Challenges persist for Private Finance in Myanmar
I. General Introduction
While most developed and developing jurisdictions have in place well-defined mechanisms and legal procedures regarding the provision of financing with corresponding onshore security of the borrower (in the form of land mortgages, charges on assets or the taking of other types of collateral), this process remains very much in its infancy in Myanmar. That said, several non-recourse offshore project finance projects occurred in 2015 in Myanmar, primarily within the telecom sector and involving foreign-owned telecom tower companies that are working with telecom licence-holders Ooredoo and Telenor.
Structuring these financing deals involved complex challenges, given the absence of defined procedures in permitting offshore private and multilateral financiers in not only taking onshore security from the Myanmar borrower but also perfecting said security. Whether financial close was obtained is a story for another day, as we believe, in most cases, conditions precedent were either waived or shifted to conditions subsequent in order to permit a partial drawdown of the loan facilities by the Myanmar borrowers.
To this end, these deals have highlighted the current issues surrounding project finance in Myanmar, essentially pushing this issue into the spotlight with the international business community requesting policy and legal reform, such as enacting a Secured Transactions Law to address security over the assets and property of a Myanmar borrower, as well as the perfection/registration of such security in the name of the lender(s).
II. Forms of Security
It is worthwhile to review the available forms of security under Myanmar law and the issues relating to the perfection and enforcement of those security instruments.
For a Myanmar company that has an investment permit (called an “MIC Permit”) and is the proposed borrower of the loan, prior approval is required of both the Myanmar Investment Commission (MIC) and (by internal MIC process or in the future possibly by separate application) the Central Bank of Myanmar (CBM). Borrower companies that are not MIC permit holders require only the approval of CBM. As part of this process, the security package should be submitted to MIC/CBM as necessary, even though the rules and approval procedures (unofficial for the most part) do not require this. A certain amount of
reliance can likely be placed on a security package submitted to and deemed “approved” by these bodies as part of the overall assessment for issuance of an MIC Permit.
(1). Taking Security over Immovable Property (Land & Buildings)
This involves a mortgage over land as well as “land use rights” (as a large majority of land ownership is in the form of leasehold rights), especially for those companies that are in possession of an MIC Permit.
The basic rule is that foreign ownership of “immovable property” (defined under the Transfer of Immovable Property Restriction Act (1987) (TIPRL) to include “land, benefits from the land, buildings and things constructed or situated on that land and things installed on those buildings”) is significantly restricted. Under the TIPRL, the following acts are prohibited:
(a). Transferring immovable property by any person to a foreigner or a company owned by a foreigner by way of sale, purchase, gift, acceptance of a gift, mortgage, acceptance of a mortgage, exchange or transfer, and acceptance of a transfer by any other means; and
(b). Transferring any immovable property by any foreigner or a company owned by a foreigner by way of sale, purchase, gift, acceptance of a gift, mortgage, acceptance of a mortgage, exchange or transfer, and acceptance of transfer by any other means.
This effectively prohibits foreign ownership of land and thereby includes any offshore private and/or multilateral financier that under its mortgage has the power and title to sell the property in the event of default on a loan.
A charge (an English law concept recognized in Myanmar, and akin to a lien in other jurisdictions such as the United States) over immovable property is a legal workaround over a mortgage and is an option for offshore private and/or multilateral financiers since such security does not necessarily involve the transfer of land by or to a foreigner, but involves only the right to sell the property and apply the proceeds of a sale to repay the loan.
The Foreign Investment Law of 2012 (FIL) gives a foreign investor the right to “to sub-lease and mortgage the [lease of] land and building which are allowed to carry out business under the [MIC] permit.” It is unknown how this exemption from the TIPRL interacts with the TIPRL prohibition and there are no reported cases in relation to enforcement of a foreign-held mortgage of a long-term lease granted under the FIL (which is unlikely to be a surprise given this law is only three years old). The FIL does not specifically permit enforcement of a foreign-held mortgage.
Assignment of a lease is a possible alternative to a mortgage. An assignment can be upfront or conditional (e.g., possession takes place only on the occurrence of an event of default under the loan agreement). Assignments of leases suffer the same potential perfection issues described below (including the need to obtain the lessor’s consent), and if an offshore private and/or multilateral financier prefers to take an assignment rather than a mortgage over a lease, it should consider applying for MICapproval of the assignment in any event for additional assurance.
