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TABLE OF CONTENTS PAGE

CHAPTER 1: MOVABLE PROPERTY FINANCING AND ITS

RELEVANCE TO THE ECONOMY............................ 03

CHAPTER 2: DEVELOPMENT OF SECURED

TRANSACTIONS IN CAMBODIA.............................. 11

CHAPTER 3: PRINCIPAL SOURCES OF LAW GOVERNING

COLLATERALIZED TRANSACTIONS......................17

CHAPTER 4: WHAT IS A SECURITY INTEREST?......................... 23

CHAPTER 5: WHAT IS A COLLATERAL?....................................... 27

CHAPTER 6: CLASSIFICATION OF COLLATERALS..................... 49

CHAPTER 7: ATTACHMENT OF A SECURITY............................... 61

CHAPTER 8: PERFECTION AND PRIORITY..................................80

CHAPTER 9: ENFORCEMENT OF SECURITY INTEREST............100

CHAPTER 10: SECURED TRANSACTIONS FILING OFFICE......... 109

ANNEX A: DRAFT LAW ON SECURED TRANSACTIONS....................................................... 114

2 EExxaammpplleess aanndd EExxppllaannaattiioonnss SSeerriieess:: Secured Transactions

Introduction

This book is one the Examples and Explanation Series covering Secured Transactions Law and

Practices. It sets forth a concise summary of the theoretical and practical aspects of the secured

transactions system in Cambodia. It provides a rich volume of examples and explanations of the secured

transaction system. A section-by-section analysis of the proposed law, with many detailed examples, is

presented throughout each chapter. The explanatory notes are expected to help legal practitioners and

other professional as they use the law. The works are largely build upon the works and materials

provided by the Ministry of Commerce, in particular the works undertaken under a Technical Assistance

project (TA3861: Improving Legal Infrastructure in the Financial Sector) of the Asian Development

Bank in the context of the preparation and formulation of the secured transaction law and the

development of a secured transaction system.

Chapter 1 describes the movable property financing and its relevance to the economy. Chapter 2

describes the development of the secured transactions system in Cambodia. Chapter Three reviews

existing Cambodian commercial law with respect to movable property financing. Chapter Four defines

what is security interest. Chapter Five defines broadly collateral followed by Chapter Six which

provides for a classification of the various collaterals. Chapter Seven describes how security interests

are enforced. Chapter Eight anticipates potential conflicts between competing creditors, including

creditors whose claims arise before and after the creation of security in movable collateral. The chapter

then provides detailed priority rules that resolve any potential conflict in advance. Chapter Nine

provides new remedies for the enforcement of claims against collateral. Chapter Ten provides for the

Filing Office which is the heart of the secured transactions law.

3EExxaammpplleess aanndd EExxppllaannaattiioonnss SSeerriieess:: Secured Transactions

1. Origins of security in movable property

A. Pledge

The pledge is perhaps the oldest transaction by which movable property is used to secure obligations.

The pledge was used under Roman law that gave rise to the civil law that eventually made its way to the

Kingdom of Cambodia.

In short, a pledgor may pledge movable property to secure an obligation. The pledgee is obligated to

take possession of the pledged property while the property is claimed as security. Upon default, the

pledgee may dispose of the property and apply the proceeds to the secured debt. If the pledgee releases

possession of the property before the secured obligation is fulfilled, the pledgee also loses the right to

dispose of the property in the event of default.

For example, a debtor offers a gold ring to secure a loan. The creditor takes possession of the ring and

disburses funds. Upon default, the creditor sells the ring. The debtor owes any deficiency between the

amount received and the balance of the debt. The

debtor is owed any amount received for the ring in

excess of the balance of the debt.

The pledge works well for collateral such as gold

rings. Pledge law is the basis for the pawn industry,

which is lively in many parts of the world to this

day. The possession requirement, however, is

unsuitable whenever it is desirable for the debtor to

maintain possession of the pledged property.

In short, the formal requirements of the pledge are

inhospitable to commerce in most modern contexts.

B. Hypothec

Even the Romans saw the limitations of the pledge. Roman law developed a form of transaction called

Chapter

1Movable Property Financing andIts Relevance to the Economy

“The pledge as the historical prototype of the

movable security right has lost its practical

relevance everywhere in the course of

industrialization and internationalisation of

the economy, because the transfer of

possession, necessarily involved in the

creation of a pledge, did not satisfy the

requirements of the modern economy.

Normally the debtor needs the collateral for

his economic activities and the creditor

regards the physical (immediate) possession

of the collateral as rather burdensome.”


“hypothec” to blunt the anti-commercial effects of the pledge’s possession requirement. Hypothecation

is the promise that property will secure an obligation, without transferring possession of the property to

the obligee – a non-possessory pledge. Under Roman law a hypothec might consist of a general right in

the assets of the debtor, including future assets.

The problem for hypothecated property is that it creates, in effect, a secret lien. The creditor’s claim to

the property is hidden from the rest of the public. This raises at least two significant problems. First, the

decisions of prospective creditors are compromised by lack of information, resulting in risk that

depresses credit. Second, further uncertainty is created by the strong possibility that multiple creditors,

past and future, may claim an interest in the same property. Who will prevail in the event of a dispute

among competing claimants? The secret lien poses even greater threat to prospective creditors as

transactions grow in size and collateral is of increasing value. Also, the more complex and valuable the

transaction, the more a creditor worries about competing claims to the same collateral that arise in the

future.

As the law of hypothec developed, legal systems tried to limit the negative effects of the secret lien. In

some countries, hypothecated property was limited to land. Secret liens could be avoided, or the

negative effects mitigated, through notations on deeds, or institutional recording of property interests.

Unfortunately, this limitation left no alternative to the pledge with respect to movable property. In

another attempt to deal with the problem of secrecy, some countries recognized the hypothecation right

as a property right only upon foreclosure against the property. This rule prefers the interests of those who

take title or other rights to the property in advance of enforcement, seriously diluting the value of the

property as collateral to the secured creditor in the meantime. The ill effects of the secret lien are

mitigated, to be sure, but at a significant reduction to the creditor’s assurance that it may obtain value

from the property upon default.

Like the pledge, hypothecation carries inherent formal requirements and procedural consequences that

are opposed to commercial needs. Nevertheless, pledge and hypothecation survived, and became part

of western legal systems in both civil law and common law regimes. Pledge and hypothecation are

found in the colonial civil codes of Cambodia. Pledge and hypothecation are contained in the proposed

civil code of Cambodia, published for review and comment in October 2002.

2. Development of security in movable property

These ancient forms of pledge and hypothec as security posed practical problems as the needs of

commerce grew more complicated, and traditional legal systems (i.e., the civil law and the common law)

reacted to the problems in similar ways, through the proliferation of forms and registries. However, the

proliferation of forms, special laws, and registries did not significantly alleviate the ill effects of the

traditional pledge and hypothec. Eventually, the techniques for movable property financing became


cumbersome, inflexible, and expensive.

A different approach was born in the mid-20th century which has come to be known as secured

transactions. After this new approach had proven itself in many jurisdictions, large and small, rich and

poor, it began to draw worldwide attention. Secured transactions law is a system of rules that facilitates

the use of movable property to secure obligations.

In countries where secured transactions laws are effective and well enforced, the following types of

financing become common:

(i) Equipment financing – revitalizes existing industry, creates opportunity for new industry,

increases productivity, and improves governmental services.

(ii) Inventory financing – improves opportunities for wholesale and retail by helping suppliers

obtain goods for sale to the public, allows businesses to begin with little startup capital.

(iii) Receivables financing – permits credit based on the accounts of a company by providing

working capital that is essential to success in business, improves cash flow in wholesaling,

retailing, transportation, the service sector, and other industries.

(iv)Building improvements financing – increases credit for new generators, wells, pumps, lifts, air

conditioners, and the like. This increases the value of land and buildings, and creates jobs in

sales, installation, and maintenance.

(v) Crops and livestock financing – increases agricultural efficiency and output by providing

cash-flow that is sensitive to growing seasons and other special situations confronted by

farmers.

(vi)Consumer goods financing – increases access to credit for purchase of appliance and furnishings,

increasing living standards and creating jobs in sales, delivery, and maintenance.

Formal legal requirements and the practical commercial needs created increasing tension in the context

of movable property as security. The law attempted to resolve the tension in a variety of ways, with

varying degrees of success.

3. Proliferation of forms

In western law, civil law and common law alike, one response to the limitations of traditional law was

to create new forms by which security is created in movable property. By the mid-20th century in the

United States, for example, the following forms were among those in general use:

(i) Pledge – a property right in the movable property of a debtor, dependent upon the possession

of the pledgee.

(ii) Conditional sale – a form of transaction based on the ownership right as security. The seller

of goods retains the ownership right to goods sold as security. Ownership is transferred to

the buyer only upon payment of the secured debt.


(iii) Chattel mortgage – a form of transaction based on a non-ownership right in movables,

similar to a mortgage right in land. The chattel mortgage right could be foreclosed upon in

the event of default.

(iv) Assignment – a form of transaction designed to accommodate intangible property under

which all or a portion of a person’s right to receive payment is transferred to another as

security.

(v) Factor’s lien – a form of transaction used by financiers who provide capital for a business by

purchasing the accounts (as opposed to taking an assignment of the accounts) of the business.

(vi) Trust receipt – a form of transaction devised to facilitate inventory financing. A supplier

delivered inventory to a seller in the name of the financier, who technically held title to the

inventory and who issued a receipt to the seller to evidence that the goods were “entrusted”

to the seller for the purpose of sale.

(vii) Consignment – an alternate form of transaction often used to facilitate inventory financing.

A consignor delivers goods to a consignee without transferring ownership in the goods to the

consignee, hoping to use the ownership right as a defense in the event that the consignee runs

into financial difficulty.

Today, restrictions on the use of movable property and intangible property as collateral vary from one

civil law country to another. There is no “civil law approach” nor “common law approach” to movable

property as security. While there may be no general rules, some scholars have made general

observations.

In countries following the civil law tradition, the approach was often the same. Creative lawyers devised

more and more forms to help creditors gain an edge over others, using multiple legal theories. The

conditional sale is commonly used in civil law countries and consignment is a familiar feature in many

civil codes. French law offers a menu of more than a dozen forms of security spread over special laws

and regulations, outside of the French civil code. By contrast, Germany tends to rely heavily judicial

interpretation of law on the transfer of title, rather than on special statutes, as a means of providing

security to creditors.

In Germanic countries, like common law countries, it is common that future rights to payment may

secure obligations. In Franco-Latin countries this highly useful technique is comparatively rare. Some

legal systems have been classified as sympathetic to security (Germany, Japan, Netherlands,

Switzerland, Scotland, South Africa, Poland, Russia) while analysts see others as unsympathetic to

security (Belgium, Luxembourg, most Latin American countries, Bulgaria, Romania, the former

Yugoslav republics, Greece, and Spain).

4. Proliferation of special laws and registries

A second reaction to the deficiencies of traditional law was the creation of registries. Amid its


disadvantages, a distinct advantage of the pledge was that the possession requirement prevented the

deception of other creditors. A debtor whose gold ring was pledged could not offer the ring to another

pledgee. An important purpose of registries is to maintain information on the ownership of assets.

Ownership registries, though not necessarily created for the purpose of facilitating credit or disclosing

security, often work well with forms of security that rely on ownership rights. Registration of ownership,

if discoverable by prospective creditors, could serve as a reasonable substitute for the possession

requirement of the traditional pledge.

In civil law and common law countries alike, registries proliferated. Registries for ships, vehicles, and

aircraft became common, and seemed to make common sense. Special laws, outside of the civil code,

might create registries for notice of security in the equipment of favored industries. Land registries were

familiar, and often they provided the operational model for movables registries. In France, the land

registry was actually transformed into a movables registry for many purposes. The cows of a dairy, the

beds of hotel, the desks in an office, came to be considered immovable property. This legal posturing

effectively created greater security for mortgages, by adding movables to the security they already

enjoyed in the land. Unfortunately, the practice does not facilitate movable property financing, per se,

and is altogether useless as a tool for the vast majority without land.

The approach in civil law countries is not uniform by any measure. Switzerland, for example, has ninety

years of experience in registration of transactions based on retention of title, a security device. Swiss

registration of security interests predated the uniform commercial code of the United States by about

half a century. By contrast, Switzerland’s neighbor Germany, with the largest economy in Europe, relies

comparatively little on registries and is quite willing to tolerate secret liens.

The proliferation of registries, in civil law and common law countries alike,

had potential to promote movable property financing because of the potential

for public disclosure of property rights. Unfortunately, the potential was

rarely realized. Registries were often implemented with burdensome

paperwork, bureaucratic review, high costs, and delay. Land registries were

often used as models despite fundamental differences between the creation of

security in land (relatively fixed and stable) and movable property (often

changing in nature as it is manufactured, processed, sold, and consumed).

5. First wave of reform: Function over form in U.S. &Canada

In the 1950s, commercial lawyers in the Unites States began a systematic review of the various forms

under which movable property is used as collateral, a review that lasted over a decade. They realized

that economic activity was unduly restricted by multiple forms, expensive to use, differently applied

from jurisdiction to jurisdiction, and lacking in certainty and enforceability. A new approach was


developed, unseen before in the common law or civil law traditions. The new

approach stressed function over form. The new approach was embodied in the

article nine of the uniform commercial code, the work product of the National

Conference of Commissioners on Uniform State Laws. The key features of

the new approach are:

� The creation of a single property right (a security interest) to

create security in any form of tangible or intangible property (other than land

and buildings).

� The simplification and unification of rules associated with the newly created, single security

interest.

� The publicizing of the existence of a security interest, simply and easily and inexpensively,

without governmental intrusion.

� The creation of a comprehensive set of priority rules that anticipate potential conflict among

creditors and resolve the conflict with certainty, avoiding the need for litigation.

� Improved opportunities for creditor rights to get value from the collateral, in the event of

default.

The uniform commercial code was eventually adopted in all fifty of the United States, beginning in the

1960s.

A Filing Office stands at the center of the new system. The Filing Office serves two purposes. First,

filing warns prospective creditors that another creditor may already hold a security interest in collateral.

Second, filing establishes the creditor’s date of priority in the event of a dispute among competing

creditors over the same collateral.

Filing requirements are simple and inexpensive. A creditor files a simple notice containing identification

of the creditor and debtor, and a description of the collateral. There is no need to produce a loan

agreement, no need for witnesses or authentication by notaries or other officials. No financial

information is delivered to the Filing Office.

Filing Office responsibilities are limited. The Filing Office notes the date and time of filing, assigns a

unique number to the filing, and indexes the filing by the name of the debtor. A filed notice has a life of

five years, and can be amended, continued, or terminated.

In the 1990s, most Canadian provinces adopted Personal Property Security Acts, based upon the same

general principles of the uniform commercial code, with some adaptations that (1) took into account

special circumstances in Canada, and (2) avoided some mistakes observed in previous decades of

American experience. The civil law province of Quebec adopted substantial amendments to its civil

code, including the creation of a Filing Office, that accomplish many of the same reforms as the Personal

Property Security Acts enacted by other provinces.


Today, the functional approach, as opposed to the

historical formal approach, has proven itself for

approximately half a century as an effective means

of promoting economic activity based on the use of

movable property, tangible and intangible, as

collateral. Opportunities for credit were greatly

expanded, and credit based on movable collateral

today qualifies for lower interest rates than credit

based upon personal guarantees. The principle of “function over form,” familiar among modern

architects, gained equal importance among commercial lawyers.

6. Second wave of reform: Europe, Asia and International

Upon the fall of the Berlin wall, western nations began widespread efforts to assist in the economic

recovery of eastern European countries. Access to credit was a key issue. The European Bank for

Reconstruction and Development (EBRD) convened an international steering committee of European

legal specialists (and including one Canadian law professor) to guide it in developing a strategy for

movable property financing. The steering committee could have adopted any model it preferred, and it

had a varied menu of European models from which to choose. Their work product was the EBRD Model

Law on Secured Transactions. The principles of the EBRD Model Law on Secured Transactions include:

(i) A single security right, a property right that may apply to tangible and intangible collateral

for the purpose of securing obligations;

(ii) Minimal formal restrictions in the creation of the security right;

(iii) Flexible definitions of secured debt and collateral;

(iv) Simple public registration to avoid secret rights; and

(v) Broad rights of enforcement.

The underlying principles of the EBRD Model Law on Secured Transactions are, of course, an

endorsement of the functional approach over the traditional formal approach of common law and civil

law jurisdictions.

In central and eastern Europe, many countries responded, beginning with Poland in 1995, and followed

by countries as diverse as Albania, Bulgaria, Hungary, Latvia, Lithuania, Slovakia, and Ukraine.

More recently the Asian Development Bank has commissioned publications on the applicability in Asia

of secured transactions principles and the functionality of a secured transactions Filing Office. Secured

Transactions Law Reform in Asia: Unleashing the Potential of Collateral, published by ADB in 2000,

analyzes existing law and opportunities for reform in RETA countries. A Guide to Movables Registries,

published by ADB in 2003, demonstrates how the principles of a secured transactions Filing Office,

There is no bureaucratic review or approval of

the contents of the notice. After all, public

notice of security is not a license that

government may grant or withhold. Filing

Office records are public records, available for

anyone to inspect without discrimination.

Today, filing is often accomplished via the

internet, without intervention by any

government official.


patterned on a functional approach to secured transactions law, can be implemented in nearly any

country, even given widely disparate circumstances.

Asia now sees the consideration, adoption, or implementation of secured transactions laws in Cambodia,

Bangladesh, India, Kyrgyzstan, Laos, Nepal, Sri Lanka, and Vietnam. Nearby, New Zealand has recently

adopted a secured transactions law and officials in Australia are considering a draft law.

Over time, it may be likely that a modern, functional approach to secured transactions law will be

adopted in western European countries. At least one German commentator has called the prospect

“desirable” for Germany. In the United Kingdom, after the publication of two reports recommending

the adoption of a North American model, the Law Commission of Great Britain has published a white

paper, advocating substantial reform.

