In the process of managing financial resources, enterprises may choose to reduce their charter capital for a variety of reasons, such as restructuring, optimizing operations, or reallocating resources. However, a capital reduction, if not carefully planned and executed, can lead to a shortage of working capital, thereby jeopardizing the enterprise’s ability to meet its short-term financial obligations and maintain daily operations.
1. What Does a Working Capital Shortage After Capital Reduction Mean?
A working capital shortage after capital reduction refers to a situation where a company’s current assets (such as cash, inventory, and accounts receivable) are insufficient to cover its short-term liabilities following a reduction in charter capital as per legal procedures. When capital is reduced, the available financial resources shrink, making it difficult for the enterprise to sustain daily operations without resorting to additional borrowing.
This situation is often characterized by delayed payments of financial obligations, reliance on short-term loans to maintain operations, or an inability to fulfill contractual commitments.
2. Causes of Working Capital Shortages After Capital Reduction
There are several causes for working capital shortages after a reduction in capital, including:
- Inadequate Planning for Capital Reduction: Poorly calculated capital reductions can disrupt the balance between assets and liabilities, leading to financial strain.
- Poor Cash Flow Management: Delays in collecting receivables, unexpected increases in operating costs, or inefficient allocation of resources can exacerbate the issue.
- External Factors: Economic downturns, inflation, or changes in government policies can negatively impact the enterprise’s financial position.
- Non-Compliance with Legal Requirements: Failure to adhere to legal conditions for capital reduction may result in penalties or financial restrictions, further aggravating the shortage.
Thus, working capital shortages after capital reduction can stem from internal inefficiencies, legal non-compliance, and external market conditions.
3. Common Violations When Enterprises Fail to Manage Working Capital After Capital Reduction
When enterprises fail to effectively manage their working capital after reducing their charter capital, the following violations commonly occur:
- Failure to Register Adjustments to Charter Capital: Enterprises may neglect to update their charter capital with the relevant authorities following a reduction.
- Providing False Information to Regulatory Bodies: Misrepresentation of financial data or operational conditions can lead to legal and reputational consequences.
- Reducing Capital Without Ensuring Debt Repayment: Enterprises may reduce capital without fully settling their debts, causing harm to creditors, employees, and business partners.
These violations not only increase legal risks but also undermine the enterprise’s reputation, operational stability, and long-term viability.
4. Legal Provisions Related to Working Capital Shortages After Capital Reduction
The management of working capital following a capital reduction is subject to several legal frameworks in Vietnam, including:
- Law on Enterprises 2020
The Law on Enterprises 2020 provides detailed regulations on increasing and reducing charter capital:
- For Limited Liability Companies (LLCs) (Article 68): LLCs may reduce their charter capital by refunding part of the capital contribution to members in proportion to their ownership, provided that all debts and other financial obligations are fully paid after the refund. Capital reduction is also permissible when the company repurchases member contributions or when members fail to fully and promptly pay their capital contributions.
- For Joint-Stock Companies (JSCs) (Article 112, amended by Clause 17(a), Article 1 of the amended Law on Enterprises 2025): JSCs may reduce their charter capital based on a resolution of the General Meeting of Shareholders, allowing the company to return part of the capital contribution to shareholders in proportion to their shareholding. Capital reduction is also allowed when the company repurchases issued shares or when shareholders fail to fully and promptly pay for their shares.
These provisions aim to ensure that capital reductions are conducted transparently while protecting creditors and preventing enterprises from evading financial obligations.
- Law on Accounting 2015
The Law on Accounting 2015 establishes the following requirements:
- Article 29: Enterprises must prepare financial statements that accurately reflect their financial position and operational results. Financial statements must be prepared in accordance with legal standards and formats.
- Article 40: Enterprises must conduct asset inventories to verify and evaluate the quality and value of assets and capital at the time of inventory to ensure consistency with accounting records.
These provisions provide a legal basis for regulatory authorities and stakeholders to assess an enterprise’s financial capacity following a capital reduction.
- Law on Tax Administration 2019
The Law on Tax Administration 2019 (Article 68) requires enterprises to fulfill their tax obligations before completing corporate restructuring, including capital reductions. This prevents enterprises from using capital reductions or restructuring to evade tax liabilities and financial obligations to the state.
These legal provisions collectively require enterprises to ensure adequate liquidity and the ability to meet financial obligations after reducing their charter capital.
In conclusion, ưorking capital shortages following capital reduction can pose significant challenges to the financial stability and operational continuity of enterprises. Such shortages often result from inadequate planning, poor cash flow management, or external factors, and they can lead to legal violations that jeopardize the enterprise’s reputation and long-term sustainability. To mitigate these risks, enterprises must carefully evaluate their financial capacity, ensure compliance with legal requirements, and maintain transparency during the capital reduction process. By adhering to the provisions of the Law on Enterprises 2020, the Law on Accounting 2015, and the Law on Tax Administration 2019, businesses can prevent financial imbalances, protect their stakeholders’ rights, and ensure sustainable operations even after reducing their charter capital.
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1. Lawyer Vu Thi Phuong Thanh, Chairman of the Members’ Council, Ha Noi Bar Association
Email: vtpthanh@tlalaw.vn
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Email: tmle@tlalaw.vn.
Dinh Phuong Thao