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After MFone, insolvency perils remain numerous in Kingdom

MFone workers protest outside the Ministry of Social Affairs in January last year.
MFone workers protest outside the Ministry of Social Affairs in January last year. Heng Chivoan

After MFone, insolvency perils remain numerous in Kingdom

Uncertainty over the law, inexperienced judges and a total lack of precedent have made bankruptcy in Cambodia a decidedly worrisome proposition

Two years ago yesterday, on January 9, 2013, telecommunications operator MFone filed for insolvency in the Phnom Penh courts.

The failure of the company, which had run up too much debt and could no longer compete in the crowded telco sector, left more than 1,000 workers jobless - many of whom hit the streets in protest.

Creditors as large as Chinese telco provider Huawei Technologies, owed more than $65 million, quickly emerged, while small claimants like mobile credit vendors owed as little as $20 also demanded their money back.

After years of legal wrangling, Cambodia’s first bankruptcy case is still being unravelled. One complexity is the sell-off of telecommunications assets – such as the towers scattered all over the country – whose value was severely diminished from the moment they were no longer transmitting a signal. But the other, more pertinent issue brought to light by the case, is the holes in Cambodia’s insolvency law itself and the lack of judicial experience in its application.

“There is a problem regarding the procedures: the law is not really clear,” said Ouk Ry, a senior partner at Cambodian law firm Bou Nou Ouk and Partners and court-appointed MFone liquidator.

“The law is written before it is applied,” he said.

This is a common theme in many of Cambodia’s commercial laws, which according to Ry, remain largely untested. And even when those laws are cited in court cases, the findings are not made public, meaning no precedent is established for judges, lawyers and – importantly for Cambodia’s economic prospects – businesses.

MFone, the company involved in Cambodia’s first bankruptcy case, had racked up large debts.
MFone, the company involved in Cambodia’s first bankruptcy case, had racked up large debts. Phnom Penh Post

Everyone is feeling their way through the dark rather than learning from established cases.

“When the AEC comes in, there’s going to be foreign lawyers and foreign businesses. They want to see transparency, certainty and predictability,” Ry said.

“Without publication of judicial decisions, nothing is predictable and certain – it is all discretion,” he said

“We can talk all about the law, but without that, it is useless.”

UK legal expert professor Michael Schillig from King’s College in London came to Cambodia in February last year to provide training to Cambodia’s future judges.

Shillig said Cambodian judges have little understanding of the insolvency legislation introduced in 2007, and strengthening of the bankruptcy process will only happen over time with experience gained in such cases.

“It reads like a bad translation from German into English and then into Khmer,” he said referring to Cambodia’s insolvency law.

“There are many omissions and gaps that will need to be filled by case law, for which the experience in other countries may serve as a useful guide.”

The strength of insolvency laws are an important part of a foreign company’s decision-making process when eying a country in which to invest according to Rutherford Hubbard, a senior associate with VDB Loi, a Cambodia-based legal and tax consultancy that works with foreign investors.

“In higher risk jurisdictions like Cambodia, foreign investors want to be sure that bankruptcy procedures are transparent and reliable when it comes to trying to recoup some of their outstanding debt,” he said.

“If foreign investors know that they can rely on insolvency laws in a certain country, this makes that country a more attractive target for investment,” he added. “Unfortunately, the opposite is also true.”

A lawyer representing one of the creditors on the MFone case who would only speak on the condition of anonymity, recalled the difficulties of inter-preting the insolvency law throughout the hearing.

“If there’s any inconsistency or any differences then we have to seek clarification or explanation from the authorities, and it takes time,” he said.

“But I can understand this, as it is the first case and no one has any precedent to refer to, and no one has any experience, so they have to refer to the law and seek explanation from the judge and the Ministry of Justice – I can say that it is really challenging,”

For MFone administrator Ry, after two years he too describes the landmark case as “challenging”.

Ry points to the all-to-common occurrence in the garment industry of factories shuttering and simply leaving workers stranded as an example of the need for greater confidence in Cambodian insolvency laws. Confidence in Cambodia’s bankruptcy laws will give businesses more options, but that will only come through education and understanding the outcomes of other cases Ry said.

“The system or the judiciary needs to be open like that, so that they are subject to certainty and predictability. That would be my vision, to see Cambodia do that,” he said.

“If you have a strong legal system, then everything else will move on – it will develop,” he said.

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