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Secured Transactions

Secured Transactions

S ECURED transactions are business dealings which generally involve the granting of

credit from one party to another.

•Typically, one party (the "debtor") buys something from another (the "creditor"

or "secured party") but does not pay immediately. The creditor wants to

be able to rely on something other than the debtor's promise to ensure payment.

A security interest is that something. A security interest is a limited right in

specific personal property (the "collateral") of the debtor that allows

the creditor to take the property if the debtor fails to fulfill the credit obligation.

The most common secured transaction that people can identify is probably a mortgage

over real property. Because mortgages involve land, however, they are treated differently

from secured transactions involving personal property and have unique rules and procedures

in most jurisdictions.

Currently, personal property secured transactions in Cambodia are governed by the

provisions of the 1988 State of Cambodia contract law which devotes 8 articles to

the subject.

The scheme set up under the 1988 law requires that the contract establishing the

security interest be in writing and that the creditor take physical possession of

the collateral.

This latter provision severely limits the usefulness of secured transactions as a

way of financing ongoing businesses since it is often the use of the collateral by

the debtor that will enable them to generate the income needed to repay the debt

owed to the creditor.

The creditor must care for the collateral while it is in their possession and may

not use or profit from the collateral in any way. On full satisfaction of the debt,

the creditor must return the collateral to the debtor.

If the debtor defaults on their loan, the creditor must make application to the court

system for a judicial sale of the collateral. In no case can the creditor take claim

to take ownership of the collateral in satisfaction of the debt.

Law Change Pending

It is likely that the secured transaction system established by the 1988 contract

law will soon be replaced by that set out in the draft contract law which is now

being prepared by the Ministry of Commerce.

The draft law proposes significant changes in the existing system. The requirement

that creditors take physical possession of the collateral has been done away with.

Instead, creditors would file a financing statement with the Ministry of Commerce.

The financing statement would be in a form to be established by the Ministry and

would have to:

  1. Be in writing;
  2. Be signed by the debtor;
  3. Identify the total amount of the debt and the schedule of repayment;
  4. Identify the collateral;
  5. State whether or not the proceeds of sale of the goods are covered by the security

    interest;

  6. State the names and principal addresses of the debtor and creditor and the location

    where the collateral will be kept.

This financing statement will be the instrument which creates the security interest.

The debtor will be bound by the terms of the financing statement after it is signed

and delivered to the creditor.

In order for the security interest to be enforceable against third parties the financing

statement must either be registered with the Ministry of Commerce (or such other

office as might be established to deal with this subject), published in the official

gazette, or the third party must have actual knowledge of its existence.

As the 1988 contract law required that the collateral be in the possession of the

creditor, there was never any need to be concerned with the situation where more

than one creditor has a claim to the collateral. This may often be the case if the

debtors loans are less than the value of the asset being used as collateral.

By allowing the debtor to maintain possession of the collateral, the draft contract

law is forced to deal with issues of priority in creditors rights.

Generally a "first come, first served" attitude has been adopted. With

the exceptions of the overriding priorities taken by the Royal Government for amounts

owed by the debtor for unpaid taxes and by employees for unpaid wages, creditors

are granted priority in the order that their financing statements have been filed

with the Ministry of Commerce or published in the official gazette.

If a financing statement has not been filed or published, it will be subordinated

to any which have been, regardless of the order in which they were signed.

Debts are released under a financing statement system by an official release form

which the creditor must sign and deliver to the debtor upon full repayment of the

debt. The debtor will then publish or register the release in the same manner as

the original financing statement.

The kinds of assets which may serve as collateral under the draft law are more limited

than one would normally find.

Most Western jurisdictions allow three main kinds of personal property collateral:

tangible property, intangible property and proceeds. Tangible property would include

most kinds of consumer goods, equipment, farm products and inventory. Intangible

property would include assets created by operation of law such as copyrights, stocks

and bonds, accounts and other non-physical assets.

Proceeds includes all funds received from the sale of any goods which are deemed

part of the collateral.

The draft law specifically excludes intangible property from the assets which may

be used as collateral in Cambodia.

This will mean that investors will be unable to offer their shares in Cambodian ventures

as collateral to raise financing if enforcement is to take place in Cambodia.

The difficulties of obtaining corporate financing in Cambodia are largely a result

of lenders being unsatisfied with the kinds of security that they are currently able

to take in the Kingdom.

With real property ownership limited to Cambodian nationals, there remain many unresolved

issues which must be clarified in order for foreign lenders to feel comfortable taking

land titles as security.

If a registration system of personal property security is put into place and the

courts respect and enforce the security interests registered, Cambodian businesses

will have greater access to debt and more opportunities to expand.

- (Michael Popkin is a partner of Dirksen Flipse Doran & Le, an international

law firm with offices in Cambodia, Laos and Vietnam.)

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