A security is a guarantee to ensure performance of contractual obligations as provided by law or pursuant to a contract. According to the Law on Secured Transactions No. 06/NA dated 20 May 2005 (the “Law on Secured Transactions”), there are two types of security.¹ One is a security pursuant to the law, and the other is a security pursuant to a contract. A security pursuant to the law is a guarantee that secures the repayment of a debt as provided for under the law based on reasons of humanity and the overall benefit of the nation, such as payment of wages, salary or other benefits as provided for under the Labor Law, tax and duty payments, and other payments to ensure the interests of the nation, but excluding debts or other benefits arising from any agreement between the State and any individual or organization.² On the other hand, a security pursuant to a contract is an agreement to guarantee the repayment of a debt between a creditor and a debtor, or an agreement to repay a debt on behalf of the debtor by another individual or legal entity when the debtor fails to perform the contract.

Regarding a security pursuant to a contract, there are three forms of security,i.e. security over movable property, security over immovable property, and security by another person or legal entity.³

1. SECURITY OVER MOVABLE PROPERTY

Nature of Security

Security over movable property, or a pledge, is a guarantee of repayment of a debt or other benefit by movable property. There are five main types of security over movable property, based on the type of property being pledged, as follows:

• – A pledge of material items;
• – A pledge of documents. For example, documents certifying right of ownership, share certificates, bonds;
• – A pledge of inventories in a warehouse;
• – A pledge of intangible property, including shares in a company, intellectual property, bank savings accounts, contractual rights, receivable rights of property or assets, approval, permission or right to operate a business; and
• – A pledge over assets or gains from any project or business which may occur in the future.⁴

Specific Types of Pledge

A. Pledge of Material Items

A pledge of material items must fulfill three conditions: 1) an agreement to repay the debt guaranteed by the material items must exist; 2) such material items must be owned by the debtor or by another person who has authorized the pledge in writing; and 3) such material items must be in the possession of the creditor or the other person who has been mutually agreed upon by both parties.⁵ However, according to Article 12 of the Law on Secured Transactions and Article 6 of the Decree on Secured Transactions No. 178/POM dated 20 June 2011 (the “Decree on Secured Transactions”), material items which have been pledged may be in the possession of the debtor if explicitly agreed upon in a security contract.

Although pledged material items are in the possession of the creditor or other appointed person, the ownership of the itemsremains with the debtor. When the debt has been fully paid, the pledge contract shall terminate and the pledged material items must then be returned to the debtor. However, if the debtor fails to repay the debt within the agreed period, the material items shall become the property of the creditor⁶. In the case that the value of the material items is higher than the value of the debt, the creditor may choose to pay the difference, sell the material items as agreed with the debtor, or sell then items on auction. After deducting cost and interest of the debt, the remaining balance must be returned to the debtor. On the contrary, if the sum obtained from the sale of the pledged material items is insufficient to repay the debt, the debtor remains liable for the difference.

B. Pledge of Documents

A pledge of documents is a contract where the debtor assigns documents of title over movable property to the creditor to guarantee the repayment of a debt, but the debtor retains the ownership and the right to use such property.⁷ Nevertheless, the owner shall not have the right to sell, transfer, or to put the movable property under another pledge.⁸

Pledge of share is one of the types of pledge of documents. In this regard, the debtor shall give the share certificate to the creditor in order to ensure the repayment of debts or the performance of contractual obligations, whereas the debtor retains the right of ownership and the right to use the pledged shares, andhas no right to sell, transfer or to put the shares under another pledge.

C. Pledge of Inventories in a Warehouse

A pledge of inventories in a warehouse is where the debtor deposits an inventory in a warehouse with the creditor to guarantee the repayment of a debt. A negotiable warehouse receipt is transferable.

To pledge inventories, the debtor shall deposit an inventory certificate to the creditor to guarantee the repayment of the debt. This means that only inventory certificates will be in the possession of the creditor, but not the goods itself. Theoretically, the concept of pledge of inventories is quite similar to lien where the creditor does not have possession over the inventories of the debtor.

