Bankruptcy Law: Role, inefficiencies and social drama

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The bankruptcy law prevents social drama because an excessive debt trap would put the debtor and his relatives into extreme poverty. HBS Law Firm and Notaries

The Covid 19 pandemic has caused significant financial distress for small and large businesses around the world, including Cambodia.

Hundreds of factories, hotels, restaurants and other businesses have closed or been at the brink of closure. They are facing bankruptcy with little hope of survival.

In this time of economic turbulence, the bankruptcy law plays a very crucial function in resolving legal conflicts and reducing social and economic problems. The authorities need to pay urgent attention to the implementation of this law.

However, Cambodia’s bankruptcy law which was promulgated in 2007 is little known to the public and business community as it has rarely been used.

Key objectives and social roles of bankruptcy law

The bankruptcy law has two main objectives – to provide collective, orderly and fair satisfaction of creditors’ claims out of a debtor’s estate, and to rehabilitate the business of the debtor.

Its first objective – the collective, orderly and fair satisfaction of claims from the creditor – is a “distributive” function.

The bankruptcy law provides for rules, conditions, procedures, and a process for distributing the properties of the debtor to satisfy the creditors’ claims.

The law ensures fairness and lawfulness in distributing the debtors’ assets to prevent and terminate conflicts between creditors and creditors, or creditors against the debtor. It is the economic role of the law to ensure fair play in the market system.

In its second objective to rehabilitate the debtor’s business, the law offers a chance to the debtor or administrator to propose a plan to either reorganise the business or compromise with creditors.

In this plan, the debtor or administrator may propose to creditors to write off certain debts and/or defer the repayment schedules.

The compromise plan which is approved by the creditor and the court would allow the business to continue operating concurrently with debt repayments so that the business may survive.

The bankruptcy law’s fundamental goal is to give the debtor a fresh start from burdensome financial debts.

It’s like “giving to the honest but unfortunate debtor a new opportunity in life and a clear field for future efforts, unhampered by the pressure and discouragement of pre-existing debts”.

To put it simply, the bankruptcy law prevents social drama because an excessive debt trap would put the debtor and his relatives into extreme poverty. It also ensures that creditors’ interests are fairly satisfied.

A lot of Cambodians believe in karma. They would try their best to honour and repay their debts no matter what happens to them.

They sell lands, houses and whatever properties they have. Parents are keen to pay for their children’s debt or vice versa, until they are left in extreme poverty.

Struggling to overcome debt causes emotional stress and consequently harms the physical health of debtors.

A depressed debtor may choose to commit suicide to release him or her from existing debts, and this needs to be avoided, which is another reason for leveraging on the bankruptcy law.

Debtors who encounter misfortune may end up trapped in heavy borrowings with exorbitant interest rates and penalties from both formal and informal lenders.

The failure of their businesses and inability to repay the debts may be caused by an unpredictable economic downturn. In this situation, the bankruptcy law could be used as a social legislation to help such unfortunate people, whether they are businessmen or individuals.

Applying for bankruptcy proceedings

The bankruptcy law applies to both individual merchants and business organisations, including partnership and limited companies.

An exception is made for those business entities covered by the law on banking and financial institutions, the law on insurance, and law on non-government securities.

A petition to begin a bankruptcy proceeding can be filed by a debtor, one or more creditors, or a public prosecutor. A debtor is a natural person or legal entity that is insolvent.

A creditor means any natural person or legal entity that owns a claim against the debtor or estates of the debtor. If the debtor is a legal entity, the director of the company is entitled to file the petition to start bankruptcy proceedings.

Requirements to apply for bankruptcy

The failure of a debtor to meet one or more valid and mature obligations to pay an aggregate amount in excess of 5,000,000 riel (US$1,250) is a ground to start bankruptcy proceedings with respect to the debtor. The Minister of Justice may change the minimum amount of such obligation.

The petition to begin bankruptcy proceedings shall state the name and address of the debtor and petitioner, grounds for the petition, list of creditors (if the petition is filed by the debtor) and description of the circumstances showing the existence of such ground(s).

It must also have as attachments, any evidence or documents to substantiate the petition.

The petition shall be submitted to a competent court located at the domicile of the debtor or the registered office of the legal entity or its place of business or at the location of their assets.

After a hearing, if the court is satisfied with the grounds of the petition, it will issue a written ruling to begin bankruptcy proceedings against the debtor.

The examination of the petition, payment of court fees and security requirement shall be determined by the court according to the provision of the code of civil procedure.

If the court decides to open the bankruptcy proceedings and to appoint an administrator, his fees and expenses shall be paid from the estates of the debtor as part of admissible claims, taking into account the amount of time the administrator spent to perform his duties, the value of the estate of the debtor, and the scope and complexity of the bankruptcy proceeding.