In January 2002, the United Nations Commission on International Trade Law adopted a convention on

the assignment of receivables in international trade. After many years of study, the convention adopts

modern principles on the assignment of accounts. Contrary to traditional rules under civil law and

common law, the convention permits general assignments of receivables, assignments of future

receivables, and recognizes (although it does not require) filing as a proper method of perfecting security

interests in receivables. In other words, the principles of modern secured transaction law with respect to

intangible property are becoming standards of international trade.

��


1. What is a secured transaction system?

What is a secured transactions system is a modern system of rules that facilitates

the use of movable property to secure obligations. The establishment of secured

transactions system provides a crucial ground for financial and commercial

activities by creating the basis for the rights and obligations of both creditors and

debtors. A well-functioning secured transactions system generates tremendous

economic and social gains for creditors and debtors as it reduces transaction and

operating costs of creditors and debtors.

Why focus on movable property? Sources of business credit are limited to personal guarantee, credit

secured by mortgage, and credit secured by movable property. Personal guarantee is insufficient to meet

the needs of any business except the smallest. Credit secured by mortgage is limited because there is so

little land and so few landowners. Movable property is, therefore, a primary source of business credit in

many economies. Cambodian law, however, has not kept pace with developments in the use of movable

property to expand business and consumer credit.

Movable property financing permits entrepreneurs with good character and business plans to obtain

business capital without owning land. Movable property financing is democratizing because it allows

many more people to participate in productive economic activity.

2. What is the situation in Cambodia?

There is no operational secured transactions system in Cambodia because the legal basis for secured

transactions has yet to be in place. The lack of legal base for secured transactions system as well as other

financial infrastructure has led to uncertainties related to law and contract enforcement. This, combined

with weak institutional and human capacity in Cambodia, impedes the development of the financial

sector which is still at its primary stage.

Cambodia’s banking sector, the dominating force in the financial sector, offers limited amount of credit

to a small group of borrowers. In addition, due to lack of legal infrastructure, non-banking financial

institutions have yet to be developed. An efficient secured transactions system will promote the banking

sector operation, and enable the emergence of various means of financing in Cambodia.

Chapter

2DDEEVVEELLOOPPMMEENNTT OOFF SSEECCUURREEDD

TTRRAANNSSAACCTTIIOONNSS IINN CCAAMMBBOODDIIAA


In 2000, Asian Development Bank launched its comprehensive financial sector operation in Cambodia.

ADB, in close consultation with the government and key private sector stakeholders, drafted the

Financial Sector Blueprint for 2001-2010, which was adopted by the Government in August 2001 as a

long-term plan for financial sector development. One of the component of the Blueprint aims at

improving legal infrastructure in the financial sector with focus on the establishment of a secured

transactions system in Cambodia.

The primary models for the Cambodian proposed secured transactions law are the Asian Development

Bank’s Guide to Movables Registries, the Uniform Commercial Code (of the United States, where

modern secured transactions law was born) and the Personal Property Security Acts (of Canada).

While the proposed secured transactions law may not be as sophisticated as its North American models,

it is intended and expected to be perfectly well-suited to accommodate a variety of transactions of

immediate consequence in Cambodia. These include (i) new equipment financing, (ii) inventory

financing (stock in trade), (iii) accounts receivable financing and factoring, (iv) agricultural financing

(for crops and livestock), (v) building improvement financing, (vi) consumer goods financing, and (vii)

import and export facilitation.

3. Approach to the development of the SecuredTransaction Law in Cambodia?

The purpose of the proposed secured transactions law is to promote economic activity through a modern

system for using movable things, rights, and claims as collateral to secure obligations. Eonomic growth

requires access to credit. Creditors generally require security as a condition of credit. Personal guarantees

are usually inadequate. Immovable property is the first form of security lenders ask for, but borrowers

often do not have immovable property to offer. A modern system for the use of movable things, rights

and claims as collateral enables people to participate in economic activity where their participation

might otherwise be difficult or impossible. The proposed law address a variety of business, consumer,

and governmental needs and will promote many kinds of economic activity, including:

Economicactivities Purposes Benefits

EquipmentFinancing

• to encourage the purchaseof new vehicles andmachinery for business,and government

• revitalizrs existing industry,creates opportunity for newindustry, increasesproductivity, and improvesgovernmental services


The draft secured transactions law pursues the goal of wider access to business credit through four

strategies.

Inventoryfinancing

• to encourage a wider rangeof goods for sale in shops,offering customer greaterchoice

• improves opportunities forwholesaling and retailing byhelping suppliers obtain goods forsale to the public

Receivablesfinancing

• to solve cash flow problemsfor farmers, delveers ingoods, importers andexporters, and othermerchants

• permits credit based on the bookdebt (accounts) of a company,providing working capital that isessential to success in business

Financing ofaccounts

• improves cash flow inwholesaling, retailing,transportation, the service sector,and other industries

Financing forbuildingimprovement

• to encourage themaintenance andimprovement of land andbuildings

• enables landowners to installgenerators, lifts, air conditioning,and the like

Financing forlandimprovement

• promotes efficient use of water,mineral, and gas resources withnew wells, mines, pumps, and thelike

Crops and

livestock

financing

• to encourage lending forproduction of crops, growingof livestock, and processingof agricultural products

• increases agricultural efficiencyand output by providing cash flowthat is sensitive to growingseasons

Consumergoods financing

• to enable consumer access tomore products and services

• increases access to credit forpurchase of appliances andfurnishings


SSttrraatteeggyy 11:: Simplify the rules for creating security

The draft creates a single and simple set of rules for creating security in movable property of any nature.

• The formalities for creating security are minimal. The security agreement need not use any

special terminology and need not be on any particular form.

• Anyone may give a security interest in movables and any person can take a security interest in

movables. The law is not just for banks or special classes of persons.

• Collateral may be movable property of any nature; tangible or intangible; existing now or

acquired in the future.

• A single agreement may create security in collateral that arises in the future, saving the expense

and formalities of executing amendments to loan agreements and complying with other legal

requirements. Under traditional law, a number of separate contracts may be required to give

security in movable assets, each with its own set of formal legal requirements.

• Simplified rules lower the costs of business credit.

SSttrraatteeggyy 22:: Clarify the rights of competing creditors • Lenders do not like uncertainty in the law. Lenders want to know their rights against competing

creditors in advance of any dispute. When lenders are certain of their rights, access to credit

expands.

• Existing legal framework creates uncertainty. Movable assets offered as collateral may be

subject to prior mortgages, leases, hire-purchase agreements, and many other legal encumbrances.

It is always difficult and usually impossible for creditors to discover the status of movables under

existing law. Also, future creditors may arise who can assert superior rights against collateral,

merely because of the legal form of transaction used by the lender.

• The secured transactions act establishes clear rules to prioritize and resolve competing claims to

collateral.

• Lenders can assess their risk. Lenders can minimize their risk.

• Access to credit expands when risk is reduced.

SSttrraatteeggyy 33:: Modern means of information sharing – the filing office

• Lenders need an easy, fast, accurate, and inexpensive way to determine whether others claim an

interest in the collateral.

• The filing office serves this purpose.

• The filing office is not a traditional registry, where delay and expense are caused by formal

requirements and bureaucratic intervention.

• The secured transactions filing office can be offered via the internet to those who wish to use this

technology. Filing can be done at the desk of the lender, perhaps as the borrower completes the

loan application.

• Only a simple notice is required, identifying the parties and describing the collateral.


• The filing office can be operated with user fees. No taxpayer subsidy should be required.

SSttrraatteeggyy 44:: Efficient enforcement

• Most people pay their bills on time and in full.

• Good borrowers, however, pay the cost imposed by defaulting borrowers when enforcement

mechanisms are weak or inefficient.

• The risk of ineffective and expensive enforcement must be factored into every loan decision,

depressing credit for everyone.

The draft secured transactions law strengthens enforcement procedures by guaranteeing the lender’s

right to possession of collateral upon default, and by assuring the lender’s ability to dispose of the

collateral by methods most likely to satisfy the secured debt. This is in the interest of both the lender

and the borrower.

4. Structure of the proposed secured transaction law

The proposed draft is divided into four chapters. Chapter One defines the purpose and scope of the law,

and sets out the basic formal rules governing the creation of security in movables. The scope of the law

is broad. Anyone is permitted to give or take security in movable collateral. Collateral is defined broadly.

Collateral may be tangible, such as equipment, inventory (stock-in-trade), crops, or livestock. Collateral

may be intangible, such as accounts, other rights to payment, or intellectual property. Collateral may be

movable property that becomes fixed to immovable property, or goods such as minerals that are

extracted from the ground. The formalities required to create security are kept very simple, to avoid

expense and potential disputes.

Chapter Two anticipates potential conflicts between competing creditors, including creditors whose

claims arise before and after the creation of security in movable collateral. The chapter then provides

detailed priority rules that resolve any potential conflict in advance. The priority rules are intended to

give creditors the confidence they need to make a greater number of positive decisions to extend credit.

This result can be expected because creditors have greater certainty about the outcome of disputes

over collateral, certainty that may well prevent disputes.

Chapter Three provides for the Filing Office. The Filing Office is the heart of the secured transactions

law. Notices filed by creditors in the Filing Office serve to warn other creditors that claims already exist

to the movable property of a borrower. The date and time of filing a notice may also provide the priority

date by which competing claims to the same collateral are judged. The contents of notices are simple,

requiring only identification of the creditor and the borrower and a general description of the collateral.

The Filing Office will not receive copies of loan agreements, and will have no power to review

documentation for veracity, conformance to the law, or authenticity. Filing fees are expected to be small.


An internet-based system is contemplated, by which creditors can file from their offices.

Chapter Four provides new remedies for the enforcement of claims against collateral. Creditors are

guaranteed the right to take possession of collateral upon default. Creditors have the right to dispose of

collateral. New techniques are enabled for enforcing claims against intangible collateral such as

accounts. Creditors have a duty to behave fairly, however, and debtors may take action against creditors

who are found in breach of their duties. The remedies provided to the creditor under this chapter are in

addition to other remedies provided by law. Creditors may continue to use any existing law for the

purpose of enforcing their rights.

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1. Reviews of existing Cambodian commercial law withrespect to movable property

This Chapter reviews existing Cambodian commercial law with respect to movable property financing.

As the reader will discover, existing law is scarce. Cambodia has little commercial law in place. The

rights and obligations of parties in a commercial relationship are generally set out in bit and pieces in

various laws and regulations. Only decree 38D on contracts, which includes a movable property

mortgage, provides for movable property financing. The civil code of 1967 is not important in

commercial practice. Special laws, such as the labor law, the commercial contract law, and proposed

bankruptcy/insolvency law, present no obstacles to the implementation of a modern secured transactions

law. Finally, existing institutions such as the land registry and motor vehicle registry do not operate in a

manner that would conflict with the implementation of a secured transactions law.

� Constitution

The Constitution is the supreme law of the land. Therefore, it goes without mention that any secured

transaction, any commercial dealing, and, for that matter, any legal interaction must comport with the

Cambodian Constitution.

� Draft Law on Secured Transactions

The Draft Law on Secured Transactions is expected to be debated in the Council of Ministers and

National Assembly in 2003. Its passage will allow individuals and businesses to extend and receive

credit secured by collateral, consisting of personal property. The ability to enter into secured

transactions is one of the cornerstones of a functioning market economy. The Draft Law, as written, will

provide the legal protection necessary for affordable credit to become more available.

� Land Law

The Land Law was passed in 2001. The Land Law permits individuals and businesses to extend and

receive credit, secured by real property, such as land. The concept of the Land Law is similar to the Draft

Law on Secured Transactions. Both pieces of legislation permit individuals and companies to extend and

receive credit with the use of collateral. The Land Law deals with collateral consisting of real property

Chapter

3PPRRIINNCCIIPPAALL SSOOUURRCCEESS OOFF LLAAWWGGOOVVEERRNNIINNGG CCOOLLLLAATTEERRAALLIIZZEEDDTTRRAANNSSAACCTTIIOONNSS


and the Draft Law governs collateral, comprised of personal property.

The land law of 2002 governs real rights in immovable property, and thus has almost no relevance to the

secured transactions law which governs real rights in movable property. There are two intersections,

however, between the two bodies of law.

First, movable property may become fixed to immovable property in such a way that a right arises under

the land law. Such movable property is referred to as “fixtures.” For example, a pump is movable

property when purchased, but becomes part of immovable property when installed in a well. A mortgage

on land would cover the pump when installed. If a secured party holds a security interest in the pump,

the conflicting rights must be resolved.

Second, land may yield movable property. Minerals, timber, and crops may be extracted from land. A

mortgage may cover these forms of property prior to extraction or separation from the land. A secured

party may finance the extraction, taking a security interest in the minerals, timber, or crops after

separation from the land. The law must be clear about the rights of the parties in these circumstances.

� Personal Property Mortgage under the Contract Law

The contract law provides for a “personal property mortgage.” (Decree 38D [1988], Section 3, Articles

64 through 71). A personal property mortgage is a method of using movable property to secure an

obligation and is therefore worthy of note. Section 3 is, essentially, the classic pledge. It is legal basis

for the operation of pawnshops. It authorizes creditors (pledgees) to take possession of the property of

others (pledgors) to secure debts. In the event of default, a pledgee is entitled to dispose of the pledged

property to satisfy the debt. In the meantime, the pledgee is under certain obligations with respect to the

property – to keep it safe, to refrain from selling the property, etc. The secured transactions law will

displace these provisions entirely.

� Tax Law of 1997

Tax Law can potentially impact any kind of commercial transaction. Tax law may, in part, determine the

priority of a secured party in the event of debtor default. Tax law will also determine the extent to which

property offered as collateral is subject to taxation.

The tax law of 1997 contains powerful provisions permitting the tax authority to seize movable property

of a delinquent tax payer. The tax authority’s right to seize property arises without any public notice.

Consequently, prospective creditors have no way of knowing that assets proposed as collateral are

already subject to seizure. More importantly, the tax authority’s claim against the debtor’s property is not

subject to prior claims. A secured creditor must factor into every loan decision the possibility that the

debtor’s collateral may be subject to future seizure under the tax law. This risk hurts all debtors, even

those who pay their debts and their taxes in full and on time. The risk of future confiscation of collateral


inevitably means less credit at higher interest rates.

Tax claims should be publicized, just like security interests, judgments, and bankruptcy filings. The

secured transactions Filing Office can serve the publicity function, as it does in many other countries.

More importantly, the filing date of the tax claim should serve as the priority date of the tax claim, just

as it does for secured creditors. In this way, prospective creditors who file before tax authorities need

not penalize debtors for the possibility of future confiscation of collateral.

� Law on Enforcement of Judgments

Existing procedures on attachment of movable property to enforce judgments are summarized in very

good fashion by Koy Neam in Introduction to the Cambodian Judicial Process, published by the Asian

Foundation (1998). The procedures for attachment of movable property contemplate the situation in

which the creditor has no prior property rights in the property to be attached. Under secured transactions

law, an enforcement action relates to moveable property in which the debtor has already given property

rights to the creditor. Under the general attachment provisions, enforcement may be against all the

movable property of the debtor that can be located. In an enforcement proceeding under the secured

transactions law, enforcement is against the specific property in which the debtor has granted rights to

the creditor.

Issues arise similar to those presented by the preferential rights scheme under the proposed civil code.

The law on enforcement of judgment exempts certain property from execution. Bedding and religious

objects are examples. These exemptions should not apply to an enforcement action under a secured

transactions law. If a debtor has offered a bed or a golden devotional object as security, the creditor must

be able to execute against the property upon default even though it may be exempt from attachment as

to an unsecured creditor.

Civil Code

Secured transactions do not happen in a legal vacuum. For example, one element of the transaction is a

security agreement between the debtor and creditor. The security agreement is just like any other

contract, and, thus, its provisions are also governed by Cambodian Contract Law. In addition,

Cambodian Tort Law will apply in certain circumstances, such as when the court must analyze whether

the party in possession of the collateral has used “reasonable care” in maintaining the collateral. These

are just two instances when specific provisions of the Civil Code will inform the outcome of a dispute

concerning a secured transaction.

Civil Code of Cambodia of 1967

The civil code, as amended in 1967, was the last act of its nature adopted by a constitutional lawmaking

body in Cambodia. The civil code contains only meager provisions on the use of movable property to

secure obligations. The familiar possessory pledge is included in part 4, chapter 2, section 2. There are


provisions on hire-purchase, indicating that some form of sale with retention of title was authorized (Part

3, chapter 2). The hire-purchase provisions would have been of some value in financing new equipment

but would have been cumbersome as a method of finance secured by existing equipment. The possessory

pledge, of course, is entirely unsuitable for most business finance needs.

There appear to be no provisions addressing the problem of inventory financing. Hypothecation appears

in part 4, chapter 3. Hypothecation is used in some countries as a means for inventory financing. The

provisions of the Cambodian civil code, however, are limited in effect to immovable property.

There appear to be no provisions whatsoever on assignment of rights, although it is common for civil

codes to do so. Without provisions on assignment, there could be no meaningful finance secured by

accounts or other rights to payment.

Today, the status of the 1967 civil code is uncertain at best. The strongest argument that it has force is

based on article 139 of the Constitution of 1993. Article 139 provides:

“Laws and standard documents in Cambodia that safeguard State properties, rights, freedom and

legal private properties and in conformity with national interests, shall continue to be effective

until altered or abrogated by new texts, except those provisions that are contrary to the spirit of

this Constitution.”

As a practical matter, however, the civil code of 1967 is not cited by lawyers in civil matters and is not

relied upon by the judiciary in making decisions.

Proposed Civil Code

A new civil code under development contains numerous provisions that affect the use of movable

property to secure obligations.

Book Three addresses the subject of property rights. The main thrust of the book relates to immovable

property. There is considerable discussion of the treatment of buildings, trees, water, and minerals. There

is considerable treatment of the relationship between people and the land, and the use of land in such a

way as to cause a nuisance. Ownership and co-ownership is explored at length. Book three has some

application to movable property. Movable property is defined as a type of “thing” and a thing must be

tangible. This raises the question of the applicability of the proposed civil code to intangible property.

The proposed civil code partially answers the question by invoking the legal principle of mutatis

mutandis. Property rights in movables are described in book three primarily in terms of ownership

rights.

