2011 05 December

The Implementation of Cambodia’s New Civil Code

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The Civil Code of Cambodia (the “Civil Code”) was adopted by Royal Kram № NS/RKM/1207/030 dated 8 December 2007 as part of the first phase of the Plan of Action for Implementing the Legal and Judicial Reform Strategy which was implemented by the Royal Government of Cambodia on 29 April 2005. Defined as both a fundamental law (together with the Criminal and Civil Procedure Codes and the Criminal Code) as well as a strategic objective of the Council for the Legal and Judicial reform, the Civil Code did not take effect until the law on its implementation had also been promulgated. This – the Law on the Implementation of the New Civil Code (the “Implementation Law”) was promulgated by the King on 31 May 2011 which set the effective date for the implementation of the Civil Code at 21 December 2011. 


Introduction: Civil Code Pointer

1. New Civil Code: Juristic Persons

2. New features in Contracts and Torts under the Civil Code

3. Real Estate Transactions under the Civil Code

 


Introduction:

Cambodia’s New Civil Code


The Civil Code of Cambodia (the “Civil Code”) was adopted by Royal Kram № NS/RKM/1207/030 dated 8 December 2007 as part of the first phase of the Plan of Action for Implementing the Legal and Judicial Reform Strategy which was implemented by the Royal Government of Cambodia on 29 April 2005. Defined as both a fundamental law (together with the Criminal and Civil Procedure Codes and the Criminal Code) as well as a strategic objective of the Council for the Legal and Judicial reform, the Civil Code did not take effect until the law on its implementation had also been promulgated. This – the Law on the Implementation of the New Civil Code (the “Implementation Law”) was promulgated by the King on 31 May 2011 which set the effective date for the implementation of the Civil Code at 21 December 2011.

The stated purposes of the Implementation Law are to ensure continuity in legislation governing civil matters and to guarantee the proper enforcement of the provisions of the Civil Code and of any matter related to the implementation of the Civil Code. The Implementation Law reflects three salient  principles for the enforcement of the Civil Code: the principle of non-retroactivity, the continuity of the rule of law and legal consistency. According to these principles, although the Civil Code will not apply to any transaction (or contractual or similar arrangement) that completed prior to the effective date of the Civil Code, to the extent a transaction (or contractual or similar arrangement) was ongoing (and not completed) as at that date, it would be subject to the provisions of the Civil Code on and from that date (even though these obligations may have been entered into prior to that date).

Further to the implementation of the Civil Code, a number of provisions in existing Cambodian laws will be abrogated or amended. This special edition of our monthly pointer is intended to reflect a high-level summary on the areas that the provisions of the Civil Code will have a major impact[1].

[1] This Special Edition of DFDL Mekong Legal and tax Pointer has been prepared on the basis of an unofficial English translation of the Khmer version of the Civil Code.

 

1. New Civil Code: Juristic Persons


by Sophorne Kheang

The Law on Commercial Enterprises (the “LOCE”), dated 19 June 2005, provides for two forms of Companies (Juristic Persons): partnerships and companies. The implementation of the Civil Code on 20 December 2011 will introduce two new juristic persons, the incorporated association (“INCA”) and the incorporated foundation (“INCFO”). The Civil Code not only defines the forms of these two new juristic persons but also their functions, registration, establishment and dissolution.Juristic persons, as legal person entities, can enter into contracts, own land, sue and be sued. The Civil Code sets out the rights and functions of INCAs and INCFOs, which may be either for-profit or non-profit entities.

In the case of INCAs, the rights and obligations of the association are independent of its individual members. There are two categories of incorporated associations, those with limited liability and those with unlimited liability. A limited liability incorporated association (“LINCA”) limits individual members’ liability for debt(s) to third parties to the contribution of each member. In the case of an unlimited liability incorporated association (“UNLINCA”), members are exposed to unlimited liability for debt(s) to third parties regardless of each member’s contribution.

