Everything you Need to Know about Corporate Guarantees in Mongolia: Part II

In our most recent blog post we introduced the concept of the corporate guarantee in Mongolia, its basic function in a commercial transaction, and some unique aspects of such guarantees under Mongolian law.

Today, I wanted to briefly summarize the basic roles and responsibilities taken on by the Guarantor and as well as the Obligee.

Firstly, remember that the Obligee has a positive obligation to report to the Guarantor if and when the Obligor has failed to perform its duties. An Obligee will lose its right to claim against the Guarantor if the Obligee doesn’t properly perform this notification. The Obligee should also provide further information relating to the circumstances of the failure of Obligor as requested by the Guarantor.

As for the Guarantor, it is entitled to claim all rights and defenses as to non-payment which the original Obligor would be entitled to. The Guarantor will keep such rights and defenses even where the Obligor has taken action to relinquish or waive such rights.

If the Obligor is a natural person, in case such individual dies, the estate is primarily responsible for meeting the original obligations utilizing the funds and resources at its disposal. The Guarantor is only required to pay any amounts which cannot be covered through the estate.

The Guarantor of course has the ability to challenge a claim raised by Obligee if there are legitimate concerns.

As to potential liabilities of the Guarantor, beyond the obvious chance that the Guarantor may be made to pay in the event the Obligor doesn’t, the Guarantor may be required to pay any expenses in relation to early contract termination, or legal fees and expenses relating to any judicial proceedings required to adjudicate claims made by various parties. The guarantee contract may also specify that the Guarantor is required to pay for any damages or loss caused to the Obligee by the Obligor’s failure to meet its end of the agreement. The Guarantor will also be made to pay for any interest accrued do to the non-payment. Where Guarantors are more than one individual persons, they will each be jointly liable for the Guarantee regardless of any specific agreement between them.

There are many moving parts and considerations which we cannot address fully and effectively in this blog post. If you may require a corporate guarantee in Mongolia, you should seek assistance from a Mongolian lawyer.

Everything you Need to Know about Corporate Guarantees in Mongolia

One of the firm’s Mongolian lawyers was asked recently to assist a longstanding client to confirm the legality of a corporate guarantee in connection with one of this client’s commodities trading transactions. The corporate guarantee is common in varies business transactions in Mongolia.

This particular client had some questions about the corporate guarantee, based on the client’s experience using similar instruments in the UK. A corporate guarantee in Mongolia has some special features, so it is worth taking a look at what makes a Mongolian corporate guarantee unique, and what the main laws are governing this vital business tool.

Under a typical guarantee contract the Guarantor undertakes to guarantee to an Obligee to accept a specific obligation in case of the failure of the Obligor to fulfill that obligation. The Guarantor’s obligation is normally limited by the Obligor’s obligation to the Obligee under the guarantee contract, and the Guarantor will not be responsible for obligations of the Obligor relating to separate agreements concluded after the date the guarantee is issued.

The guarantee contract itself may specify future obligations that come due at a certain time in the future, or conditional obligations which only arise in the event of the occurrence of a certain defined situation.

The guarantee contract must be concluded in writing. This is a formal requirement which is stated in the law. It’s always better to specify a limit to the Guarantor’s potential liabilities in case of the failure of the Obligor to meet its own obligations.

If the guarantee contract is to be valid for a period over 5 years, or by its terms is valid for an indefinite period, Mongolian law requires the Guarantor to notify the Obligee and Obligor at least three months in advance of any termination of the guarantee contract by the Guarantor;

If the guarantee contract is terminated on any party’s initiative, the Guarantor is legally required to fulfill its obligations arising before the termination of the contract.

Our next post will review some specific obligations of the parties to the guarantee contract under Mongolian law.

Mongolia Continues Cooperation with China on Mutual Free Trade Zone

Chinese news media is reporting that China and Mongolia are beginning a new process of conducting a feasibility study regarding development of a new Free Trade Zone (FTZ).

This comes in the contest of the second China-Mongolia Expo, held in Hohhot, the capital of China’s Inner Mongolia region. The conference will occur in late September, and will serve as a forum to discuss issues of mutual cooperation and development between China and Mongolia.