Book Four addresses the subject of obligations. The treatment is rather thorough and liberal. Parties

have broad freedom to structure obligations in a contract. All of the usual subjects are treated:


conditional obligations, capacity, mistake, fraud, misrepresentation, duress, overreaching, performance,

termination, breach, and remedies. Considerable attention is given to agency law. All of these subjects

are important and useful supplements to secured transactions law. Treatment of obligations is clearly far

more comprehensive than the provisions of the 1967 civil code.

Chapter Nine of Book Four on the assignment of claims is of importance to movable property financing.

The chapter contains many provisions found in civil law and common law jurisdictions that impair or

prohibit the free and easy use of intangible property as collateral. For example, obligors must consent

or be notified of assignments if they are to be enforced. General assignments do not appear to be

authorized. Agreements prohibiting assignment are enforceable, a provision that adds considerable cost

and delay to receivables financing. Priority among competing assignments is measured by the date of

notice to the obligor.

The proposed civil code is far more extensive and comprehensive than the civil code of 1967. Its

treatment of immovable property is thorough, but its treatment of movable property is less thorough.

Proposed Code of Civil Procedure

A new code of civil procedure is also under development and provides for the execution or liquidation

of movable property.

Remedies in the secured transactions law are in addition to remedies provided by other law. The

additional remedies of the secured transactions law are primarily the secured party’s right to possession

of collateral upon default, and the secured party’s right to control the disposition of the collateral

(contrasted by the usual system of judicially supervised auctions).

� Proposed Bankruptcy/Insolvency Law

A proposed bankruptcy/insolvency law is also under development. The proposed law is of crucial

importance to secured creditors because bankruptcy administrators often exert powerful claims over the

property of debtors, property that may be the collateral securing a debt. The stronger the secured

creditors rights to the collateral, even in bankruptcy, the more likely creditors will be to give credit in

general.

Under the proposed law, the administrator has the power to allow a secured creditor to repossess and sell

collateral whenever the administrator deems it to be in the best interest of the estate. The bankruptcy

administrator is required to assess the value of assets that secure debts, such as collateral under a secured

transactions law, within thirty days after the commencement of the bankruptcy proceeding. A secured

party has a right to contest the valuation. The administrator must pay secured creditors interest on the

secured claim. Interest is to be paid on a monthly basis. When assets of the estate are liquidated under

the proposed bankruptcy law, secured creditors are the first recipients of proceeds.


The proposed law will mostly impact a secured transaction in the phase of perfection and priority. It

will outline the priority of creditors in the event of default. As the secured party represents one kind of

creditor, its priority, in terms of repayment from the debtor, may be impacted by the forthcoming

bankruptcy legislation.

� Foreign Law

The Draft Law on Secured Transactions specifically states that “secured obligations may be governed

by Cambodian law or foreign law.” This means that, to the extent Cambodia permits the choice of law

in contracts, foreign law may be applicable. This is a common freedom under contract law and could be

beneficial for a country, like Cambodia, whose body of commercial law is still in its developing stages.

Which foreign law applies and the extent to which it applies would be determined on a case-by-case

basis. The security agreement in question should outline whether foreign law would be enforced and

under which circumstances.

2. How does one determine which principal source of lawgoverns?

To determine which law applies, look to the kind of collateral used to secure the credit:

• Personal Property: The Draft Law on Secured Transactions governs when the collateral

consists of personal property.

• Real Property: The Land Law governs when the collateral consists of real property, such as

land.

• Fixtures: Both the Draft Law on Secured Transactions and the Land Law govern when the

collateral consists of fixtures. The creation, maintenance and enforcement of secured credit

consisting of fixtures are governed by the Draft Law on Secured Transactions. The registration

notice, required to perfect the secured interest, is filed, however, with the Land Registry, as set

up by the Land Law, and not with the Filing Officer, as mandated by the Draft Law on Secured

Transactions.

��


1. What is a security interest?

A security interest is a right in rem. Rights in rem are distinguished from in personum obligations.

Rights in rem are property rights, rights in things such as land, buildings, or movables. An in

personum obligation is a personal obligation, such as a debt. For example, a buyer who buys an

automobile on credit has created a debt, an in personum obligation in favor of the creditor. If the person

also gives a security interest in the automobile to secure the debt, a second right has been created – an

in rem right – in the automobile, not the buyer.

This Draft Law on Secured Transactions does not place restrictions on the types of persons, including

juridical persons, who may give or take security interests. Of course, laws governing the capacity of

individuals to make contracts would restrict the right of minors or incompetents to give or take security

interests. The draft law, however, is broad in its application to individuals and entities.

If a security interest is created in consumer goods, it must be created to secure the credit actually used

to purchase the goods. In other words, a creditor may not take a security interest in all the consumer

goods of a person. A security interest in consumer goods of a debtor must be a purchase money security

interest. This requirement is intended to protect consumers from unscrupulous creditors, who, as a

condition of credit, might require a consumer to give a general security interest in his or her consumer

goods. Another consequence of this rule is that the law cannot be construed to authorize or regulate

pawnshops.

Under traditional law, a pledge or other form of security may be invalid if the debtor has possession of

the collateral, or if the debtor sells or trades the collateral. Under this law, a security interest cannot be

held invalid on such a basis.

Examples & Explanations

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4 WWHHAATT IISS AA SSEECCUURRIITTYY IINNTTEERREESSTT??

Example 1A consumer buys a television on credit, andgives the seller a security interest in thetelevision to secure the debt.

•The security interest is permitted under thislaw because it secures the credit used to obtainthe television. The security interest is apurchase money security interest.


2. What is a securedobligation?

A security interest may secure more than one

obligation, such as an obligation to pay a debt and

to provide insurance for goods. The obligation may

be monetary, such as a debt. The obligation may be

non-monetary. For example, a promise to build a

building may be secured by a security interest in

financial instruments.

A secured obligation may be governed by foreign law, to the extent Cambodian permits the choice of

law in contracts. This freedom is common under contract law. This freedom can also be of great benefit

to Cambodia while its own commercial is developing.

A security interest may secure a future obligation. For example, a security interest may secure an

obligation to make advances in the future, even if the obligation is contingent upon the occurrence of an

event that may or may not occur.

A security interest may secure a pre-existing obligation. For example, suppose Debtor owes $500 to

Lender and the loan is unsecured. Debtor requests a further advance of $300. The parties may agree

that Debtor’s movable property will secure payment of the new $300 obligation and the existing $500

obligation.

Example 2 A consumer buys a television oncredit, and gives a security interest in thetelevision, his jewelry, and his householdfurniture to secure the debt.

•The security interest is effective with respect tothe television but not with respect to thejewelry and furniture because the securityinterest does not secure a debt incurred topurchase the jewelry and furniture. Withrespect to the jewelry and furniture, thesecurity interest is not a purchase moneysecurity interest.

What is an obligation?

The most common form of obligation is to

pay money at some point in the future in

exchange for a loan, for goods or for a service

performed. For example, a person who takes

out a loan must eventually pay the loan back

pursuant to the loan contract. A person who

receives something of value (either a good or

a service) may need to pay for such good or

service.



Question: Who may receive a security interest? Answer: Any person may receive collateral as acondition for extending credit, provided he/sheis capable of entering into a contract underCambodian law.

Question: Who may give a security interest? Answer: Any person is allowed to offercollateral as a means to procure credit, providedhe/she is capable of entering into a contractunder Cambodian law.

Question: Why is it so important to determinewhen a security interest attaches?

Answer: It is essential to know precisely when asecurity interest attaches. If the debtor were todefault on a loan, there is a chance that morethan one creditor will try to seize the samecollateral. To determine which creditor haspriority to the collateral, the courts will look tothe dates when each security interest attached.With some exceptions and caveats, earlierattachments will get priority over subsequentattachments.

Question: Must the security interest be createdin Cambodia?

Answer: For the Draft Law to apply, thesecurity interest must be created in Cambodia.If the security interest is created outside ofCambodia, the law of the territory, in which thesecurity interest was created, applies.

*Reminder* Though the security interest must be created in Cambodia for the Draft Law to apply, thecollateral underlying the security interest can be located anywhere in the world. Nevertheless, it may bedifficult to enforce the security obligations within the Cambodian judicial system, if the collateral is locatedoutside of Cambodian jurisdiction.

What is a security interest?Question: Prisath, wishing to start his ownbusiness, approaches the local bank for a loan.When the bank asks for collateral to back up theloan, Prisath offers the land he owns outside thecity. Is this form of collateral permissible forcreating a security interest under the DraftLaw?

Answer: No. Remember the scope of the DraftLaw. It only applies to security interests inwhich personal property is offered as collateral.Land is considered real property, not personalproperty. Of course, land can be used ascollateral. Indeed, it is considered one of themost valuable forms of collateral. However,transactions in which land and other forms ofreal property are put up as collateral aregoverned by the 2001 Land Law, not the DraftLaw.


��

Question: What are the most controversialissues with respect to creation of a securityinterest?

Answer: • Determining whether all conditions have been

reached for attachment to occur• Determining precisely when a security interest

attaches

Question: Which parties are protected by asecurity interest?

Answer: Remember that the security interest iscreated on a bilateral basis. Therefore, itsenforceability extends only to the parties to thetransaction creating the security interest. For thesecurity interest to be enforceable against thirdparties, such as lien holders, further steps needto be taken.

Question: What kinds of obligations may asecurity interest secure?

Answer: • Monetary or non-monetary obligations• Future obligations, whether mandatory,

conditional or optional• Pre-existing obligations

Question: How many obligations can onesecurity interest secure?

Answer: Each security interest may secure oneor more obligations

Question: When does the security interestattach? In other words, when does it becomeenforceable?

Answer: Most of the time, the security interestbecomes enforceable as soon as the threeconditions are met. Occasionally, parties to thetransaction postpone attachment to a specificdate in the future. When parties make such anagreement, it must be explicitly indicated. Evenif such an explicit agreement is made,attachment cannot occur unless the threeconditions of attachment are met.


1. What can be used as collateral?

What is collateral?

Collateral is an essential tool for promoting the extension of credit to businesses and individuals.

Collateral is a right in property given by the property owner in order to facilitate the receipt of credit. If

the debtor fails to repay the loan, the creditor may sell the collateral as compensation. In many instances,

a creditor will not agree to extend a loan unless the debtor secures repayment of the loan through the

offering of collateral.

What can be used as collateral?

Any kind of movable property, either presently existing or to be created in the future

1. Goods

1 Inventory

Goods held for sale or lease, or goods that are raw materials

[picture: stock in garment factories], work in process, or

materials used or consumed in a business.

2 Farm Products

• Goods of a debtor engaged in farming, other than standing timber, which

are:

- Crops grown, growing or to be grown;

- Aquatic goods produced in aquacultural

operations;

- Livestock, born or unborn;

- Supplies used or produced in a farming

operation;

- Products of crops or livestock in their

unmanufactured state

3 Equipment

• Goods that are not farm products, inventory or consumer goods,

such as the ovens (equipment) of a bakery, or the bread and

pastries (inventory) of a bakery.

Chapter

5 WWHHAATT IISS AA CCOOLLLLAATTEERRAALL??


4 Consumer Goods

• Goods used primarily for personal, family or household

purposes, except serial numbered vehicles

5 Fixtures

• Goods that are fixed to immovable property, or are intended to become

fixed to immovable property, in a manner that

causes a real right to arise under the land law of

2001. [picture: air con wall units], For example, if

an air conditioner is installed in a building, an

owner or mortgagee or other person with an

interest in the building also gains an interest in the

air conditioner. This is because property rights in

immovable property extend to improvements on the immovable property.

2. Secured sales contracts (Chattel paper)

A writing that creates a monetary obligation (the customer’s obligation to

make his periodic payment to the seller) and a security interest in, or a

lease of, goods. For Examples, Party A receives seed from Party B,

promising to pay after two weeks. As collateral, Party A offers Party B

his livestock. Both Party A’s obligation to pay and the security interest in

the livestock are documented in a written record.

This law applies whenever the effect of a transaction is to create security in movable things, rights,

and claims. It does not matter what name the parties give to the transaction, or what words they

use in their agreement. Without this rule, people who wish to avoid the law, including its

crucial filing office, may devise clever new forms that they claim to be outside the scope of this

law. For example, “chattel mortgage,” “hire-purchase agreement,” “conditional sales contract,”

“sale with retention of title,” and “financial lease” are forms used in many parts of the world to

create security in movable property. All these transactions, and any similar future inventions,

must be covered by this law even though they may not now be in use.


3. Documents of title

Warehouse receipts, bills of lading or dock warrants issued by a person in the business of

transporting or storing goods

• Warehouse Receipt: Issued by a commercial entity engaged in the storage

of other people’s goods and which charges a fee for its services

• Bill of Lading: Issued by a commercial carrier on receipt of goods that it is

to transport from one point to another in exchange for compensation.

• Dock Warrant: Issued by a maritime shipping company upon delivery of

goods at the dock. If goods are to be transported, then it is similar to a bill of

lading. If goods are to be stored, then it is similar to a warehouse receipt.

4. Instruments

Writings, including the following, that evidence a right to the payment of money and is not itself

a security agreement or lease, and that is of a type which is in ordinary course of business

transferred by delivery with any necessary endorsement or assignment.

• Personal Check

• Notes Payable

• Certificated Security: Actual paper certificate that evidences

ownership of corporate securities

5. Money

It would be an unusual situation in which someone would put up money

as collateral for a loan. Generally, if one is able to offer money as

collateral, he would be able to finance the commercial dealing without

recourse to a loan or other secured transaction. Nonetheless, for the sake

of completeness, it should be mentioned that money, in other words, cash,

is still considered a type of collateral.

Similar practices in other countries: Many legal practitioners may be familiar with the term

chattel paper. The term secured sales contract can be used interchangeably with chattel paper. The

definition of secured sales contract is essential the same as the definition of chattel paper under

article 9 of the uniform commercial code (U.S.). The rules in this law with respect to secured sales

contracts are essentially the same as the rules applicable to chattel paper under article 9 of the

uniform commercial code


6. Intangible property, either existing or to be created in the future

Intangible property differs from the above forms of property in that it has no physical presence.

Intangible property represents the right to receive value from others. For example, collateral may be a

baker’s right to receive money under a contract to sell bread and pastries to a supermarket.

There are two main sub-headings of intangible property:

Accounts • any right to payment for goods sold or leased or for services rendered which is not evidenced

by an instrument or secured sales contract. For example, Party A receives rice seed from

Party B, promising to pay sometime in the future. Party B has an account. Another example,

Party A leases a motorbike from Party B. Payment for lease of the motorbike is held by Party

B in the form of an account.

6. Other intangible property

• any thing or right other than goods, secured sales contracts, documents of title, instruments,

money or accounts

Sale of an account or secured sales contract Assignment of an account or secured sales contract

The sale of an account or secured sales contract works differently than the assignment of an account or

secured sales contract.

• The sale of an account or secured sales contract

operates differently than an assignment. In a sale,

the buyer assumes the business risk of the

transaction. The buyer, therefore, does not need to

turn over to the seller any surplus received from

the proceeds of the collateral. At the same time,

the buyer is not entitled to require the seller to

make up for any deficiency resulting from the

repossession and sale of a debtor’s collateral.

• The assignment of an account or secured sales

contract is the “transfer from one person to

another [usually a creditor to a third party], in

whole or in part, of any right in an account,

secured sales contract, document, instrument, or

other right to payment.” If the debtor defaults on

the loan, the assignee has the rights originally

held by the creditor-assignor. If the proceeds from

the sale of the collateral are less than the amount

given by the assignee to the assignor, the assignee

has the right to receive the difference from the

assignor. If the proceeds from the sale of the

collateral are greater than the amount assignee

transferred to the assignor, the assignee is

obligated to transfer the surplus amount to the

assignor.


7. Long-term leases

A lease is a transaction in which one party (lessor) allows a second party (lessee) to have possession of

a certain good for a certain period of time. During the entire period of the lease, the lessor retains

ownership of and title to the property in question. When the lease period expires, the lessee is obligated

to return the goods to the lessor.

The law applies to long-term leases of goods. Prospective debtors may offer equipment or other goods

as collateral.

Leases are not technically secured transactions. Nevertheless, the Draft Law applies to certain kinds

of leases because a prospective secured party needs to know whether the collateral offered by a debtor

is subject to a lease. For example, a debtor could offer as collateral a piece of equipment that he doesn’t

own, but rather leases from someone else. If this is the case, then after the lease expires, the owner of

the equipment has the right to take back that piece of equipment. A prospective secured party would

want to know therefore, before accepting a certain piece of equipment as collateral, whether the

equipment is subject to another party’s interest. If the offered collateral is leased, rather than owned, by

the prospective debtor, the security interest of the prospective secured party would be compromised.

Note: Lender/Borrower may keep record of the intangible, such as an account, but the physical record is not

what contains value. What is of value - and thus what represents the intangible collateral – is the right to

receive payment, not the record indicating the right to receive payment. Indeed, any record kept of an

intangible would only be for personal book-keeping purposes. Thus, even if the record were somehow

destroyed, the value of the underlying intangible property would not be lost.

Short term Leases versus Long term leases: Why Short-term leases are not subject to this law? This is

primarily for practical reasons. A business that leases power tools or vehicles for a day or a week would be

unnecessarily burdened by this law’s requirement that a notice be file to protect the lossor’s rights in the

goods. prospective creditor who is offered existing goods as collateral assumes the risk that some of the

goods may be owned by a short-term lessor who is not required to file under this law.

Lease vs. Secured TransactionWhether a transaction is a lease or a transaction that creates a security interest under is determinedby the facts of the particular case.


Are these 2 kinds of transactions not covered by the Draft Law?

Transfer of a claim for compensation of an employeeAn employee’s wages may not be offered as collateral by either the employee or

anyone else who may have an interest in his wages. The secured transactions

law does not apply to a transfer of an interest in wages, even if the transfer is

by consent of the employee. The involuntary garnishment or attachment of

wages is dealt with in the Labor Law.