INCFOs are foundations formed for the public benefit where assets contributed, rights conferred and obligations which arise are independent of the contributors.

While the Civil Code provides for the recognition of a Foreign Juristic Persons (“FJP”) incorporated under foreign law and expressly limits such an entity to a State, administrative division of a State or a foreign trading company, the term is undefined. Nevertheless, these FJPs are entitled to the same private law rights as their Cambodian equivalents, provided domestic legislation or an applicable international treaty exists which allows for the recognition of such equivalent entities. Naturally this recognition does not apply to rights explicitly denied to foreigners or in cases where there is a specific provision to the contrary in a domestic law or applicable treaty.

Organization and Functioning of Juristic Persons

Registration

A juristic person comes into existence through registration at the registry having jurisdiction over its principal office, which has been defined in the Law on Enforcement of the Civil Code. The registration works of the legal entity shall be under the competence of the Ministry of Justice[1]. However, modalities and forms of a legal entity registration are to be defined by Prakas of the Minister of the Ministry of Justice.

A juristic person must submit specific information (“Particulars”) to the registry, including business objectives, name, principal and secondary offices, grounds for dissolution, names of directors and supervisors and specific directors representing the juristic person. Any changes to Particulars must be registered within two (2) weeks of the change(s) at the registry with jurisdiction over the organization.

Management

Juristic persons, excluding UNLINCAs, have directors who manage the affairs of the organization. Such directors are appointed via the articles of incorporation, or during the general meeting of members, and must act in good faith, within the defined objectives of the organization and may not represent the organization if a conflict of interest arises.

Juristic persons, excluding UNLINCAs, also have supervisors who oversee the organization. Supervisors may be appointed via the articles of incorporation, during the general meeting of members or through a directors’ meeting. Supervisors are responsible for: overseeing director and employee performance; the financial status of the organization; reporting any breach of the law or articles of incorporation to the members; and representing the juristic person in lawsuits against a director or by the director against the organization. Directors and employees of a juristic person may not be supervisors.

Dissolution and Liquidation

Juristic persons may be dissolved in the following circumstances: the occurrence of one of the grounds for dissolution set out in the articles of incorporation; the conclusion of the undertaking for which the juristic person was established; bankruptcy; or a judgment ordering dissolution. An Incorporated association may also be dissolved if the number of members is reduced to one.

In the case of liquidation, juristic persons only cease to exist when the liquidation process is completed. The treatment of any surplus assets after full payment of debts is governed by the articles of incorporation. Liquidators will be determined by either the articles of incorporation or by a decision of the directors and/or members and are responsible for winding down the business of the juristic person, paying any debts and delivering surplus assets. Liquidators must give official notice to the Ministry of Justice at least three (3) times to enable creditors to make claims against the juristic person. Liquidators must register the conclusion of the liquidation procedures at the registry with jurisdiction over the principal office.

Incorporated Associations

Limited Liability Incorporated Associations

A LINCA is formed by registering notarized articles of incorporation at the registry with jurisdiction over the principal office. Prospective members must jointly prepare and sign the articles of incorporation. A limited liability juristic person must have an asset base of at least Twenty Million Riel (KHR 20,000,000).

If no contributor has been confirmed for any portion of the asset base at the time of the formation, the directors and members will be considered joint contributors of the outstanding contribution(s) due and will be liable to pay in or contribute the remainder of the unpaid contribution(s).

Members must pay the association’s expenses and are entitled to vote at the general meetings of members. Members may resign or may be expelled by a majority vote.

The directors must hold at least one annual ordinary general meeting of members. The general meeting of members may pass resolutions in accordance with the articles of incorporation, oversee matters decided upon by directors and supervisors and amend the articles of incorporation.

The directors must present an annual financial statement at the general meeting of the members. Prior to their presentation, such financial statements may be audited by supervisors. Accounting documents and audit reports must be duly kept at the principal office for five (5) years.

