When the subsidiary loses money and creditors knock on the parent’s door
Group H. placed its holding company in Ho Chi Minh City, owning three operating subsidiaries in packaging manufacturing. In 2025, one subsidiary fell into heavy losses after losing export orders and defaulted on a VND 40 billion bank loan. The bank went after the subsidiary’s secured assets and also wrote to the holding company demanding it take responsibility. The group’s CEO was stunned: parent and subsidiary are separate legal persons, so why would creditors come after the parent? The answer lies in the fine line between shareholder rights and ultra vires intervention under Vietnam’s 2020 Enterprise Law.
1. What counts as a parent company under Vietnamese law
Article 195 of the 2020 Enterprise Law treats a company as a parent when it owns more than 50% of another company’s charter capital or ordinary shares, holds the right to appoint the majority of the board, directors or general director, or holds the right to amend that company’s charter. Once parent status exists, the relationship with the subsidiary is no longer purely between two independent persons but is specially governed by Article 196.
2. Three doors through which parent liability enters
Door one: ultra vires intervention. Article 196(3) provides that where the parent intervenes beyond the authority of an owner, member or shareholder and compels the subsidiary to conduct business contrary to normal business practice, or to carry out loss-making operations without reasonable compensation in the relevant financial year, causing damage to the subsidiary, the parent must compensate that damage. In group H.’s case, the holding had directed the subsidiary to buy raw materials at inflated prices from another affiliate without compensation, exactly the situation the law targets.
Door two: joint liability of managers. Article 196(4) makes the parent’s managers who carried out the intervention jointly liable with the parent. Risk therefore reaches beyond the legal person to the individuals in charge.
Door three: creditors and minority shareholders can sue. Article 196(5) allows creditors or members/shareholders holding at least 1% of the subsidiary’s charter capital to demand the parent compensate the subsidiary where the parent fails to do so voluntarily. That is why the bank in our story had a legal basis to write to the holding company.
3. Companion risks that are often missed
Cross guarantees: when the holding guarantees a subsidiary’s loan, the repayment duty becomes the parent’s direct contractual obligation, independent of Article 196. Many groups sign guarantees out of habit without tracking total guaranteed exposure across the system.
Cash pooling: moving cash from subsidiary to parent other than through lawful dividends may be treated as unlawful capital withdrawal or an unfair transaction, eroding the subsidiary’s solvency and handing creditors their evidence.
Subsidiary insolvency: where a subsidiary fails to pay a debt more than six months after its due date — the insolvency test in Article 5(2) of the Law on Recovery and Bankruptcy 142/2025/QH15, in force since 1 March 2026 and replacing the 2014 Bankruptcy Law — recovery and bankruptcy proceedings may be opened, and the subsidiary’s assets are distributed in the order set by Article 46 of that Law: bankruptcy costs; unpaid wages; compulsory insurance debts; severance allowances and other employee entitlements; debts incurred to rescue the business; financial obligations to the State; and, last, unsecured debts together with any shortfall on secured debts left unpaid because the collateral was insufficient. Secured creditors are paid first out of their own collateral (Article 44); any shortfall ranks in this final tier. The parent as owner stands behind every tier: it recovers only what remains after all the debts above are paid, and abnormal asset transfers made before the proceedings open may be declared void.
4. Four safeguards for a holding company in Vietnam
First, every contract and transaction between parent and subsidiary must be set on independent, arm’s-length, market terms as Article 196(2) requires, while also complying with related-party transaction rules under Decree 255/2026/ND-CP (effective 1 July 2026, replacing Decree 132/2020). Second, draw clear authority lines: the parent exercises ownership rights through the general meeting and capital representatives, never by direct meddling in the subsidiary board’s daily management. Third, all guarantees need authorised approval with clear limits and centralised monitoring. Fourth, build an early-warning mechanism for signs of subsidiary insolvency so problems are handled before creditors must resort to Article 196(5).
Conclusion
Locating a holding in Vietnam does not insulate the parent from every subsidiary risk. Vietnamese law respects separate legal personality but hands creditors and minority shareholders concrete tools to hold the parent liable for ultra vires intervention. The lesson from group H.: proper group governance from day one is always cheaper than fixing risks after they materialise.
Frequently asked questions
Does a 100% parent automatically repay the subsidiary’s debts?
No. The general rule is that each company answers with its own assets. The parent is liable only in legally defined cases such as ultra vires intervention causing damage (Article 196), signed guarantees, or unlawful capital withdrawal or asset transfers.
Can a subsidiary’s creditor sue the parent directly for its own money?
Under Article 196(5), the creditor demands the parent compensate the subsidiary, not pay the creditor directly. The compensation replenishes the subsidiary’s assets, improving the creditor’s recovery prospects within the general process.
Can the parent’s managers face personal liability?
Yes. Article 196(4) provides that managers of the parent who carried out the intervention are jointly liable with the parent for the damage. Group directors and CEOs need to grasp this personal exposure fully.
What should intra-group service contracts watch for?
Contracts must reflect market terms as between independent parties, be fully documented, and comply with transfer pricing documentation under Decree 255/2026/ND-CP. Abnormally cheap pricing or services without substance are the first things tax authorities and creditors examine.
FLAT Law Firm supports groups operating in Vietnam
Designing a safe holding model demands deep understanding of group governance, related-party transactions and liability mechanics under the Enterprise Law. FLAT Law Firm helps groups review existing governance, draft intra-group contract systems and build early-warning processes for subsidiary solvency risk.
This article is pending review by the QA Council.