In corporate governance activities, the legal liability of capital representatives has increasingly attracted attention in order to ensure that investment capital is managed and utilized for the proper purposes and with efficiency.

I. Current situation related to the legal liability of capital representatives

In the context of increasingly diversified capital investment activities in enterprises, especially where the State and organizations appoint representatives for contributed capital, the issue of legal liability of capital representatives has become increasingly important and complex.

  • Firstly, capital representatives are commonly found in enterprises with State capital contributions, parent company–subsidiary structures, or investment organizations. These individuals are entrusted with the authority to exercise shareholders’/members’ rights on behalf of the capital owner, including voting, participating in governance, and supervising business operations.
  • Secondly, regarding the legal framework, Vietnamese law has established regulations relating to capital representatives, notably the Law on Enterprise 2020 and provisions governing State capital management in enterprises. However, regulations on legal liability remain scattered and have not yet formed a unified legal institution, resulting in difficulties in application.
  • Thirdly, regarding practical difficulties and risks, in reality, there are many cases where capital representatives fail to comply with the instructions of the capital owner or make decisions causing damage to the contributed capital portion. In addition, determining liability when damage occurs (between the individual representative and the appointing organization) remains difficult and often leads to disputes.

Practice requires clearer clarification of legal liability in order to improve capital management efficiency and limit risks.

II. Concept of the legal liability of capital representatives

1. What is the legal liability of a capital representative?

The legal liability of a capital representative may be understood as the obligations that a person appointed to represent a contributed capital portion must be responsible before the law and before the capital owner when exercising rights and obligations related to the assigned capital portion.

In terms of content, such liability includes:

  • The obligation to comply with the instructions of the capital owner;
  • The duty of loyalty and prudence in managing and utilizing capital;
  • The obligation to compensate for damages if violations cause losses.

Accordingly, the legal liability of a capital representative is the aggregate of obligations and legal consequences that the representative must take when exercising representative rights over the contributed capital portion.

2. How does the legal liability of a capital representative differ from that of the legal representative of an enterprise?

Although both are representative subjects, the legal liability of these two types of representatives differs fundamentally.

  • Firstly, regarding the scope of representation, the legal representative represents the enterprise in all legal relations with third parties, while the capital representative only represents the capital owner within the scope of the contributed capital portion in the enterprise.
  • Secondly, regarding the subject of liability, the legal representative is liable before the law and the enterprise for all management and operational activities, while the capital representative is mainly liable to the capital owner who appointed them.
  • Thirdly, regarding the basis leading to liability, the liability of the legal representative arises from the statutory management position, whereas the liability of the capital representative arises from the authorization relationship or the decision of appointment.

These two types of liability differ in nature and scope, reflecting two independent representative mechanisms within an enterprise.

3. Does the legal liability of a capital representative depend on the content of the authorization contract?

Pursuant to Article 562 of the Civil Code 2015, the authorization contract is the basis for establishing the rights and obligations of the representative. Therefore, the scope of liability of the capital representative depends on the content of the authorization, including limitations on voting rights, reporting obligations, or specific instructions.

On the other hand, the legal liability of a capital representative is not limited only to the authorization contract but is also governed by law, especially general duties such as loyalty, prudence, and non-abuse of authority. Even if the contract does not stipulate these obligations, they still arise by law.

III. Legal regulations related to the legal liability of capital representatives

1. Does the law require the signing of an authorization contract between the capital-contributing party and the capital representative?

The law does not require a separate type of contract specifically called a “capital representation authorization contract”, but in practice, the relationship between the capital-contributing party and the capital representative is usually established through an authorization contract.

Pursuant to Article 562 of the Civil Code 2015, an authorization contract is an agreement between the parties whereby the authorized party, in the name of the authorizing party, performs certain tasks. It is entirely consistent with the nature of a capital representative, exercising the owner’s rights over the contributed capital portion.

In addition, in the case of the State capital, the appointment of representatives may also be made through administrative decisions or internal regulations rather than purely civil contracts.

2. How does current law regulate the liability of capital representatives?

Currently, such liability can be determined through related provisions.

  • Firstly, under the Law on Enterprise 2020, if the capital representative is also an enterprise manager (for example, a member of the Board of Directors), they must comply with obligations under Article 165 of the Law on Enterprise 2020, including duties of loyalty, prudence, and prioritizing the interests of the company.
  • Secondly, under the Civil Code 2015, according to provisions on representation and authorization, the representative must perform tasks within the scope of authorization and take liability for acts exceeding such scope (Articles 135 to 143 of the Civil Code 2015).
  • Thirdly, under specialized regulations (if any), for State capital portions, the liability of representatives is also governed by separate regulations on capital management, emphasizing the obligation to preserve and develop capital.

The liability of capital representatives is determined comprehensively from multiple legal sources, including the obligations of enterprise managers and obligations arising from representative relationships.

