A PRIMER ON COMMERCIAL LITIGATION IN MYANMAR DEBT RECOVERY AND ENFORCEMENT

Client briefing note 9 September 2015 Many businesses will try to steer clear of Myanmar courts in case of a commercial dispute. But sometimes, commercial litigation in Myanmar cannot be avoided. In this note, we summarize what investors need to know about commercial litigation in Myanmar. VDB Loi (www.vdb-loi.com) is a network of leading law and advisory member firms and affiliated companies that comprise nine partners and over 100 lawyers and advisors, with offices in Cambodia, Indonesia, Laos, Myanmar and Vietnam, and representatives in Singapore and Tokyo. With over 40 lawyers and advisors in our offices in Yangon and Nay Pyi Taw, we are a leading firm in Myanmar. Having been joined by U Aye Kya & Associates, a specialized Myanmar litigation firm comprising former magistrate and judge U Aye Kyaw and a team of litigators, VDB Loi offers a wide range of advisory services in connection with commercial disputes in Myanmar. Our disputes practice is strengthened by a team of foreign solicitors and lawyers with extensive experience in commercial, land and insolvency litigation. Our firm maintains close collaborative relationships with the disputes practices of leading law firms in Singapore, Hong Kong and the United Kingdom. We assist clients with disputes in a range of subject matters in Myanmar, including property, resources, labour and commercial contracts. A PRIMER ON COMMERCIAL LITIGATION IN MYANMAR DEBT RECOVERY AND ENFORCEMENT With the recent opening of Myanmar s economy to a variety of new investment, both foreign and domestic, there will inevitably be a corresponding increase of diverse litigation, in the future. While many businesses will try to steer clear of Myanmar courts, in some instances commercial litigation simply cannot be avoided in any jurisdiction, including Myanmar, whether as a plaintiff or as a defendant. Of interest to lenders in Myanmar, our survey of Myanmar court cases showed that lenders are successful in debt enforcement cases 95% of the time. In this note, we summarize what investors need to know about commercial litigation in Myanmar, including the different court-levels and their jurisdictions; the treatment of foreign litigants in Myanmar; the overall process for commencing a commercial action to final hearing, and including the execution of judgments through court ordered sale of property; the process for enforcing certain securities without court intervention; enforcement of guarantees; shareholder disputes and remedies; and the process for seeking temporary and permanent injunctions in Myanmar. We have emphasized questions in connection with the enforcement of securities and recovery of debts. Arbitration and the recognition and enforcement of foreign judgments have Highlights of this note Commercial Courts in Myanmar Foreign Litigants Process in General Enforcement of securities without Court Intervention Court Ordered Sale Enforcement of Guarantee Shareholder Disputes Injunctions not been covered below, being the subject of a separate briefing note. Which courts have jurisdiction? In Myanmar, there are four court levels relevant to commercial disputes: the Townships Courts, which have jurisdiction over suites valued at 10,000,000 Myanmar Kyat (MMK) (approx. US$8,000) or less and disputes involving immovable property situated within the relevant township; the High Courts, which have jurisdiction over suites valued up to 500,000,000 MMK (approx. US$390,000), and which can hear appeals from the Township Courts; District Courts, which have jurisdiction over suits which may exceed a value of 500,000,000 MMK, and which can hear appeals from Township and High Courts; and the Supreme Court, which Page 1

is the highest court in Myanmar and can hear appeals from High and District Courts. Can foreign companies sue and be sued? Section 83 of the CPC provides for the right of a foreign national to sue in Myanmar, as if it were a citizen of Myanmar, except if the foreign person is an enemy of the state (in which case it shall be allowed to sue only with the permission of the President of the Union of Myanmar), or where the interest claimed is prohibited to foreigners. For instance, the Transfer of Immovable Property Restrictions Act (1987) (TIPRA) prohibits a foreigner from acquiring immovable property, or acquiring a lease for a term exceeding one year, except the latter prohibition may not apply where a foreign company has a relevant beneficial contract with the state. In addition, there is nothing in the CPC preventing a foreign person from being sued and made defendant in a proceeding. Indeed, the