As it will be elaborated further in this document, each pledge agreement is required to be registered at the Ministry of Finance. Therefore, officials shall have the statistic record on the registration of pledge contract concluded in practice. However, such statistic record shows that there has never been any case regarding the pledge of inventories in the Lao PDR so far.⁹ Although, the Law on Secured Transaction specifies that specific regulations regarding the negotiable warehouse receipt will be issued separately by the government, such regulation has not been enacted and enforced yet. Therefore, a concrete concept of pledge of inventories under Lao law is still ambiguous.

D. Pledge of Intangible Property

According to the law on secured transactions, intangible property such as intellectual property, bank savingsaccounts, contractual right, receivable rights of property or assets, or approval, permission or right to operate a business may be pledged.

Regarding the pledge of money in bank savings accounts, it is an accepted practice that such money can be used as a security of debt provided by the debtor. Although the Law on Secured Transaction does not stipulate the type of bank account which can be used as the security, in practice, only savings accounts areaccepted for being pledged. This is because savings accounts are more flexible than fixed deposit accounts when withdrawing money from the debtor’s bank account in order to pay off debt when the debtor fails to perform his or her obligation.

To make an encumbrance over the money in a bank account, the debtor shall notify the bank where his or her account is opened in writing. With approval from the authorized bank officials, the money in such account will then be seized. Consequently, such money will not be allowed to be transferred or withdrawn until the bank has been informed that the debt has been fully paid.

In order to notify the bank, the documents required to be submitted to the bank are as follows:

1. An application;
2. An approval letter from the owner of the bank account;
3. A house registration document and identity card of the owner of the bank account;
4. A copy of Enterprise Certificate or Concession Certificate or Tax Certificate (in case of juristic person);
5. A summary of income-outcome for the last 3 years (in case of juristic person); and
6. A loan agreement and security contract.

When a debtor fails to perform its obligation and the creditor desires to enforce its right against the money as the collateral, unless otherwise stipulated in the agreement, the creditor is entitled to deduct the money from the debtor’s account for pay off debt.

E. Pledge over Future Assets or Gains

According to the law on secured transactions, a pledge over assets or gains from any project or activity which may occur in the future can be made.The right over such assets or gains may also be sold or exchanged or given to with another person.

Form

A contract must be in writing. It may be executed in a single contract or multiple contracts.¹⁰ The form, contents and conditions of the security contract shall be based on those of general contracts as provided for under the Law on Contract and Tort No. 01/NA dated 8 December 2008 (the “Law on Contract and Tort”). The security contract can be made at the same time as the loan agreement or later. Also,the security contact can be made in the same document as the loan agreement or as a separate agreement.¹¹

Generally, a contract must be signed by the parties with at least three witnesses and have the following contents:

1. Name and address of the parties;
2. Objectives and scope of the contract;
3. Time for performance;
4. Place of performance;
5. Effectiveness of breach of contract;
6. Dispute resolution; and
7. Condition for contract amendment.

In addition, the security contract must be certified at the Notary Office, Ministry of Justice, in order to constitute full legal enforcement. To complete the certification process will take 3 official days at the Notary Office. The required documents to be submitted to the Notary Office are as follows:

1. Application from;
2. Security contract (one original security contract must be kept at the Notary Office);
3. Enterprise Certificate and a Tax Certificate (in case of juristic person);
4. Minutes of the shareholders’ meeting approving such contract (in case of juristic person);
5. Share certificates (in case of pledge of shares);
6. Power of Attorney (in case that the parties cannot be present at the Notary Office);
7. Copies of house registration document and identity card of the parties; and
8. Documents requested by the competent official (if any).

