Changes to the Regulatory Framework on Secured Transactions
The Civil Code No. 55/NA dated 6 December 2018 (“Civil Code”), which has been in effect since 26 May 2020, contains provisions on secured transaction in Part VII and repeals the Law on Secured Transaction No. 06/NA dated 20 May 2005 (“Secured Transaction Law”). While the Secured Transaction Law was supplemented by other regulations, including the Decree on the Implementation of the Secured Transaction Law No.178/PM dated 20 June 2011 (“Implementing Decree”) which further clarifies the process for registration of securities, Part VII has yet to be supplemented by any regulations.
Nevertheless, this does not mean that the provisions in the Civil Code on secured transaction are incomplete. In fact, there are several developments made to principles related to this area of law in the Civil Code. This article highlights major changes made to the regulatory framework on secured transaction by the Civil Code and the impact of such changes.
Although the Civil Code repealed the Secured Transaction Law, it does not mean that the previous applicable regulatory framework on secured transaction has entirely been abandoned. Some provisions in Part VII, albeit not many, endorses the same principles that have already adopted under the previous law, especially on fundamental rules of pledging security. An example of this is the confirmation that there are only two types of securities, specifically; securities under law and securities under contract, in which there are two forms, pledge by assets or guarantee by legal entities.
The main reason that these principles are unaffected by the introduction of the Civil Code is probably due to the fact that they are internationally recognised rules applicable for secured transaction.
Preferential rights of secured creditors
While the Civil Code accepts that secured creditors have preferential right to demand payment of outstanding debt over secured assets, similar to the Secured Transaction Law, it provides further details on the management and allocation of preferential rights of secured creditors. This includes, introduction of general rules that the purchaser or lessee who transacts with debtor in relation to secured asset in good faith shall not be liable to a creditor, and simplification of determination of priority rights of secured creditor that were secured by perennial trees grown on secured land.
The most significant change to principles relating to preferential rights is where an asset is secured to several creditors by stating the conditions for how the secured transactions are to be concluded and how preferential rights are to be manage for these creditors. This is an important development, especially in mortgage or pledge by immovable asset, given that the previous law and the Implementing Decree do not comprehensively address this aspect of secured transaction.
Forms of secured transaction
The significant change in this aspect is the fact that Civil Code no longer classed secured transaction based on pledged assets utilised, as under the previous law. Secured transactions are now categorised into three main forms, pledge, mortgage and personal guarantee. This would allow immoveable and moveable assets to be place as security, both by physically transferring the possession in a secured asset to a pledge, and registering such assets to mortgage. The change also results in pledge by rights, such as commercial, shareholding or intellectual property rights, being expressly recognised and regulated.
Following the change to the categorisation of secured transaction, formality requirements have also been developed. In pledge transaction, physical delivery of pledged assets, either moveable or immoveable, or documents is the main condition for pledge to be perfected. This formality requirement was only applicable to pledge by moveable asset under the Secured Transaction Law.
For mortgaging, in addition to the agreement to mortgage, registration of mortgage is required for the effectiveness of this form of secure transaction. Although this is akin to formality requirement to formalise pledge by immoveable asset under the previous law, the Civil Code no longer imposes the requirement of a written agreement with the presence of a government notary or a village chief with three witnesses or three witnesses. Now, mortgage agreement would only be required to follow the general form of contract under the Civil Code, which also does not require the presence of any witness.
The Civil Code adopts a formality for contract of personal guarantee, requiring it to be in writing and be certified by notary officer or village chief and witness.
Similar to the previous law, the Civil Code requires that any secured transaction related to immoveable asset be registered with the office of natural resource and environment where the asset is located. However, in the event that there is pledge or mortgage of land use right to more than one creditor, the Civil Code further requires that the land title be surrendered to the office of natural resource and environment where the asset is located by the land use right holder.
Also, when a debtor pledges by moveable asset, the transaction would also be required to be registered with the relevant regulators (such as the financial regulator). It is unclear whether this registration requirement for moveable pledge is the same as registration of security contract. The Civil Code provides that details on method and procedure for registration of pledge and mortgage will be specified in a separate regulation.
The changes to the rules on secured transaction in the Civil Code will potentially impact how such transactions will be structured in the future. Given the novelty of the Code, the practical implementation of the newly introduced principles would still need further clarification from relevant sectors, especially the banking and financial regulators, such as the introduction of supplementary instruments similar to the Implementing Decree.
If you have any questions or require any additional information, please contact Tuchakorn Kitcharoen or the ZICO Law Lao partner you usually deal with.
This alert is for general information only and is not a substitute for legal advice.