Application to begin bankruptcy proceedings

If the petition to begin bankruptcy proceedings is filed by the debtor, the court shall hear the petition as soon as possible and in any event, no later than 15 days from the date of filing the case.

If the petition is filed by a creditor or director of a company or public prosecutor, the court shall hear the petition no later than 30 days after it is filed.

The announcement of the ruling shall be made no later than 14 days after it is heard. This ruling can be appealed by a debtor or creditor within seven days after the issuance of the ruling.

In the ruling to begin bankruptcy proceedings, the court shall also announce the date to convene the creditors’ meeting, which shall be between at least 30 days and no more than 60 days of beginning bankruptcy proceedings.

The submission of claims by creditors shall also be done seven days before the date of the creditors’ meeting.

The time required for completing a bankruptcy proceeding depends on whether there is a compromise or rehabilitation plan, or complexity of proceedings for disposal of the estate and the satisfaction of admissible claims.

Claims in a bankruptcy proceedings

A claim is defined as any right to receive payment from the debtor or from assets of the debtor which arose before the opening of insolvency proceedings, regardless of whether such claims are conditional, unliquidated, or contingent.

The claims could be classified into admissible, inadmissible and administrative claims. The administrative claims include the remuneration, fees and expenses of the administrator.

Inadmissible claims include interest accruing on claims from the date of beginning bankruptcy proceedings, costs incurred by creditors for participating in the bankruptcy proceedings, fines, administrative penalties and other incidental legal consequences which obliges the debtor to pay, etc.

Effects of the bankruptcy proceedings

After the beginning of bankruptcy proceedings until its termination by the court, no action, proceeding, execution of process or any other action of any kind by or on behalf of a creditor can be commenced or continued against the debtor or the debtor’s assets.

This means all legal actions against the debtor shall be stayed.

The management and power over all assets of the debtor shall be vested in the administrator appointed by the court.

The administrator shall obtain consent from the creditors to sell any real property, transfer any part of assets of a related party, or carry out any transaction that would irreversibly preclude the proposal, approval or implementation of a plan of compromise.

The administrator may elect to continue the performance of a contract between the debtor and a counterparty which has not been fully performed by the debtor and the counterparty before the beginning of bankruptcy proceedings.

The proceeds of the liquidation of the debtor’s assets will be used to satisfy admissible and administrative claims in order of priority.

The payment of employee wages, administrator’s remuneration, administrative fees and court fees are a top priority.

After this, the proceeds are used to settle secured claims, government taxes which have not been filed, and all other admissible unsecured claims. Any proceeds left undistributed after the satisfaction of all claims are returned to the debtor.

Punishment for failing to file for bankruptcy

A debtor that has ceased to meet its mature and valid obligations to pay debts of 5,000,000 riel or more shall file a petition to begin bankruptcy proceedings.

In case of a partnership or limited company, each individual director, partner, or manager as the case may be, shall ensure that the petition is filed in a timely fashion.

Any person who intentionally or negligently fails to file a petition shall be personally liable to the debtor’s creditor or creditors for damages that result directly from such failure.

If such duty falls on more than one person, all such persons shall be jointly and severally liable for such damages.

Despite such functions of the bankruptcy law, it has been little used by merchants, businesses, lawyers and other stakeholders in Cambodia.

So far, there have been less than a dozen bankruptcy cases filed in competent courts. The experience has shown limited success due to the inefficiency of the bankruptcy process, insufficient trust in the court process, and lack of knowledge of the bankruptcy law.

The bankruptcy law empowers the Minister of Justice to issue a number of regulations to implement it, including determining the qualifications, roles and powers of the administrator, setting the minimum obligations as grounds to begin insolvency proceedings, and fixing the rate of remuneration and expenses of the administrator etc.

Nevertheless, none of these regulations has been issued since 2007.

So far, there are a dozen administrators accredited by the Minister of Justice to undertake bankruptcy work.

To effectively implement the bankruptcy law, the ministries of Justice and Commerce should work closely to issue relevant regulations to ensure an efficient and simplified bankruptcy process and to raise more awareness among the public and business community.

Moreover, they should also speed up the operation of the Commercial Court at each court of first instance by putting in place expedited proceedings to resolve commercial conflict.

In my experience, it is far more complicated and time-consuming to liquidate and close businesses than to register one in Cambodia.

Some have chosen to remain silent and leave the business to die, rather than go through bankruptcy proceedings due to the complexity, uncertainty and inefficiency of the bankruptcy process.

Consequently, the bankruptcy law has not been sufficiently used to serve its legal, social and economic objectives. This urgently needs to change.

The author is the managing partner of HBS Law Firm and Notaries. He welcomes your comments and can be reached at: [email protected] The above views are that of the author and intended purely as general information only. The Post shall not be held responsible for any unintended damages suffered because of the views expressed in this article.