During the preparation and implementation of an investment project, the pre-investment loan debts of a business owner constitute an important factor that must be carefully considered in order to assess the investor’s financial capacity and level of risk exposure.

I. Current situation regarding pre-investment loan debts of business owners

In investment practice, pre-investment loan debts of business owners have become an increasingly significant issue, particularly in the context where many investors participate in projects despite not having sufficiently stable financial capacity. In reality, there are numerous cases where business owners already have existing personal debts or debts related to previous business activities, but such liabilities are not fully disclosed during the capital contribution process or project implementation. It creates substantial risks for partners, co-investors, and credit institutions.

During the project appraisal process, many partners focus solely on business efficiency without fully evaluating the credit history and financial obligations of the business owner, leading to inaccurate assessments of actual financial capacity. When pre-investment debts become the subject of disputes or repayment demands, the project may be seriously affected, or even interrupted or rendered incapable of further implementation.

Furthermore, although the current legal system has provided regulations on property obligations and the responsibilities of business entities, in certain cases, determining the boundary between personal obligations and corporate obligations remains complicated, particularly where assets and cash flows are intermingled.

Accordingly, the current situation demonstrates that pre-investment loan debts of business owners are a potential risk factor that may directly affect the safety and efficiency of an investment project if not strictly controlled.

II. Concept of pre-investment loan debts of business owners

1. What are pre-investment loan debts of business owners?

Pre-investment loan debts of business owners refer to financial obligations arising from loans borrowed from individuals or organizations which the business owner established before conducting investment activities or before establishing the enterprise. 

Each legal subject must take responsibility for the financial obligations established by itself, except where otherwise agreed by the parties or otherwise provided by law.

Accordingly, these debts have the following characteristics:

  • They are associated with the personal legal status of the business owner;
  • They arise before the time of investment or before the establishment of the enterprise;
  • They do not automatically become obligations of the enterprise unless lawfully transferred.

Thus, these are personal debts of the business owner and must be clearly distinguished from the obligations of the enterprise during the investment process.

2. How are pre-investment loan debts of business owners distinguished from enterprise loan debts arising after establishment?

Distinguishing between these two types of obligations is important for determining property liability and the scope of legal risks:

(i) In terms of the liable subject

  • Pre-investment debts: The business owner (individual) is liable;
  • Post-establishment debts: The enterprise (legal entity or business organization) is liable.

(ii) In terms of the scope of secured assets

  • Pre-investment debts: They may be settled using all personal assets of the individual;
  • Enterprise debts: They are settled using the assets of the enterprise, except where the business owner takes unlimited liability (for example, a private enterprise).

(iii) In terms of the ability to affect the investment project

  • Pre-investment debts: They may indirectly affect the project if related to contributed assets;
  • Enterprise debts: They directly affect the operation and financial capacity of the project.

(iv) In terms of the time of occurrence

  • Pre-investment debts: Before project implementation or before enterprise establishment;
  • Post-investment debts: During the operation of the enterprise.

Accordingly, clearly distinguishing between these two types of debts helps accurately determine the liable subject and minimize legal risks in investment activities.

III. Legal provisions related to pre-investment loan debts of business owners

1. Conditions for transferring debt repayment obligations from the individual business owner to the company

Pursuant to Article 370 of the Civil Code 2015, an obligation may be transferred from the obligor to another subject when the following conditions are satisfied:

  • There is consent from the obligee (creditor);
  • The transfer does not fall into cases prohibited by law;
  • The parties may establish a written agreement on the transfer of obligations.

In the investment context:

  • The personal debts of the business owner do not automatically transfer to the company upon establishment;
  • Only when there is a lawful agreement and creditor approval does the enterprise become the obligor for repayment;
  • In the absence of creditor consent, the business owner must still take personal responsibility for the debt.

Therefore, the transfer of debt repayment obligations from an individual to a company is only lawful when creditor consent is obtained and all statutory conditions are fully satisfied.