The security contract over movable property shall be applicable between the parties when: 1) the pledged property has been specified in the contract; 2) the creditor has made payment or fulfilled any other obligations to the debtor; and 3) the property is owned by the debtor or by another person who has authorized the pledge in writing.¹²

However, even if all conditions as specified above have been fulfilled, a security contract shall have no effect upon third personsunless it has been registered at the responsible government agency. In this regard, it must be registered at the registration office of the Ministry of Finance in order for the creditor to have preferential right over the movable property.¹³ In addition to the registration, a security contract over movable property shall also have legal effect towards third persons if: 1) the creditor has possession over the movable property; or 2) the creditor has control over such movable property.¹⁴ The registration shall be effective for 5 years and can be renewed. When such term is expired, the right over the pledged property in accordance with the registration will be terminated unless such right is still effective by other means such as the possession or the control over the property by the creditor.¹⁵

Enforcement of Pledge

Where a secured transaction has been breached, the creditor may enforce the security contract by two means i.e. 1) the security contract may be voluntarily enforced; or 2) the security contract may be enforced through the justice process.

Voluntary enforcement of a security contract is where the debtor agrees for the pledged property to be enforced according to the means and procedures as specified in the security contract or as agreed in writing by the creditor and the debtor after the secured transaction has been breached.¹⁶ In this regard, the creditor may decide the means to enforce the pledge, but it must not be violent or violate the law. For example, the creditor may not enter the debtor’s property without permission, use violentforce, or threaten the debtor in order to possess the pledged property.

If the pledged property is in the possession or control of the creditor with consent of the debtor, the creditor may decide to enforce the pledged property by auction, rent out the property, or buy it himself.¹⁷

If the debtor does not voluntarily agree for the pledged property to be enforced, the creditor may present the conflict to the court.¹⁸

On the enforcement of the pledge, after deducting cost and interest of the debt, the remaining balance must be returned to the debtor. On the contrary, if the sum obtained from the sale of the pledged property is insufficient to repay the debt, the debtor remains liable for the difference.¹⁹

In the case where the pledged property is a bank savings account, the creditor may deduct the money from the account for the repayment of debt by the following methods:²⁰

1. In the case where the creditor is a commercial bank and it is the same bank which the debtor has the bank account, the creditor is entitled to deduct such money for paying off by itself without informing the debtor in advance;
2. In the case where the creditor is a commercial bank but it is not the same bank as the bank where the debtor’s account has been opened, the creditor shall notify the bank where the debtor’s account has been opened to deduct or transfer the money in the debtor’s account to the account of the creditor; and
3. In the case where the creditor is a person or entity which is not a commercial bank, the creditor is also entitled to notify the bank where the debtor’s account has been opened to deduct or transfer the money in the debtor’s account to the account of the creditor.

2. SECURITY OVER IMMOVABLE PROPERTY

Nature of Security

A security over immovable property is a guarantee to repay a debt or perform other obligations to a creditor which is secured by the immovable property or the right to use the immovable property of the debtor, for example, a piece of land, a house or a factory. A security over immovable property may be done by placing documents that certify the right of ownership or the right to use the immovable property in the possession of the creditor or an appointed person. To give a security over the right to use the immovable property, prior written consent by the owner of such immovable property must be obtained.

Form

A security contract over immovable property must be concluded in writing in the presence of a government notary or a village chief with three witnessess. In addition, written consent of the owner of the immovable property must be obtained in the case that the debtor is not the owner of the immovable property in order for the creditor to have the right over such immovable property.²¹ However, the creditor shall have no preferential right unless the security contract has been registered. In this regard, a security contract over immovable property shall be registered at the land management office where the property is located.²²
In order for a security contract over immovable property to be registered, three steps must be taken. First, the title deed of the immovable property must be certified. In this regard, an application requesting for a certification of the title deed must be submitted to the land management office where the property is located. The land management office shall consider the application and issue a certificate of title deed within 3 days.²³ Second, the security contract must be certified by the government notary.²⁴ Finally, the certified security contract must be registered at the land management office where the property is located.²⁵

After the security contract has been fully registered, the contract shall have legal effect toward third persons and the creditor shall have preferential right over the immovable property.²⁶

