In September 2019, the Supreme Court has given an important opinion to lower courts about how to deal with a loan agreement by a borrower who has failed to obtain appropriate corporate approval. The opinion relates to a borrower being a limited liability company which has failed to obtain Members Council’s approval for a bank loan. However, the opinion should generally be applicable for borrower being joint stock companies. The court’s opinion is not a law. But it could still help lenders in protecting their loans in case a corporate borrower wants to get out of the loans on the ground the loan does not have appropriate corporate approvals.

For a loan which is signed by the legal representative of a company but which has not been approved by the relevant corporate body of the company (an unauthorised loan), in general, the court should still consider the company being the borrower and bound by the loan agreement if:

·         the loan proceeds is transferred into Company’s account;

·         the loan proceeds is used by the Company; and

·         the loan proceeds is accounted for on the accounting book of the Company.

The court seems to rely on Article 143.1(a) of the Civil Code 2015 which requires the principal to be bound by an unauthorised transaction entered into by a representative if the principal agrees to the transaction.

On the other hand, if there is evidence that the legal representative, who signed the unauthorised loan has used the loan proceeds for his/her personal benefits, then the court should consider the legal representative being the borrower of the loan (not the company). Technically, under Article 143.1 of the Civil Code 2015, for an unauthorised loan, the court should only treat the legal representative as the borrower of the part of the loan which exceeds the authority of the legal representative.

This post is written by Nguyen Hoang Duy, and Nguyen Quang Vu.