Mongolia’s trade with China in the first six months of 2017 has been USD $3.1 billion. This is a 44.2% increase year-on-year. China mainly exports gas, diesel, food, machinery and equipment to Mongolia, and imports natural resources, fur and raw materials.

Talk of the new FTZ comes after the China-Mongolia Cross-border Economic Cooperation Zone (CECZ) was announced in 2015. The CECZ is a 18 square kilometer  territory evenly divided along the China-Mongolia border. The CECZ is intended to facilitate import/export processing, logistics, warehousing, and e-commerce.

The increase in economic cooperation between China and Mongolia is a core part of the wider China-Mongolia-Russia economic corridor, which seeks to facilitate integration of Mongolia with the economies and infrastructure of China’s northern territories and Russia’s far east.

Importing Products into Mongolia without a Buyer? Put it in a Bonded Warehouse.

Foreign investors who import products into Mongolia may be required or need to place their products into a custom bonded warehouse. In this case, below are main regulations of the bonded warehouse and things to know.

The purpose of the placing products in the custom bonded warehouse is providing an opportunity to find a market for imported products, as well as to time for the importers to pay customs duties and other taxes.

The kinds of goods which should be stored in the bonded warehouse are firstly, Mongolian goods, secondly, foreign goods coming from abroad and thirdly, goods which are placed in the bonded warehouse temporarily in connection with other non-import or export procedures.

Importantly, Foreign goods placed in bonded warehouse are not subject to non-tariff restrictions which means goods which are not generally prohibited to cross the national border of Mongolia are not required to obtain any further permissions from the relevant authorities when goods are entering into the border of Mongolia. When products are kept in the bonded warehouse, any permission or licenses normally required for possession of such products are not required to be obtained from the relevant government organization. This is because the customs bonded warehouse is considered as being outside of the customs territory of Mongolia. Keep in mind that the relevant license or permission is required upon release of the products from the bonded warehouse.

The product is to be stored in the bonded warehouse under the name of the importer. When imported products are exported directly from the custom bonded warehouse out of Mongolia, payment of an export tax is not required. There are not any export controls/restrictions and/or any licences/permits, to be obtained in order to export the product from the bonded warehouse.

In contrast to imported goods, Mongolian goods placed in the bonded warehouse will be subject to non-tariff restric­tions, which mean the exporter is required to obtain permission from relevant authority and limits may be imposed on the quantity of the goods. Of course, goods which are prohibited to be carried through the national border will not be allowed.

There are two types of bonded warehouse in Mongolia, open and closed. Open bonded warehouse is for public use and all goods allowed to enter or leave Mongolia may be stored or placed in the open bonded warehouse.

A closed bonded warehouse is not for public use and is designated for use solely by one or more legal entities or organization. Goods which require special storage condi­tions, facilities and equipment or which may have af­fect on other goods are typically placed in a closed bonded warehouse.

The timeline for storage of goods in a bonded warehouse is up to two years. The Customs Office will extend the timeframe by up to 1 year with no further renewal possible.

Mongolia Company Liquidation: What are Requirements for Employee Termination?

There are many reasons a company or organization may decide to liquidate. Some liquidations are compulsory, in which case the process occurs as the result of a court order. Other liquidations are voluntary, in which case the people running the organization decide to cease operations. Either way there are formal steps in which you should closely follow. One of one of the key aspects of any company liquidation is termination of employment. Here is a quick guide to termination of employment in process of company liquidation in Mongolia.

When terminating employees’ contracts, the employer must perform certain steps:

  • formalize the termination of employment;
  • complete all necessary payments to employees;
  • complete the handover of work and duties by employees, if necessary provide employees with letter of reference;
  • make corresponding entries to health and social insurance books, handover books to employees.