CPC specifically provides for service of summons on persons residing outside of Myanmar, which requires that the summons is issued by the relevant court and translated into English or the language of the receiving locality. In the event that service cannot be affected, it is possible for the court to order for substituted service by posting the summons on a conspicuous place in the court-house, and (if applicable) on a conspicuous part of the building where the defendant was last known to carry on business in Myanmar, or by such other manner as the court thinks fit. How is the court process organized? The average commercial court case in Myanmar takes 2 to 3 years. In case the defendant does not contest the case, proceedings only last a few months. In our practice we often see that parties may be inclined to settle after receiving a summons or when a temporary injunction is granted, which is generally a matter of a month or two, although there are notable exceptions. In the first instance, the claimant to a commercial dispute must file a Plaint with the appropriate court. Thereafter, time is given for the defendant to file an answer, a counterclaim (if applicable), and claim for set-off against another debt (if applicable) which time period is set by the court and is not prescribed at law, although 15-30 days is common in court practice. In the event that the defendant does not file an answer, it may be possible to obtain a decree from the court based on the defendant s non-compliance with pleading requirements. If the defendant files a counterclaim or claim for set-off, then the plaintiff would have an opportunity to respond by way of written statement, after which the pleadings are closed. After the pleadings are completed in accordance with the foregoing, the next AN ENGLISH MORTGAGE (A BIT OF A MISNOMER IN CURRENT TIMES) OCCURS WHERE THE IMMOVABLE PROPERTY IS TRANSFERRED ABSOLUTELY TO THE LENDER/MORTGAGEE WITH THE PROVISO THAT THAT THE PROPERTY WILL BE RETRANSFERRED UPON FULL REPAYMENT. step is first discovery and inspection of documents. It is also at this stage that a party may file for temporary injunctions and other interlocutory orders. The court will then frame issues based on submissions of the parties. Thereafter if settlement is not reached, there will be a hearing and resulting decree and execution thereof. Appeals may be filed after issuance of a decree. Enforcement of mortgages without court intervention According to the Transfer of Property Act (1882) (TPA), there are a number of different types of mortgages in Myanmar. An English mortgage (a bit of a misnomer in current times) occurs where the immovable property is transferred absolutely to the lender/ mortgagee with the proviso that that the property will be retransferred upon full repayment. A simple mortgage occurs where the borrower/mortgagor keeps possession of the property, but subject to the agreement that in the event of default, the property will be sold and the proceeds applied to the debt. A mortgage by conditional sale occurs when the mortgagor transfers the property to the mortgagee, although subject to the condition that the sale will not become absolute until the mortgagor defaults. A usufructory mortgage occurs where the mortgagee takes possession of the property until repayment, with the ability to receive rents and profits from the property in lieu of interest. A mortgage by deposit of title deed Page 2

above conditions have been met (i.e., the property can be sold without court intervention) and provided that the receiver is expressly identified in the mortgage deed, or otherwise agreed to in writing between the mortgagee and mortgagor - otherwise a court order will be required. Therefore a lender/mortgagee is well advised to ensure that the mortgage deed carefully identifies a number of alternate receivers and the process for appointing such receivers in the event of default. Can creditors enforce on movable goods? occurs when the borrower delivers the title documents in respect of the property with the intent to create a security, without registration. In Myanmar practice, mortgage by deposit of title deed is currently nearly the only form of mortgage which is actually used, because it does not require registration or payment of stamp duties. An English mortgage is from the perspective of enforcement the strongest form of mortgage currently available in Myanmar. It can be enforced without court intervention, provided that no party is Hindu, Buddhist, Muslim (i.e., so this would not be an issue if the parties are companies). However, practically speaking the English mortgage has some important drawbacks at this