Mortgages or other interests in real property Any mortgage or other attempt to use real property such as

land or buildings, as collateral is outside the scope of the Draft Law. Rather, such transactions would be

A transaction does not create a security interest

merely because it provides that:

a. the present value of the amounts the lessee is

obligated to pay for the right to possession and

use of the goods is substantially equal to or is

greater than the fair market value of the goods at

the time the lease is entered into,

b. the lessee assumes risk of loss of the goods, or

agrees to pay taxes, insurance, filing, or

registration fees, or service or maintenance costs

with respect to the goods,

c. the lessee has an option to renew the lease or to

become the owner of the goods,

d. the lessee has an option to renew the lease for a

fixed rent that is equal to or greater than the

reasonably predictable fair market rent for the use

of the goods for the term of the renewal at the

time the option is to be performed, or the lessee

has an option to become the owner of the goods

for a fixed price that is equal to or greater than the

reasonably predictable fair market value of the

goods at the time the option is to be performed.

A transaction creates a security interest if the

amounts the lessee is to pay for the right to

possession and use of the goods is an obligation for

the term of the lease, not subject to termination by

the lessee, and

1. the original term of the lease is equal to or greater

than the remaining economic life of the goods, or

2. the lessee is bound to renew the lease for the

remaining economic life of the goods or is bound

to become the owner of the goods, or

3. the lessee has an option to become the owner, or

to renew the lease for the remaining economic life

of the goods, for no additional consideration or

nominal additional consideration upon

compliance with the lease agreement.

The sale of accounts, the consignment of goods, and many leases are not, strictly speaking, secured

transactions because they do not secure obligations. Since the sale of accounts and secured sales contracts

is not for the purpose of security, then why does the draft Secured Transactions Law cover these

transactions? Under this law, however, the economic effect of these transactions is such that prospective

creditors might be deceived if they are not treated in the same manner as secured obligations (for example,

if they are not subject to the filing requirements). Buyers and prospective assignees have equal need for

reliable information and rules governing prior assignments and sales. The filing office will serve the needs

of buyers and assignees. Therefore, the term “collateral” applies to property subject to these transactions.


governed by the 2001 Land Law. Remember that, though this Draft Law does not deal with collateral

in the form of real property, it does apply to fixtures, which are articles of property attached to real

roperty.


Is the following transaction within the scope of the Draft Law?

Movable property as collateralQuestion 5.1: Sophearin wishes to expand her

internet cafe. In order to purchase some more

equipment, she receives a $1000 loan from a local

bank. She offers as collateral some movable

property, namely, “all computers held in operation of

the business.” Is this transaction within the scope of

the Draft Law?

Answer 5.1: Yes. The collateral Sophearin offers is

movable property and thus is covered by the Draft

Law.

ConsignmentQuestion 5.2: Suosdey is a farmer. He sells some of

his produce at his home. He feels, however, that he

could generate more business if his produce were

sold from a shop in the center of town. He

approaches Virak, who runs one of the produce

stands in Central Market, offering to sell him his

produce and thus become one of Virak’s suppliers.

Virak says that he already has enough suppliers, but

makes the following offer. Instead of purchasing the

produce, Virak offers to accept some of Suosdey’s

produce to show at his stand. If any of it sells, Virak

will take a small commission and the remainder will

go to Suosdey. Suosdey agrees to the arrangement.

Is this transaction within the scope of the Draft Law?

Answer 5.2: Yes. But before understanding what

kind of transaction is the one described herein, it is

important to know what it is not. It is not your

typical secured transaction. In fact, Suosdey has not

granted any security interest to Virak. Even though it

is not a secured transaction, remember that this Draft

Law covers certain commercial transactions that are

not considered secured transactions. This transaction

is called a consignment. Consignment is defined by

the Draft Law as the following:

“a transaction, regardless of form or terminology, in

which a person (the consignor) delivers goods to a

merchant (the consignee) for the purpose of sale and:

a. the merchant deals in goods of that kind under a

name other than the name of the consignor;

b. the merchant is not an auctioneer;

c. the goods are not consumer goods prior to

delivery to the merchant; and

d. the transaction does not create a security interest

that secures an obligation.”


With the aid of this definition, we should go through

each step to convince ourselves that this transaction

is a consignment and thus should be covered by the

Draft Law. In our example, Suosdey is the

consignor. He is delivering goods (the produce) to a

merchant, Virak, who is the consignee. The purpose

of the transaction is clearly to sell Suosdey’s

products. Virak, the merchant, deals in produce under

a different name than does Suosdey. Virak is not an

auctioneer. The produce is not a consumer good.

The transaction does not create a security interest

that secures an obligation. Therefore, this

transaction is a consignment, as defined by the Draft

Law, and thus is governed by the Draft Law.

Question 5.3: Assume the same scenario as in

Example Three, except that, instead of selling farm

produce, Suosdey sells jewelry to individual

customers. Would the transaction be within the

scope of the Draft Law

Answer 5.3: No. The key distinction between this

example and the prior one is the classification of the

good being consigned. Whereas farm produce is not

a consumer good, jewelry is. According to the Draft

Law, consignment only encompasses “goods that are

not consumer goods prior to delivery to the

merchant.” Therefore, Suosdey’s transfer of jewelry

for sale by Virak is not a consignment and thus is not

governed by the Draft Law.

Comparison PLACE US FLAG: US law on secured transactions allows the consignment of consumergoods and thus governs such transactions. Suosdey’s jewelry, therefore, would be covered by US law onsecured transactions.AccountQuestion 5.4: Manufacturer regularly receives raw

materials from Supplier. It makes two payments a

year for the materials. Supplier in need of cash

decides to sell its account with Manufacturer to

Bank. Is this transaction covered by the Draft Law?

Answer 5.4: Yes. Remember that secured

transactions are not the only kinds of transactions

covered by the Draft Law. In this example, Supplier

sold his account to Bank. A sale of accounts is one type

of transaction governed by the provisions of the Draft

Law.


Secured sales contract

Question 5.5: Buyer purchases a computer from

Seller, agreeing to pay within one month. Seller

takes a security interest in the computer. Seller has

a secured sales contract. After one week, Seller

decides to sell the secured sales contract to Bank. Is

this transaction covered by the Draft Law?

Answer 5.5: Yes. Remember that secured

transactions are not the only kinds of transactions

covered by the Draft Law. In this example, Seller has

sold his secured sales contract to Bank. The sale of a

secured sales contract is one type of transaction

governed by the provisions of the Draft Law.

Comparison: The term, Secured Sales Contract, may be used interchangeably with the term,Chattel Paper, which is often used in American jurisdictions. Indeed, Secured Sales Contractsreceive the same treatment under the Draft Law that Chattel Paper receives under America’sSecured Transactions legislation.

Question 5.6: Orn, the owner of a computer

business, regularly arranges secured sales contracts

with his customers. Thinking that it is time to retire,

Orn sells his company to his son. Along with the

sale of the business, Orn sells to his son all of the

outstanding secured sales contracts. Will this

transaction be covered by the Draft Law?

Answer 5.6: No. Recall that the sale of secured sales

contracts is normally governed by this Draft law, even

though it does not, technically speaking, represent a

secured transaction. However, there is one exception

to this rule. The sale of secured sales contracts that

are part of a sale of a business out of which these

secured sales contracts arose is outside the jurisdiction

of the Draft Law. The same exception applies to

accounts.

Long term versus short term leasesQuestion 5.7: Suppose Prisath is interested in

opening an outdoor market. He determines that one

large truck will be needed to transport stone and

other materials to the site of the market. As he does

not own a large enough truck, Prisath decides to

lease one from Toyota for a duration of two years.

Is this transaction within the scope of the Draft

Law?

Answer 5.7: Yes. Although the lease in question is

not a secured transaction, it is still covered by the

Draft Law. (see 2.1.c). Indeed, all leases of goods for

a period greater than one year are subject to the

provisions of the Draft Law, in particular, its filing

requirements.

Rationale: The purpose of this requirement is to provide added protection to prospective secured parties.For example, Prisath may decide that he needs additional financing for his project. He approaches a bankand offers as collateral the one truck he has leased from Toyota. Though the truck may be consideredvaluable collateral, and otherwise suitable for the bank, the true ownership interest in the truck is not withPrisath but with Toyota. This means that, after the expiration of the lease, the truck reverts to its owner,Toyota. In other words, even if the bank accepts the truck as collateral, it would not have a valuable securityinterest in the truck. If the bank were in formaed of the ownership status of the truck prior to disbursing theloan, it would realize that to accept the truck as collateral would leave the bank, unsecured, without anyeffective security interest.


To prevent this situation from arising, the Draft Law subjects all leases of goods for a period greater thanone year to its filing requirements. This, in turn, gives any prospective secured party the chance todetermine before entering into a security agreement the ownership status of collateral put up by theprospective debtor.


Example Six. What if the stated duration of the

lease were three months, instead of two years, with

no option to renew? Would the Draft Law

apply?Answer 5.8: No. In this case, the duration of

the lease is less than one year. Thus, it is outside the

scope of the Draft Law


Example Six. What if the lease, allowing Prisath to

rent the truck for an indefinite period, lasts more

than one year? Will the lease be subject to the

provisions of the Draft Law?

Answer 5.9: Yes. This question is straightforward.

The intent of the Draft Law is to encompass leases

that last more than one year. Though the duration of

this lease was unspecified, the lease did endure for

more than one year and thus is subject to the

requirements of the Draft Law.


Example Six. What if the lease allowed Prisath to

rent the truck for an indefinite period, but Prisath,

ultimately, rented it for nine months? Does the

Draft Law apply?

Answer 5.10: Yes. Though the lease lasted for less

than one year, Article 3.16 of the Draft Law defines a

“lease of goods for a period greater than one year” to

include leases with indefinite terms that ultimately

last for less than one year.

Reminder: Always refer to the Definitions Section of the Draft Law. Though the Draft Law uses manyfamiliar words, these words may have definitions that are specific only to the Draft Law. The term “leaseof goods for a period greater than one year” is a perfect example.


Example Six. Suppose Prisath signs a nine-month

lease and receives the truck on January 1st. When

the nine months have expired, Prisath determines

that he will need the truck for at least four more

months. The lessor agrees to extend the lease for

the additional four months. Will the lease be

subject to the Draft Law? If so, when will the lease

be subject to the Draft Law?

Answer 5.11: Yes, the lease is subject to the Draft

Law. Refer to Article 3.16.c. For this subsection to

apply, the following conditions must be met:

1. The initial lease must be for a period less than

one year;

2. The lessor must give his consent for the lease to

be extended;

3. The lessee must retain “uninterrupted or

substantially uninterrupted” possession of the

leased goods for more than one year “after the

lessee first acquired possession;”

Of course, at the original signing, it would have been

impossible to know whether the lease would

ultimately fall within the jurisdiction of the Draft

Law.


Therefore, it is essential to note that the lease does

not become a “lease of goods for a period greater

than one year,” and thus is not subject to the Draft

Law, until the lessee has had possession of the good

for at least one year.

This means that, at the nine month of possession, for

example, the lease is still considered a short-term

lease and is not subject to the Draft Law’s filing

requirements. If the lease is extended, it falls within

the Draft Law’s filing requirements as soon as the

lessee has had “substantially uninterrupted”

possession of the good for more than one year.

Reminder: Draft Laws occasionally

contain ambiguous words or phrases,

whose meaning cannot be

determined until the court system has

had a chance to review them. The phrase

“substantially uninterrupted” in Article 3.16.c is a

good example of this.


Example Six, in addition to the following new

information. The lessor has left the country and the

lessee, Prisath, who wishes to extend the lease,

cannot reach the lessor. Prisath decided, after

making an attempt to find the lessor, to retain

possession of the truck for the additional four

months. At the close of these additional four

months, the lessor returns to the country and collects

the truck. Will the Draft Law govern?

Answer 5.12: Unsure. Refer to the conditions of

Article 3.16.c as outlined in the Answer to Example

10. The initial lease was for nine months, a period

less than one year. Condition One, therefore, is met.

Condition Three is also met, as the lessee retained

uninterrupted possession of the leased goods for

more than one year. Condition Three, therefore, is

met.

The problem gets trickier when determining if

Condition Two is reached. Condition Two requires

the lessor to give his consent for extension of the

lease. However, how does the law define “consent?”

Does consent require formal approval of the lessor?

Does the lessor have to give his signed consent or

will an oral consent suffice? Or, perhaps, is consent

considered given by the lessor, if he fails to object to

the lease’s extension? In other words, if the lessor

fails to object, does he waive his right to formally

consent to the new lease terms?


These are the kinds of questions one needs to ask to

determine the meaning of “consent” as used in the

Draft Law.

There are a number of steps to take in determining the

answer to this question. First, look to the Definitions

Section of the Draft Law to determine whether the

word is defined. In this case, the Draft Law does not

define “consent.” Second, look beyond the Draft Law

to Cambodian Contract Law or the Draft Civil Code.

Does Contract Law give an adequate definition of the

term “consent?” Third, consider how courts have

defined the term “consent” in cases similar to the one

raised by this issue. Though Cambodian Law

embodies a Civil Law tradition, this does not mean

that past judicial decisions should be disregarded. In

fact, judicial precedent can provide an excellent way

to predict how ambiguous aspects of the Draft Law

will be interpreted.

Reminder: Occasionally, the Draft Law uses terms with unclear meanings. If the DraftLaw, itself, does not adequately define a term, look to other legislation, such as the Law onContracts, Civil Code or case law for the meaning.

Question 5.13: Again, assume the scenario in

Example Six with the following twist. At the close

of the initial nine-month lease, Prisath approaches

the Lessor with his idea of extending the lease for

an additional four months. The Lessor says that he

must think about it, and, in the interim, demands to

retake possession of the truck according to the

original terms of the lease. Prisath returns the truck

at the end of nine months and waits for Lessor’s

reply. Four weeks later, Lessor agrees to the lease

extension for an additional four months. Will the

Draft Law apply to this situation?

Answer 5.13: Again, we are dealing with some

ambiguous wording in the Draft Law and thus cannot

be completely sure how the courts would determine

whether the Draft Law would apply. Did Prisath

retain “uninterrupted or substantially uninterrupted

possession” of the truck, despite having to return the

truck for four weeks until Lessor decided to extend

the lease?

Remember, to clarify ambiguous wording, look first

to the Definitions Section of the Draft Law. Are the

terms “substantially interrupted,” “substantial” or

“interrupt” defined by the Draft Law? No. Thus, one

must look to general Cambodian law, such as the Civil

Code, or to past case law to assess how the term

“substantially interrupted” should be defined.


In view of the short-term nature of the original lease

and the extension request, most likely, courts will

conclude that the four-week interim did substantially

interrupt Prisath’s possession of the truck.

Question 5.14: Assume the same facts as in

Example 12 with one exception. Only one day after

retaking possession, the Lessor agrees to grant the

requested extension to Lessee. How would the Draft

Law interpret this transaction?

Answer 5.14: Again, there is no definite answer to

this question. However, it is appropriate to assume

that courts would not interpret one day as a

substantial interruption of the lease.


Example 12. However, suppose that in the middle of

the nine-month lease, the truck breaks down and, for

two weeks, remained in the repair shop. Did this

two-week repair period “substantially interrupt”

Lessee’s possession of the truck?

Answer 5.15: The answer depends on two factors.

One, what is the status of the Lessee’s possession of

the truck while it is located in a repair shop. Second,

what are the conditions, such as length of time,

required for possession to be “substantially

interrupted?” One must look outside the Draft Law

for a better idea of answer to these questions.


Example Six with one modification. What if the

terms of the lease included the following provision:

“Prisath hereby agrees to rent one large truck from

Toyota for a period of one month with a monthly

option to renew”? Would the Draft Law apply?

Answer 5.16: Yes. At first glance, the duration of the

lease appears to be one month. On this basis, one

may conclude that this is a short-term lease and thus

not subject to the Draft Law. However, on closer

inspection, the words “with a monthly option to

renew” change everything. Because theoretically

Prisath could renew the lease 12 times, the ultimate

duration of the lease may turn out to be longer than

one year. (INSERT See 3.16.d).

Question 5.17: Again, assume the same scenario in

Example Six with one change. What if the stated

duration of the lease were one year, exactly, with no

option of renewal? Would the Draft Law govern this

transaction?

Answer 5.17: No. The scope of the Draft Law

includes leases of duration greater than one year. A

one-year lease lasts, obviously, no greater than one

year and thus remains outside the scope of the Draft

Law.

Movable versus real property


Question 5.18: Suppose Ang wishes to make

renovations to his guesthouse. Since he doesn’t

have all the money required for supplies and salaries

of construction workers, he applies to a bank for a

loan. The bank, in turn, asks that Ang offer

something as collateral, so that, should Ang fail to

pay back the loan, the bank is assured of some

compensation. Ang agrees to put up as collateral a

plot of land he owns outside the city. Would this

transaction be covered by the Draft Law on Secured

Transactions?

Answer 5.18: No. Remember that the Draft Law

deals only with transactions in which the collateral is

movable property, not real property. Any transaction

in which land, or other forms of real property, is used

as collateral fall within the jurisdiction of the Land

Law.

Question 5.18: Assume the scenario from Example

17. Suppose that Ang, instead of offering his plot of

land as collateral, puts up the house in which his

family lives. Would this transaction be covered by

the Draft Law on Secured Transactions? What if he

offers his guesthouse as collateral?

Answer 5.18: No. Remember that the Draft Law

governs transactions where the collateral is

considered movable property. Just like with land, a

house is considered immovable. Therefore, this

transaction would be outside the scope of the Draft

Law. Even if Ang offers his guesthouse as collateral,

this would not change the answer. Such a

transaction would also be outside the scope of the

Draft Law.

Reminder: Just because Ang’s proposed transactions fall outside the scope of the Draft Law, this doesn’tmean that Ang will not be able to raise financing for his project or that the collateral offered would not beattractive to a prospective lender. The only conclusion that should be drawn is that a different law – theLand Law – and not the Draft Law on Secured Transactions would govern the transaction.

Equipment


17. Ang, still pursuing his goal of renovating his

guesthouse, offers as collateral for a loan all of his

equipment used in the operation of his business.

Which law would govern this transaction?

Answer 5.19: As the chapter on collateral shows,

“Equipment” is considered movable property and

thus is governed by the Draft Law. Bear in mind

why Equipment is governed by the Draft Law.