When liquidation process is formally initiated this establishes clear legal ground by which a company or organization may lawfully lay off employees. In compliance with Labor law of Mongolia, firstly, the employer must give notice of termination of all employees due to liquidation of the company to the employees’ representatives at least 45 days prior to the employment termination date. Once employees have been notified, the employer is required to issue a formal decision of employment termination and provide it to each terminated employee. This is the formalization of termination of employment. In such decision employer must specify the grounds for termination of employment, dismissal date, time period for employees to handover work and duties and complete all outstanding payments (salary, holiday payment, health and social security payments, etc.), amount of severance pay. In the case where employees’ contracts are terminated upon liquidation of a company or organization, employer needs to pay severance pay in an amount equal to at least the employee’s average salary for one month. The amount of severance pay may be negotiated between employer and employees’ representatives prior to issuing a decision, and typically this negotiation is required in any Mongolian company liquidation.

However, just because liquidation is underway, this doesn’t suggest that all employee contracts should be terminated immediately. In fact, it is often the case and preferred that some employees are kept on to help and support the liquidation process. For example, accountants may contribute by managing the liquidation balance sheet, to ensure the payment to all creditors, assist with final tax inspections, and other proceedings. Therefore it would make sense to keep such employees to support the liquidation process instead of terminating them immediately.

Mongolia Presidential Election Maintains Divide Between Presidency and Parliament

The people of Mongolia have just completed the election of the President of Mongolia. Battulga Khaltmaa, of the Democratic Party, is the victor. Mr. Khaltmaa follows Ts. Elbegdorj, also of the Democratic Party in serving as President. This will continue the previous dynamic of a Democratic Party President serving concurrently with a parliament dominated by the Mongolian People’s Party (MPP).

Mr. Khaltmaa achieved his win with 50.6% of votes cast, with a voter turn-out estimated at 60%. The MPP candidate received 41.2% of the vote, while 8.2% of ballots were returned in protest with no selection, a practice expressly allowed by the Election Law of 2015.

The MPP continues to hold a supermajority in parliament. Therefore, they will retain the capability to override any potential veto by Mr. Khaltmaa of proposed legislation. Still, his presence at the top is expected to force some concessions on the part of the parliament. Mr. Khaltmaa will be primarily responsible for foreign policy, and negotiations of treaties with foreign governments.

During the campaign, Mr. Khaltmaa advocated for state involvement in the economy, and management of natural resources. He has framed his pending presidency as a necessary balance against the MPP dominated parliament. It is expected that a period of adjustment will follow the election in which the parliament and Mr. Khaltmaa learn to work together and set boundaries.

Mr. Khaltmaa is called a Nationalist by Bloomberg. His campaign has promised to increase public access to wealth from Mongolia’s large resource mining projects. He has also promised to reduce trade imbalances Mongolia has with Russia China, a task which may be easier said than done. Even so, the rhetoric has not been overly hostile to foreign investment and the election is not expected to derail Mongolia’s recent efforts to revitalize its mining boom, or efforts to diversify its economy in the agricultural sector.

Mongolia’s Economic Diversification

Strategically located between Russia and China, Mongolia provides rare opportunities for savvy business leaders and investors to start new businesses and expand existing ones. In recent years, Mongolia has suffered economic hardship, as can be seen from the stark drop in GDP growth over the past few years.

As a consequence, the country has embraced economic evolution. Political and business leaders have been forced to seek ways to fuel the economy, not only from mining which was the backbone of Mongolia’s economy for many years, but also from other sectors such as agriculture, renewable energy and tourism. At the same time, a global wave of technology and entrepreneurship have impacted the way Mongolians think and do business, spurring bold initiatives and a reaching out to the international community.

According to the World Bank, while livestock provides subsistence, income, and wealth for nearly half of Mongolia’s population, only 7 % of exports consist of raw livestock materials and primary processed products. This is in stark contrast with statistics for the mining sector, which only employs 5% of the workforce but has produced nearly 90% of Mongolia’s exports since 2000. This imbalance has spurred the Mongolian government to initiate policies and programs that support export-oriented enterprises outside the mining sector.

However, small and medium sized enterprises, which make up more than 80 percent of registered businesses in Mongolia, lack the knowledge, skills, capital and networks to effectively develop and distribute products that can compete in international markets. Therefore, foreign talent, expertise, capital and connections and investment, are well sought after in the country.

