Risks arising when an enterprise lacks working capital after capital reduction

In a context of strong economic volatility, the reduction of charter capital has become an option chosen by many enterprises to restructure their finances and optimize resources. However, after capital reduction, a shortage of working capital often occurs, leading to significant challenges in maintaining stable business operations. Thus, NPLaw would like to provide legal matters and regulations on working capital shortages after capital reduction.  

I. Impacts of working capital shortages after capital reduction on enterprises

A reduction of charter capital may directly affect an enterprise’s ability to maintain production and business operations, fulfill financial obligations, and perform commitments to partners if not carefully calculated.

A shortage of working capital after charter capital reduction may cause serious consequences to the operation and even the survival of an enterprise, such as delays in paying employee salaries, settling payments to suppliers, or covering daily operating expenses. In severe cases, it may push the enterprise into a vicious cycle of debt, increasing interest costs, and even the risk of bankruptcy if not promptly remedied.

In the long term, such a situation may also increase the risk of disputes, administrative sanctions, or even lead to insolvency.

II. Understanding working capital shortages after capital reduction

To adopt an appropriate approach, enterprises need to clearly understand the nature and causes of working capital shortages after capital reduction.

1. What does a working capital shortage after capital reduction mean?

A working capital shortage after capital reduction may be understood as a situation in which an enterprise’s current assets (such as cash, inventory, and receivables) are insufficient to cover its short-term liabilities after completing procedures for reducing charter capital in accordance with the law. When charter capital is reduced, available financial resources are narrowed, making it difficult for the enterprise to sustain daily operations without additional borrowing.

Such a situation is often reflected in delayed fulfillment of financial obligations, reliance on short-term loans to maintain operations, or insufficient resources to perform signed contracts.

2. What causes working capital shortages after capital reduction?

In practice, there are various causes leading to working capital shortages after capital reduction. Common causes include:

• Decisions on capital reduction that are not carefully assessed, resulting in an imbalance between assets and liabilities;
• Poor cash flow management, such as delayed debt collection or sudden increases in operating costs;
• External factors such as economic downturns, inflation, or policy changes;
• Failure to comply with statutory conditions for capital reduction, resulting in sanctions or financial constraints.

Accordingly, working capital shortages after capital reduction stem not only from internal enterprise factors but are also influenced by legal and market conditions.

III. Legal regulations related to working capital shortages after capital reduction

Vietnamese law currently provides relatively stringent regulations to ensure effective capital management by enterprises and to prevent shortages after capital reduction.

1. Which legal framework governs the management of working capital after capital reduction?

The management of working capital after capital reduction is primarily regulated by the following legal instruments:

• Law on Enterprise 2020:
• Article 68 on the increase and reduction of charter capital of limited liability companies; and Article 112 (as amended by Point a, Clause 17, Article 1 of the amended Law on Enterprise 2025) on the capital of joint-stock companies. These provisions aim to protect creditors and prevent enterprises from abusing capital reduction to evade financial obligations.
• A limited liability company may reduce its charter capital in cases of refunding part of the capital contribution to members in proportion to their capital contribution, provided that the company ensures full payment of all debts and other property obligations after such refund; redeeming a member’s capital contribution; or where charter capital has not been fully and timely contributed as required.
• A joint-stock company may reduce its charter capital under a resolution of the General Meeting of Shareholders by refunding part of the capital contribution to shareholders in proportion to their shareholding, provided that the company ensures full payment of all debts and other property obligations after such refund; by redeeming issued shares; or where charter capital has not been fully and timely paid by shareholders as required.
• Law on Accounting 2015:
• Article 29 on financial statements of accounting units; and Article 40 on asset inventory. These provisions provide the legal basis for competent authorities and related parties to examine an enterprise’s solvency after capital reduction. 
• Enterprises are required to prepare financial statements to summarize and explain their financial position and operating results in accordance with prescribed forms, contents, and methods. Asset inventories must accurately reflect the actual condition and value of assets and capital sources at the time of inventory.
• Law on Tax Administration 2019, Article 68 on fulfillment of tax obligations in cases of enterprise reorganization:
• Enterprises undergoing reorganization (division, separation, consolidation, or merger) must complete existing tax obligations before formalizing changes in capital, thereby preventing the use of capital reduction to evade tax liabilities and financial responsibilities toward the State.

These regulations require enterprises to ensure solvency with respect to debts and property obligations after capital reduction.

2. Is an enterprise required to notify competent authorities of working capital shortages after capital reduction?

Enterprises are not directly required to notify authorities of working capital shortages; however, they must submit periodic financial reports in accordance with Point a, Clause 2, Article 29 of the Law on Accounting 2015, as amended and supplemented in 2024.

In addition, when there is a change in charter capital, enterprises are required to register such change with the business registration authority under Clause 1, Article 44 of Decree No. 168/2025/ND-CP. Where a shortage results in insolvency, enterprises must make notification when implementing dissolution or bankruptcy procedures in accordance with Clause 1, Article 6 of the Law on Bankruptcy 2014, which provides that Individuals, agencies, and organizations, upon discovering that an enterprise or cooperative is insolvent, have the responsibility to notify in writing those who have the right and obligation to file a petition for the initiation of bankruptcy proceedings as prescribed in Article 5 of this Law. 

