New Civil Code of the Lao PDR: Key Changes to the Secured Transaction Law

The efficacy of a country’s legislative framework in regulating and implementing secured transactions significantly influences credit accessibility in the domestic market, an essential factor in driving economic growth. In recent years, the government of the Lao PDR has made several changes to its legal regime to facilitate trade and investment growth and increase the efficiency and ease of doing business in the country. One of the significant changes made this year is the enactment of Civil Code No. 55/NA dated 6 December 2018 (the “Civil Code”), which is a single body of laws that aims to cover most “civil” transactions and matters, including provisions on creating and perfecting a security interest in the Lao PDR. The Civil Code came into effect in May 2020, Part VII of which (Articles 510 to 564) replaces most of the provisions of Secured Transactions Law No. 06/NA dated 20 May 2005 (the “Security Law”).

This article summarizes some of the key changes to the Lao PDR’s legislative framework with regard to secured transactions, and their likely effect on access to credit and ease of doing business in the Lao PDR.

Creation and perfection of security

Unlike the Security Law, which categorized security types based on the nature of the assets, the Civil Code categorizes security types based on how the security is created:

• By pledge – The Civil Code allows a creditor to create security over both (i) tangible assets, by taking possession of the assets (movable or immovable) or the title documents conferring title over the movable assets, and (ii) intangible assets, such as accounts receivable, negotiable instruments, shares, and intellectual property, by taking possession of the documents conferring ownership or use rights over such intangible assets.

There is no registration requirement to perfect a pledge over movable assets. However, a pledge over immovable assets must be perfected by registration with the land registry authority under the Ministry of Natural Resources and Environment.

• By mortgage – The Civil Code allows the creation of a non-possessory security over both movable and immovable assets by registration of the security with the relevant registration authority. Registration of the security over movable assets can be done through the online security registry at https://www.mof.gov.la/str/en_index.html.  

The is no additional requirement for the perfection of security in case of a mortgage.

• By guarantee – The provisions relating to personal guarantees remain the same as under the Security Law. A third party can guarantee to perform obligations on behalf of a debtor if the debtor is unable to pay or perform its obligations. There is no registration requirement for the creation or perfection of a security by guarantee.

Rules concerning preferential rights to collateral

The Security Law only provides for the preferential rights of creditors in general and is silent on the competing interests of third parties and other creditors vis-à-vis the rights of the secured creditors. The Civil Code now provides rules concerning competing interests in a secured asset for certain specific transactions. 

The rights of buyers, lessees, or licensees of collateral vis-à-vis the rights of a creditor

Article 514 of the Civil Code states that the buyers and lessees of an asset who are acting per market practice with honesty and are not aware of the security interest of a creditor (created and/or perfected) in the asset at the time of such transaction will not be liable for any debts or obligations. Per our understanding, the aforesaid provision is one of the exceptions to the general rule of security prioritization (first-to-file or first-to-perfect rule), and protects the rights of a buyer or lessee of a collateralized asset in the ordinary course of business as against the claim by a secured creditor.

The purchase-money security interest of a creditor in collateral vis-à-vis other creditors’ security interest

Per Article 515 of the Civil Code, a creditor that has financed the purchase of an asset will automatically have a preferential right over such asset as against other creditors’ secured interests therein. However, this automatic preferential right will cease to exist if the creditor does not perfect the security by registration within 10 days from the date on which the debtor receives possession of the asset.

Preferential rights of multiple secured creditors in a single piece of collateral

Article 523 of the Civil Code states the conditions necessary for a debtor to grant security over a single asset to multiple creditors. Article 524 lays down the first-to-perfect rules of the secured creditors, requiring a secured creditor to register their security interest in collateral (movable or immovable) first to have priority over other secured creditors, except for the pledge of a movable asset, whereby the first creditor to create security either by taking possession (pledge) or by registration (mortgage) will have priority over the other creditors.

In addition to the above, the Civil Code provides for specific provisions concerning preferential rights relating to security over livestock and agricultural land.

Remarks

Although the Civil Code provides some clarity on security creation and perfection procedures, it does not provide a comprehensive set of rules that adequately deals with all aspects of modern secured transactions, in contrast to international best practices and the UNCITRAL Model Law on Secured Transactions, 2016, which exhaustively deals with security interests in all types of tangible and intangible movable property. The current legislation does not provide specific rules for a number of aspects, such as what limitations can be imposed by way of contractual arrangements, the treatment of the rights of a judgement creditor vis-à-vis a secured creditor, rules regarding cross-border guarantees, etc.

The Civil Code states that only some of the provisions of the Security Law have been replaced, which means the provisions of the Security Law that are not inconsistent with the Civil Code will remain in force.  Furthermore, it is likely that the Implementation Decree on Secured Transactions No. 178/PM dated 20 June 2011, which provides guidelines on the performance of security and enforcement based on the Security Law, will also continue in effect, as currently, the Lao government has not issued any separate implementation guidelines.

For more information on the secured transactions framework of the Lao PDR, or for any other queries about access to finance in the Lao PDR, please contact the VDB Loi Laos office: Daodeuane Duangdara ([email protected]), Sornpheth Douangdy ([email protected]), or Sibasish Mohapatra ([email protected]).