Equipment is generally transportable or movable

and is not attached to the land. Thus, it is considered

movable property and, therefore, falls within the

scope of the Draft Law.

Reminder: For a complete discussion of the kinds of collateral covered by the Draft Law, refer to thechapter entitled “Collateral.”

Attachment of wages



17. In order to supplement income earned from his

guesthouse, Ang works in a local factory. He makes

a stable salary and is consistently paid month-by-

month. Though he doesn’t earn much, he earns

enough that his salary could be an attractive source

of collateral. Would such a transaction in which

future wages are offered as collateral be governed by

the Draft Law?

Answer 5.20: No. The attachment of wages as a

security interest would be governed by the Labor

Law and not by the Draft Law on Secured

Transactions. The answer to this question, however,

is even simpler than understanding which law to

apply. If Ang is making a stable salary, he would be

able to perhaps finance the improvements on his

own without the aid of a bank loan. In this case, Ang

would not need to enter into a secured transaction,

and thus the Draft Law would be irrelevant.


17. Suppose one of Ang’s employees needed some

money to pay for his mother’s hospital bills. Ang,

being a compassionate boss, gave his employee an

interest-free, $500 salary advance. Ang then

approaches the bank about securing financing for his

renovation project. As collateral, he offers his

employee’s future wages for the next five months

(the employee makes $100/month). Would this

transaction be within the scope of the Draft Law?

Answer 5.21: No. Wages may not be offered as

collateral. Any transaction that deals with the

garnishment of wages is covered by the Labor Law.

Nevertheless, a bank would most likely find such

collateral to be unattractive and too risky to accept.

Indeed, if the employee continues to work over the

next five months, the bank will see its collateral

progressively shrink. If Ang extended a $500 loan to

his employee, rather than a salary advance, Ang

could offer his claim to repayment of the loan as

collateral. The collateral would fall into the category

of “Instrument” and would be a more attractive

option for the creditor-bank.

Question 5.22: Prior to creation of the security

interest, whose responsibility is it to determine the

value of collateral?

Answer 5.22: Since both parties have an interest in

knowing the value of collateral being offering, it is

in the interests of both to independently conduct

their own due diligence. The prospective debtor,

who wishes to offer the collateral, should determine

on his own the value of the property he is willing to

put up as collateral. At the same time, the

prospective creditor needs to determine on his own

and in light of his interests whether the collateral is

sufficiently valuable that it would secure extension

of a loan. The Draft Law does not require any

particular party to assess the value of the collateral.

However, it really is the responsibility of both

parties, when they accept the use of a particular

piece of property as collateral, to fully comprehend

its value.


Question 5.23: Must collateral be located in

Cambodia?

Answer 5.23: No. Collateral may exist anywhere, in

Cambodia or outside of Cambodia. Of course, the

secured transactions law may not be of use to

enforce obligations against collateral found outside

of Cambodia.

Remember, however, that, in the event of default, if

collateral is located outside Cambodia, Cambodian

courts will have difficulty in enforcing the security

agreement. If collateral outside of Cambodia comes

within Cambodian borders, the secured transactions

law would be available to enforce the rights of the

parties. If collateral is removed from Cambodia and

enforcement is required, it may be necessary to

obtain a judgment in Cambodia and attempt to

enforce it in the other jurisdiction. The key point is

that the security interest is not invalid simply

because the collateral is abroad.

Question 5.24: What protections are in place for

consumers who become debtors pursuant to a

security agreement?

Answer 5.24: The Draft Law forbids an individual

from offering as collateral all consumer goods or

personal effects. This restriction is meant to protect

consumers from unscrupulous creditors, who may

demand that a potential debtor must put up all of his

belongings as collateral in order to receive a loan.

For example, suppose a debtor puts up “all consumer

goods presently acquired” as collateral and then

defaults. This would allow the creditor to seize all of

the debtor’s property, including the clothes off his

back and the food in his cupboard. In a legal

environment, such as Cambodia’s, where most of the

population is unfamiliar with commercial laws, this

restriction is an important and necessary safeguard.

The Draft Law allows the collateralization of

consumer goods only in one kind of transaction: the

purchase-money security interest. In other words,

the only consumer goods that can be used as

collateral are those that are purchased with the

money loaned in the transaction in question.


2 Ownership and possesion of collateral?

The prospective debtor must have certain property rights in the collateral; however, he does not

necessarily have to own the collateral. To be sure, in most instances, the prospective debtor will have

ownership rights in the collateral. But, the prospective debtor may also give a security interest in

collateral in which he has only the right to use the property under a lease or other agreement.

In many transactions, the secured party may take possession of collateral. This draft law requires the

secured party in possession to take “reasonable care” of the collateral, although expenses of care may

be chargeable to the debtor, such as insurance premiums, taxes, and fees.

How does one determine what is reasonable care? The law has developed a fictitious legal standard,

called the reasonable person, for determining whether negligence has occurred. The reasonable person

is someone who acts sensibly and takes proper, but not excessive, precautions. The courts, when asking

whether reasonable care was used, will inquire whether a reasonable person would have committed the

same acts as the party under investigation.

Fruits or increases from collateral in the secured party’s possession may be held as additional collateral

to secure the obligation. For example, newborn livestock would be additional collateral if the livestock

were collateral. Profits in the form of money may be kept by the secured party only if they are applied

to reduce a secured debt.

Question 5.25: When must collateral be formed? Answer 5.25: Under the Draft Law, collateral can

either be in existence at the time the secured

obligation is formed or can be created in the future.

This broad definition of collateral is designed to

foster the market for credit financing. For many

prospective debtors, either individuals or companies,

the most valuable form of collateral is inventory,

which often will not exist until after creation of the

security agreement.

Ownership right Right to possession

Ownership is defined by Black’s Law Dictionary as

“the collection of rights allowing one to use and

enjoy property, including the right to convey it to

others.” “Ownership implies the right to possess a

thing….”

A possessory right, on the other hand, allows the

holder to control the property in question and

includes the right to exclude others


Examples & ExplanationsReasonable Care” of Secured Party while in Possession of CollateralQuestion 5.26: Suppose Siphana and Sopheat enter

into a secured transaction. Sopheat, the secured

party, possesses the collateral, five computer

systems. Suppose Sopheat leaves the computers

outside on the uncovered porch of her house during

the rainy season. Inevitably, the rains come, and the

computers are destroyed. Who is responsible for the

destruction of the collateral?

Answer 5.26: The question the courts will ask is,

did Sopheat use reasonable care when handling the

collateral. Most likely, the courts would decide that

she did not, in fact, use reasonable care while

possessing the computers. Clearly, she should have

known that computers should not be exposed to the

elements and must remain dry. She should also have

known that it was the rainy season, which practically

guarantees daily rainfall. In other words, a

reasonable person would not have left the computers

outside during the rainy season. Thus, the secured

party would be found liable. This question of

reasonableness is a question primarily of Cambodian

Tort Law. The Draft Law merely outlines the tort

standard to apply. With this kind of question,

lawyers will have to move beyond interpretation of

the Draft Law and apply the relevant Tort Law

doctrines.

Remarks: Although the owner of property will always have a possessory right in that property, a holder ofa possessory interest does not necessarily hold an ownership right in that property. For example, a personmay have the right to possess a car under a lease agreement, but that person may not have the right, inherentin ownership, to convey the car to others. In other words, an ownership right is more comprehensive thana possessory right.



Example 17. This time, however, suppose that

Sopheat left the computers indoors in the living

room. Suppose, also, that, due to heavier-than-

normal rainfall, the roof above the living room

began to leak, the water from which ultimately

ruined the computers. Which party is responsible for

the ruined collateral?

Answer 5.27: Again, the answer to this question

depends on the application of Cambodian Tort Law.

The question the court will ask is whether a

reasonable person would have left the computers

indoors with the belief that he is taking the necessary

precautions to protect the collateral. On the one

hand, the court could rule that Sopheat, in fact, did

take reasonable care. Where else would she have put

the computers, if not in her house? She should

reasonably expect that property left indoors would

be protected from the outside elements. On the other

hand, the court could hold that, since all Cambodian

rooves leak, Sopheat should have been aware that

hers would as well, leaving the computers wet and

unusable. According to this line of thinking, the

court would ask why Sopheat didn’t cover the

computers with blankets to protect the hardware. As

you can see, there is no definitive answer to this

question. It depends on what the courts determine a

reasonable person would have done in Sopheat’s

position.

Question 5.28: Suppose both parties opt out of the

“reasonable care” standard. In other words, in the

security agreement, which the parties have a right to

freely draft, suppose there is a clause stating that the

“reasonable care” standard in the Draft Law does not

apply to the transaction in question. Do the parties

have a right to include such a provision in their

security agreement?

Answer 5.28: Again, the Draft Law says nothing

specific about this scenario. However, it is essential

to remember that the security agreement is a contract

between parties. Thus, any dispute will most likely

be resolved by Cambodia’s Contract Law. Under

American Contract Law, to remove the “reasonable

care” standard would be found as void as a matter

of public policy. That is, the courts will disallow

“contracting around” the “reasonable care” clause in

the Draft Law. The clause in the security agreement

will be removed, but the remainder of the security

agreement, provided it comports with Contract Law,

will remain valid.


“Reasonable Expenses” of Secured Party while in Possession of Collateral?Question 5.29: Assume the same scenario as in

Example 17. This time, Sopheat decides to take out

insurance on the computers. She stores them

indoors, but wants to makes sure that, should

something unforeseen happen, she will be protected

by insurance. Does Siphana need to compensate

Sopheat for the insurance costs?

Answer 5.29: According to the Draft Law, the

secured party, while in possession of the collateral,

should be compensated for “reasonable expenses”

incurred for maintenance of the collateral, unlessotherwise agreed. These three words are very

important because it signals that the parties could

draft around this clause of the Draft Law in their

security agreement. If the parties do not specifically

repudiate this clause of the Draft Law, then it

remains in effect. Assuming that the parties choose

not to draft around the clause, the Draft Law

specifically states that insurance payments are

considered a reasonable expense. Accordingly, it

seems pretty clear that Siphana should compensate

Sopheat for the insurance. The answer to this

question is less clear, however, if Sopheat must pay

uncommonly high insurance premiums due to

multiple past break-ins. In this case, should Siphana

really pay for Sopheat’s past bad luck or lack of

responsibility? How much would be too much?

What if the past robberies at Sopheat’s home were

not due to her own negligence? These are questions

that the court will wrestle with on a case-by-case

basis. The lawyer should know, however, that the

Draft Law considers insurance payments reasonable

expenses that should be compensated by the debtor.


Question 5.30: Which party is responsible if

collateral is damaged or ruined after creation of the

secured interest?

Answer 5.30: This depends on two things:which party is in possession of the collateraland which party was responsible for thepreservation of the collateral. The Draft Lawdoes not give a definitive rule in response tothis question and would be foolish to do so.Rather, it offers the standard of reasonable careas a means to gauge liability. The courts arebest left to determine liability on a case-by-casebasis, applying this “reasonable care” standard.For example, if the secured party possesses thecollateral, but he uses what the courtsdetermine to be reasonable care in preservingthe collateral, any damage would be theresponsibility of the debtor.

Question 5.31: If the secured party needs to be

reimbursed for “reasonable expenses” incurred, how

shall reimbursement be carried out?

Answer 5.31: Under the Draft Law, the secured

party should bill the debtor, securing the incurred

expenses with the collateral held, pursuant to the

security agreement.

What are “fruits…received from the collateral” and what can they be used for?

Question 5.32: Suppose Prisath loans a local farmer,

Ra, $500. As collateral, Ra puts up his livestock,

which include chickens and cows. Suppose the two

cows have a healthy litter of calves. Are these calves

also collateral in this transaction?

Answer 5.32: Unless the parties otherwise agree,

Prisath, the secured party, would be allowed to hold

onto these baby calves as additional collateral,

securing the same transaction. These baby calves

are considered “fruits of the collateral.”


Example 21. Prisath holds onto the baby calves. As

they grow older, they are able to provide milk to the

local villagers. Suppose Prisath sells this milk. What

must he do with the profits received from the sale?

Answer 5.33: According to the Draft Law, Prisath

has two choices. He can remit the money to the

owner of the calves, Ra. Or, he can apply the money

to reduce Ra’s obligation to him. Prisath may not

spend the money on other purchases. If he holds on

to the money, it must be used to reduce Ra’s

obligation. Keep in mind, however, that this section

of the Draft Law is subject to the three all-important

words, “unless otherwise agreed.” Therefore, both

parties have the latitude to made changes to this

provision when drafting the security agreement.


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Question 5.34: Who must possess the collateral

after the secured interest is created?

Answer 5.34: Either the secured party or the debtor

may possess the collateral. The law does not require

that either one or the other must have possession of

the collateral. Instead, the law merely outlines the

responsibilities of whichever party possesses the

collateral. These responsibilities are addressed in

different parts of the law, depending on the identity

of the possessor. Under traditional laws, the creditor

would take possession of the collateral for the

duration of the transaction. This was called a pledge

of the collateral. However, this was not seen as a

very efficient method for promoting credit finance

because whenever a prospective debtor wanted to

take a loan, he would have to surrender possessory

rights in valuable property to the creditor. This could

seriously disrupt the debtor’s business, if, for

example, he had to hand over to the creditor all of his

business equipment.


1. Why must collateral be classified into one of the abovecategories?

There are several reasons for classifying collateral.

• First, we need to determine whether the property offered as collateral is of the kind that is covered

by the Draft Law. If a specific piece of property cannot be classified into one of the collateral types

listed in the Draft Law, two potential conclusions can be drawn. This may mean that the property

offered as collateral requires application of a different law than the Draft Law. Though land may be

valuable property, to offer it as collateral would trigger application of the 2001 Land Law, not the

Draft Law on Secured Transactions. Alternatively, if a piece of property cannot be fit into one of

the collateral types listed in the Draft Law, this may mean that, inherently, the property in question

is not considered appropriate for use as collateral. For example, to offer all of one’s personal

belongings as collateral does not accord with any of the types of collateral recognized by the Draft

Law and, thus, would not be permissible.

• Second, we must go through the process of classifying collateral because specific rules may apply,

depending on the collateral offered. For example, take consumer goods. In an effort to protect

consumers, the Draft Law limits the kinds of consumer goods that can be put up as collateral. In

fact, consumer goods can only be used as purchase-money security interests. This means that the

only consumer goods that can be offered as collateral are the ones purchased with the money

borrowed under the security agreement.

• Third, the classification of the collateral must be known in order to determine the necessary steps

for perfection of that collateral. As the chapter on Perfection explains, for a secured party to ensure

in the event of default that it can claim a right in the collateral, it must “perfect” its security interest.

In order to perfect, it must know the classification of the collateral because each type of collateral

may require different steps for perfection.

The classification of collateral depends as much on the use of the particular piece of

property as on the form of the property. Therefore, a piece of property, such as a

computer, may be a consumer good under one transaction and a piece of equipment

under another. In some instances, during the term of a transaction, the use of a piece of

property offered as collateral may change, and thus its classification of collateral may

change. Property most susceptible to this change is that which can be employed for business as well as

Chapter

6 CCLLAASSSSIIFFIICCAATTIIOONN OOFFCCOOLLLLAATTEERRAALLSS


for personal use. For example, a small business owner may own one computer. While

being used in the operation of the business, the computer should be classified as

equipment. However, what if the owner moves the computer to his home and gives it

to his children to use? It no longer is being employed in the operation of the business,

but, instead, is being given to personal use. No longer should the computer be

classified as equipment. It would now be considered a consumer good.


Property becomes collateral only at the moment of attachment. Therefore, the moment of attachment is

considered the best time to properly classify the collateral.

How to Classify Collateral

Tangible property: Inventory

Question6.1: Suppose Sim’s Corpora-tion makes

personal computers. It wants to expand operations

and goes to Canadia Bank for a loan. As collateral,

Sim offers a large number of its computers stored in

its warehouse facility. How should this collateral be

classified?

Answer 6.1: As inventory. Let’s go through the

steps. First, it should be fairly clear that the

computers are tangible property as they have a

concrete and discernable physical form. Within the

category of tangible property, it should likewise be

clear that the computers represent goods, as opposed

to secured sales contracts, documents, instruments or

money. Within the category of goods, there are five

choices: inventory, farm products, consumer goods,

equipment and fixtures. The computers should be

classified as one and only one of these choices. It

should be fairly clear that the computers in the

warehouse facility were held for sale by Sim. Thus,

they fit into the category of inventory.

Tangible property: Inventory

Question 6.2: Chan’s Computer Store sells

computers. Mr. Chan purchases 40 computers. He

puts 38 in his warehouse and one on display. The

last he sets up in his office to use in keeping track of

his business operations. If Chan were to use these

computers as collateral for a loan, how would they

be classified?

Answer 6.2: The 38 computers in the warehouse

and the one on display would be classified as

inventory. The analysis is the same as in the last

question. The computer set up in Chan’s office,

however, is classified differently. It falls into the

category of equipment. Remember, equipment is the

residual category. If a good is not inventory,

consumer goods or farm products, then by process of

elimination, it must be equipment. So, even though

the 40 computers are exactly the same, when they are

used as collateral, they fall into different

classifications, depending on their use.


Tangible property: Consumer goodsQuestion 6.3: Suppose Ra purchases a computer for

his family’s use. He sets it up in the main room at his

house. He uses it for household accounting, while his

kids use it for the internet and games. Wishing to

receive a small business loan, Ra offers this

computer as collateral. How should it be classified?

Answer 6.3: As consumer goods. The same analysis

as in the above questions applies to narrow the

classification of the collateral to goods. Goods are

consumer goods if they are “used primarily for

personal, family or household purposes.” It is pretty

clear that that this definition fits the use of Ra’s

computer.

Tangible property: EquipmentQuestion 6.4: According to the same scenario as in

Example Three, suppose Ra places the computer in

his bedroom, instead of the main room, telling the

rest of his family that the computer is not for their

use, but for tracking the operations of his small

business. Would the classification of the collateral

be different as a result?

Answer 6.4: Yes. If you change the use of the

collateral, the classification of it also changes.