point in time. Registration is required and particularly in connection with foreign invested borrowers (who may only lease land, not own it) largely administratively untested. Furthermore, for a number of types of land a registered mortgage such as the English mortgage or the simple mortgage registration has not even been tested in connection with Myanmar borrowers. For other forms of mortgages aside from the English mortgage and mortgage by deposit of title deed, enforcement without court intervention may occur (i) if the mortgagee is the government and power of sale is expressly provided for in the mortgage deed; or (ii) if the mortgagee is a non-government party, the power of sale without court intervention is expressly provided for in mortgage deed, and the property is situated in any town in Myanmar. Before the mortgagee may exercise the power of sale, principle repayments must have been outstanding for at least three months after the mortgagee has served written notice on the mortgagor, or interest payments must have been outstanding for a minimum of three months. The mortgagee can appoint a receiver to sell the property, provided that the A GUARANTEE UNDER MYANMAR LAW IS PROVIDED FOR UNDER THE CONTRACT ACT, AND, SIMILAR TO MOST JURISDICTIONS, IS DEFINED AS A CONTRACT TO PERFORM A PROMISE OR DISCHARGE A LIABILITY OF A THIRD PERSON. Movable property may be pledged, which according to the Contract Act (1872) occurs when possession of goods are provided to the pledgee (called pawnee under the Contract Act) under bailment to secure payment of a debt or performance of a promise. In the case of default, the pledgee can generally maintain possession of the goods without the need for court intervention. Shares in a company may be pledged or can be charged. In the case where there is a simple charge over movable property, and where the debtor is still in possession of the property, as a rule, a court ordered sale would be necessary, although exceptional arrangements may be agreed to between the lender and borrower. Court ordered sale Court intervention in enforcement of securities is often unavoidable, and in practice nearly always successful before Myanmar courts. A review we conducted of debt enforcement court cases from 1980 to 2014 shows that lenders are successful in 95% of the cases. In order to seek a court ordered sale of property, it is first necessary to obtain a preliminary decree from the relevant court, in which the court fixes the outstanding principle, interest, and costs. Thereafter the court will issue a process for execution of the decree, specifying, amongst other things, the date of execution. The property will then be attached by the court. In the case of movable property (except agricultural property) this means actual seizure of the Page 3

property by a court officer. Where the property is immovable, attachment is made by an order prohibiting the judgment debtor from transferring or encumbering the property. The order shall be posted on a conspicuous place on the property (in case of immovable property) and the courthouse. Where property has been attached, the court may order that the property is sold to satisfy the debt. A proclamation of the order for sale must be posted on a conspicuous place on the property (in the case of immovable property) and the courthouse. The sale cannot take place until at least 30 days after the said proclamation, in the case of immovable property, or 15 days in the case of movable property. Myanmar courts generally recognize that a debtor has a continued right of redemption between the time of attachment and final sale. The sale would be conducted by a court bailiff or deputy bailiff in some well-known place, and the bailiff would be entitled to commissions of 1% of realized sale proceeds. According to the CPC, where a decreeholder purchases the property, the amount it is owed may be set-off against the auction price. Myanmar case law confirms however that a decree-holder may not exercise his right to set-off in circumstances where such would deprive another decree holder, having higher priority, of realizing on its debt. Where the property to be sold is a negotiable instrument or company shares, the court may order that the sale is carried-out by a broker rather than by public auction. In the case of immovable property, where the court can be persuaded that the debtor can effectively sell/lease/mortgage the property and raise enough proceeds to settle the debt, the Court can postpone the auction to allow the debtor to source a buyer/lessee/ mortgage, although the sale/lease/ mortgage shall not be absolute until confirmed by the court. MYANMAR COURTS