Project transfer associated with land use rights (LUR) is a form in which an investor transfers all or part of an investment project to another investor, including land and attached assets. For businesses and investors, this method helps save time and take advantage of available planning and infrastructure. However, the transfer of projects associated with land use rights is a complex legal field, many regulations on investment and land must be complied with, so it is easy to arise legal risks if not careful. In this article, we will analyze legal regulations, point out some core legal issues and lessons learned for stakeholders, through the case 43/2023/KDTM-PT of the High Court in Ho Chi Minh City on May 23, 2023 on the transfer dispute of the cashew oil factory project in Binh Phuoc.
The Hoa Lan Residential Area Project, possessing a “golden land fund” of more than 49 hectares, has the opportunity to be relaunched after the parties have brought their dispute to a close. Source: Tuoi tre
Summary of Judgment
According to the judgment[1], M Co., Ltd. (100% Vietnamese capital) was established on 2/10/2015, initially with two members, Ms. Nguyen Thi Ngoc O and Ms. Vo Thi Thanh K with an equal ratio of contributed capital of 50-50. At the end of 2016, Ms. K transferred the contributed capital to Ms. O (1%) and Mr. Huh Moon S (49%, Korean investors). Thus, by the beginning of 2017, Ms. O accounted for 51% and Mr. Huh accounted for 49% of the charter capital. On the basis of the land use right certificate with an area of 6,289.2 m² in Phuoc Long town (issued to Company M – the former owner of the Project) and the attached warehouse, Mr. Huh and Ms. O have registered to invest in the Cashew Oil Factory Project according to Decision No. 2824/QD-UBND dated 2/11/2016 of Binh Phuoc Provincial People's Committee.
After a period of operation, the project faced financial and export difficulties. In January 2018, Company M (Korea) – to which Mr. Huh is associated, proposed to become the new investor of the project. The parties agreed to transfer the Cashew Oil Plant Project from Company M (Vietnam) to Company M (Korea). On February 6, 2018, Binh Phuoc People's Committee issued Decision 323/QD-UBND adjusting the investment policy, transferring investors from Company M (Vietnam) to Company M (Korea), on the same day the Department of Planning and Investment issued the Investment Certificate No. 6526986408. On this basis, Company M (Korea) established M Vietnam One Member Co., Ltd. (Business Registration Certificate 7/2/2018), Mr. Huh is the legal representative. On March 20, 2018, Mr. Huh and Ms. O signed a project transfer contract, whereby the entire value of investment capital in land use rights and attached assets at the price of VND 5 billion was transferred to Company M Vietnam. The contract was notarized on March 20, 2018. On 26/3/2018, the Land Registration Office updated the changes, transferred the land use right book to M Vietnam Company.
After the transfer, Ms. O's Company M (Vietnam) was dissolved, Mr. Huh became the sole legal representative of Company M Vietnam, continuing to manage the Cashew Oil Factory. However, investor M (Korea) then did not transfer any more capital to Vietnam, causing Mr. Huh and Ms. O to pay all production and business expenses themselves. Therefore, forcing Mr. Huh and Ms. O to sue Company M (Korea) with the argument that the transfer is only a formality to call for investment capital, there is no actual payment at all.
At the appellate court, the Board of Directors concluded to accept the counterclaim appeal of Company M (Korea) and Company E (Korea) to declare the transfer contract of M Vietnam and E invalid, and at the same time force Company M to return the capital to Company E (total VND 6.75 billion). On the contrary, the court did not accept the lawsuit request of Mr. Huh and Ms. O, upholding the first-instance judgment. Specifically, the Judgment declaring the project transfer contract dated 25/12/2017 and the investment capital transfer contract dated 20/3/2018 between Company M (Vietnam) and the parties (Company M Vietnam, Company E) are still valid. The court rejected the request to declare the contract invalid, cancel the investment approval decision No. 323/QD-UBND (6/2/2018), the 6526986408 investment certificate (6/2/2018), the 3801167013 enterprise registration certificate (7/2/2018) and the land use right certificate CD739504 issued to M Vietnam Company. The decision of Binh Phuoc People's Committee on adjusting the project investor for Company E (No. 2863/QD-UBND dated 19/12/2018) was also legally confirmed.
Prominent legal issues in transfer transactions
Conditions for project transfer
According to the provisions of Clause 1, Article 45 of the Law on Investment 2014, an investor is only allowed to transfer a project when the following conditions are met: (1) the project (or part of the project) is not terminated; (2) If there is a foreign investor receiving the transfer, the investment conditions for foreign investors must be satisfied. Especially in the case of transferring projects attached to land, it must comply with the conditions prescribed by the land law such as having a certificate, no disputes, no mortgage, and within the expiration date.... Thus, in this case, both the original Company M (Vietnam) and Company M Vietnam (related) have been granted full investment licenses and land use rights before transferring the project, and the People's Committee of Binh Phuoc province has also adjusted and approved the investment policy in accordance with regulations. Administrative documents and investment licenses issued according to the dossier submitted by the enterprise are in accordance with the provisions of law. Therefore, in terms of formal conditions, the management agency and the court have determined that the procedures for adjusting the investor and transferring the project between the parties are in accordance with regulations and meet the legal conditions.
