The COVID-19 pandemic has triggered a severe economic shock, especially in countries like Myanmar that rely heavily on labor-intensive industries. The recent change of government has added new concerns to the political state of Myanmar. With this recent series of events, we have seen foreign investors and suppliers struggling to recover their debts in Myanmar. This Alert sets out the actions that may be considered by creditors to recover the debts of a Myanmar company.
In the event of dispute of the claim, the parties will be required to proceed in accordance with the dispute resolution clause contained in the transactional documents. If necessary, the creditors can sue the debtor in the appropriate forum in Myanmar.
Due Diligence on the debtor company
Company searches can be conducted on Myanmar’s online business registration system (MyCo), which reveals, among other things, the status of the company (for example, registered, suspended, deregistered or dissolved), the details of the partners, the paid-up capital as well as the mortgages and charges on the assets of the company, if applicable. It is not uncommon for corporate debtors to be suspended or debarred for failing to meet certain filing requirements. In this case, the creditors can ask the debtor company to request that the stay be revoked by the clerk or ask the court to reinstate the company as creditor.
Court inquiries (usually from the Yangon area) in Myanmar may reveal ongoing and past litigation, including liquidation proceedings. It should be noted here that official court searches are not available in Myanmar as there is no central repository of information to definitively find past or current cases. The results of these unofficial surveys may not be accurate and may not be comprehensive.
Drafting and service of letters of formal notice
The service of a formal notice is a necessary step before initiating legal proceedings against debtors in Myanmar. According to Section 162 of the Myanmar Insolvency Act 2020 (MIL) and Section 78 of the Insolvency Rules 2020, a company will be deemed insolvent if a creditor serves a legal demand requiring the company to pay a sum owed greater than 1 million kyat (approximately US$560) and the company has for 21 days failed to pay the sum or secure or compound it to the reasonable satisfaction of the creditor. In such cases, creditors can petition for compulsory liquidation on the grounds that the debtor company is insolvent.
Negotiation and settlement
Typically, the parties will seek an amicable solution during this phase, such as negotiating a revised repayment schedule and/or taking security over the debtor company’s assets. It should be noted that foreigners (individuals or entities) are not permitted to own immovable property in Myanmar, including taking security over land/immovable property (except leasehold interests subject to the Myanmar Investment Commission approval).
Creditors may ask the court to liquidate the debtor company, provided that the conditions referred to in paragraph 3 are met. After hearing the motion for liquidation, the court may order the liquidation of the company and appoint a liquidator. The winding-up order acts in favor of all the creditors and all the contributors of the company as if it had been rendered at the joint request of a creditor and of a contributor.
The principal duties of the liquidators are to ensure that, as soon as reasonably possible, the assets of the company are placed under their control and distributed to the creditors and/or partners of the company, if there is a surplus. However, unsecured creditors can only be paid on a past bet basis followed by secured creditors, according to the order of priority provided by the MIL.
After the opening of the liquidation procedure, the company must cease to exercise its activity except to the extent necessary for its beneficial liquidation. In the event of insolvency, subject to limited exceptions, transactions entered into during a period prior to liquidation will be void, including:
- Giving gifts or entering into a transaction for a consideration significantly lower than the value of the business assets sold (section 360);
- Enter into transactions with an unsecured creditor in which the creditor receives more than he would receive if the transaction were canceled (article 361);
- The conclusion of exorbitant credit transactions (article 363); and
- Creation of a floating charge on the company’s business or property (Section 364).
According to the MIL, a “period” can range from two months to five years depending on the type of transaction and whether it was with an associated person. If any of the above transactions are identified, the court may order, among other things, the reinstatement of the position.
In accordance with the MIL, directors may be personally liable for the following:
- Fraud in preparation for liquidation: within 12 months prior to liquidation, if a director has fraudulently removed part of the company’s property exceeding 500,000 kyat (approximately US$280) or concealed a debt owed to or by the company (Section 214 );
- Misrepresentation to creditors: In the course of liquidation, if a director makes a false statement or commits any other fraud for the purpose of obtaining the consent of any creditor to an agreement relating to the affairs of the company or to the liquidation (section 216) ;
- Fraudulent trading: During liquidation, if any activity of the company has been carried out with the intention of defrauding the creditors of the company (section 218);
- Unlawful transactions: at any time before liquidation, if a director continued to operate when he knew or should have concluded that there was no reasonable prospect that the company would avoid entering into insolvent liquidation (section 219 ); Where
- Reuse of the corporate name: Within five years of dissolution, if a director carries out activities or acts as a director of another company using the name of the company, except in the event of voluntary liquidation of the partners (Articles 220 ).
Directors who commit offenses as described in Articles 214, 216 and 220 may also be punished with imprisonment in addition to pecuniary liabilities.
At this point, it would be prudent to do your due diligence with local partners and merchants before entering into business deals or injecting funds and to ensure that transactional documents are properly drafted to protect your interests.