The dissolution clause in the company incorporation agreement is an essential provision that establishes the legal basis for terminating a company’s operation when special circumstances arise. Compliance with dissolution regulations helps minimize risks and safeguard the rights of shareholders and business partners.
I. Understanding of the dissolution clause in the company incorporation agreement in the current context
In the present context, the dissolution clause in the company incorporation agreement plays a vital role in protecting the rights and interests of the participating parties.
It defines the circumstances, conditions, and procedures under which a company may be dissolved when business objectives are no longer achievable or in cases of severe disputes. In practice, many companies have difficulties due to vague dissolution clauses, leading to complex disputes. Therefore, developing such a clause in compliance with the law, with clarity and detail, is essential.
1. Definition
The dissolution clause in the company incorporation agreement refers to the provision stipulating the circumstances, conditions, and procedures for terminating the company’s operation when it fails to meet business objectives or due to legal, financial, or mutual agreement among members/shareholders. Such a clause clearly defines the rights and obligations of the parties upon dissolution and helps mitigate disputes, thus it is necessary to ensure the dissolution is executed lawfully and transparently.
2. Example of issues relating to the dissolution clause in the company incorporation agreement in practice
For instance, a joint-stock company established by three shareholders agreed in its incorporation agreement that the company would be dissolved if profits remained below 5% of revenue for three consecutive years. However, when such an issue occurred, one shareholder opposed the dissolution and wished to continuously operate the business. A dispute then arose regarding the enforcement of the dissolution clause. In this case, the clause serves as the legal basis to determine the rights and obligations of the parties.
3. Why should the dissolution clause be enforced in the company incorporation agreement?
The dissolution clause is a critical legal tool that allows enterprises to anticipate and plan for the termination of operations. It specifies the handling of assets, the rights and obligations of members/shareholders, prevents disputes, and protects the interests of creditors and employees. Moreover, its proper implementation ensures compliance with the Law on Enterprises 2020, maintaining the transparency and credibility of the company.
Accordingly, the dissolution clause serves as a foundation for an orderly, lawful, and equitable termination of operations.
II. Legal provisions on the dissolution clause in the company incorporation agreement
1. Main regulations concerning the dissolution clause in the company incorporation agreement
To ensure the lawful drafting and implementation of the dissolution clause, enterprises must take into account critical provisions of the Law on Enterprise 2020, including:
- Article 207: Establishes grounds and conditions for dissolution (decision of dissolution, revocation of the Enterprise Registration Certificate, full settlement of financial obligations, etc.).
- Article 208: Provides procedures for dissolution.
- Article 210: Details dissolution dossier requirements.
- Article 211: Identifies prohibited acts after a dissolution decision has been issued (e.g., concealing or dispersing assets, unlawful transfers, etc.).
These constitute the essential legal bases that enterprises must comply with when drafting or implementing the dissolution clause.
2. Conditions for applying the dissolution clause in the company incorporation agreement
To apply the dissolution clause lawfully, the enterprise must comply with the conditions provided under Article 207 of the Law on Enterprise 2020, namely:
- The company may only dissolve after fully discharging all debts and financial obligations.
- The company must not be involved in pending disputes before the Court or Arbitration.
- The dissolution process must comply with the procedures and dossier requirements under Articles 208 and 210.
Only upon meeting these conditions can the dissolution clause be lawfully enforced.
3. Sanctions for violations relating to the dissolution clause in the company incorporation agreement
Pursuant to Article 58 of Decree 122/2021/NĐ-CP, sanctions include:
Violations:
- Failure to implement dissolution procedures upon expiration of the company’s operation term under its Charter without an extension decision.
- Failure to dissolve when the company no longer meets the minimum membership requirement for six consecutive months without converting to another type of enterprise.
- Failure to terminate branches, representative offices, or business locations prior to filing for dissolution.
Sanctions: Monetary fine ranging from 20,000,000 VND to 30,000,000 VND per violation.
Remedial measures:
- Mandatory dissolution procedures for violations under points (1) and (2).
- Mandatory termination of branches, representative offices, or business locations for violations under point (3).
Thus, non-compliance not only incurs monetary fines but also obliges the enterprise to complete dissolution procedures in accordance with the law.
III. Questions regarding the dissolution clause in the company incorporation agreement
1. Can the dissolution clause be amended? If so, under what circumstances?
Pursuant to Article 207 of the Law on Enterprise 2020, the clause may be amended in the following cases:
- By resolution of the General Meeting of Shareholders or Members’ Council, depending on the type of enterprise.
- By unanimous agreement of all partners in a partnership.
- In accordance with the company’s Charter provisions.
Amendments must be undertaken cautiously and lawfully to avoid disputes and legal risks.
2. What risks arise if the dissolution clause is not properly implemented?
Failure to properly implement the dissolution clause in the company incorporation contract may result in serious legal risks for the enterprise.
- Under Article 58 of Decree 122/2021/NĐ-CP, fines range from 20,000,000 VND to 30,000,000 VND for failure to dissolve upon expiration of the company’s operation term without extension, or when the company lacks the minimum members for six months without conversion.
- Enterprises will be forced to execute dissolution procedures if they do not comply with the provisions on dissolution, according to the remedial measures prescribed in Article 58 of Decree 122/2021/ND-CP.
3. Who has authority to enforce the dissolution clause?
As stipulated in Point b, Clause 1, Article 207 of the Law on Enterprise 2020:
- Sole proprietorship: The owner decides the dissolution.
- Partnership: The Members’ Council makes the dissolution resolution.
- Limited Liability Company: The Members’ Council or the owner decides the dissolution.
- Joint-Stock Company: The General Meeting of Shareholders adopts the dissolution decision.
Each entity type has its corresponding authority to decide dissolution.
4. What is the procedure for implementing the dissolution clause?
According to Article 208 of the Law on Enterprise 2020, the procedure includes:
- Adopting a dissolution resolution or decision.
- Liquidating assets by the owner, Members’ Council, or Board of Directors, unless otherwise stipulated in the Charter.
- Notifying authorities and relevant parties within 07 working days.
- Settling financial obligations in priority order, including employee-related debts → tax liabilities → other debts.
- Distributing residual assets to members or shareholders proportionally after executing financial obligations.
- Filing the dissolution dossier with the Business Registration Authority within 05 working days after completing financial obligations.
- Updating the enterprise’s status in the National Business Registration Database after 180 days if no objections are raised.
Such a process ensures lawful, transparent dissolution and protection of stakeholders.
5. What factors may affect the implementation of the dissolution clause?
- Financial situation of the company.
- Internal consensus among members or shareholders.
- Compliance with legal requirements.
- Contractual relations with third parties.
Proper preparation in finance, law, and internal governance is crucial for prompt dissolution.
IV. Should legal counsel be sought for advice on the dissolution clause?
Engaging a lawyer is advisable to ensure the dissolution clause in the company incorporation agreement is implemented lawfully and to minimize dispute risks. Legal counsel can provide analysis, drafting, and procedural guidance. For professional assistance, please contact NPLaw for timely consultation and support.