(2). Taking Security over Moveable Property in Myanmar
Section 109(1) of the Myanmar Companies Act, 1914, provides for the granting by a Myanmar company of a fixed and floating charge (FFC) over the assets of a company in favour of a lender, including book debts, cash flows, receivables, intangible assets, contractual rights and bank accounts. This is a flexible but imperfect form of security that can cover the following assets and property:
(i). a mortgage or charge for the purpose of securing any issue of debentures;
(ii). a mortgage or charge on uncalled share capital of the company;
(iii). a mortgage or charge on any immovable wherever situate, or any interest therein;
(iv). a mortgage or charge on any book debts of the company;
(v). a mortgage or charge, not being a pledge on any movable property of the company except stock-in-trade; or
(vi). a floating charge on the undertaking or property of the company.
III. Perfection Issues
(1). Issues with Perfection of Mortgage / Charge over Land & Buildings
- Prior Approvals. The approval of the MIC is required prior to taking the mortgage over the lease of land—this is not guaranteed and the MIC reviews each case under certain criteria set out in the FIL. However, it is not expected that the MIC will refuse in the vast majority of the cases, and while very few applications have been made to date as we understand, the feedback from MIC on this issue so far has been positive.
- Registration of Mortgage. There are two registrations of mortgages or charges over leases of land and buildings that are required by law to protect lenders:
- Under §59 of the Transfer of Property Act, 1882, and §17(1)(b) of the Registration Act of 1909, a mortgage on immovable property must be registered with the Office of the Registration Deeds (ORD). Contrary to law, practice dictates otherwise, in that all mortgages that are granted by Myanmar banks to local persons are “mortgage by deposit of title deeds” which under law are not required to be registered. This method involves the bank keeping the original title documents to prevent a transfer of the property (the original deed must be presented to the Township or District Land Records Office to effect and record a sale of the property). It is important to note that the ORD is a deeds registry and is separate from the Land Records Offices, which are akin to cadastral registers, not registers of title (meaning that they record information filed with them in relation to land and ownership, but do not constitute a guarantee of title). Leases and mortgages, which are required to be registered
with the ORD, are not noted on the Land Record Office register, as with a mortgage, documents creating a charge or an equitable charge on immovable property also require registration. Registration creates priority rights over later-registered mortgages and charges, may refuse to register the lease mortgage, despite the exemption given to such security if MIC approval has been given under the FIL. The registrar has up to now almost uniformly decline to register leases granted to
foreigners of more than a one-year term (in reliance on the TIPRL and a longstanding directive from the Ministry of Agriculture and Irrigation), despite the FIL exemption. So far, the Union Government has not been able to solve this disconnect, but due to many foreign investors expressing deep concerns to Union Government about leases being invalid by law if not registered, it is anticipated to be resolved soon.
- Under §109 of the Myanmar Companies Act, 1914, mortgages and charges created by Myanmar companies over their immovable property must be registered with the Companies Registration Office (CRO) of the Directorate of Investment and Company Administration (DICA) within 21 days after their creation, in order to be valid and effective. If they are not registered, such mortgages and charges will be void against a liquidator and the company’s creditors.
- Issue: Under §112 of the Myanmar Companies Act, 1914, the CRO is required to maintain a register in the prescribed form of all mortgages and charges created by a company requiring registration under § 109. These registers, however, do not currently
exist or they have been maintained and have long fallen into disuse and the CRO has not yet reconstituted them. While this is a concern, under §114 of the Myanmar Companies Act “the [r]egistrar shall give a certificate under his hand of the registration of any mortgage or charge registered under [§]109, stating the amount thereby secured, and the certificate shall be conclusive evidence that the requirements of [§]109 to [§]112 as to registration have been complied with.” Holders of security are therefore entitled to rely on this certificate (commonly referred to as a CRD) as evidence of compliance with requirements under the law. It should be noted that the CRO has recently become reluctant to issue CRD where it is uncertain of the position under the law vis-à-vis the registers.
- Appointment of a Security Agent. This is a relatively new mechanism to be used in Myanmar (even though is fairly standard practice in other jurisdictions). Use of onshore security agents (OSA) is believed to be a legal way to avoid perfection issues on registration of mortgages and charges, as a local person/entity (typically a local bank) is granted the mortgage or charge to
hold on behalf of the offshore private and/or multilateral financier. There have been a finite number of deals using an OSA to address the perfection issues as indicated above.
- Lack of Search Function of Public Records and Registries. It is not currently possible to carry out public searches of any public records or registries, other than a review or search of the Official Gazette of Myanmar to find out whether, for example, a company has been forced into bankruptcy or winding-up.