MAY INVALIDATED A GUARANTEE FOR A NUMBER OF REASONS, BUT RARELY DO SO. aside the sale (based on fraud/material irregularity or third party claim of prior interest in property) the court will make an order confirming the sale, after which time the sale will be become final. It should be noted that any irregularity in the attachment/ sale process will not vitiate the sale once final, although a party wronged by such irregularity may claim for damages. Problems with guarantees in Myanmar A guarantee under Myanmar law is provided for under the Contract Act, and, similar to most jurisdictions, is defined as a contract to perform a promise or discharge a liability of a third person. For a guarantee to be valid, it must satisfy the requirements of a valid contract, including legality, consideration, competence to contract, etc. With respect to consideration, there is no requirement of direct consideration to the guarantor (called surety under the Contract Act), but rather the consideration received by the principal debtor is sufficient consideration for the guarantor. Myanmar courts may invalidate a guarantee for a number of reasons, but rarely do so. If the principal debtor is discharged from the debt (by agreement with the creditor or by any act or omission of the creditor), the guarantor can no longer be held to perform the guarantee. Myanmar law provides that where the underlying contract between the creditor and principle debtor For immovable property, on a sale, a Myanmar court will as a rule require the buyer to immediately pay 25% of the price with the balance due within 15 days. Upon the sale being paid for in full and completed, and where there has been no application to set Page 4

is modified in any way without the guarantor s consent, the guarantor s obligation and/or liability would be discharged. There is no materiality standard. This would include a situation where the principle debtor and creditor enter into a contract whereby the creditor makes a composition with, or promises to give time to the principle debtor or not to sue the principle debtor, although not in the case of mere forbearance on the part of the creditor (i.e., must be based on subsequent agreement between the principle debtor and creditor, without consent of guarantor). There is also the problem of a corporate guarantor acting outside of its authority, i.e, ultra vires, which is still an issue in Myanmar. The Myanmar Companies Act (1914) (MCA) has not been updated to resolve the problem of ultra vires acts as opposed to other jurisdictions. In particular, if a company s memorandum of association (MOA), does not provide for the ability to provide a guarantee, and the guarantee is provided without any benefit to the guarantor company, then the act may be deemed ultra vires according to Myanmar law. According to the early English cases, an ultra vires act cannot be cured by even a unanimous shareholders resolution. Amendment to the MOA would be one way to remedy this issue. It is unclear if this is still the present state of law in Myanmar. In any event, in Myanmar, amending the MOA can be MYANMAR LAW PROVIDES THAT WHERE THE UNDERLYING CONTRACT BETWEEN THE CREDITOR AND PRINCIPLE DEBTOR IS MODIFIED IN ANY WAY WITHOUT THE GUARANTOR S CONSENT, THE GUARANTOR S OBLIGATION AND/OR LIABILITY WOULD BE DISCHARGED. difficult, and according to s.12 of the MCA, requires approval by court order. Lenders and borrowers are well advised to scrutinize the MOA of a proposed corporate guarantor to determine whether it has capacity to provide the relevant guarantee. Shareholder disputes Corporate governance is provided under the MCA, which provides scarce protection for minority shareholders. Indeed the general principle underlying company law in Myanmar is that a company should be managed by its directors according to the normal voting rights of its shareholders. There are no general statutory provisions allowing oppressed shareholders to take legal action against the company or derivative action against a third party. There is limited ability to wind-up a company through court order, where the company cannot pay its debts or where it is deemed just and equitable by the court. In the latter case (just and equitable grounds), the courts will generally order that a company be wound-up only in extreme cases, as where there is an irretrievable breakdown between the shareholders/ directors and it is virtually impossible to carry-out the company s business - but not where the company is functioning albeit to the detriment of the minority shareholders. It is possible for the shareholders to bring actions against the directors in extreme cases, for