Clearly, the computer, in this situation, would not be

a consumer good. Because it is also not a farm

product or inventory, it must fall into the residual

classification, equipment.

Change of classificationQuestion 6.5: Suppose after three years of family

use, Ra takes the computer, places it in his bedroom

and tells his family that it can no longer be used for

family fun, but will be used for his personal business.

Ra erases the computer games and website history

from the computer and begins to add only business

software onto the machine. At this time, Ra applies

for a loan, putting the computer up as collateral. How

does the change in the computer’s use affect its

classification?

Answer 6.5: In this situation, the collateral started

off as a consumer good. However, over time, it was

converted to another use – as equipment. So, how do

we determine which classification is correct? The

Draft Law does not instruct us in this matter. Since

there is no case law concerning secured transactions,

the best strategy would be to examine how other

jurisdictions, with more developed secured

transactions legislation, deals with a similar scenario.

Comparative Note: In the U.S., courts will look to the primary use of the collateral. Is it mostly being used

for consumer purposes or for business purposes? However, what time frame is most appropriate for analysis?

Should courts look to the primary use of the collateral at the time of its acquisition or to its primary use at a

later date? U.S. courts have largely determined that the primary use of the collateral at the moment of its

attachment is the appropriate time frame for determining its classification. Property becomes collateral only

at the moment of attachment. The moment of attachment is the best time to properly classify the collateral.

In this example, because attachment doesn’t occur until Ra and the bank complete the loan and security

agreements and until after Ra changes the use of the computer to business use, the collateral would be

classified as equipment.


Reminder: Because Cambodia’s case law on secured transactions is incipient, its courts will have to addressmany issues, similar to ones already addressed by jurisdictions with more developed secured transactionslegislation. For its predictive capacity, referral to these other jurisdictions for analysis is an importantstrategy for determining the different options Cambodian courts may consider.

Classification of collateralsQuestion 6.6: Prisath owns a rice farm in Kompong

Cham Province. In addition to his newly harvested

rice crop, Prisath also has on his farm sown seed,

several cows, two of which are pregnant, one tractor,

fertilizer, tractor fuel standing timber and rice

packaged and ready for sale. He also owns several

chickens, the eggs from which he uses for household

consumption. He wants to secure a loan from the

local agricultural bank. In an effort to offer the most

valuable collateral possible, Prisath puts up all of the

above items. How should each be classified?

Answer 6.6: Let’s take each item in turn. The

harvested rice crop and the sown seed are “crops

grown, growing, or to be grown” and, thus, clearly fit

into the category, farm products. The cows as well as

the calves to be born are “livestock, born or unborn”

and thus are also considered farm products. The

fertilizer and tractor fuel are “supplies used orproduced in a farming operation” and thus also farm

products.

Status of the tractor, however, is a little tricky and

unclear. It needs further clarification than is given in

the Draft Law. On the one hand, the tractor could be

classified as a farm product, as it is a supply

“used…in a farming operation.” On the other hand,

it could very easily be classified as equipment, the

residual category of goods that are not inventory,

consumer goods or farm products. Because each

piece of collateral must have one and only one

classification, there is only one correct

characterization. It hinges on interpretation of the

following provision of the definition of farm

products: “supplies used or produced in a farming

operation.” If the provision is interpreted to mean

supplies that are used up in a farming operation, then

the tractor may be classified as equipment. Tractors

are not ordinarily used up in a farming operation.

However, if the phrase is interpreted more broadly to

mean supplies that are merely used in a farming

operation, then the tractor would fit into the category

of farm products.

Standing timber is clearly not a farm product. The

definition of farm product explicitly tells us so:

“Farm products means goods of a debtor engaged in

farming, other than standing timber…”


Because it is a good, standing timber, as opposed to

cut timber, must fit into one of the following

categories: consumer goods, inventory, equipment

or fixtures. The standing timber would be

considered a fixture because it is a good “fixed to

immovable property, in a manner that causes a real

right to arise under the Land Law of 2001.” If the

timber were cut, its classification would depend on

its use: as inventory, if it were being sold; as a

consumer good, if it were being used for personal

consumption; as equipment, if it were being used

neither as inventory nor consumer goods nor farm

products.

The rice packaged and ready for sale seems to rest

on the borderline between farm products and

inventory. In the sense that it is a harvested crop, it

should be classified as a farm product. However, its

packaging and preparation for sale seems to elevate

the sophistication of the rice from merely a harvested

crop. Because of this change in the status of the rice,

its collateral classification should also change, to

inventory.

Finally, the chickens as well as their eggs should be

classified as consumer goods. Though the chickens

are clearly “livestock” and the eggs “products of

crops,” they are goods “used primarily for personal,

family, or household purposes” and thus should be

characterized as consumer goods. If the chickens

were used to produce eggs for sale, then clearly both

the chickens and the eggs would be classified as

farm products.

Question 6.7: Suppose An makes various

Cambodian handicrafts for sale. His supplies

include unchopped wood, a wood-cutting machine,

various kinds of uncut stone, a stone-cutting

machine, fuel for both machines, packaging

materials and ultimately final products. How would

all of these supplies be classified for the purposes of

collateral?

Answer 6.7: The two machines are not inventory,

not farm products and not consumer goods.

Therefore, they are clearly equipment. The rest of

the materials – the unchopped wood, uncut stone,

fuel, packaging materials and final products – are

inventory. The Draft Law gives the term

“inventory,” a broad definition. It is defined as

“goods held for sale or lease, or goods that are raw

materials, work in process,


or materials used or consumed in a business.” This

definition is broader than the conventional meaning

many of us would have given to the term. Inventory,

therefore, covers the final product awaiting sale, as

well as the raw materials used in preparation of that

final product.

Why is inventory given such a broad definition?

First, it is hard to think what other category these

raw materials would be put in. They would not be

equipment because they are used up in the process of

forming the final product. Another type of collateral

would have to be invented to include these raw

materials, if they were not part of inventory. Limiting

the different collateral classifications simplifies the

process of creating a security transaction.

Second, and more importantly, the broad definition

given inventory is a means to encourage the use of

“floating liens” as collateral. A floating lien is the

use of inventory as collateral, commonly described

in security agreements in the following manner: “All

inventory now held or hereafter acquired.”

Describing collateral in this manner has proven to be

a valuable and effective means of securing

transactions.

Sure, An could offer both machines as collateral, but

chances are, the machines are old or, if new, will

depreciate quickly. Thus, they may be an

unattractive form of collateral. On the other hand, to

be able to offer all of his final products, as well as all

of the materials used in making those final products,

may be seen as more valuable in the eyes of potential

lenders. A floating lien is a very attractive form of

collateral for lenders. Indeed, the Draft Law wants to

encourage the use of inventory financing because,

for many Cambodian businesses, inventory may be

their most valuable property


Third, the expansive definition of inventory makes

the filing process much easier for the lender. A

lender only has to file once and does not need to

make constant amendments or additional filings

every time a debtor’s inventory changes. Though the

composition of the inventory changes as a debtor’s

business moves forward, a lender continues to hold

as collateral the aggregate value of what is in the

pool of inventory at any one time. For example,

An’s lender at the beginning of the business year

may be mostly fuel, uncut stone and unchopped

wood. However, as the business moves forward and

more final products are made, the composition of the

inventory will change. It will be comprised more of

final products and products nearing completion than

it will fuel or raw materials. At any time during the

secured transaction, however, and no matter the

composition of An’s inventory, it is sufficient to

describe the collateral one time as merely

“inventory, now held or hereafter acquired.”

Question 6.8: Mr. Siv owns a small business that

produces motorbike tires. All completed tires, not

yet sold are put into his warehouse. How would you

classify these tires?

Answer 6.8: It should be clear that these tires are

goods, rather than accounts, documents, instruments

or other intangibles. More specifically, it should be

clear that the tires are inventory, as they are “goods

held for sale.”

Classification of collateral: AccountsQuestion 6.9: Assume the same scenario as in

Example Eight. Suppose Mr. Siv contracts with one

of his buyers for a sale of a number of tires.

According to the sales contract, the buyer agreed to

pay Mr. Siv in full for the tires within 90 days of its

receipt of the tires. Suppose now that Mr. Siv would

like to take a loan, and, as collateral, offers the

money owed him by the buyer. How would you

classify this kind of collateral?

Answer 6.9: The money owed Mr. Siv would fit

under the classification of “accounts.” It is best to

come to this conclusion by process of elimination.

First, the money clearly could not be considered

“goods.” Second, according to the definitions of

“documents” and “secured sales contracts,” it is

clear that the owed money would fit into neither

category. The definitions of “instrument” and

“account” appear very similar. The big difference

between the two types of collateral is that an

instrument is tangible property, a written record

evidencing a monetary obligation, while an account

does not have physical presence.


In our case, Mr. Siv does not hold a written record,

such as a notes payable, from his buyer. Thus, the

collateral could not be an instrument. Therefore, it

must be an account. Look to the definition of

accounts, which should confirm this for you.

Distinguishing between instruments and accounts

can become tricky, especially if Mr. Siv keeps for his

own records tangible evidence of the money owed

him. As any smart businessman, I’m sure he would

keep track of money he owes and money owed to

him. However, this documented record does not

make the collateral an instrument because the

document represents only Mr. Siv’s personal

bookkeeping.

If the record were to burn or somehow get lost, it

would not change the fact that he is still owed the

same amount of money. On the other hand, were an

instrument to burn or get lost, the owner would lose

the right to receive the money underlying the

instrument. Accounts can be a very valuable form of

collateral.

Classification of collateral: Document of titleQuestion 6.10: Assume the same scenario as in

Example Eight. Suppose that Mr. Siv runs out of

personal warehouse space. He decides to transport

his tires to Ang’s Warehouse Facility for storage.

Upon receipt of the tires, Ang issues a warehouse

receipt to Mr. Siv. How would this warehouse

receipt be classified in terms of collateral?

Answer 6.10: Again, an easy way to solve this

question is to use the process of elimination. Since

the receipt represents something tangible, the

collateral clearly could not be classified as an

intangible, such as an account. The receipt also does

not fit neatly into the goods category, or, for that

matter, into the categories, instruments and secured

sales contracts. In fact, the warehouse receipt is

precisely one form of what the Draft Law has

defined as a Document of Title. It is important to

understand that the Draft Law defines Document in

a very specific way. It does not cover any old piece

of paper, receipt, or written record. It is defined to

mean three, very particular kinds of receipt, received

in the storage or transport of goods. That’s it. It is a

very narrow definition. It is important to remember

that the Draft Law gives specific definitions to

otherwise common words used with quite different

connotations in everyday speech.


Classification of collateral: InstrumentsQuestion 6.11: Lucky Supermarket takes payments

from its customers in various forms. How would you

classify the following forms of payment in terms of

collateral?

Answer 6.11:

a. Personal checks fit under the definition of

instrument. Look at the definition of instrument:

a. Personal checks he receives from customers

b. Notes made payable “to the order of Lucky

Supermarket,” calling for payment over a series

of months.

c. Copies of a form “Retail Sales Installment

Agreement” which he asks of customers who

intend to pay for larger purchases over a period of

time. The form sets out a payment plan and also

states the following: “Buyer grants to Lucky

Supermarket a security interest in any and all

items purchased under this agreement as security

for Buyer’s obligations to pay any amount due

hereunder.”

d. Sometimes, Lucky Supermarket asks customers

to sign both a Retail Sales Installment Agreement

as well as a promissory note covering the

payment obligation. The note is then stapled to

the Agreement.

“Writings that evidence a right to the payment of

money and is not itself a security agreement or

lease…” Personal checks are one form of such

writings. Checks are not commonly used in

Cambodia and may not ever become prevalent. It

is important, though, to understand how they

work, as they function in a manner similar to

other kinds of instruments that may, indeed,

become popular forms of payment in Cambodia.

The owner of a personal check maintains a

checking account at a bank. He deposits this

money in the bank, and, in return, the bank offers

the individual safekeeping, a small annual rate of

interest and the convenience to withdraw the

money at will. The bank, in which the checking

out is deposited, offers the account holder blank

personal checks. With these personal checks, an

individual-account holder may make purchases.

After such a purchase is made, the seller takes

possession of the check and receives payment

from the bank, who issued the personal checks in

the first place. The bank, in turn, takes the

required amount from the individual-account

holder’s account. This is a slightly simplified

description of the payment system with respect to

checks. But, regardless, it is important to note

that checks represent a common form of payment

in many parts of the world and are considered

elements of a sophisticated financial system.

b. The Notes Payable are also considered

instruments. How do we know this? Well, first

think of the possible types of collateral these

notes could represent. They are certainly not

goods.


They also can’t be documents, remember, due to

the very specific definition given that term by the

Draft Law. They are also not secured sales

contracts because no embody no kind of security

agreement. In sum, they could be instruments or,

perhaps, accounts. If you look to the definition of

accounts, you should be able to convince yourself

that notes payable are instruments. An account

means “any right to payment…which is not

evidenced by an instrument….” The Notes

Payable are just that, instruments. It should also

be clear that since the notes are in physical form

and thus represent something tangible, they, in no

way, could be classified as an intangible type of

collateral, such as an account.

c. The Retail Sales Installment Agreement fits

under the category that the Draft Law entitles

“secured sales contracts.” The written form has

two components: first, it indicates the customer’s

monetary obligation; second, it gives a security

interest to the seller for the goods purchased. It is

the combination of these two obligations in the

same set of written records that make it a secured

sales contract.

d. The Agreement and promissory note, when

attached together, also represent a secured sales

contract. The promissory note represents the

obligation to pay. The Agreement evidences the

security interest given the seller.

Question 6.12: Siphan has just purchased 100

shares in a local energy company. These shares are

evidenced by a share certificate in his possession. If

Siphan wanted to use the shares as collateral for a

loan, how should they be classified?”

Answer 6.12: These shares are evidenced by a

certificate. They should be classified as instruments.

The last sentence in the Draft Law’s definition of

instrument should confirm this.


Classification of collateral: InventoryQuestion 6.13: Suppose Saory owns a fleet of

motorbikes that he leases to people for varying

periods: some for one day, others for much longer.

How would you classify the vehicles in his fleet?

When the vehicles are rented, how would you

classify the lease agreements held by Saory?

Answer 6.13: The vehicles in Saory’s fleet clearly

represent inventory. The lease agreements should be

classified as secured sales contracts. Give the

definition of secured sales contracts a careful

reading. It covers writings that create a monetary

obligation and a security interest in goods. It also

covers writings that create a monetary obligation and

a lease of goods. These lease agreements, detailing

both the customers’ obligation to pay and the lease

of motorbikes, clearly fall under the heading of a

secured sales contract..

Classification of collateral: Other intangiblesQuestion 6.14: Prisath enters into a 10-year

agreement with Chan, the owner of several offshore

islands off the Cambodian coast. According to the

agreement, Chan allows Prisath to mine for oil

deposits within the vicinity of the islands. Any oil

that Prisath finds, he can keep, provided he pay Chan

a 20% royalty. One year into the agreement, Prisath

believes that he has discovered a particularly large

oil field. However, the oil is located too deep

beneath the surface for Prisath’s oil equipment.

Therefore, Prisath attempts to secure financing for

more technologically-advanced equipment. As part

of his collateral, he offers the rights he has to explore

Chan’s land for oil. How should these rights as

collateral be classified?

Answer 6.14: Other Intangibles. We come to this

answer only by the process of elimination. It is

sometimes easier to think of what a certain piece of

property is not, instead of what it is. These

exploration rights are clearly not goods. Prisath is

not offering the oil deposits as collateral, but the

rights to search the land for oil deposits. They cannot

be documents, secured sales contracts or

instruments. We know this because the rights have

no physical presence and thus are intangible. The

Draft Law contemplates two categories of

intangibles: accounts and other intangibles. The

rights do not represent any kind of monetary

obligation and thus cannot be accounts. This leaves

the classification, other intangibles. This category is

a residual category. Its definition indicates that it is

meant to cover all legitimate collateral that cannot be

categorized under any other headings.


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Question 6.15: Siphana wishes to sell his villa.

Mok is interested in buying it, but cannot afford to

purchase it outright. He asks Siphana to finance it

for him. Siphana agrees, Mok gives a down payment

for 25% of the purchase price and a mortgage note,

representing the rest of the purchase price. Would

this transaction be within the scope of the Draft

Law? Assume Siphana then goes to a bank in search

of a loan. As collateral, he offers the note he has

received from Mok? Does this note represent a

legitimate form of collateral under the Draft Law?

Answer 6.15: This transaction would not be covered

by the Draft Law. The Draft Law deals with the use

of personal property as collateral. The transaction in

question deals with a real estate mortgage, which

represents a way of using real property as collateral.

This kind of transaction would fall under the

jurisdiction of the 2001 Land Law. Perhaps,

confusingly, the note held by Siphana would

represent a legitimate form of collateral and would

be covered by the Draft Law. The note falls under

the definition of an instrument. Even though the

transaction underlying the instrument falls outside

the Draft Law, the use of the instrument itself would

be covered by the Draft Law. It is important to

distinguish between the two transactions. Though

they are related, one will be governed by the 2001

Land Law and the other will be governed by the

Draft Law.

Question 6.16: What happens if a good can be

classified into more than one category of collateral?

Answer 6.16: Impossible. Again, all collateral can

fit into one and only one classification. Sometimes,

it is quite easy to determine which category the

collateral fits into. Other times, it can be quite

difficult, requiring a very careful reading and

analysis of the definitions of the different kinds of

collateral.

Question 6.17: Should a dispute arise regarding a

secured transaction, what is the first step the lawyer

or judge must take?

Answer 6.17: Identify the core elements of the

secured transaction: the debtor, the creditor (secured

party), the security interest and the collateral. With

respect to the collateral, first identify in concrete

terms what the property is. Then, attempt to classify

it into one of the types of collateral outlined by the

Draft Law. All collateral can and will fit within oneand only one of a set of carefully defined types.


1. Attachment of security interest to collateral

Why create a security interest? In many cases, an

individual’s or company’s mere promise to repay is

not adequate for a creditor to disburse a loan.

