Fraudulent conduct in dividend distribution may expose enterprises and their managers to significant legal risks, particularly where profit distribution is implemented in violation of corporate, accounting, and securities laws.
I. What legal risks may an enterprise take when accused of fraudulent conduct in dividend distribution?
The payment of dividends is one of the fundamental rights of shareholders and, at the same time, an obligation of an enterprise once all statutory conditions have been satisfied. However, if an enterprise or its managers distribute profits based on inaccurate financial data, deliberately conceal information, improperly value assets, or employ other deceptive practices that distort shareholders’ rights and interests, such conduct may be regarded as fraudulent conduct in dividend distribution. Such a type of misconduct carries substantial legal risks, particularly in joint-stock companies with a large shareholder base or public companies.
When accused of fraudulent conduct in dividend distribution, an enterprise may face a variety of legal consequences, including the invalidation of resolutions on profit distribution, liability for damages to shareholders, administrative sanctions in the sectors of corporate governance or securities regulation, and, in serious cases, criminal liability for the individuals involved. Beyond financial losses, the enterprise may also suffer reputational damage, diminished investor confidence, and adverse effects on its future fundraising activities.
II. Detailed analysis of fraudulent in dividend distribution
1. What constitutes fraudulent conduct in dividend distribution?
Pursuant to Clause 5, Article 4 of the Law on Enterprise 2020, a dividend is the net profit distributed to each share in cash or in other assets.
Fraudulent conduct in dividend distribution may be understood as conduct whereby an enterprise or its managers intentionally provide false information, conceal financial information, prepare inaccurate reports, or engage in other deceptive practices aimed at altering shareholders’ entitlement to dividends or facilitating dividend payments in violation of legal requirements.
Common examples include the misstatement of after-tax profits, concealment of revenue, inflation of expenses, profit distributions made without satisfying statutory conditions, or preferential distributions to a particular group of shareholders contrary to the company’s charter and applicable laws. Depending on the nature, severity, and consequences of the misconduct, such conduct may lead to civil, administrative, or criminal liability for the responsible individuals.
Thus, fraudulent conduct in dividend distribution is not merely a corporate governance issue but may also result in serious legal consequences.
2. What level of shareholder loss is required for fraudulent dividend distribution to be subject to criminal prosecution?
Current criminal legislation does not prescribe a specific monetary threshold applicable exclusively to fraudulent conduct in dividend distribution. The initiation of criminal proceedings depends on whether the competent authorities determine that the conduct satisfies the constituent elements of a criminal offence under the Criminal Code 2015.
In practice, depending on the circumstances, such conduct may be examined under offences including obtaining property by fraud, abuse of trust to appropriate property, intentionally disclosing false information or concealing information in securities activities, or other related criminal offences. In case the conduct merely results in civil damages or constitutes a breach of corporate governance obligations, the matter may be resolved through compensation mechanisms or administrative sanctions.
Thus, the possibility of criminal prosecution must be assessed on the basis of the totality of circumstances rather than solely the amount of loss suffered by shareholders.
3. Is the distribution of dividends through artificially overvalued assets considered fraudulent conduct in dividend distribution?
Pursuant to Clause 3, Article 135 of the Law on Enterprise 2020, dividends may be distributed in cash, company shares, or other assets as prescribed by the company’s charter. If dividends are paid in cash, payment must be made in Vietnamese Dong and through payment methods permitted by law. However, the valuation of assets used for dividend distribution must be objective, accurate, and reflective of their actual value.
If company managers intentionally overvalue assets far beyond their actual worth in order to create fictitious profits or distort the value of dividends distributed to shareholders, such conduct may be considered fraudulent dividend distribution.
In case such conduct causes losses to shareholders or the enterprise, the responsible individuals may also be liable for damages and subject to applicable legal sanctions. Accordingly, assets used for dividend distribution must be valued transparently, based on objective evidence, and in compliance with corporate and accounting regulations.
III. Legal framework governing fraudulent conduct in dividend distribution
1. Current legal requirements for dividend distribution intended to prevent fraudulent conduct
Pursuant to Clause 2, Article 135 of the Law on Enterprise 2020, dividends payable on ordinary shares are determined based on realized net profits and must be distributed from the company’s retained earnings. A joint-stock company may distribute dividends on ordinary shares only when all of the following conditions are satisfied:
- The company has fulfilled all tax obligations and other financial obligations as required by law;
- The company has established the required reserves and offset prior losses in accordance with the law and the company’s charter;
- Following the dividend payment, the company remains capable of paying all due debts and other property obligations.