In order to decrease the economic vulnerability and meet the needs of the majority of Mongolian society who are dependent on non-mining, agrarian sectors, Mongolian government has been obliged to diversify Mongolia’s economy. In doing so, in addition to export-oriented support policies and programs, Mongolian government has introduced various programs and policies supporting import substitution.

In addition to macro-economic motivations, a strong societal need for food security has led to the opening of a large variety of food factories. Many of them have been formed in partnership with foreign companies and experts who have the sophisticated technical skills to complement their Mongolian partners’ local knowledge.

In this country of vast territory, patriotic people and thirst for advanced technologies and international connections, savvy investors and business people will discover many opportunities.

Bank of Korea Assisting with Modernization of Mongolia’s Foreign Exchange Policy

The Bank of Mongolia, signed a cooperation agreement on June 21, 2017 with the Bank of Korea. The agreement solidifies plans by both organizations to cooperation regarding development of a comprehensive strategy for development of the foreign exchange market in Mongolia.

The Bank of Korea has been conducting a study on Mongolia’s foreign exchange market. The results of the study are expected to have an important impact on development of foreign exchange regulations and growth of the foreign exchange market in Mongolia.

Major complaints about the current state of the foreign exchange market in Mongolia include the lack of transparency in the process and inefficient operations. The study will draw on the Bank of Korea’s past experience in managing foreign exchange issues in Korea to set out a road map for Mongolia.

The plan is expected to help stabilize the exchange rate of the Mongolian Tugrug, which will facilitate a better environment for foreign investment and domestic economic growth.

Renewable Energy Program Means New Opportunity for Mongolian Economy

According to The World Bank, a new renewable energy project is to be launched in Mongolia, utilizing over $50 million in loans and grants from international organizations. The project is a part of the World Bank’s efforts to assist Mongolia’s long term path of sustainable development.

Playing off the government of Mongolia’s plans to produce 30% of the country’s energy via renewable sources by the year 2030, the new project will focus on providing financing for renewable energy investments in Mongolia.

Mongolia is a vast, open country with abundant solar energy and wind energy potential, waiting to be taken advantage of. One key aspect of the program is the construction of the first large scale solar power plant in Mongolia, designed to supply electricity throughout Mongolia’s western regions.

Another important aspect of the program will be the revamping and renewal of Mongolia’s electricity distribution grid, which currently operates inefficiently resulting gin losses of up to 25% of energy transferred on the network.

Sustainable development and efficient electricity distribution are key to promoting long term economic growth in Mongolia. The new funding will go toward providing new opportunities for businesses and families in Ulaanbaatar, as well as throughout the rural areas of Mongolia. The project will also provide funded needed to attract foreign companies with renewable energy technologies to Mongolia.

Mongolia’s Role in the New Silk Road

When China held its Belt and Road Forum for International Cooperation in Beijing May 14 to 15th, China’s President Xi Jinping welcomed Mongolia’s efforts to help link the European and Asian economies.

China welcomes cooperation with Mongolia in areas of trade and investment, agriculture, industrial growth, and energy development. President Xi suggested that China Belt and Road Initiative complements Mongolia’s own Prairie Road development initiative. Cooperation is also important to promote a China, Mongolia, Russia economic corridor.

President Xi advocated for a study of establishing a Free Trade Zone on the Border wth Mongolia, and increasing economic cooperation between the countries, including cooperation on major mineral industry programs and infrastructure.

Prime Minister Erdenebat of Mongolia indicated cooperation with China is a Priority for Mongolia, and said China’s Belt and Road initiative is important for promoting development in Mongolia. According to Erdenebat, Mongolia may play an important role as a link between Europe and East Asia.

Mongolia is well placed between major powers Russia and China to serve as a conduit for economic and cultural exchange. Mongolia suffers from a lack of population compared to its large southern neighbor, however, Mongolia’s rich mineral resources mean Mongolia will be able to generate foreign interest and income for years to come. With budgetary reform in Mongolia well underway, further integration with China and Russia is one more positive development for the future of the Mongolian economy.