Unlimited Liability Incorporated Associations

As with a LINCA, an UNLINCA is formed by registering notarized articles of incorporation with the registry with jurisdiction over the principal office. Persons wishing to become members must jointly prepare and sign the articles of incorporation.

If an UNLINCA is unable to pay its debts, its members are jointly and severally liable. Members joining an UNLINCA after its formation will be liable for debts incurred prior to joining and members who resign shall remain liable for debts arising prior to their resignation.

The business of an UNLINCA is executed by its members and, unless provided otherwise in the articles of incorporation, any member may carry out routine business. Decisions, likely those that do not contribute routine business, are to be made by a majority of members and since they represent the UNLINCA, they are subject to specific governing directors provisions. In addition, supervisors may be appointed to execute business of the UNLINCA.

Incorporated Foundations

An INCFO is established for the public benefit and is established by filing notarized articles of incorporation and obtaining permission from the relevant supervising authority, which is to be defined in specific implementing regulations.

The articles of incorporation must include: the objectives of the foundation, its name; location; total asset base (money and in-kind contributions); accounting particulars; directors; supervisors and other officers; method of giving public notice; and the date on which permission was obtained from supervising authorities for the foundation’s establishment.

An INCFO must maintain an asset base of at least two hundred million Riel (KHR 200,000,000). If a contribution of assets is made via an inter vivos disposition, the contributed asset(s) will vest at the time of the entity’s registration at the registry having jurisdiction over its principal office. However, if a contribution of assets is made via a testamentary disposition, the assets will vest at the time the will becomes effective, which is understood to occur upon the death of the testator.

INCFO directors must prepare annual financial statements and submit them to the supervisors for audit. The audit should be completed prior to submission of the documents to the supervising authority. INCFOs should maintain financial statements and audit reports for a period of five (5) years. Creditors of an INCFO are entitled to view its financial statements or receive certified copies of the statements.

Conclusion

Once the Law on Enforcement of Civil Code becomes fully effective by the end of 2011, the Civil Code will have a significant impact on the structuring of business operations in Cambodia. The introduction of LINCAs, UNLINCAs and INCFOs – three entirely new forms of juristic person, is particularly noteworthy.

Until the Code is fully implemented, the interrelationship between these new juristic persons with existing business forms will remain unclear. However, the Code does give comprehensive information as to their functions, rights, registration, establishment and dissolution. Ultimately, these additional structures will provide Cambodian enterprises with greater flexibility in selecting an appropriate form of entity.

[1] According to one official of the Ministry of Commerce, there was an official letter, which was issued in early 2011 by the Minister of the Ministry of Justice in the name of Ministry of Justice in response to the Ministry of Commerce, which mentioned that a non-profit juristic person shall be registered at the Ministry of Justice. For a profit juristic person, the details shall be incorporated under [another] law to be stipulated separately. Therefore, profit juristic persons registration is still governed by the Ministry of Commerce and by the current existing laws and regulations.

 

2. New features in Contracts and Torts under the Civil Code


by Potim Yun

Currently, contracts and other liabilities are governed by Decree Law № 38 (the “Contract Law”), dated 28 October 1988. The Contract Law provides general rules on the formation and execution of contracts, special contracts and other civil and non-contractual obligations. On 21 December 2011, the Contract Law will be replaced by the comprehensive provisions of the Civil Code, except for the provisions applicable to Carriage Contracts.

In this Pointer, we highlight the main key changes which will be implemented by the Civil Code in relation to contracts and obligations.

Validity of a Contract

The Civil Code introduces the concept of the formation of a contract based on an offer and acceptance. Generally, the formation of a contract is based on the principle of consent. Unlike the Contract Law, no writing is generally required, except for some specific contracts. Writing and/or authentication is one of the requirements for the validity of a contract if it is specifically required by this Civil Code or other specific laws, such as is the case with a loan with interest rate exceeding the legal interest rate or the sale of immovable property.