Therefore, the prospective debtor must offer

something additional in order to convince the

creditor that the costs to the prospective debtor of

failing to repay the loan are sufficiently great.

Attachment is a legal term for creation. When a

security interest is created, it becomes enforceable as between the debtor and creditor

and is said to have attached.

A security interest is enforceable when three conditions are met. The conditions may be

met in any order. The three conditions are:

Condition 1: There must be a security agreement

There must be a security agreement that describes

the collateral. A security agreement may not be an

oral agreement. The purpose of the requirement of

an agreement is to provide evidence of the security

interest.

A. Elements of the security agreement

Three basic elements are required to consummate a valid security agreement:

- Element 1: Agreement must be consonant with the Cambodian Law on Contracts. The most

important thing to remember about the security agreement is that, ultimately, it represents

a contract between two parties. Because it is a contract, the Cambodian laws of Contract

apply. Thus, for example, the agreement must contain an offer and acceptance.

Chapter

7 AATTTTAACCHHMMEENNTTOOFF AA SSEECCUURRIITTYY

Definition: What is the security interest?

A security interest is a contract between two

parties according to which one party (the

debtor) offers personal property to the other

party (the creditor) as collateral in exchange

for the creditor’s consent to provide the

debtor with a loan or other form of credit

finance.

Definition: What is the security

agreement?

It is the agreement in written record between

the debtor and creditor that transfers a

security interest in a piece of collateral from

the debtor to the creditor.


Furthermore, the agreement must not be unconscionable or contain terms that would be

void for purposes of public policy.

- Element 2: Agreement must be authenticated.

Though both parties, of course, need to agree to the creation of a

security interest, the Draft Law requires only the debtor to authenticate

the agreement. There is no requirement that the security agreement be

notarized or made in front of witnesses.

- Element 3: Agreement must contain a description of the collateral.

General Rules: The security agreement must reasonably identify the collateral. The

description does not need to be overly specific. Indeed, the description may be expressed

in general terms, such as “all assets” or “all movable property.” The purpose for

describing the collateral is merely to ensure that there is no confusion between the two

parties as to the collateral’s identity. The description is not designed to be a running

itemization of the collateral.

Exceptions:

1. Serial-Numbered Vehicles: A serial-numbered vehicle is the

following: a motor vehicle, trailer, aircraft or motorized boat that is not

held as inventory of a debtor. Under some circumstances, the priority

of a creditor may depend on a correct description of a vehicle by its

serial number.

This exception may only affect the priority of the creditor with respect

to third-party interests in the collateral. It may not affect the validity

of the security agreement per se. In other words, to describe a serial-

numbered vehicle in general terms, rather than by the serial-number,

does not automatically render the security agreement invalid.

However, if there is any confusion regarding which serial-numbered vehicle is being

offered as collateral, the security agreement may be invalid. Therefore, it is

Definition: An authenticated agreement is defined in the Draft Law:

* “To authenticate means to execute or adopt a name or symbol, manually or otherwise, with

present intent to identify the authenticating party or to adopt or establish the authenticity of

a record.”

* that authenticating an agreement does not mean to sign the agreement. The parties’

signatures are not required to authenticate a security agreement.


recommended, when using a serial-numbered vehicle as collateral, to always describe the

collateral by its serial number. This will minimize opportunities for dispute between the

parties to the transaction.

2. Consumer Goods: Because only a purchase-money security interest is permitted to be

taken in consumer goods, the collateral description must describe the subject of the

interest. Therefore, it is insufficient to describe the collateral in general terms, such as “all

consumer goods held by debtor.”

The purpose for this exception is to protect consumers from unscrupulous lenders. To

offer all consumer goods as collateral means that, should the debtor default, the secured

party would be entitled to take the debtor’s furniture, clothing, food and any other

material that is considered a consumer good. This ability to take away a debtor’s essential

goods gives the secured party considerable power over the debtor. In a developing

country, such as Cambodia, where most individuals and companies are unfamiliar with

secured transactions, protection of the consumer is especially important.

B. Effectiveness of the security agreement

The security agreement must be in the form of a “written record.”

• The requirement of a written

record does not mean that the

agreement must be

handwritten. The

agreement may be typed,

in the form of email

correspondence or in any

other tangible medium.

• An oral agreement is not sufficient to represent a valid security agreement.

• A security agreement may be found in multiple records when the records are read together.

This means that an offer in one document, followed by an acceptance in another document, when read

together would represent an appropriate security agreement.

There is no strict format that the security agreement must follow. Therefore, it doesn’t matter how the

security agreement was labeled or entitled. As long as the contract functions as a valid security

agreement, formalities, such as proper headings, are not important. Again, whether addresses are

included or not, the security agreement will remain valid, provided it meets the above requirements.

Most importantly, the parties should have sufficient information to know each other’s identity.

Sometimes including an address on the security agreement will help. However, sometimes it will hinder,

especially if a party’s address changes often.

Definition: A Record is defined in the Draft

Law as:

“Information that is inscribed on a tangible

medium or that is stored in an electronic or

other medium and is retrievable in perceivable

form.”


C. Difference between the security agreement and the loan agreement

Condition 2 Debtor must receive

something of value

The debtor must receive something of value from

the secured party. The secured party cannot have a

real right in collateral unless the secured party has

given something of value to the debtor. This “value”

could be cash, a promise to advance cash in the

future, a promise to sell collateral to the debtor at a

price that is agreed upon or that will be agreed

Loan agreement Security agreementIt is important to remember that the security agreement is a distinct contract from the loan agreement. In

most cases, parties to a secured transaction will complete both a loan agreement and a security agreement.

• In the loan agreement, the creditor and debtor

outline loan-specific information, such as the value

of the loan and its repayment terms.

• In the security agreement, on the other hand, the

parties will provide only the information needed to

complete a valid security agreement.

• It should deal primarily with the collateral that is

being given in order to facilitate execution of the

loan agreement. For any transaction to be secured

by collateral, there must be a security agreement.

• It is advisable for parties in the security agreement

to make reference to the relevant loan agreement.

The reference need not be detailed. It should

provide just enough information so that all parties

concerned know with certainty to which loan

agreement the security agreement relates.

If the loan agreement is distinct from the security

agreement, must each agreement be a separate

document or can they be combined?

Although custom and perhaps clarity suggest that

both agreements be consummated in distinct forms,

there is nothing in the law that requires both

agreements to be contained in separate agreements.

As long as the required elements of a security

agreement are provided, and the information

concerning the loan agreement constitutes a valid

loan agreement, both agreements could be contained

in one document.

Definition: Article 3.32 provides a definition

for “value” as:

“A person gives value for rights if he acquires

the rights: (i) in return for a binding

commitment to give credit, whether or not

drawn upon; or (ii) as security for or

satisfaction of a pre-existing claim, in whole

or in part; or (iii) by accepting delivery

pursuant to a pre-existing contract for

purchase; or (iv) in return for anything given

in exchange, or for any promise.”


upon. There can be no complete listing of the ways in which value may be given.

The parties are free to structure the commercial arrangement as they please, but

no security interest is enforceable until the secured party gives something of

value to the debtor.

Condition 3 Debtor must have rights in the collateral

The debtor must have rights in the collateral. The secured party may not claim an in rem right to the

debtor’s property until the debtor has rights of some kind in the collateral. In most cases, the debtor’s

right will be an ownership right, but the debtor may also give a security interest based on the right to

use property under a lease or other agreement.

• What does it mean to have “rights in” a piece of collateral? What does it mean to have the

“power to transfer rights in the collateral?”

“Rights in” collateral is not defined by the Draft Law. However, in most cases, the rights that a

debtor has in a particular piece of collateral will be ownership rights. In some other instances, the

debtor will not own the collateral, but rather will have the rights to use or possess the collateral.

These latter kinds of rights usually arise from a lease agreement.

• Why must a debtor have rights in a piece of collateral in order to transfer his interest in it?

The answer is obvious. You can’t give an interest in something that isn’t yours to begin with.

• How does a prospective creditor determine if the debtor enjoys sufficient “rights in” the

property in order to use it as collateral?

Ultimately, it is the prospective creditor’s responsibility to make sure that the debtor has sufficient

“rights in” the collateral. The prospective creditor may accept any collateral he wishes. However,

if the debtor did not have the rights to use the property in question as collateral, then a security

interest will never have been created, leaving the creditor vulnerable to the debtor’s default. The

best way for the creditor to ensure his status as a secured party is to ask the debtor for a documented

proof of ownership, such as a bill of sale, or for some other form of formal notification that he was

entitled to transfer the property in question as collateral. The prospective creditor should not rely

on the debtor’s word that he owns the property. To be safe, the prospective creditor needs to find

information independent from the debtor attesting to the debtor’s rights in the collateral.


If a security interest attaches to collateral, it automatically attaches to any proceeds of the collateral.

Proceeds may be cash or other property received in exchange for the collateral (see definitions). There

is no need for the security agreement to state that proceeds are covered by the security interest. The

parties, however, may agree that proceeds are not covered by the security interest.

Note: These conditions do not need to be attained in any particular order. For example, a security agreement

can be completed before the transfer of collateral and the delivery of value. Similarly, the delivery of value

can occur before completion of the security agreement and before the debtor transfers collateral. The order in

which the conditions are met is not important. What is essential, however, is that all conditions are reached.

Without all three conditions, a security interest cannot be created.

Example 1 – [Order of conditions: 1 / 3 / 2]

• Ang (debtor) and Samithi (Secured Party) enter into a security agreement under which Samithi will lend

money to Ang for the purchase of office equipment. Ang’s obligation to pay is secured by any equipment

purchased with the borrowed money. Condition 1 is met – a security interest is granted in a written

agreement.

• Ang goes to motorbike dealer, selects a motorbike to be used to make deliveries of goods in connection

with Ang’s business. A price is agreed upon and Ang signs a binding agreement for purchase of the

motorbike. Condition 3 is met – Ang has acquired rights in the auto.

• Samithi gives money to Ang to complete the purchase. Condition 2 is met – Samithi has given value to

Ang. The security interest has attached to the auto.

Example 2 – [Order of conditions: 3 / 1 / 2]• Ang owns an automobile. Condition 3 is met – Ang has rights (the ownership right) in the collateral.

• Ang and Samithi enter into a secured agreement in which Samithi takes a security interest in the automobile

to secure a loan. Condition 1 is met – a security interest is granted in a written agreement.

• Samithi advances money to Ang. Condition 2 is met. Samithi has given value to Ang. The security

interest attaches to the auto.

Example 3 – [Order of conditions: 1 / 2 / 3]• Ang and Samithi enter into an agreement in which Samithi will provide periodic advances of cash for

purchase of inventory for Ang’s television dealership. Ang grants Samithi a security interest in all the

inventory of the dealership, including all inventory acquired in the future. Condition 1 is met – a security

interest is granted in a written agreement.

• Samithi begins to make advances. Condition 2 is met – Samithi has given value to Ang.

• In the future, Ang acquires new television sets to replace televisions sold to customers. Condition 3 is met

– Ang has acquired rights in collateral. The security interest attaches to the future acquired televisions.


A security agreement is also enforceable against other creditors as provided in this law. Other creditors may

include (a) other holders of security interests, (b) lien holders such as tax authorities, judgment creditors, or

bankruptcy administrators. It is important to understand that, in order for the security agreement to be

enforceable against third parties, additional steps need to be taken to perfect the security interest.


Creation of secruity interest

Question 7.1: How is a security interest created? Answer 7.1: Three conditions are required for a

security interest to be created:

1. Debtor must transfer conllateral to the creditor.

The debtor must have rights in the collatereal, or

the power to transfer rights in the collateral.

2. Creditor must deliver value to the debtor

3. Both parties must complete a security agreement

When these three conditions are met, the security

agreement becomes enforceable between the debtor

and the creditor

Question 7.2: Can there be an unattached security

interest?

Answer 7.2: No. There is no such thing as an

unattached security interest. If there is no

attachment, the agreement is not enforceable

between anyone. If it is not enforceable, it cannot be

considered a security interest, as all security interests

are enforceable between the debtor and creditor.

Does the debtor have sufficient "rights in" the collateral?

Question 7.3: Suppose Sim would like to receive a

$2000 loan from his friend, Sophie. Sophie would

like to help her friend, but, nevertheless, $2000 is a

lot of money. Therefore, she asks Sim to put

something of value up for collateral. As collateral, he

offers a painting he owns. Does Sim possess

sufficient rights in the painting to offer it as

collateral?

Answer 7.3: Unequivocally, yes. Although the Draft

Law itself does not define "rights in collateral,"

property law instructs that to have ownership rights

is to have sufficient property rights in an item put up

for collateral.



Example Two with one exception. Sim's parents, not

Sim, enjoy full ownership and possessory rights in

the painting. Does Sim possess sufficient rights in

the painting to offer it as collateral?

Answer 7.4: It looks as if Sim does not have

sufficient rights in the painting to offer it as

collateral. He neither owns nor possesses it. The

only way Sim would be able to offer the painting as

collateral is to show that he has the power to transfer

the painting as collateral. To have such a power, Sim

would need to arrange a separate contractual

agreement to that effect with his parents, the

painting's owners.


Two with the following exception. Though Sim

doesn't own the painting, under a lease agreement

with his parents, he enjoys possessory rights in the

painting. Does he have sufficient rights in the

painting to offer it as collateral?

Answer 7.5: Under the Draft Law, Sim enjoys

sufficient property rights in the painting in order to

put it up as collateral. However, remember that

certain aspects of the Draft Law are default clauses

that could be contracted around. Indeed, without

examining the lease agreement, it is impossible to

say with certainty whether Sim has sufficient

property rights. For example, the lease agreement

could contain a clause restricting Sim's ability to use

the painting as collateral.

Reminder: Many clauses of the Draft Law are considered default clauses. This means that,

if the parties so choose, they may contract around such clauses. Of course, not every clause

can be contracted around. For example, it would not be possible for the parties to decide

between each other to disregard the requirement of composing a security agreement.

However, parties can choose to add restrictions greater than what is contained in the Draft Law. In this case,

the lease agreement between Sim and his parents prevent Sim from offering the painting as collateral,

despite the Draft Law's willingness to allow him to do so.


Two with the following caveat. Sim has no

ownership rights in the painting, but does have

possessory rights. His parents have allowed Sim to

use the painting temporarily. There was no lease

agreement between Sim and his parents and, thus, no

concrete instructions concerning the use of the

painting as collateral. Does Sim have sufficient

rights in the painting to offer it as collateral?

Answer 7.6: The Draft Law does not provide a

definitive answer to this question. Therefore, one

must look beyond the Draft Law to the country's

Laws on Property. Most likely, the courts would

consider Sim to be a bailee with respect to the

painting. His parents gave him the right to possess

the painting, but not to sell it or give it away. There

is no reason to think that the parents have given Sim

the right to use the painting as collateral.



Two with the following caveat. Sim stole the

painting from his friend's house before offering it as

collateral. Does Sim have sufficient rights in the

painting to offer it as collateral?

Answer 7.7: In this case, Sim clearly does not have

any rights in the painting. He doesn't own it. Though

he possesses the painting, the principles of Property

Law inform us that a thief cannot gain title or any

interest in the goods stolen. Thus, no security interest

would be created in this circumstance.

Lessons: The last three questions raise two very important issues. Whose responsibility is it to determine

whether the prospective debtor has sufficient "rights" in the collateral? Secondly, what steps can be taken to

ensure that the debtor indeed possess such rights?

It is the responsibility of the prospective creditor to determine whether the debtor enjoys sufficient "rights

in" in the collateral. In our examples, if Sophie were to accept the painting as collateral, she sends the

message that she believes all three conditions of a security interest have been met. In other words, she

announces her belief that her loan to Sim has been securitized by the painting. However, if Sim were to default

and Sophie were to attempt to collect the collateral, she would discover that Sim may not have had any rights

in the painting and thus nor could Sophie. In effect, despite her understanding to the contrary, Sophie extended

Sim an unsecuritized loan. Thus, there isn't much she can do to enforce Sim's repayment of the loan. In this case,

it is clearly Sophie's responsibility to ensure that Sim enjoys the appropriate rights in the collateral before

accepting it as part of a security agreement.

So, what steps should Sophie take in order to ensure that Sim enjoys sufficient "rights in" the collateral?

First, she could ask Sim. However, most likely Sim would claim that, of course, he has the requisite rights.

Taking the prospective debtor's word for it would be too risky for Sophie. Another option would be to

require Sim to sign a statement, asserting that the painting is truly his and that he may offer it as collateral.

However, this option is also problematic because, ultimately, such a contractual covenant is not enforceable.

Rather, what any prospective creditor must do is determine, independent of the debtor, whether the debtor

has sufficient rights in the property. The best way to do this is demand from the debtor some proof of

ownership or, if he does not own the collateral, some proof that he is empowered to offer it as collateral.

Has the creditor given the "value" required in order to create a security interest?Question 7.8: Mara operates a successful internet

café. Feeling that she can do even better business had

she owned more computers, she approaches a local

bank for a $2000 loan. The bank requires Mara to

sign a security agreement, offering as collateral her

business' computer equipment. She agrees to do so.

The bank then tells Mara that she

will need to wait several days

before her loan gets formally

approved. Has a security

agreement been created?

Answer 7.8: No. Remember that for a security

agreement to be created, three conditions need to be

met: the debtor must have property rights in the

offered collateral; the debtor and creditor must

complete a security agreement; and the creditor must

give value in exchange for the security interest in the

collateral. In this example, both parties have

finalized a security agreement. Furthermore, we can

assume that Mara has sufficient property rights in the

collateral, since it is equipment from her business.

However, the bank has not given any value to Mara.

All it has done is promise to consider giving Mara a

loan.


Question 7.9: Assume the same facts as in Question

Six along with the following information. After two

weeks, the bank disburses the loan to Mara. Has the

security interest been created?

Answer 7.9: Yes. The bank has given value, and thus

all three conditions for creating a security interest

have been met.


Question Six with one change. Suppose that, instead

of giving a loan, the bank, on April 1st, offers Mara

access to a $2000 credit line. Mara decides not to

access the credit line until May 1st. When has the

security interest been created?