Enforcement of Security over Immovable Property

As same as the enforcement of pledge, the creditor may enforce the security contract two ways: 1) the security contract may be voluntarily enforced; or 2) it may be enforced through the justice process.²⁷
According to the voluntary enforcement of security contract, the creditor has the right to have possession or control over the immovable property. In order to take possession over the immovable property, the creditor must notify the debtor in writing as to the debtor’s breach of contract. In addition, the creditor must inform the debtor to move out of the property or offer another solution for the debtor to comply with within 60 days. Copies of such notification must also been sent to the owner of the property, other creditors, or government officers, if any.²⁸ In this regard, the debtor must answer to the creditor in writing within 15 days informing that he shall repay the debt and interest, or move out of the immovable property, or oppose the creditor’s possession or control over such property. If the debtor fails to repay the debt, or move out of the property, or oppose the creditor’s possession or control over the property within such period of time, the creditor may decide whether the immovable property willbe enforced by auction, rent out, or buy it himself in accordance with the contract or the agreement between the parties.²⁹

3. PERSONAL GUARANTEE OR GUARANTEE BY LEGAL ENTITY

Nature of Security

A security by a person or legal entity is a contract where a person or legal entity agrees in writing to repay the debt or perform the contractual obligations on behalf of the debtor in the event that the debtor fails to repay the debt or perform such contractual obligations.³⁰ Unless otherwise agreed, the guarantor has the obligation to repay only the principal amount of the debt.³¹

Form

According to Article 26 of the Law on Secured Transaction, a security contract by a person or legal entity contract must be concluded in writing. It shall have legal effect when signed by the debtor, the guarantor and the creditor. In contrast to the pledge and the security over an immovable property contract, the security contract by a person or legal entity contract is effective without the need to be registered.³²

Enforcement of Personal Guarantee or Guarantee by Legal Entity

After expiry of the repayment date as provided in the contract, the creditor must first claim the repayment from the debtor. If the debtor fails to repay the debt, then the creditor shall have the right to claim the repayment from the guarantor.³³

Mr. Rawat Chomsri, Partner
Email: rawat@siampremier.com

Ms. Natchar Leedae, Advisor
Email: natchar@laopremier.com

Ms. Salin Thewphaingam, Advisor
Email: salin@laopremier.com

¹ Article 3 of the Law on Secured Transactions.
² Article 4 of the Law on Secured Transactions.
³ Article 8 of the Law on Secured Transactions.
⁴ Article 11 of the Law on Secured Transactions.
⁵ Article 13 of the Law on Secured Transactions.
⁶ Article 14 of the Law on Secured Transactions.
⁷ Article 15 of the Law on Secured Transactions.
⁸ Article 15 of the Law on Secured Transactions.
⁹ This information was obtained on 9 January 2013 by the official of the Ministry of Finance.
¹⁰ Article 6 of the Decree on Secured Transactions.
¹¹ Secured Transactions Law , Article 6: Form, contents and condition under security Contract
¹² Article 7 of the Decree on Secured Transactions.
¹³ Article 27 of the Decree on Secured Transactions.
¹⁴ Article 8 of the Decree on Secured Transactions.
¹⁵ Article 29 of the Decree on Secured Transactions.
¹⁶ Article 35 of the Decree on Secured Transactions.
¹⁷ Article 42 of the Decree on Secured Transactions.
¹⁸ Article 39 of the Decree on Secured Transactions.
¹⁹ Article 46 of the Decree on Secured Transactions.
²⁰ Article 37 of the Decree on Secured Transactions.
²¹ Article 49 of the Decree on Secured Transactions.
²² Article 31 of the Law on Secured Transactions.
²³ Article 56 of the Decree on Secured Transactions.
²⁴ Article 57 of the Decree on Secured Transactions.
²⁵ Article 58 of the Decree on Secured Transactions.
²⁶ Article 31 of the Law on Secured Transactions.
²⁷ Article 62 of the Decree on Secured Transactions.
²⁸ Article 64(1) of the Decree on Secured Transactions.
²⁹ Article 66 of the Decree on Secured Transactions.
³⁰ Article 26 of the Law on Secured Transactions.
³¹ Article 27 of the Law on Secured Transactions.
³² Article 72 of the Decree on Secured Transactions.
³³ Article 27 of the Law on Secured Transactions.