According to the Civil Code, a contract may be voided, among other reasons, if it is concluded, (i) as a result of mistakes relating to substantial terms of the contract; (ii) fraud; (iii) misrepresentation; (iv) abuse of circumstances; (iv) duress; (v) act of making excessive benefits; (vi) mental reservation; (vii) fictitious declaration of intention; (viii) initial impossibility; or if it is (ix) illicit or contrary to the public order and good morals or (x) not in conformity with the general interest or moral principles of society.

Breach of Contract

Once a contract is effective, the parties are obliged to adhere to its provisions. A breach of contract occurs when there is no performance, late performance or an inability to perform the obligations expressed in the contract. Where an obligor fails to perform an obligation, the obligee may demand specific performance, damages, or termination of the contract. In cases of a breach of contract, the aggrieved party is entitled to compensation covering not only the value of the contract, but also any expenses or charges suffered as a result of non-performance. The court may also decide upon any moral damages claimed by the aggrieved party. Additionally, the obligor and obligee may separately, and in advance, establish conditions for the payment of damages and an amount to be paid; however, a special agreement exempting the obligor from liability for non-performance that is either intentional or the result of gross negligence is void.

Statute of Limitations

Unlike the Contract Law, the Civil Code provides more kinds of statute of limitations on extinctive prescription, such as claims for compensation for damages, right for termination of a contract and right to the claim. This statute of limitations is fixed to five years. Additionally, the extinctive prescription period for a claim pertaining to the price of a product or service sold or provided by a manufacturer or merchant to a non-merchant is two years but the right of a non-merchant to make a claim against a merchant or manufacturer is five years. Apart from the above, the extinctive prescription for property rights, other than claims and ownership, is fixed for 10 years.

Assignment of Claims, Obligations and Contract

There is no specific provision under the Contract Law on the assignment, and therefore, under the current Contract Law. The assignment must be agreed by the assignor, assignee and the other contracting party. However, under the Civil Code, claims, obligations, or contracts may be assigned unless the nature of a claim or a contract is inconsistent with such an assignment, or otherwise restricted by an agreement.

The assignment of a contract or claims shall take effect only through agreement between the obligee seeking to assign the claims or contract and the assignee. However, in order to assert the assignment of a claim or a contract against the obligor, the assignor must give notice thereof to the obligor or the obligor has consented thereto to the assignor or the assignee and it shall have effect against third parties only when the notice or the obligor’s consent is notarized by a notary public.

However, the assignment of obligations alone is valid between the obligor and the assignee only and not binding against the obligee and third parties. In this case, the obligor and the assignee are jointly and severally liable for performance of obligations for the obligee.

Special Contracts

The Contract Law provides provisions on sales and purchase contracts, interest bearing loans, secured personal property, contractor contracts, carrier contracts, bailment contracts, loans for use, leases and personal guarantee contracts. Except for the carrier contract, the Civil Code provides further provisions on Gifts, Profit-Sharing Leases, Mandates, Partnerships, Life Annuities and Compromises. In addition to this, the Civil Code provides more complete and comprehensive provisions on a secured transaction, details of which are provided in another article of this Pointer.

Loan for Consumption with Interest

A loan for consumption exists when a person borrows money, food-related products, paddy or other fungible objects from another and returns objects of the same type, quality and quantity as those originally received from the lender at the expiry of the term. Interest may be charged on a loan for consumption only if it is made in writing. The interest rate may be determined by the parties to the contract or, if not specified in the agreement, by law. Where parties to a contract fail to specify a rate of interest to be charged, the Civil Code provides for an interest of 5% per annum. However, if the rate of interest agreed on by the parties exceeds 5%, it must still comply with a maximum rate which will be fixed by the Ministry of Justice (“MOJ”) between 10% and 30% per annum (the “Ceiling Rate”). In the event the interest rate charged exceeds the Ceiling Rate, the portion of interest paid in excess of the Ceiling Rate shall either be abrogated or applied to repayment of the loan principal.