In addition, the figures forming the basis for dividend distributions must be reflected in financial statements prepared in compliance with accounting regulations. If the company executives intentionally manipulate business results to facilitate dividend payments or unlawfully refuse to distribute dividends to shareholders; civil, administrative, or criminal liability may arise depending on the circumstances.
2. Legal basis for determining criminal liability of commercial legal entities in cases of fraudulent dividend distribution
Pursuant to Article 75 of the Criminal Code 2015, a commercial legal entity may incur criminal liability only for offences expressly designated by the Criminal Code as applicable to commercial legal entities. Criminal liability of a legal entity arises where the criminal act is committed in the name of the legal entity, for its benefit, under the direction or approval of a person authorized to act on its behalf, and within the applicable limitation period for criminal prosecution.
In cases involving fraudulent dividend distribution, if the conduct satisfies the constituent elements of offences for which commercial legal entities may be held criminally liable, such as the offence of disclosing false information or concealing information in securities activities under Article 209, insurance business fraud, tax evasion, or other economic crimes applicable to commercial legal entities, the enterprise may be subject to criminal prosecution.
However, if the matter merely concerns a dispute regarding dividend entitlements between shareholders and the enterprise and does not satisfy the elements of a criminal offence, it will generally be resolved through civil proceedings or administrative sanctions.
3. Administrative sanctions and imprisonment frameworks applicable to fraudulent dividend distribution
At present, there is no specific administrative sanction provision addressing fraudulent conduct in dividend distribution. Depending on the nature of the violation, competent authorities may impose different sanctions.
If an enterprise discloses false information, conceals financial information, or breaches information disclosure obligations in the securities market, it may be sanctioned under regulations governing administrative fines in the securities and securities market sectors, with fines potentially reaching billions of Vietnamese Dong for violating organizations.
In case the conduct exhibits criminal elements, the individuals concerned may be prosecuted under the corresponding offences prescribed in the Criminal Code. For example, Article 209 of the Criminal Code 2015 provides for the offence of disclosing false information or concealing information in securities activities, carrying a maximum sanction of five years’ imprisonment for individuals. If the conduct is intended to appropriate shareholders’ assets, it may also be examined under Article 174 of the Criminal Code 2015 concerning obtaining property by fraud, which carries a life imprisonment.
4. Mitigating circumstances specific to company executives convicted of fraudulent conduct in dividend distribution
Pursuant to Clause 1, Article 51 of the Criminal Code 2015, mitigating circumstances include, among others, voluntarily remedying damage, compensating for losses, mitigating the consequences of the offence, making a sincere confession, demonstrating genuine remorse, voluntarily surrendering unlawfully obtained benefits, and actively cooperating with competent authorities during investigation, prosecution, and trial proceedings.
In cases involving fraudulent conduct in dividend distribution, actions such as voluntarily reimbursing unlawfully distributed dividends, fully compensating shareholders for losses, correcting inaccuracies in financial statements, or proactively providing documents that assist in clarifying the facts of the case are often considered by the courts when determining sanctions.
Furthermore, if the offender has made significant contributions to society, possesses a positive personal background, or commits the offence for the first time in a less serious case, such factors may also be taken into account as mitigating circumstances.
IV. Questions regarding fraudulent conduct in dividend distribution
1. Can a person acting under the instructions of a superior be considered an accomplice providing assistance in fraudulent dividend distribution?
Pursuant to Clause 1, Article 17 of the Criminal Code 2015, accomplicity exists where two or more persons intentionally participate in the commission of a criminal offence. An aider or abettor is a person who provides either material or moral support facilitating the commission of the offence. Thus, the fact that an individual acts under the instructions of a superior does not automatically exempt that individual from criminal liability.