instance for civil claims (breach of contract, negligence) and even criminal cases (misappropriation, breach of trust, forgery). In addition, s.54 of the Specific Relief Act (SRA) may be of some guidance. Section 54 provides that a perpetual injunction may be granted in order to prevent the breach of an obligation. Illustration (c) provided under s.54 provides the following example: The directors of a public company are about to pay a dividend out of capital or borrowed money. Any of the shareholders may sue for an injunction to restrain them. In the case of a permanent injunction, it is important to note that a shareholder probably cannot seek relief under s.54 of the SRA simply where it is being oppressed by the majority, but rather only where the directors are violating specific duties (e.g., paying dividends out of capital or loans; failing to give proper notice of shareholder meetings; or failing to allow the shareholders to examine the accounts of the company). In addition, if a shareholder has filed a claim against company director/s (for whatever cause of action), it may be possible for that shareholder to seek a temporary injunction in accordance with the CPC, as better described below. Page 5

Needless to say, given the scarcity of Myanmar statutory provisions in this regard, particularly minority shareholders would do well to provide comprehensive remedies and dispute settlement mechanisms in joint venture or shareholder agreements where possible. How do injunctions work? As noted above, in Myanmar, it is possible to obtain a temporary injunction under the CPC, and a permanent injunction under the SRA. The process to obtain a permanent injunction is consistent with the process for obtaining any final decree, whereas a temporary injunction can be sought after closing of pleadings but before final decree. For a temporary injunction to be granted, there must be a danger of property being wasted, damaged, alienated, or property being threatened or intended to be removed or disposed of with a view to defraud creditors. The timeline to obtain a perpetual injunction is obviously longer than that of a temporary injunction, although the exact timeline is not prescribed in the CPC or SRA, and will ultimately depend on the circumstances and complexities of each case. Once an injunction is obtained, the court does have power to require and the defendant to pay security into court. In the event of a breach of an injunction, the Court can order detainment of offender of up to 6 months. If an injunction is ordered as against a company, the order is CONTACT THE PROCESS TO OBTAIN A PERMANENT INJUNCTION IS CONSISTENT WITH THE PROCESS FOR OBTAINING ANY FINAL DECREE, WHEREAS A TEMPORARY INJUNCTION CAN BE SOUGHT AFTER CLOSING OF PLEADINGS BUT BEFORE FINAL DECREE. also binding on the directors and shareholders of that company. As in most jurisdictions, if a plaintiff is able to obtain a temporary injunction pending final hearing, it will likely be able to exert a degree of leverage against the defendant for the purposes of reaching a favourable settlement. Therefore the temporary injunction is a potentially strong weapon in the arsenal of a litigant in Myanmar, and should not be overlooked by any party involved in a dispute. RELATED VDB LOI PUBLICATIONS DICA taking steps to clean up the Myanmar companies register? Myanmar to Reorganize Rules on Government Debt and Guarantees The do s and don ts of buying an existing towerco in Myanmar 関 連 当 事 者 への 与 信 リー ス 会 社 および 銀 行 による 利 益 分 配 を 刷 新 する 新 銀 行 法 Payment, invoice, contract or price? How far will the CBM go to limit foreign currency within Myanmar? OUR OFFICES IN MYANMAR YANGON Level 8, Centrepoint Towers No. 65 Sule Pagoda Road & Merchant Street, Kyauktada Township T: +95 137 1902 / +95 137 1635 F: +95 124 1238 Edwin Vanderbruggen Partner, VDB loi edwin@vdb-loi.com T: +95 137 1902 +95 137 1635 www.vdb-loi.com Edwin is one of Myanmar s leading foreign legal advisors. He assists international development financial institutions, oil and gas supermajors, IPPs, mobile network operators and commercial banks on their projects in Myanmar. Edwin advised on many of the largest investments in the country, including a greenfield multibillion US$ telecom project, the Thilawa SEZ, onshore and offshore oil and gas block tenders, the market entry of newly licensed foreign banks, the first westernowned power plant, a major new port terminal and the privatization of state-owned enterprises. He has worked in the region since 1997, and has lived and worked in Yangon since 2012. NAY PYI TAW No. S-204, Tha Pyay Kone Ward Zabu Thiri Township T: +95 678 108 091 F: +95 678 108 092 Page 6