Additionally, under the Civil Code, the interest on interest is expressly allowed. Where the payment of interest is in arrears for one year or more, if the obligor fails to pay such interest after receiving a demand of payment from the obligee, the obligee may include the amount of such interest in the principal.

Furthermore, a pre-agreed amount of compensation for damages or clause on damages penalty interest on late payment (the “Penalty Rate”) is expressly allowed by the Civil Code; however, the Penalty Rate must not exceed the ceiling Penalty Rate which will be fixed by the MOJ at a limit of 1.2 to 2 times of the Ceiling Rate.

Other Liabilities

Like the Contract Law, the civil liabilities on damages caused by a person’s acts, including involuntary acts such as carelessness or negligence is expressly stated. However, other civil liabilities stated in the Contract Law are limited to the act of property, act of animal, fault of private employees or government officials and fault of minors. In addition to the Contract Law, the Civil Code provides further provisions on the management of affairs without mandate, unjust enrichment, dangerous defect products, dangerous things and structure affixed to land.

Under the Contract Law, any person who has caused damage to others is not liable to bear the responsibility resulting from such damages if (i) the damage was caused by a force majeure; or (ii) the damage was caused entirely by the fault of the victim. However, under the Civil Code, the following may be grounds for excuse of liabilities:

(i) A tortfeasor shall be excused from responsibility for harm caused by the tortfeasor where the injured party consented to or assumed the risk of such harm;

(ii) A person who causes harm while engaged in justifiable self-defense or emergency escape shall not be held responsible for harm that results therefrom;

(iii) A person who commits an act that is deemed reasonable and acceptable under prevalent social standards shall not be held responsible for the harm caused thereby;

(iv) A tortfeasor shall be excused from responsibility for harm caused by the tortfeasor where the injured party consented to or assumed the risk of such harm; or

(v) A person who causes harm while engaged in justifiable self-defense or emergency escape shall not be held responsible for harm that results therefrom.

Like the Contract Law, under the Civil Code, where a thing is destroyed or damaged by a tortious act, the injured party may seek compensation for the price of the damaged or destroyed thing, the cost of repair, etc. However, in the event where the injured party dies as the result of a tortious act, such injured party’s successors shall acquire the right to demand damages for economic harm and emotional distress suffered prior to death. Additionally, where an injured party suffers bodily harm as the result of a tortious act, the injured party may demand damages for economic harm and emotional distress suffered thereby. Furthermore, where one’s honor or reputation is damaged by a tortious act, the injured party may seek damages for mental or emotional distress accompanying the drop in one’s social standing. The damages for emotional distress or mental damages, damage of honor or reputation are not expressly treated in the current Contract Law.

 

3. Real Estate Transactions under the Civil Code


by Seka Hep

The Real Estate sector is one that will experience a considerable number of changes due to the fact that some provisions of the Land Law 2001 (the “Land Law”) shall be abrogated and amended and Decree 38 on Contracts and Other Liabilities in 1988 (“Contract Law”) shall be completely abrogated by the Civil Code.

Sale Purchase Agreement

Other than the consent of the Seller and the Buyer regarding the terms and conditions of an agreement, in order to transfer ownership over immovable property, the Sale Purchase Agreement (“SPA”) shall be referred to as an Authentic Act and registered with the Cadastral Administration. An Authentic Act is a legal document that has been properly prepared by any accredited public official which enhances the status of its authenticity. In other words, this refers to legal documents executed in front of a notary public.

Lease Agreement

The Land Law, provided two categories of lease agreement: (i) leases of less than 15 years and (ii) leases of more than 15 years. Moreover, a lease may have a specified duration or be without duration.

