Legal issues for Chinese enterprises in the Secured Transaction Law of Laos

By Wang Jihong and Xu Yibai, Zhong Lun Law Firm
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Guests from over 150 countries and 90 international organizations participated in the recently concluded second Belt and Road Forum for International Cooperation held in Beijing. However, there are bound to be twists and turns along the Belt and Road Initiative journey – the differences in legal concepts across these countries could become one of the most notable issues.

For instance, securities laws vary greatly from country to country. As a Chinese lawyer, the author noticed some issues in the Secured Transaction Law of Laos while providing legal services to some projects there. These issues could be easily neglected by some Chinese enterprises that have not looked deep enough into the local legal environment. This article discusses three major differences between the laws in the two countries based on the authors’ personal experience.

Secured Transaction Law of Laos
Wang Jihong
Partner
Zhong Lun Law Firm

The Secured Transaction Law of Laos only provides a general guarantee, and it is extremely easy for a debtor to be deemed as being unable to fulfil the debt obligations. According to the Secured Transaction Law of Laos, a creditor should first pursue a claim against the debtor and then make a claim against the guarantor if the debtor is unable to perform his or her obligations. A creditor does not have the right to choose whether to make the debtor fulfil the debt obligations or ask the guarantor to assume the guarantee liability within the scope of the guarantee. In that sense, the type of guarantee provided in the Secured Transaction Law of Laos is similar to the general guarantee stipulated in the Securities Law of the People’s Republic of China. There is no provision relating to joint liability guarantee in the Secured Transaction Law of Laos.

Pursuant to the laws and regulations in China, a general guarantor is entitled to assert beneficium ordinis, which mean a general guarantor may refuse to assume the guarantee liability if the dispute over the principal contract has not yet undergone judicial trials or arbitration proceedings and the debtor remains incapable of performing his or her obligations despite an enforcement order against his or her properties.

Laos Secured Transaction Law
Xu Yibai
Associate
Zhong Lun Law Firm

However, under the Secured Transaction Law of Laos, a creditor is entitled to ask the guarantor to assume the guarantee liability as long as the creditor has sent a prior notice to the debtor to perform his or her debt obligations and the debtor has failed to perform such obligations within the specified time. In addition, there is no provision regarding the time limit of fulfilling the debt obligations, which means that the creditor may ask the debtor to repay the debt within a working day. Otherwise, the creditor can ask the guarantor to assume the guarantee liability.

It can be seen that a debtor can be easily deemed as being “unable to fulfil the debt obligations” under the Secured Transaction Law of Laos. A creditor is only obliged to send a notice to the debtor to repay the debt and does not have to consider whether the principal contract has undergone judicial trials or arbitration proceedings and whether the debtor remains incapable of performing his or her obligations despite an enforcement order against his or her properties. Therefore, judging from the difficulty for a creditor to protect his or her guarantee interests, the legal effect of guarantee in Laos is more or less the same as that of joint liability guarantee in China.

The Secured Transaction Law of Laos does not distinguish a mortgage from a pledge by possession. There are two types of security in Laos, i.e., statutory guarantee and contract guarantee. Statutory guarantee refers to securities for salaries, benefits, taxes and other similar debts. The purpose of statutory debts is to protect the interests of the society and the country. Contract guarantee can be categorized into personal guarantee and collateral.

For collaterals, there are two different legal terms in China, i.e., a pledge and a mortgage, which can be distinguished from one another based on whether the debtor or third party transfers the possession of the collateral to the creditor. However, the laws in Laos divide securities into moveable asset security and immovable asset security based on the nature of the collateral, and there is no difference in the legal terms. In most cases, it is unnecessary to transfer the possession of the assets where such assets serve as the collateral. The proof of ownership needs to be transferred only when some special assets serve as the collateral. For instance, the equity certificate needs to be transferred to the creditor when equities serve as the collateral.

The Laos law allows strict foreclosure. And it means that it allows the creditor to foreclose the collateral in the event of non-performance by the debtor. However, the Chinese securities law forbids stipulating in the original mortgage/pledge contract that the legal ownership of the pledged property be transferred to the creditor if the debtor fails to repay the debt within the time limit.

There are many other provisions in the Secured Transaction Law of Laos that differ from the provisions in the Securities Law of the PRC. The financing of overseas projects will inevitably involve the application of the local securities law. Chinese enterprises should avoid mechanically applying the concepts and principles in the Chinese laws and regulations to other countries or simply useing the securities contract template in China without consulting experienced lawyers. Project structure and major contract terms that are designed based on presumed legal concepts may be infeasible under the local laws and regulations, which will not only cost a lot of time and energy to make right but also has hidden dangers.

The author holds that the legal risks can be best prevented by using a professional legal team when project investors or financing coordinators are having preliminary discussions on financing schemes (including securities scheme) with financial institutions. The legal team should first be responsible for ensuring that the securities schemes are in accordance with the local laws, regulations and common practices and then start drafting and amending the securities contract at a later stage.

Chinese enterprises will, with the aforementioned concepts and an advanced managerial philosophy and decision mechanism, eventually succeed in tapping into the markets of different countries. Recognizing the collision of differences in legal concepts and cultures will also promote the mutual understanding and integration among different countries.

Wang Jihong is a partner, and Xu Yibai is an associate at Zhong Lun Law Firm

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