3. Regulations on compensation for damages when a capital representative breaches obligations

Pursuant to Article 360 of the Civil Code 2015, the obligor who breaches an obligation must compensate for all damages caused by such breach. At the same time, if the capital representative is also an enterprise manager, under Article 165 of the Law on Enterprise 2020, they must take personal or joint liability for arising damages.

Damages may include asset losses, lost profits, or reasonable expenses incurred to prevent and remedy consequences.

In addition, if the violating act shows serious signs, the capital representative may also be subject to administrative sanctions or criminal liability under relevant legal provisions.

4. In what cases may a capital representative be removed from office?

The law does not specifically provide a general list of cases for dismissal of capital representatives, but such cases may be determined based on the nature of the representative relationship and relevant legal provisions.

  • Firstly, based on agreement or the decision of the capital-contributing party. Since the capital representative is appointed to exercise the owner’s rights, the appointing party has the right to replace or dismiss them when no longer appropriate.
  • Secondly, when they no longer satisfy required conditions or standards. For example, loss of civil act capacity, legal violations, or failure to meet conditions under internal regulations or the law.
  • Thirdly, when they breach obligations or cause damage. In such cases, dismissal is often accompanied by claims for compensation or liability handling.
  • Fourthly, upon termination of the representative relationship. Pursuant to Article 569 of the Civil Code 2015, an authorization contract terminates in cases such as expiration of the term, completion of the work, or agreement of the parties.

The dismissal of a capital representative mainly depends on the rights of the appointing party and legal grounds for termination of the representative relationship.

IV. Questions related to the legal liability of capital representatives

1. Must a capital representative bear liability when the enterprise suffers losses?

In principle, a capital representative is not automatically liable merely because the enterprise suffers losses, since business operations always involve objective risks.

However, if the losses result from the representative’s breach of obligations, such as lack of prudence, violation of the owner’s instructions, or self-interested conduct, they may be liable for compensation under Article 165 of the Law on Enterprise 2020 and Article 360 of the Civil Code 2015.

2. After termination of authorization, does the capital representative still take liability for decisions previously voted on?

Termination of authorization does not eliminate liability for acts performed during the period when the authorization was still valid, specifically:

  • Article 569 of the Civil Code 2015: It regulates cases of termination of authorization contracts (expiration, agreement, unilateral termination, etc.);
  • Article 143 of the Civil Code 2015: It regulates the legal consequences of representative acts, according to which transactions established by the representative within the scope of representation create rights and obligations for the represented party;
  • Article 360 of the Civil Code 2015: it regulates liability for breach of obligations, according to which the breaching party must compensate for damages caused by their acts.

From these provisions, it can be seen that if, during the authorization period, the capital representative participated in voting or made decisions causing damage (due to their own fault), then even if the authorization relationship subsequently terminates, legal liability for such acts is not excluded.

3. Can a capital representative agree to limit liability in the authorization contract?

Under the principle of freedom of agreement in Article 3 of the Civil Code 2015, the parties may agree on the scope of liability of the representative in the authorization contract.

However, limitation of liability must not violate legal provisions, especially it must not completely exclude liability for breaches of fundamental obligations such as fraud, intentional damage, or breach of the duty of loyalty.

In addition, if the representative is also an enterprise manager, obligations under the Law on Enterprise 2020 must still be complied with and cannot be excluded by agreement.

4. Must a capital representative take joint liability with other managers in the enterprise?

If the capital representative is also a member of the Board of Directors or another enterprise manager, then under Article 165 of the Law on Enterprise 2020, they may take  joint liability if they jointly participate in decisions causing damage to the company.

Conversely, if the capital representative did not participate in or opposed such decisions and their objection was properly recorded, they may be exempt from liability.

5. What mechanisms should enterprises establish to control and limit risks related to the legal liability of capital representatives?

To limit risks, enterprises and capital owners should establish strict control mechanisms:

  • Firstly, clearly stipulating in the authorization contract the scope of authority, obligations, and liabilities of the representative.
  • Secondly, establishing periodic reporting and supervision mechanisms to monitor the representative’s activities.
  • Thirdly, providing clear accountability obligations and specific sanctions in case of violations.
  • Fourthly, developing internal decision-making procedures to reduce the risk of overly personalized decisions.

An effective control mechanism is a main factor in minimizing legal risks and improving capital management efficiency.

V. Why should you seek legal advice from NPLaw regarding the legal liability of capital representatives

In the context where the legal liability of capital representatives is governed by multiple legal sources and involves potential dispute risks, seeking support from NPLaw is necessary. With experience in corporate and investment law, our team of lawyers can assist in advising, building strict authorization mechanisms, reviewing legal risks, and resolving disputes effectively, thereby helping protect the interests of capital owners and improving corporate governance efficiency.

The above information is for reference purposes only. Should you require detailed advice for your specific case, please contact NPLaw for immediate consultation.