The Cashew Oil Factory is located on a land plot with the Land Ownership Certificate No. CD739504. The 2013 Land Law in Article 188 stipulates the conditions for the transfer of land use rights: (i) the land user must have a certificate, (ii) the land is not disputed, not distrained to ensure judgment enforcement, (iii) and within the land use term. In this case, all the above conditions were satisfied: the land plot had a CD739504 certificate, there was no dispute, and after Company M (Vietnam) was licensed to implement the project, the transfer was carried out in accordance with the procedures. The fact that the Land Registration Office updated the changes and re-issued the book to M Vietnam Company proves that the procedures for transferring land rights have been carried out legally according to regulations. After that, Company M Vietnam made adjustments to E and was issued a new book, also according to legal administrative procedures. Therefore, even if there is a dispute between individuals, the court determines that there is no legal basis to cancel the Decision and Certificate issued to the companies implementing the project, as long as the licensing and issuance of books are carried out in accordance with the dossiers and processes prescribed by law.
Source: Vietnam Investment Review
Registration of adjustment of business information
The case shows that the dispute arises related to the transfer of contributed capital and the change of legal representative in limited liability companies with foreign elements. According to the Law on Enterprises 2014 and Decree 78/2015/ND-CP, the transfer of contributed capital in a two-member limited liability company must be made in writing (notarized contract) and registered for change of enterprise information at the business registration office. In the case, Ms. Vo Thi Thanh K transferred all contributed capital to Ms. O and Mr. Huh as early as 2017, adjusting the business registration certificate. After that, Company M (Vietnam) was dissolved in accordance with regulations. Company M Vietnam was established as a one-member limited liability company owned by Mr. Huh (a foreigner). The change of enterprise registration contents in terms of address and legal representative shall be carried out in accordance with enterprise registration procedures.
Regarding the authorization and authority to sign, the Enterprise Law assigns the legal representative full authority to run the business. As a general rule, contracts signed by legal representatives, even if they may exceed internal authority, are still valid for businesses and external partners. In this case, Mr. Huh was the legal representative of M Vietnam Company when signing the project capital transfer contract on March 20, 2018; therefore, this contract is binding on Company M Vietnam even if there is a complaint about the internal jurisdiction of the parties. On the contrary, if any representative abuses his or her power, leading to damage to the company, they can be claimed compensation by shareholders later, but that does not affect the validity of the signed transfer contract.
Fake trading and legal consequences
The plaintiff denounced the transfer contract as "fake", in order to hide another transaction. According to the Civil Code 2015 (Article 124), it is stipulated: "If a fake civil transaction is intended to conceal another transaction, the fake transaction is invalid, while the concealed transaction is still valid". In other words, the transfer transaction if it is only a form and does not reflect the true will of the parties (concealing another transaction) will be declared invalid. However, the high court in this case determined that the transfer contract between the parties had appropriate content and form (notarized, fully registered) and there was not enough evidence to show that there was another concealed transaction. Other parties (Company M and Company E) all affirmed that the transfer transaction was real to make the investment, and that the procedural and budget obligations had been fulfilled. Therefore, Mr. Huh and Ms. O's request to declare the contract null and void on false grounds is not accepted.
Practical lessons when conducting similar transactions
Firstly, the process of transferring projects attached to land must comply with regulations
It must fully comply with the provisions of the Law on Investment and the Law on Land. Before transferring, the project needs to have an Investment Approval Decision and a valid Investment Registration Certificate, the land right must have a Certificate of non-disputed, non-mortgaged, and within the expiration date. After signing the project transfer contract, it is necessary to adjust the investor according to the investment dossier. At the same time, the transferee must meet the conditions on financial capacity as prescribed and be able to implement the project. For land leased by the State or housing/real estate projects, there are additional conditions related to housing and real estate business. If one of the above conditions is missing, the transfer may be considered illegal, resulting in the invalidation or revocation of the License.
Secondly, internal management and authorization in companies with foreign elements must be strict
Enterprises related to foreign investors must establish appropriate investment procedures and register changes to the contents of the business registration when transferring contributed capital. Decisions on adjustment of members and legal representatives need to comply with the company's Charter and the Law on Enterprises in force. In particular, when there are foreign members/contributed capital, it is necessary to comply with the regulations on conditional industries for foreign investors and the ownership ratio. Authorization and authorization contracts must be clear. In this case, Ms. O and Mr. Huh were the two members of the original company, and the authorization to sign the documents was very important. Any conclusion that is outside the scope of the representative's authorization or exceeds the authority will create internal risks and give rise to disputes later. Although according to the principle that the contract is still binding on external partners, enterprises should still establish a strict internal control system: sharing the signing rights of all levels, assigning clear responsibilities, having meeting minutes/Board of Directors for approval before signing high-value contracts.
Thirdly, it is necessary to keep evidence proving capital contributions, investments and cash flows
In project transfer disputes, the issue of financial transparency is very important. If the seller cites that he has invested money in the project, it is necessary to have documents and certificates of money transfer, expense invoices, and detailed lists. In this case, Mr. Huh and Ms. O provided emails and financial statements stating that more than 2,688 million USD had been transferred from Company M (Korea) for the project and more than 36.87 billion VND of construction costs in the first phase. These evidences show that cash flows have flowed into the project, but also prove that the project has been invested equal to or exceeding the agreed transfer value (5 billion VND). For the transferee, it is necessary to prove that the full payment has been made according to the contract (or compensation agreement) to avoid disputes. Both parties should publicly exchange financial data, if there is a compensation for the difference or a commitment to contribute capital in the future, it must be expressed in clear and notarized documents. The authorities may request a report and inspection of the value of the property to determine the reasonableness of the transfer price.
The case of project transfer disputes associated with land use rights in Judgment No. 43/2023/KDTM-PT shows the complexity and potential legal risks in investment transactions, especially when there are foreign elements and assets attached to land. Although the parties have a close investment relationship and the same project development goals, the lack of transparency in cash flow, unclear in authorization, as well as the lack of internal control have led to protracted disputes and damage to property and reputation for many stakeholders.