The competent procedural authorities will assess whether the individual was aware of the unlawful nature of the conduct, as well as the extent of his or her involvement in preparing documents, manipulating figures, concealing information, or implementing transactions related to the fraudulent dividend distribution scheme. If it can be established that the individual clearly understood the unlawful purpose of the conduct but actively assisted in its implementation, he or she may be identified as an accomplice in the capacity of an aider or abettor. Conversely, if the individual merely performed technical or administrative tasks and neither knew nor could reasonably have known of the criminal conduct, criminal liability may not arise.
2. Can assets purchased with funds derived from fraudulent dividend distribution be seized to secure judgment enforcement?
Pursuant to Article 437 of the Criminal Procedure Code 2015, procedural authorities are empowered to impose asset distraint measures against accused persons where necessary to secure compensation obligations, confiscation of assets, or the enforcement of financial penalties imposed by the court.
Accordingly, if the investigating authority determines that funds used to acquire real estate, vehicles, or other assets originated from fraudulent dividend distribution activities, such assets may be frozen, seized, or subjected to other preventive measures in accordance with the law.
Even if ownership has been transferred to another person, the competent authorities may still examine the substance of the transaction in order to determine the true origin of the assets and take appropriate legal action. Thus, transferring or legitimizing assets after the commission of unlawful conduct does not necessarily eliminate the risk of seizure.
3. Can a first-time offender in a fraudulent dividend distribution case be exempted from monetary fines?
Exemption from monetary fines is not granted solely as the offender committed the offence for the first time. According to Article 59 of the Criminal Code 2015, a court may exempt an offender from punishment only in exceptional circumstances where the offender benefits from multiple significant mitigating factors and where such exemption would not pose a danger to society.
In economic crime cases or offences infringing upon the economic management order involving fraudulent dividend distribution, the court will comprehensively evaluate factors such as the extent of the damage, the consequences caused, the offender’s role, the ability to remedy the consequences, and the level of cooperation with procedural authorities.
4. If the capital source has been restored prior to criminal prosecution, can the case be dismissed?
Voluntarily remedying the consequences, returning assets, or restoring the capital source before prosecution constitutes a favorable circumstance for the offender. However, it does not automatically serve as a legal basis for the termination of criminal proceedings.
Pursuant to Article 230 of the Criminal Procedure Code 2015, a criminal case may only be terminated on statutory grounds, such as the absence of a criminal case, conduct that does not constitute a criminal offence, or circumstances warranting exemption from criminal liability under applicable law.
In practice, fully remedying the consequences before the violation is discovered or before criminal charges are initiated is often regarded as a mitigating circumstance under Article 51 of the Criminal Code 2015. Nevertheless, in case the conduct satisfies all constituent elements of a criminal offence and seriously affects shareholders’ rights or the economic management order, procedural authorities may still initiate prosecution, conduct investigations, and pursue criminal liability.
5. Can an accused person suffering from a serious illness have the investigation temporarily suspended in a fraudulent dividend distribution case?
Pursuant to Point b, Clause 1, Article 229 of the Criminal Procedure Code 2015, an investigating authority may issue a decision to temporarily suspend an investigation where a forensic assessment concludes that the accused is suffering from a mental illness or a serious illness, thereby warranting suspension before the expiration of the investigation period.
However, the existence of a serious illness does not automatically lead to the suspension of the investigation. The procedural authorities must assess the actual health condition of the accused, his or her ability to participate in procedural activities, and the expert conclusions issued by the competent assessment authority. Once the grounds for suspension cease to exist, the investigation may be resumed in accordance with the law.
V. Why is the presence of a lawyer from the tax inspection stage a critical factor in cases involving fraudulent dividend distribution?
In many cases involving fraudulent dividend distribution, signs of misconduct are first identified through tax inspections, audits, or financial inspections. This stage is particularly important because accounting records, financial statements, profit distribution documents, and other relevant materials will be collected and examined by the competent authorities as evidence for determining whether any legal violations have occurred.
A lawyer involved from the outset can assist the company in reviewing documentation, assessing legal risks, preparing appropriate explanations, ensuring compliance in the disclosure of information, and safeguarding the lawful rights and interests of both the enterprise and its managers. Where there are indications that the matter may progress to a criminal investigation, early legal preparation can substantially reduce procedural risks and create favorable conditions for the application of mitigating circumstances.
The information provided above is for reference purposes only. Should you require detailed legal advice regarding a specific matter, please contact NPLaw Law Firm for immediate assistance.