The significant change between the Land Law and the Civil Code pertains to a lease of more than 15 years. Instead of referring to this type of lease as a “long term lease”, the Civil Code refers to it as a “permanent lease” (Art 245 of the Civil Code) for a term of not more than 50 years (Art 247 of the Civil Code). However, a permanent lease may be renewed, but every renewal may not be for more than 50 years. A Permanent Lease shall be made in writing, otherwise it shall be considered a “Lease without duration” (Art 245 of the Civil Code). Also, according to the Civil Code, the registration of a permanent lease with the Land Administration is not a condition of validity but of enforcement against a third party (Art 246 of the Civil Code). Formalities in respect of lease registrations, as contemplated under the Land Law and under Sub-Decree (“SD”) № 114 on the mortgage and transfer of the rights over a long-term lease and an economic land concession dated 27 August 2007, should remain applicable, pending further instruction from the Land Administration. The permanent leasehold rights may be assigned, sub-leased and may be subject to the succession.

Security over immovable properties

In order to provide security in favor of the creditor, instead of the three types of security provided by the Land Law (hypothec, gage and antichrèse), the Civil Code provides four types of security: rights of retention, preferential rights, pledges and hypothec. In all cases, it is clear that a creditor shall not become an owner of a secured property.

– Right of retention: the right of retention shall be created when the debt is due. A right of retention is extinguished by the loss of possession of the thing retained.

– Preferential right: the Civil Code has indicated the priority of some specific creditors under the following circumstances (i) preservation of an immovable property (ii) work on an immovable property or (iii) sale of an immovable property. Where there are multiple retention rights created, their respective priority rankings shall follow the order specified above. The preferential rights shall be registered with the Land Administration. Even without registration, such preferential rights shall prevail for a creditor who has no specific security over the immovable property. The preferential right created under the preservation of an immovable property and the work on an immovable property shall be prioritized over hypothec.

– Pledge: This is similar to antichrèse under the Land Law which is a form of property security whereby the creditor actually takes possession of the secured property until the debt is fully repaid (Art 834 of the Civil Code). A pledge may not be for more than five years, but it may be renewed every five years (Art 838 of the Civil Code). In addition, it shall be made under the Authentic Act and registered with the Land Office in order to be enforceable against a third party. Also, it may be transferred for the benefit of another creditor sub-pledged in order to secure the debt of himself/herself or another.

– Hypothec: refers to the same regime mentioned under the Land Law. There is no clear definition of hypothec under the Civil Code other than indicating immovable property is provided as security to secure the debt, without transfer of possession (Art 843 of the Civil Code). There may be multiple hypothecs on the same property to secure different debts, thus the rank of a creditor (priority) shall be based on the chronological order of their registration (Art 851 of the Civil Code). There is no limitation on the duration of a hypothec. Furthermore, the rights over Permanent Lease and Usufruct may be an object of Hypothec (Art 843 of the Civil Code). It shall be made under the Authentic Act and registered with the Land Office in order to be enforceable against a third party. Additionally, a hypothec may be transferred for the benefit of another creditor(s) of the same debtor (Art 860 of the Civil Code) or sub-hypothecated in order to secure the debt of himself/herself or another (Art 859 of Civil Code).

The security under the form of “gage” provided under the Land Law is abrogated by the Civil Code. Upon implementation of the Civil Code, the security, whereby the debtor provides only the certificate of title to secure the debt, is no longer available and applicable.

Land Concessions

There are no substantial changes regarding land concessions. The Civil Code simply states that the provision, in relation to land under the permanent lease, is also applicable to a land concession. We presume that the rights of concessionaires are similar to the rights of permanent leases. Further to Article 307 of the Civil Code, in our view, the existing provisions in respect of the land concession under the Land Law or other regulations, such as SD 146 on Economic Land Concession dated 27 December 2005 and its amendment, dated 15 September 2008 by SD № 131, SD № 114 and others, remain applicable, including the limitation of 10,000 ha (Ten Thousand Hectares) and 99 years as the restrictions applied to economic land concessions.