28 August 2020
Laos

In the face of the reality brought about by the COVID-19 pandemic, many businesses are making the difficult decision to close their operations, either temporarily or permanently. In Lao PDR, if an investor decides on permanent closure of its enterprise, it has to follow the requirements and procedure for dissolution set under the Enterprise Law.[1] This article briefly sets out the dissolution process in Lao PDR and what needs to be done for a company to be dissolved properly.

Grounds for Dissolution in Lao PDR

For a limited company[2] in Lao PDR, there are two modes of dissolution under the Enterprise Law:

Dissolution by court order

Dissolution by court order is initiated when a director or shareholder of a company files a claim with the court for the dissolution. With the ongoing COVID-19 situation, possible grounds that may be raised includes, (i) that the enterprise continues to operate with loss and is unable to recover; or (ii) that the enterprise is unable to continue business operations due to the event of force majeure.[3]

On receipt of the petition, the court may consider to dissolve the enterprise or order the enterprise to solve the problem if the court determines that the ground provided is minor or is capable of being resolved.

Dissolution by law

Dissolution by law of a limited company is based on either of the following grounds:

  • the provisions of the company’s by-laws;
  • decision of shareholders approved by a special resolution;
  • bankruptcy; or
  • invalid enterprise registration, failure to start a business, or the continuous and unreasonable failure to operate and pay taxes for 12 months.

Where an enterprise is facing a financial crisis and is unable to repay its debts, the enterprise, shareholders, or creditor can file a bankruptcy petition with the court in accordance with the Law on Bankruptcy and Rehabilitation.[4] The court will notify all creditors and debtors of the enterprise to bring their claims to the court and an independent asset controller, who manages the assets of the debtor enterprise in the course of the bankruptcy proceedings, will be appointed. If the court finds that the enterprise is bankrupt and cannot be rehabilitated, the court will issue a decision declaring the enterprise bankrupt and the assets distributed to creditors according to the order of preference provided under Lao law.

For a recently registered enterprise who fails to commence operations within 90 days from its incorporation or who continuously fails to operate and pay taxes for 12 months without sufficient reason, the Ministry of Industry and Commerce (“MOIC”) will issue a notice to the enterprise for an explanation. If the enterprise does not have sufficient reason for non-operation, MOIC will order the dissolution of the enterprise and remove its name from the enterprise registry.

The Liquidation Process[5]

For dissolution in accordance with the by-laws or by the shareholders’ approval by special resolution, the shareholders may agree to choose the method of dissolution or liquidation as described in the by-laws or as agreed by themselves. A liquidator will be appointed by a vote of at least two-thirds of the shareholders or proxies present at the shareholders’ meeting, unless a different procedure is provided in the by-laws. Where the shareholders’ votes are insufficient to choose a liquidator, any person with involvement in the limited company may request to the court to appoint one.

In cases of dissolution by bankruptcy or court order, only the court has the authority to appoint the liquidator.

The liquidator is accorded with the duty to register for temporary dissolution with the MOIC, collect all assets, settle all debts and obligations of the enterprise, and complete pending business matters for the purpose of winding up. The liquidator must give written notice of the dissolution to the creditors, publish notice of the dissolution through suitable mass media (such as newspaper or television) three times, and allow creditors to present documents related to the debts of the enterprise.

The settlement of obligations and distribution of assets will generally[6] be made according to the following priority under the Enterprise Law:

  • salaries of employees;
  • tax and duty obligations and other amounts owed to the State not arising from contract;
  • secured debts; and
  • unsecured debts.

The remaining assets of the enterprise after payment to creditors are then distributed to shareholders.

The enterprise must also seek tax clearance from the Tax Department, who will conduct an audit of the books of the account of the enterprise and issue the certification on finding of compliance with all tax obligations of the enterprise. From experience, this part of the process may take time, particularly if the business has large volume of books to be audited.

Upon completion of liquidation, the liquidator shall prepare a report on the distribution of assets and repayment of debts for adoption by a meeting of creditors and shareholders, inform the public of the completion through another announcement via mass media, and register the completion of the dissolution with the MOIC, as provided below.[7]        

Registration of Dissolution

The registration of enterprise dissolution is made with the MOIC, initially with an application for temporary dissolution filed within 10 business days from the date the reason of dissolution has arisen. Under temporary dissolution, the enterprise cannot conduct business but its status as a legal entity continues for the purpose of liquidation. The right of a shareholder to claim against the enterprise is suspended but its liability for unpaid portions of shares continues. In addition, all debts of the enterprise becomes due.

Upon compliance with the requirements for the announcement of dissolution on mass media, the settlement of all obligations to creditors, the distribution of remaining assets, and the issuance of a tax clearance by the Tax Department, the liquidator will register the completion of the liquidation and submits all the relevant documents to MOIC.

The liquidator thereafter applies for the permanent dissolution of the enterprise. MOIC, upon finding that all requirements for the liquidation have been satisfied, shall issue a certificate of permanent withdrawal of enterprise registration, cancel the enterprise name from the enterprise registry, and issue a public notice of such cancellation within ten business days from the date of cancellation. This concludes the dissolution process for the enterprise.

Conclusion

The COVID-19 pandemic has taken a toll on majority of business with some having to take the difficult decision to dissolve. The article offers an overview of dissolution in Lao PDR. It seeks to provide investors a better understanding of the process. When dissolving an enterprise, business should comply with its legal obligation properly when settling all its obligations and tying all loose ends before formally extinguishing the existence of the enterprise in the eyes of the law.

Please note that while we try to ensure that the information provided is accurate at the time of publication, the laws of Lao PDR are continually being developed and changes in relevant legislation may thereafter be introduced. The foregoing discussion should thus not be taken as legal advice and we recommend that further consultation be made with a qualified legal professional in the jurisdiction to ensure that you have the most current information that is applicable to the circumstances of your business.

If you have any questions or require any additional information, please contact Princess Bido Principe 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.

[1]  Enterprise Law No. 46/NA dated 25 December 2013.

[2]  A limited company is discussed in this article as a common enterprise registered by foreign investors. Other kinds of enterprise such as ordinary partnership, limited partnership, sole limited company, and public company generally follows the same procedure for liquidation and dissolution.

[3] Other grounds for dissolution by court decision under Art. 167 of the Enterprise Law are: 1. Breach of any provisions and procedures for incorporation under law; 2. breach of the contract of incorporation or the bylaws of the limited company; or only one shareholder remains or the limited company has more than 30 shareholders (except if agreed by shareholders by special resolution to continue as a limited company).

[4] Law on Enterprise Bankruptcy and Rehabilitation No. 75/NA dated 26 December 2019. This Law governs the procedure in the case of distressed enterprises facing bankruptcy.

[5] This section describes the liquidation process under the Enterprise Law. Some steps may not be applicable in case of enterprise under bankruptcy proceedings under the Law on Bankruptcy and Rehabilitation.

[6] On the other hand, we note that for distressed enterprise under bankruptcy proceedings, the recently promulgated Law on Bankruptcy and Rehabilitation imposes a different order of priority for distribution of assets, as follows: (1) salary and wages of employees, including social security contributions, except those due to the board of directors; (2) loan principals and interests for rehabilitation; (3) secured debt; (4) debt to the State, such as taxes for no more than two years according to the tax rate applicable before the bankruptcy proceedings; and (5) unsecured debt.

[7]Art. 72 of the Enterprise Law provides that in case of bankruptcy, the notice of dissolution is not required.