2. How is the timing for determining pre-investment loan debts of business owners calculated?

According to the principles of establishment of obligations under Articles 274 and 275 of the Civil Code 2015, civil obligations arise from:

  • The time when the parties enter into a loan agreement;
  • Or the time when legal grounds leading to the obligation occur under the law.

Accordingly, a loan debt of a business owner is determined as a “pre-investment debt” if it arises before the time of enterprise establishment or before signing/implementing the investment project. Determining this point in time is important for distinguishing liability between the individual and the enterprise.

3. Does the law require declaration of pre-investment loan debts of business owners when registering charter capital?

Pursuant to Clause 3, Article 8 of the Law on Enterprise 2020, when registering an enterprise, members or shareholders are only required to declare information regarding contributed capital/charter capital in the enterprise registration dossier. The law does not mandatorily require declaration of personal debts of the business owner arising before investment in the enterprise registration dossier.

However:

  • The business owner must be responsible for the truthfulness and accuracy of contributed capital;
  • If assets subject to existing obligations (for example, mortgaged assets) are used for capital contribution without disclosure, legal risks may arise;

In certain specific sectors or during project appraisal, competent authorities or partners may require the provision of information regarding financial status and debt obligations.

IV. Questions regarding pre-investment loan debts of business owners

1. Do pre-investment loan debts of business owners affect future profit distribution?

Profit distribution of an enterprise is conducted based on: Business results;

And the capital contribution ratio of members/shareholders. The personal loan debts of the business owner arising before investment do not directly reduce distributable profits, because these are the individual’s separate financial obligations.

However, in practice, if such debts affect contributed assets or the cash flow of the enterprise, or if the business owner must use profits to repay personal debts, profit distribution may be indirectly affected.

Thus, pre-investment debts do not directly affect the profit-sharing mechanism but may indirectly impact the actual ability of the business owner to receive profits.

2. Is the enterprise responsible for paying the pre-investment loan debts of the business owner?

The enterprise is an independent legal subject (for limited liability companies and joint stock companies) and is only responsible for obligations established by the enterprise itself.

Therefore, pre-investment debts of the business owner are not obligations of the enterprise, except where there is a lawful transfer of obligations, or where the enterprise guarantees or agrees to assume such obligations.

3. Do pre-investment loan debts of business owners include loan interest and late payment sanctions?

Pursuant to Articles 466 and 468 of the Civil Code 2015, debt repayment obligations include: Principal amount; and loan interest according to agreement. In cases of late payment, additional late payment interest and contractual sanctions (if agreed) may also arise.

Therefore, pre-investment loan debts of business owners generally include the entire financial obligation arising from the loan contract, not merely the principal amount.

4. Are pre-investment loan debts of business owners automatically transferred to the company after establishment?

Pursuant to Article 370 of the Civil Code 2015, the transfer of obligations requires creditor consent and a lawful agreement among the parties.

Accordingly, personal debts do not automatically transfer to the company upon establishment. In the absence of a lawful transfer, the business owner must continue to take personal responsibility.

5. If the loan is used to purchase assets for capital contribution, who takes the repayment obligation?

In such a case, it is necessary to clearly distinguish between the source of funds used to form the asset and the debt repayment obligation:

  • The borrower (business owner) remains the subject responsible for debt repayment;
  • Assets purchased using borrowed funds may become contributed assets of the enterprise; however, it does not change the repayment obligation unless otherwise agreed.

In addition, if the asset is mortgaged, legal risks may arise for the enterprise, and the creditor may have the right to enforce the asset for debt recovery.

V. Why you should seek legal consultation from NPLaw regarding pre-investment loan debts of business owners

Issues relating to pre-investment loan debts of business owners often require a clear distinction between personal liability and corporate liability, while also addressing risks associated with contributed assets and financial obligations. NPLaw, with its team of experienced lawyers in investment and contract law, can assist in reviewing financial structures, advising on debt settlement solutions, designing contractual provisions to protect legitimate interests, and representing clients in dispute resolution. As a result, clients can minimize legal risks and ensure safety in investment activities.

The above information is for reference purposes only. Should Clients require detailed consultation regarding specific cases, please contact NPLaw Firm for immediate legal advice.