2011 09 November

A Look at Cambodia’s Legal Framework for Company Director Liability

#Cambodia #Corporate and Commercial #Legal


Cambodia’s legal framework, in the area of potential liability for company directors, is largely unknown, even to those who hold such positions.  Directors, as well as officers and managers, are often surprised to learn the extent to which they could be held personally liable for engaging in certain acts or failing to comply with various corporate governance and corporate secretarial requirements.

Under Cambodia’s legal framework governing the conduct of company directors, failure to carry out certain obligations can result in penalties ranging from small monetary fines to lengthy terms of imprisonment.  Company directors should be aware of their legal obligations and the potential consequences of failing to meet them.

The following is a brief discussion of certain company director responsibilities, liabilities, and potential penalties for failing to comply, under the current regulatory framework of Cambodia.

The Law on Commercial Enterprises (“LCE”) imposes several general duties on directors, along with a number of specific obligations and restrictions.  Article 289 of the LCE provides, generally, that directors and officers shall act in good faith and in the best interests of the company, and that they must exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.  Likewise, Article 133 permits a company to indemnify its directors, officers, and employees against any legal proceeding arising from the performance of their duties, so long as they acted reasonably and in good faith.  Such indemnity can extend to situations where directors, officers, and employees relied in good faith on the statements and records of others within the company.

In addition to the LCE’s general, and somewhat vague, duties of good faith and reasonableness, there are a few very specific restrictions on company directors.  First, Article 140 imposes personal liability on directors who authorize the issuance of a share of company stock where the consideration received for such share is less than the fair equivalent of the money that the company would have received if the share had been issued for money on the date of the resolution authorizing the share issuance.  Further, Article 141 imposes joint and several liability on directors, who vote for or consent to a resolution authorizing a purchase, redemption or other acquisition of shares, a reduction of stated capital, or a payment of a dividend contrary to the LCE’s requirements, to restore (financially) to the company any amounts so distributed or paid and not otherwise recovered by the company. Critically, Article 42 requires directors to record their dissent in the minutes of the board meeting or in the records of the company if they do not approve of any board resolution, or be deemed to have consented to such resolution.

The personal liability imposed on directors by Articles 140 and 141 of the LCE should be carefully considered in conjunction with Article 146’s grant of authority for directors to determine the price of shares and to accept in-kind contributions or past services as consideration for shares.  Importantly, Article 146 states, among other things, that: “A share shall not be issued until the payment for the share is fully paid.”  This means that where shares are issued for past services or for in-kind contributions, such services or contributions must have already been provided as of the date of the resolution authorizing share issuance, and the value of such consideration must be at least equivalent to the money the company could have received for such shares.  All too often, the temptation arises to authorize the issuance of shares in exchange for services yet to be rendered, such as for the future management of the company, or in exchange for in-kind contributions which cannot be measured in terms of actual monetary value.

An additional duty imposed on company directors by the LCE is the requirement under Article 134 that directors disclose, to the company, the nature and extent of any interest they have in any contract or proposed contract with the company, or any interest they have in regards to any other party to a contract or proposed contract with the company.

In addition to the LCE, other legal instruments impose noteworthy duties on company directors as well.  For example, Prakas No. 149 MOC/SM2006, on Completion of Annual Declaration of Commercial Enterprise, presents a potential trap for the unwary.  Article 1 of that Prakas specifically requires every company to file, annually, a declaration relating to the company’s status, with the Ministry of Commerce.  Failure to file such a declaration, or filing an inaccurate one, may result in monetary fines and imprisonment under provisions of the LCE and the Law Bearing upon Commercial Regulations and the Commercial Register (“LCRCR”).  Further, failure to file the declaration for three consecutive years results in the company being deemed illegal, and renders all registered documents for the company in the commercial register null and void.  Unfortunately, it is very common for incorporators to assume that filing documents with the Ministry of Commerce is a one-time event, to be done only during the incorporation process.  To the contrary, the declaration required under Prakas No. 149 must be filed every year.

Another key area of potential director liability arises in the context of the Law on Insolvency (“LOI”).  Article 9 of that law requires that any debtor, who fails to meet any valid and mature financial obligation(s) in excess of five million Riels (approximately USD 1,200), shall petition for the opening of insolvency proceedings against itself.  The petition must be filed within 30 days of the failure to pay a mature financial obligation.  Where the debtor is a company, it shall be the duty of each individual director of the company to ensure that such petition is filed.  Directors, who fail to discharge the duty to file for insolvency, may be held personally liable, jointly and severally, for damages that result from their failure to observe such duty.

In addition to potential civil damages under the LCE for issuing shares of stock below the appropriate price and under the LOI for failing to file a petition for insolvency, statutory penalties for a director’s failure to comply with his or her duties can be severe.  Article 290 of the LCE provides that a person who makes, or assists in making, a false or misleading report, notice or other document to the Ministry of Commerce or to another person or entity, may be fined up to ten million Riels (approximately USD 2,400) and imprisoned for up to six months.  Additionally, under Article 294 of the LCE, a company or person who, without reasonable cause, does not comply with the registration, filing and publication requirements of the LCE, may be prosecuted pursuant to Articles 43 and 44 of the LCRCR.  Those Articles call for a monetary fine of up to ten million Riels and imprisonment up to five years.

In addition to liabilities arising out of the corporate-specific matters above, Chapter 16 of the Labor Code imposes fines and possible imprisonment from six days to five years, depending on the nature of the violation, on employers who breach any provisions of the Labor Code.  The fact that imprisonment is an option indicates that the punishment is intended to extend to actual persons responsible for such violations, and not only to companies.

In some circumstances, company directors may be personally liable for criminal offenses committed by the company.  Under Articles 28 and 42 of the Criminal Code, company directors, and others, can be prosecuted for using their position to encourage (or require) others to engage in criminal acts, such as instructing an employee to falsify a corporate document. Likewise, criminal liabilities of directors for specific offenses committed by a company are provided for in certain sector-specific laws, such as banking, insurance, environment, intellectual property, and securities.

The above discussion is a non-exhaustive analysis of the legal duties and potential liabilities of company directors in Cambodia.  Those serving as company directors (and in some cases officers and managers) should be diligent in carrying out their duties and in ensuring that they are fully educated as to what the law requires of them.  Failure to do so can result in serious personal liability, which is likely to become even more severe as Cambodia continues to develop its body of law impacting all aspects of doing business in the country.

10 November 2011