Scenario: a group has two Vietnamese subsidiaries: profitable company A (you hold 15%) and loss-making company B (same parent) needing a VND 50 billion bank loan without enough collateral. The bank wants company A’s guarantee. The director — parent-appointed — signs it without consulting shareholders. Six months later B defaults. What happens to company A’s money — and your dividends?
What a guarantee is, and why it is riskier than a loan
Under Article 335 of the 2015 Civil Code (in force as of 19/10/2026), a guarantee is a third party’s commitment to perform another’s obligation when the obligor defaults at maturity. Unlike a loan (money out today, risk visible today), a guarantee is “sleeping” risk: one signature today, a VND 50 billion knock on the door six months later. For minority shareholders, it is the classic “group interest over company interest” decision.
May a company guarantee its sister’s borrowing?
The law does not absolutely ban a (non-public) company from guaranteeing a sister company — but sets an authority fence. Article 153(2)(h) of the 2020 Law on Enterprises: the board approves contracts and transactions worth 35% or more of total assets. A sister company is a “related person”, so Article 167 applies: deals below 35% of total assets need board approval (interested members may not vote); 35% or more goes to the GMS.
Above, the director solo-signing a VND 50 billion guarantee without board/GMS process acted ultra vires — grounds to ask a court to void the transaction. (Separately: for public companies, Article 293 of Decree 155/2020/ND-CP bans loans/guarantees to individual shareholders and their related persons, except credit institutions.)
When company B defaults: what hits company A
The bank will call the guarantee: company A pays in B’s place. Company A books the liability, cash is drained, profits — and minority dividends — evaporate. Worse, if A is itself fragile, the guarantee obligation can push A toward insolvency.
How minority shareholders defend themselves
- Block before signing: 5% shareholders demand the guarantee go through proper board/GMS approval (Article 115(2)); file a written objection.
- Void the ultra vires deal: ask a court to void the unauthorized guarantee, releasing the company from the obligation.
- Sue the managers: 1% shareholders bring a derivative suit under Article 166 against the involved director/board members for company damages.
- Demand transparency: require full disclosure of related-party transactions in financial statements and annual reports — “sleeping” guarantees must not hide in vague notes.
Frequently asked questions
May a company guarantee its sister company’s loan?
Yes, with proper authority: related-party deals below 35% of total assets need board approval, 35% or more need GMS approval (Article 167, 2020 Law on Enterprises). A director solo-signing beyond authority risks voidance.
How does a guarantee differ from a loan?
A loan moves money immediately; a guarantee is a future backstop promise (Article 335, 2015 Civil Code) — risk “sleeps” until the borrower defaults, then erupts into a real payment duty.
If the sister defaults, how much does the guarantor pay?
Per the guarantee’s scope (usually full principal, interest, and costs). The guarantor pays first, then claims against the borrower — recovery prospects from an insolvent borrower are slim.
A minority spots a “secret” guarantee — what to do?
Seek a court declaration voiding the unauthorized transaction; 1% shareholders may also sue involved managers for company damages under Article 166 of the 2020 Law on Enterprises.
This article has been quality-reviewed by the FLAW AI Legal Council Content prepared by the AI Legal Council of FLAT Law Firm for general reference only; it has not been reviewed by a human lawyer for your specific situation.