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When is an inspection committee required?

The Law on Enterprises does not clearly stipulate whether an inspection committee is required or not. However, to understand when exactly the establishment of an inspection committee is required, let us analyze the regulations on the organizational structure of a joint-stock company for clarification. Clause 1, Article 134 of the Law on Enterprises 2020 provides:

“Article 137. Organizational and managerial structure of shareholding companies

1. Unless otherwise stipulated in the law on securities, shareholding companies may select either of the following models of organization for management and operation:

(a) A General Meeting of Shareholders, a Board of Management, an Inspection Committee and a director or general director. If a shareholding company has less than eleven (11) shareholders and the shareholders being organizations together own less than fifty (50) per cent of the total shares of the company, it is not required to have an Inspection Committee;

(b) A General Meeting of Shareholders, a Board of Management and a director or general director. In this case, at least twenty (20) per cent of the total members of the Board of Management must be independent members and there must be an auditing committee under the Board of Management. The organizational structure, functions and duties of the auditing committee shall be regulated in the company charter or in the operational rules of such auditing committee issued by the Board of Management.”

According to the above regulations, the organizational structure of a joint-stock company can operate in two models. However, according to Point b, to be able to choose this management model, the Board of Management must have at least 20% of its members who are independent members and must establish an Auditing Committee directly under the Board of Management. If the above conditions are not satisfied, the joint-stock company will have to choose the management model specified in Point a, which includes the Inspection Committee.

In addition, considering the management model according to Point a, the Law on Enterprises 2020 makes an exception that it is not required to establish an Inspection Committee if the joint-stock company has less than 11 shareholders and the institutional shareholders own less than 50% of the company shares.

Thus, applying both the above provisions, a joint-stock company is required to have an inspection committee if one of the following conditions is not satisfied:

• At least 20% of the members are independent members of the Board of Management and there is an Auditing Committee under the Board of Management; or
• There are less than 11 shareholders, and the institutional shareholders are holding less than 50% of the company shares.

Role of Inspection Committee

The rights and obligations of the Inspection Committee in accordance with the Law on Enterprises 2020 include:

• To supervise the Board of Management and the director or general director with respect to management and administration of the company.
• To inspect the reasonableness, legality, truthfulness and prudence in management and administration of business activities; and the systematic nature, consistency and appropriateness of statistical and accounting work and preparation of financial statements.
• To evaluate the completeness, lawfulness, and truthfulness of reports on business, half-yearly and annual financial statements, and reports on evaluation of the Board of Management, and to submit evaluation reports at annual meetings of the General Meeting of Shareholders. To review contracts and transactions with related persons which fall under the authority of approval of the Board of Management or the General Meeting of Shareholders and to make recommendations on contracts and transactions requiring approval of the Board of Management or the General Meeting of Shareholders.
• To review, inspect and evaluate the effectiveness and efficiency of systems of internal control, internal audit, risk management and early warning of the company.
• To review books of account, records of accounts and other documents of the company, and the management and administration of the operations of the company if deemed necessary or pursuant to a resolution of the General Meeting of Shareholders or as requested by a shareholder or group of shareholders as stipulated in article 115.2 of the Law on Enterprises.
• Upon request by a shareholder or group of shareholders as stipulated in article 115.2 of the Law on Enterprises, the Inspection Committee shall carry out an inspection within a period of seven working days from the date of receipt of the request. The Inspection Committee must submit a report on the which require inspection to the Board of Management and the requesting shareholder or group of shareholders within a period of fifteen (15) days from the date of completion of the inspection. Inspections stipulated in this clause shall not disrupt the normal activities of the Board of Management and shall not interrupt the administration of the business operations of the company.
• To recommend to the Board of Management or the General Meeting of Shareholders any changes and improvements in the organizational and management structure, or any changes in the supervision and administration of the business operations of the company.
• Upon discovery that a member of the Board of Management or a director or general director is in breach of the provisions in article 165 of the Law on Enterprises, to give immediate written notice to the Board of Management and request the person committing/causing the breach to cease such breach and to take remedial measures for any consequences that may arise as a result of such breach.
• To attend and participate in discussions at meetings of the General Meeting of Shareholders and the meetings of the Board of Management and other meetings of the company.
• To use an independent consultant or the internal audit department of the company to perform the assigned duties.
• The Inspection Committee may consult the Board of Management prior to submission of reports, conclusions, and recommendations to the General Meeting of Shareholders.
• Other rights and obligations as stipulated in the charter of the company.

It can be seen that the role and intervention of the Inspection Committee in the administration and management of the company is quite comprehensive. With the ability to monitor and report violations of departments and positions such as the Board of Management, or the Director or General Director, the Inspection Committee is an incredibly important committee that helps in ensuring that the General Meeting of Shareholders takes care of the effective management of the company and limits the abuse of rights of departments and positions that affect the company’s business activities.

With the main function of deeply intervening in the company’s business, the Law on Enterprises sets standards for the members of the Inspection Committee to ensure that the Inspectors have a certain level of qualification to participate in inspection activities. Accordingly, they must be trained in one of the following fields: economics, finance, accounting, auditing, law, business management or in a specialized faculty appropriate for the business activities of the company. Further, the Law on Enterprises 2020 does not restrict the company charter to stipulate other standards. In addition, the head of the Inspection Committee must have a university or higher graduation degree in one of the following fields: economics, finance, accounting, auditing, law, business management or in a specialized faculty relating to the business activities of the company, except in a case where the charter of the company provides for other higher standards.

It should be further noted that, in the process of participating in supervision, the Inspection Committee shall not be influenced by any departments or positions including the Board of Management. The role of the Inspection Committee is independent and within the company, it is only responsible to the General Meeting of Shareholders.

As analyzed above, the Inspection Committee is one of the important parts in the management structure and operation of the joint-stock company and will help the General Meeting of Shareholders to supervise the departments and positions in the joint-stock company operating in accordance with their functions.

Besides, the selection of qualified individuals to participate in the management of the company as a part of the inspection committee is also one of the key factors to achieve the best efficiency.

With the choice of establishing a joint-stock company at hand, investors need to carefully study the cases where it is necessary to establish an Inspection Committee to avoid violation of the provisions of the enterprise laws, especially in the case of foreign organizations contributing capital to the company.

Written on: Date 02 June 2021

The article is based on the current laws at the time of drafting as noted above and may no longer be appropriate at the time the reader accesses this article due to changes in applicable law and specific cases that the reader wants to apply. Thus, the article is for informational reference only.

Source: plf.vn