(2). Issues with Perfection of Moveable Property
This form of charge suffers from the same perfection issues as are described above in relation to mortgages and charges of a company over immoveable property, especially if the FFC includes mortgage or charge over immoveable property as it often will. A mortgage over a lease that is given under the FFC will have to be separately registered at both the ORD and the CRO. Other specific security mechanisms provided for under Myanmar law include:
- pledge of moveable property—pledges under Myanmar law are generally not viable security mechanisms as the Contract Act, 1872, requires the security-holder to take delivery of and hold certain categories of goods while the pledge is outstanding;
- mortgage or pledge of bank accounts—experience in Myanmar to date is that in practice, most local banks will not accept or acknowledge notice of a charge over an account, due mainly to unfamiliarity with the concept and the unsophistication of their (paper-based) system. With the new foreign banks operating in Myanmar (13 foreign banks have been granted licenses), we
believe this issue should be minimized;
- assignment of contracts - while in most cases this will require the agreement of the counterparty to that agreement, conditional assignment (i.e., an assignment that is contingent on an event, such as default) is possible;
- assignment of official licences – these are tied to the holder of the licence (the Myanmar entity) and would not be assignable nor would such right be recognized under the law of Myanmar. A licence must be surrendered by the holder and reapplied for in the name of the assignee or transferee; and
- equitable mortgage or charge on shares - granted by the owners of shares in the Myanmar company. There is nothing novel about this concept as this can be done in most jurisdictions. Appropriate security instruments would include: (i) a blank transfer instrument signed by the owner (or an undated share transfer instrument containing full details of the shares), (ii) signed board resolutions of the company approving the transfer and (iii) a fully executed power of attorney in favour of a representative of the offshore private and/or multilateral financier (the OSA can be used as well) granting power to execute the share transfer and other documents. The Memorandum of Association and Articles of Association of the Myanmar company may also have to be changed to ensure that there is no applicable pre-emption right on transfer of shares
and that any discretion on the part of the company/board of directors to refuse to register such a transfer of shares should be removed.
- Issue: MIC approval is required for all transfers of shares in companies that operate under an MIC permit. For those companies not in possession of such a permit, DICA will approve the share transfer to the extent of ensuring that it is not by a local person to a foreigner — such share transfers are currently prohibited by Union Government policy (the law makes no such requirement). Such approval will need to be sought prior to the exercise of an “equitable mortgage of shares”—we believe that it is not possible at present to obtain an upfront approval for the transfer on or before the share mortgage is granted.
(3). Stamp Duty
The Stamp Act, 1891 (and the Amendment of the Stamp Duty Act 2014) provides that when several documents are executed under one main transaction (such the loan agreement), stamp duty nevertheless shall be assessed separately on each of the documents executed, and different ad valorem duty may be applicable on the amount secured by the loan. Therefore, the security agreements may be subject to separate stamp duties as they are due.
A possible exception to the above rule is in the case of “any sale, mortgage or settlement” in which several instruments may be employed for completing the transaction but only the principal instrument shall be chargeable with the duty prescribed for the conveyance, mortgage or settlement (at rates between 1.5 percent and 3 percent of the value of the loan).
This can be quite costly since the assessment is based on the total loan value, and will be at the expense of the Borrower to procure the stamp duty. Exemptions are possible in practice and under law when the Union Government is a party to an agreement, however, these exemptions are granted on a case-by-case basis, and require support from the respective Ministry in which the project resides. And from our experience, any Ministry is very reluctant to support this a request by a foreign investor for a stamp duty exemption. In short, until the Internal Revenue Department addresses the rates for stamp duty on security interests, then project finance will remain very costly to foreign investors.
In general, a registrable security interest in property can be enforced only by filing a suit for foreclosure or a suit to force a sale of such property. Exceptions include:
(i). mortgages of immoveable property in urban areas (such as Yangon and Mandalay where sale can be effected under the mortgage itself);
(ii). equitable share mortgages or charges can be self-enforced;
(iii). assignment can also be self-enforced; and
(iv). pledges over movable property, which under §176 of the Contract Act of 1872 may be sold without the intervention of the court and on giving reasonable notice of the sale to the pledgor.
Enforcement through court proceedings is by no means a tried and true process when it comes to suit or foreclosure on property. The relevant court is more than likely unaccustomed with non-recourse project finance transactions and is unlikely to side with an offshore private and/multilateral financier concerning immoveable property.
More so, law is not always followed and when it is it may be interpreted to the detriment of an offshore private bank or multilateral. There remains no current legislation concerning secured transactions or a central administrative governmental body to oversee and register such secured interests.
Advancements in many areas of law have been made since 2011; however, laws concerning project finance remain at the status quo.
For further information, please contact
Giles Cooper, Partner, Duane Morris & Selvam