Lao PDR's developing legal system
Aristotle David, Sithong Chanthasouk and William D Greenlee Jr
Since 1989, the Lao PDR has undertaken a complete reform of its laws to make the transition to a market economy. The reform process is well underway with more than 91 new laws enacted between 1991 and 2009. Below is a discussion of some key legislation related to investments, foreign exchange, secured transactions, bankruptcy and securities.
The Law on Investment Promotion (IL) which came into effect on 18 September 2009, and replaced: (i) the 2004 Law on the Promotion of Domestic Investment (DIL) and (ii) the 2004 Law on the Promotion of Foreign Investment (FIL) governs both domestic and foreign investments in the Lao PDR.
Even though the IL has been promulgated, the Government of the Lao PDR (GoL) has not yet issued the final implementing decree, which is expected sometime in 2010. Thus, the DIL and the FIL are technically still operative.
Comparing the IL to the DIL and the FIL, the following is a list of some of the significant changes:
- changes in registered and total capital requirements;
- lower foreign shareholding requirements;
- changes to licensing authorities and procedures;
- longer investment terms;
- changes in the process for representative office and branch establishment;
- establishment of clear timeframes for consideration of investment applications; and
- amendments to profit tax and customs duties exemptions for foreign investors.
The Lao PDR has enacted a strict regime of foreign exchange with a relatively limited list of permissible foreign currency transactions.
Foreign exchange transactions, foreign-sourced loans, and interest-rate and commodities hedging transactions, are governed by the 2008 Decree governing the Management of Foreign Exchange and Precious Metals. A Bank of Lao PDR (BoL) approval is required for transactions using foreign exchange for (i) payment of goods and services, (ii) or debt in the Lao PDR.
Exchange of Lao Kip into foreign currency is permitted only for limited purposes. In addition, all remittances abroad, transfers into the Lao PDR, foreign-sourced loans and payments in other currencies must be approved by the BoL.
Derivative transactions such as foreign exchange, interest-rate and commodities hedging transactions, fall into a general catch-all BoL approval requirement. The relevant standards are vague, detailed regulations have not been promulgated, and relevant government personnel still lack experience with such transactions. The general rule for BoL approval of such derivative transaction is that a legitimate non-speculative business purpose for the transaction be demonstrated.
Secured transactions are governed by the 2005 Secured Transactions Law ("STL") and the 2008 Law on Contract and Tort. There are two general types of security interests: (i) legal security, as created by law (e.g. wage and tax claims and other non-contractual obligations to the GoL); and, (ii) contractual security, as created by contract.
The following are permitted as contractual security:
- security agreements (covering immovable assets (including land use rights, leases) and movable assets);
- pledges (of movable assets, documents, shares, contractual rights, receivables, bank accounts, intellectual property rights, licenses and future assets or gains from projects or activities certain to occur in the future);
- mortgages (of movable assets); and
Floating liens over inventory or receivables related to a project or activity that the grantor has a present legal right to engage can also be granted. Perfected security interests are junior to legal security but are senior to subsequently perfected security interests and non-secured claims of creditors.
Enforcement of security interests through self-help is permitted—to the extent that no laws are violated in the process.
A security interest will automatically expire, without the necessity of the filing of any documents, if the underlying debt has been paid in full, the relevant statute of limitations period has expired or the creditor has relinquished the claim. Amendment or modification of the underlying guaranteed obligation without the consent of a guarantor will fully release the guarantor.
Registration of all security agreements is required for the perfection of the security interest. Immovable asset security agreements are registered with the relevant Land Management Authority. Movable asset security agreements and guarantees are registered with the State Assets Management Department.
Notarisation is mandatory for the registration of land related documents and security agreements under the Land Law and the implementing decree presently applied for the STL.
The Law on Bankruptcy of Enterprises gives the court appointed liquidation committee the power to overturn any transfers or agreements concerning a proposed transfer, which occurred prior to the bankruptcy petition and were made on the basis of an illegal contract.
Illegal contracts would include the granting of a security interest for a pre-existing unsecured debt. Any attempt by a lender to transfer debtor assets - secured or unsecured - after the acceptance of the petition for bankruptcy or rehabilitation without court or liquidation committee approval is prohibited.
Lao PDR securities regulation
The GoL has initially set a target date of October 10 2010 to establish a stock exchange. The securities and exchange will be governed by the 2010 Securities and Exchange Decree (SED). The SED provides a large discretion to the Lao Securities and Exchange Commission (SEC) to issue sub-regulations to implement the SED.
Initially there are two types of securities: (i) stocks and (ii) debentures. The SEC may include other types of securities. The securities may be in Lao Kip or in other currencies as authorised by the SEC. The securities issuer must have a prior registered capital of at least 2 billion Kip among other conditions.
Under the SED, foreign investors may buy securities in the Lao PDR, which will be regulated by the SEC.
Foreign investors may also establish a securities company (i.e. broker-dealer) in the Lao PDR which must be in joint venture with a Lao investor. The foreign investor may hold not more than 51% of shares in a securities company. The foreign securities company may establish a branch in the Lao PDR. The minimum required capital for securities companies is to be determined by the SEC.