3. What violations commonly occur when enterprises fail to manage working capital after capital reduction?

Common violations include:

• Failure to register changes to charter capital after capital reduction;
• Provision of inaccurate or untruthful information to regulatory authorities;
• Reduction in capital without ensuring debt repayment, causing damage to employees, creditors, and partners.

Such violations not only increase legal risks but also directly affect an enterprise’s reputation, operational stability, and long-term viability.

IV. Questions regarding working capital shortages after capital reduction

In practice, many enterprises encounter difficulties when working capital shortages arise after capital reduction. Below are some common questions.

1. What should an enterprise do upon discovering a working capital shortage after capital reduction?

Upon identifying a working capital shortage, an enterprise should proactively:

• Review and reassess its entire financial position, cash flow, and capital structure;
• Determine the extent of the shortage and its ability to settle due debts;
• Examine compliance with legal conditions and procedures related to charter capital reduction;
• Develop appropriate remedial plans to ensure uninterrupted production and business operations;
• Fully execute legal obligations toward partners, employees, and competent authorities to minimize dispute and sanction risks.

Timely handling helps stabilize operations, limit disputes, and avoid sanctions arising from insolvency or improper capital reduction.

2. What measures may enterprises adopt to remedy working capital shortages after capital reduction?

Enterprises may consider one or more of the following solutions:

• Reviewing and restructuring cash flows, prioritizing essential and urgent expenditures;
• Mobilizing additional lawful capital through supplementary capital contributions, borrowing, or other appropriate financial instruments;
• Negotiating with partners and suppliers to adjust payment schedules or terms to reduce short-term cash flow pressure;
• Adjusting production and business plans appropriate with financial capacity and existing working capital;
• Strengthening financial management, cost control, and minimizing unnecessary expenditures during periods of capital shortage.

Selecting and combining appropriate solutions enables enterprises to gradually overcome working capital shortages while ensuring legal compliance and maintaining long-term operational stability.

3. What future risks may arise from working capital shortages after capital reduction?

Such shortages may lead to significant risks, including:

• Difficulties in paying due debts, salaries, taxes, and regular operating expenses;
• Declining credibility due to delayed or unfulfilled commitments to partners and customers;
• Increased risk of contractual disputes and claims for damages;
• Potential insolvency, leading to the risk of bankruptcy proceedings.

Accordingly, working capital shortages after capital reduction not only affect immediate business operations but also entail long-term legal and financial consequences, requiring early identification and preventive measures.

4. What sanctions may an enterprise take if it fails to report working capital shortages after capital reduction?

Under the Law on Enterprise 2020 (Point a, Clause 3, Article 68; Point a, Clause 5, Article 112 as amended by Point a, Clause 17, Article 1 of the amended Law on Enterprise 2025), charter capital reduction is only permitted where the enterprise ensures full payment of all debts and other property obligations. Where an enterprise reduces capital dishonestly, conceals insolvency risks, or fails to comply with notification obligations, it may take the following sanctions:

• Administrative fines ranging from 20,000,000 VND to 30,000,000 VND for providing false information or data in publicly disclosed financial reports (Point a, Clause 3, Article 12 of Decree No. 41/2018/ND-CP);
• In cases of intentional capital reduction and failure to report working capital shortages to evade debt obligations, criminal liability may arise for fraud under Article 174 or misappropriation of property under Article 175 of the Criminal Code 2015, as amended and supplemented in 2025.

Failure to comply with notification obligations and to ensure solvency after capital reduction may therefore result not only in administrative penalties but also in serious legal consequences affecting both enterprises and their managers.

5. May customers claim damages if an enterprise fails to perform contracts due to working capital shortages?

Pursuant to Article 13 of the Civil Code 2015: Individuals and legal entities whose civil rights are infringed are entitled to full compensation for damages, unless otherwise agreed by the parties or provided by law.

Clause 1, Article 548 further provides: Any person who infringes upon the life, health, honor, dignity, reputation, property, rights, or other lawful interests of another and causes damage shall compensate for such damage, unless otherwise provided by this Code or other relevant laws.

Accordingly, where an enterprise breaches a contract due to working capital shortages and fails to properly perform its contractual obligations, the injured party has the right to claim compensation for damages in accordance with the above provisions.

V. Are you seeking a reputable law firm to assist with issues related to working capital shortages after capital reduction?

Charter capital reduction and working capital management require careful preparation in both financial and legal aspects. Where enterprises encounter difficulties or require in-depth advice on working capital shortages after capital reduction, consulting legal counsel can help minimize risks and best protect lawful rights and interests.

With a team of experienced lawyers and legal professionals, NPLaw provides reputable and professional legal services, ensuring optimal protection of clients’ lawful interests. Should you require legal assistance, please contact NPLaw for consultation and support.

The above information is provided for reference purposes only. For detailed advice tailored to specific circumstances, please contact NPLaw for prompt consultation.