August 2008, Binh, general director of KHB, signed documents to advance VND400 million to himself and disappeared once the money has been disbursed.
As KHB’s capital was siphoned off, Kiet, its chairman, decided to intervene by keeping the company’s seal and repeatedly asking Binh to resume duty. Still, there was no response from Binh. To aggravate matters, Kiet could not sign corporate tax declaration forms as he was not the company’s legal representative. Attempts to find a new legal representative, through four extraordinary shareholder meetings, proved futile because Kiet and Hoa, the two founders who showed up, held merely 60% of the chartered capital, lower than the 75% required to change the legal representative in line with the Enterprise Law. In the end, the company could neither pay taxes nor temporarily shut down.
In December 2009, Kiet proposed that a representative from the Business Registration Division attend KHB’s fifth extraordinary shareholder meeting and take note of Dinh’s and Binh’s deliberate absence. However, the division dismissed the suggestion and asked Kiet to file a lawsuit.
Lessons
The saga indicates that the Enterprise Law should be amended in several aspects.
First, the Enterprise Law 2005 and documents guiding its implementation do not provide regulations on how to deal with irresponsible shareholders or capital contributors. At present, an investor with a 25.2% stake can effectively paralyze the company. As many non-state companies are mired in internal conflicts, perhaps amendments to the Enterprise Law are warranted.
Second, it is necessary to standardize the procedure for resolving disputes within an enterprise, which currently differs from locality to locality. A bone of contention is whether business registration divisions under departments of planning and investment or the court should step in to tackle these conflicts. If both parties intervene, there may exist two boards of directors or even two general directors in the same company, as has been the case in Nghe An, HCM City and some other localities.
Third, shareholders must bear in mind that while trust is essential for cooperation, it is intangible and cannot replace legal procedure. In KHB’s case, there was no official lending agreement to certify that Dinh borrowed VND200 million from Kiet. Moreover, Kiet was reluctant to sue Binh on account of their rapport. In the end, KHB had no choice but to shut down.
The downfall of KHB attests to the problems bred by unprofessional, relationship-based corporate governance, a severe shortcoming of many Vietnamese enterprises.