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The Rule of Law

The Rule of Law

T HE National Assembly of the Kingdom of Cambodia is scheduled to debate two

important commercial laws in its upcoming session. At the top of its list is the

draft Company law, followed by the Commercial Register law. The approval of

these two laws would be a giant leap toward the establishment of the Rule of Law

in Cambodia in the commercial arena.

Both laws are vital to the operation

of business entities in any free market system, including Cambodia's fledgling

market economy.

The new daft Company Law is an essential component in the

legal infrastructure necessary for the operation of a market economy in

Cambodia. It would establish a comprehensive system for the formation, operation

and liquidation of a company and other business entities in Cambodia. It would

authorize and regulate Limited Liability Companies, Corporations (Societes

Anonymes), partnerships, sole proprietorships, state companies and

associations.

Actually, the draft company law is not new at all, but

rather an adaptation of the pre-1975 Company Law to modern business operations.

Historically, Cambodia's commercial and company laws have been modeled after the

French system, and the draft company law does not deviate from this

approach.

The draft law would fill a large hole in Cambodia's current

legal infrastructure. At present business entities are regulated by a number of

different laws, including the 1989 and 1994m investment laws, and the 1989

investment sub-decree.

But none of these laws clearly recognize and

authorize the forms of company organization common in other market economies.

The investment law and sub decree of 1989, for example, provide for the

establishment of joint venture or foreign-owned "enterprises" (as opposed to

companies) on which "members" (i.e.shareholders) make capital contributions. The

rights and obligations of persons contributing capital, directors and other

interested parties is not clearly spelled out.

An essential issue to the

operation of companies in any market oriented legal system is the scope of

liability of company owners, directors, and managers for claims against the

company. One of the main reasons for which a group of investors will form a

company is to protect them and other interested parties from having to pay for

claims against the company.

In light of this desire for protection from

liability, nearly all companies in Cambodia are established as "limited

liability" companies. However, the legal rights and obligations usually

associated with this phrase are not clarified, protected or regulated in any

Cambodian law. In fact the form "Limited Liability Company" is not authorized by

any law or regulation: which is why the new company law is so needed.

The present situation, however, is not quite as vague and ambiguous as

it may seem. In practice, while these and other aspects of company operation are

not regulated by Cambodian law, Cambodia currently adheres to generally accepted

principals of company formation and operation - with special emphasis on

recognition of the pre-1975 company law.

A second vital commercial law

on the agenda of the National Assembly is the draft Commercial Register

Law.

The importance of a Commercial Register to the establishment of a

free market economy and the Rule of Law in Cambodia may not be readily apparent

to many. Even so, implementation of a Commercial Register in Cambodia would do

more to establish the Rule of Law in the commercial arena here than perhaps any

other commercial law.

Why is this law so important? Primarily because it

would require the transparent, consistent, and comprehensive registration of all

business entities in Cambodia at one central location, and would permit public

access to this information. Making such information available to the public

would allow business persons to verify the status of the company, who are the

shareholders, authorized directors, the amount of the registered capital, what

debts the company owes, and what liens and security interests are on assents

owned by the company. This information would be a great benefit to banks and

other financial institutions, who cannot lend money without being able to

investigate such information.

While some companies may not like having to

reveal certain, company "internal" details most will welcome these regulations

as an important and refreshing move towards the Rule of Law.

Other

important commercial laws that are currently working their way up through the

law drafting and review committees in other departments of the Kingdom of

Cambodia government would establish a commercial tribunal, and a contract

law.

- David Doran is the resident director of the Phnom Penh office

of Dirksen Flipse Doran and Le. He has been writing about Cambodian legal issues

since 1992.

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