Answer 7.10: The security agreement is created as

soon as all three conditions are met. The bank gives

value to Mara as soon as it makes the credit line

available to her. It doesn't matter when Mara actually

draws on the money.

Definition: Credit Line

A credit line is a more flexible instrument than a loan. In a credit line, the bank does not disburse the loan

to the prospective borrower. Rather, it makes the money available to the borrower, in case she determines

that she needs it. Many individuals and companies arrange a credit line just in case they need short-term

financing in the future. This means that Mara, though she has access to the $2000, is not obligated to draw

on the money. If she ultimately decides that she doesn't need the money, she will not access the credit line

and thus will not have incurred any debt.

Question 7.11: Prisath runs a small farm. On

February 1st, in order to purchase more seed, he asks

his friend Denora for $500. Because they are old

friends, Denora lends the money immediately.

Without bothering to ask for any collateral, he relies

on Prisath's promise that he will repay the loan after

two months. After one month, Denora begins to

think that maybe Prisath will fail to pay the loan back

on time. Therefore, on March 1st, he approaches his

friend with a draft security agreement and asks him

to put up some collateral. Prisath agrees to do so: he

signs the agreement and offers his livestock as

collateral. Has a security interest been created? In

particular, has Denora given the "value" required to

establish a security interest?

Answer 7.11: The security interest has been created

as soon as all three conditions are met. Thus, though

Denora lends the money on February 1st, the

security agreement is not created until March 1st. In

this case, the "value" given to Prisath by Denora is a

pre-existing claim, satisfied by the security interest

arranged on March 1st.


Difference between loan agreement and security agreementQuestion 7.12: Suppose Mealy takes a loan from

Mekong Bank. The agreement signed with the bank

mentions only the following information: the size of

the loan, interest to be paid on the loan and the loan's

repayment terms. The bank entitles the document,

"Security Agreement." Has the loan been

securitized?

Answer 7.12: No. The agreement signed between

the two parties is a loan agreement, not a security

agreement. How do you know? Remember that the

security agreement must contain certain information,

such as a description of the collateral offered as

security. The agreement, as described, says nothing

about collateral. Do not be confused by the title of

the document. The Draft Law focuses on the

function, not the form of an instrument. Therefore,

the title of the agreement is irrelevant. What matters

is the content of the agreement. In this case, clearly

the content is of a loan agreement, not security

agreement..

Contents of the Security AgreementQuestion 7.13: Suppose Prisath asks his friend,

Ricky, for a $1000 loan. He promises to repay the

loan. A valid loan agreement is signed between the

two friends. Prisath offers Ricky his motorbike as

collateral. Ricky accepts the offer, telling Prisath to

keep possession of the bike. They agree, verbally,

that should Prisath fail to repay the loan, Ricky will

collect the collateral. Does a security agreement

attach to the collateral?

Answer 7.13: Both parties may think they have

created a valid security interest. In fact, both accept

that the motorbike should serve as collateral for the

loan. However, there is no written record of the

security agreement authenticated between the

parties. Though the intent of the parties, clearly, was

to form a security interest, and the Draft Law

nevertheless demands an authenticated security

agreement in written form. The purpose for requiring

an authenticated security agreement in written form

is to provide evidence of the security interest. Oral

security agreements are not allowed under the Draft

Law.

Question 7.14: Assume the same facts as in the

above question with one caveat. In this case, Ricky,

the creditor, takes possession of the motorbike. Still,

no security agreement is authenticated between the

parties. Now that Ricky has possession of the

collateral, has a security interest attached to the bike?

Answer 7.14: Although Ricky, the creditor, has

possession of the bike, which both parties

understand to be collateral for the loan, the Draft

Law, nevertheless, requires an authenticated security

agreement in written form. Therefore, as in the above

example, no security interest has been created.


Comparison: These last two examples should be compared with American legislation, which

embodies one of the most developed laws on Secured Transactions. According to Article Nine

of the Uniform Commercial Code, a distinction is made between a situation, as in Example

7.13, wherein the debtor retains possession of the collateral and the situation in Example 7.14,

wherein the creditor takes possession. If the creditor assumes possession of the collateral, the

law does not require an authenticated security agreement for a security interest to attach to the collateral. On

the other hand, if the debtor retains possession of the collateral, an authenticated record of the security

agreement is required for attachment. As you can see, American law defines the term "security agreement"

more broadly. It is an agreement "in fact" and does not necessarily need to be in writing. Cambodian law,

on the other hand, currently, does not allow any exceptions to the requirement of an authenticated security

agreement in written form. According to both legal traditions, the purpose of a security agreement is to

provide evidence of the security interest. Cambodian law requires this evidence always to be manifested by

an authenticated security agreement in written form. American law, on the other hand, states that the secured

party's possession substitutes as a means of providing evidence of the security interest. It is important to be

aware of the difference here between American and Cambodian law on Secured Transactions because it

demonstrates the direction Cambodian law may take in the future.

Question 7.15: In need of money to pay for English

lessons, Mr. Orn asks his friend, Ang, for $200. Mr.

Orn promises to repay the loan within one week. Ang

agrees to give Mr. Orn the money without asking for

collateral or interest in return. While handing over

the money, Ang notices that Mr. Orn is driving a

brand-new motorbike. Ang, whose motorbike is

being repaired, desperately needs another in order to

bring his parents to work. Mr. Orn decides to help

Ang out, permitting him to use the bike, while his in

the shop. Ang graciously accepts. After one week,

Mr. Orn contacts Ang and tells him he will be unable

to repay the loan. Ang, subsequently, informs that he

will hold onto Mr. Orn's bike until the loan is

repayed. Is Ang legally permitted to do so? In other

words, has a security interest been created in the

motorbike?

Answer 7.15: No. Ang is not permitted to retain

possession of the bike. The parties never agreed that

the bike would serve as collateral for Ang's loan.

Indeed, no security agreement was ever reached, and

thus no security interest has been created. The bike

was lent on certain terms that were in no way

connected to the terms of the loan. Do not be

confused that, since both transactions were arranged

at the same time, they necessarily must be

connected.


Question 7.16: Mara arranges to borrow money

from her lawyer-friend, Denora. Denora requires

Mara to sign both a loan agreement and security

agreement. The security agreement reads: "I, Mara,

hereby grant Denora a security interest in all the

equipment used in the operation of my business in

connection with a loan being made by him to me."

Mara signs the agreement. Shortly after, she falls

behind in her payments. When Denora tries to

possess the collateral, Mara argues that they never

consummated a valid security agreement. Assess the

validity of Mara's arguments, taking into account the

following information. Assume that the agreement is

in accordance with Cambodian contract law.

a. The document was not entitled "Security

Agreement"

b. No witnesses observed Mara signing the

agreement

c. Denora failed to sign the agreement

d. The agreement contained no information about

the terms of the loan

e. Description of the collateral was too vague

Answer 7.16: Let's look at each argument, one-by-

one. Before doing so, never lose track of the specific

information required in a security agreement. It must

contain a description of the collateral, it must be in

the form of a written record, it must be authenticated

and it must be in accordance with the Law on

Contracts. Though the agreement is short, it satisfies

all the elements required by law: it contains a

description that reasonably identifies the collateral,

is in written form and is authenticated.

a. The Draft Law does not require that the security

agreement be entitled "Security Agreement."

[Ordinary contract law also does not contain any

heading requirements.]

b. The Draft Law does not require that witnesses

observe authentication of the security agreement.

c. The Draft Law requires the debtor, and not the

creditor, to authenticate the security agreement.

Mara, the debtor, has authenticated the agreement

with her signature.

d. The security agreement does not need to contain

any of the loan terms. That information belongs

in the loan agreement. Though not explicitly

stated in the Draft Law, common sense and

ordinary principles of contract law require that

the security agreement make reference to which

loan agreement it refers. Though the phrase "in

connection with a loan being made by him to

me," is short and arguably general, it does its job

of clarifying to which transaction the security

agreement refers.

e. The Draft Law requires that the security

agreement contain a description that "reasonably"

identifies the collateral being offered. The Draft

Law goes on to state that, with the exception of

consumer goods and serial-numbered vehicles,

the collateral can be described in general terms,

such as "all assets" or "all movable property."

"All equipment used in the operation of my

business" is therefore of appropriate specificity.


Question 7.17: Suppose that the brothers, Sen and

Son, intend to create a security interest. Sen wishes

to borrow $2000 from Son. In return, he offers as

collateral "all the equipment used in the operation of

Sen's business." Sen lives in Sihanoukville, Son in

Battambang. Because they can't get together to

arrange the security agreement in person, they decide

to finalize it over email. Sen drafts the security

agreement, which respects the Law on Contracts and

contains all of the required information, including a

description of the collateral in the form indicated

above. He sends it to Son, who replies in a separate

email that he accepts the security agreement. The

security agreement, therefore, is not embodied in one

document. Has a valid security agreement been

created?

Answer 7.17: Sen has offered collateral in which he

possesses sufficient rights. Son, in return, gives

value, as defined by the Draft Law. Therefore, the

first two conditions for creating a valid security

interest have been met. The security agreement is

consonant with Cambodian Contract Law and does

contain an adequate description of the collateral. In

addition, the Draft Law's requirement that the

security agreement be in the form of a written record

permits such an agreement to be consummated over

email. Furthermore, the Draft Law allows the

security agreement to be recorded in multiple

documents, provided that, when read together, they

otherwise meet all of the requirements of a security

agreement. Sen's offer and Son's acceptance, as

recorded in a separate document, therefore, do not

violate the Draft Law. Finally, the requirement of

authentication has been met when Sen, the debtor,

pressed "send," thereby delivering the email to Son,

the creditor.

Question 7.18: Suppose businesswoman, Sok

Sophearon, takes a loan from a local bank. All

conditions for creating a valid security interest under

the Draft Law have been met: Sophearon gives

collateral in which she has sufficient rights; the bank

gives value in return; a proper security agreement

has been completed. However, in the security

agreement, Sok Sophearon's name was misspelled as

Sok Sophearen. Does this typographical error

invalidate the security agreement and thus creation

of the security interest?

Answer 7.18: Of course, such a fact-specific

question cannot be answered with certainty. The

courts will assess these kinds of errors on a case-by-

case basis. Nevertheless, it is worth considering how

the courts may approach such an issue. The

underlying purpose of requiring identification in a

contract (and, therefore, security agreement) is to

ensure that no confusion exists concerning the

identity of the parties to the transaction. The

question, therefore, that the courts would ask is if the

typographical error creates any doubt about the

parties' identity. If such a doubt exists, the error may

invalidate the security agreement. Names in the

Khmer language tend to be quite similar. Sophearon

is a female's name; Sophearen a male's name. In

many cases, siblings will share almost identical

names with minor differences. Therefore, though

apparently a minor error, the misspelling of the

above name may, indeed, create doubt as to the

identity of the debtor in this transaction.


Has a Security Agreement Been Reached?Question 7.19: Prisath buys a television from{name of store}for $300. Unable to pay for it allat once, Prisath signs a "Retail Sales InstallmentAgreement." According to the Agreement,Prisath agrees to pay for the television inweekly installments over a three-month period.The agreement also stipulates that the title inthe TV will remain with the store until fullrepayment is remitted. After one month, Prisathfalls behind in his payments. The storethreatens to repossess. Does the store have aright to repossession? In other words, have theparties entered into a valid security agreement?

Answer 7.19: Yes. Although neither partymentions anything about the creation of asecurity agreement, the "Retail Sales InstallmentAgreement," in effect, constitutes such anagreement. The collateral is a secured salescontract. The collateral is reasonably identifiedin a sufficiently specific manner for consumergoods. The agreement was in the form of awritten record and was duly authenticated bythe debtor. In other words, all of therequirements for creating a security agreementhave been met. Therefore, the store has theright to claim a security interest in thetelevision.

Collateral Description

Question 7.20: Ang operates a taxi service. He owns

two Toyota Corrollas and one Honda Civic. Because

there is a high demand for group travel, Ang decides

to purchase a larger vehicle, namely, a Ford

Explorer. To do so, he approaches a bank for

financing. Ang authenticates a security agreement, in

which the collateral is described as "one car owned

by Ang and used in his business." Is this description

of the collateral sufficient?

Answer 7.20: The answer to this question is unclear

and open to interpretation by the courts.

Nevertheless, it would seem that the description is

too vague and therefore insufficient. To analyze this

question, consider the purpose of requiring a

description of the collateral in the first place. It is for

both parties (in addition to third parties, which

involves another issue discussed in later chapters) to

be able to identify the specific property used as

collateral. In the event of a default, the bank will

want to seize the collateral. However, the

description of the collateral as provided does not

instruct the bank as to which car can be possessed.

The bank may decide to take one car. Ang, in turn,

may argue that it was the second car, third car or

fourth car that collateralized the loan and thus, by

seizing the first car, the bank has stolen Ang's

property. To minimize the chances of such a dispute,

the Draft Law requires that the collateral be

"reasonably" identified. In light of the above-

mentioned confusion, it is likely that the courts will

hold that such a description does not reasonably

identify the collateral.


The best way to avoid this confusion is toidentify all motor vehicles, trailers, aircraft andmotorized boats that are used as collateral bytheir respective serial numbers. This has twobenefits. First, as each motorized vehicle has itsown, specific serial number, there will be noconfusion in identifying the collateral. Second,as discussed in the chapter on Perfection &Priority, in order to perfect a motorized vehicleas collateral, it must be described according toits serial number. Therefore, though not required

for the purpose of attachment, it is nevertheless

advisable to describe collateralized motor vehicles

according to their respective serial numbers

Question 7.21: Assume the same scenario as in the

above question. However, instead of being described

as "one car owned by Ang and used in his business,"

the collateral is identified as "one Honda Civic

owned by Ang and used in his business." Would this

description be sufficient?

Answer 7.21: Yes. The above description reasonably

identifies the collateral and, therefore, would be

sufficient. Though there may be many Ford

Explorers on the streets, Ang owns only one.

Therefore, there should be no misunderstanding

between the parties as to which vehicle was meant to

be offered as collateral. Notice that, for a security

interest to attach to a piece of collateral, it is not

mandatory to describe a motor vehicle by its serial

number. Nevertheless, it is advisable to do so for two

reasons: 1. It eliminates misunderstanding between

the parties as to the identification of the collateral;

and 2. A serial-number is required in some

circumstances to establish priority with respect to

third parties.

Question 7.22: Refer to the same scenario as above.

However, suppose that one of the Toyota Corrollas is

being offered as collateral. Both parties, sensibly,

decide to describe the collateral by its serial number.

However, instead of identifying it by its correct

number, 55Z3AB, the number was mistakenly listed

as 55Z3AC. Does this mistake render the description

of the collateral insufficient?

Answer 7.22: This question is a judgment call and is

open for interpretation by the courts. Keep in mind

the underlying purpose of requiring a description of

the collateral. It is to make sure that there is no

misunderstanding between the parties as to which

piece of property has been offered as collateral. In

determining whether the collateral was sufficiently

described, the courts may look also to the serial

number of the second Toyota Corrolla. If this

number were entirely different than the one

mistakenly given, and thus there would be no chance

of confusing the given serial number with that of the

second Toyota, then the court may decide that,

despite the error, the first Toyota was reasonably

described.


However, if the number of the second Toyota were

something like 55Z3AD, most likely the courts will

decide that the original error misrepresents the

collateral and thus renders the security

unenforceable.

Question 7.23: Suppose Siphana runs a small

guesthouse. In connection with the guesthouse, he

owns two computers, a printer, and a refridgerator, in

addition to other equipment. Siphana decides that he

needs to renovate some of the older-looking rooms.

To do so, he would need to take a loan from a bank.

He approaches Canadia Bank and signs a security

agreement that describes the collateral as "all

Siphana's equipment." Does the agreement

"reasonably identify" the collateral, as required by

law?

Answer 7.23: Yes. It is not necessary for Siphana to

describe in detail all of his equipment. As long as the

agreement states an appropriate form of collateral,

recognized by the Draft Law as such, the collateral is

sufficiently described.

Question 7.24: Refer to the above scenario. Suppose

instead that the security agreement describes the

collateral as "all Siphana's assets." Would this

sufficiently describe the collateral, as required by the

Draft Law?

Answer 7.24:Yes. Article 6.7 states that a

description such as "all assets" is sufficient,

provided the description does not refer to consumer

goods.

Comparison: According to American law on Secured Transactions, a description such as "all

of Siphana's assets," would be construed as "supergeneric," even if not in reference to consumer

goods, and thus would be an insufficient description. Cambodian law allows such a description

as long as it doesn't refer to consumer goods.

Question 7.25: Ung needs $2000 to make repairs to

his house. He approaches a local bank for a loan. The

bank is willing to extend the credit, provided that

Ung puts up some collateral. Ung agrees, offering as

collateral "all consumer goods held by Ung." Is this

security interest valid?

Answer 7.25: No. The Draft Law forbids a debtor to

offer as collateral all of his consumer goods. This

prohibition is designed to protect consumers, who

may be unfamiliar with the concepts of secured

credit, from inadvertently encumbering certain

property. Without this protection, if Ung were to

default on the loan, the creditor-bank would be able

to take everything Ung owns - his clothing, food,

appliances, motorbikes, anything construed as

consumer goods. This puts Ung in an unfavorable

and vulnerable position vis-à-vis the creditor.


Reminder: Remember that consumer goods are a special kind of collateral, subject to more restrictions than

other forms of collateral. Consumer goods can only be used as collateral in the form of purchase-money

security interests. This means that consumer goods can only be used as collateral to secure a loan used to

purchase those specific consumer goods.


Example [ . Would the security interest be valid if

the agreement were to limit the collateral offered to

one kind of consumer good, say, "all books held by

Ung?"

Answer 7.26: In this case, there is no risk that all of

Ung's consumer goods would be taken by the

creditor-bank in the event of default. The collateral

description, therefore, would seem appropriate.

However, the Draft Law limits the use of consumer

goods only to transactions that are called "purchase-

money security interests." This means that, if a

security interest were created in consumer goods, it

can only be created to secure the credit actually used

to purchase the goods. The only way for the above

collateral description to be valid is if the bank loan

were used to purchase all of the books held by Ung.

Comparison: American secured transactions law does not limit the collateralizing of

consumer goods to purchase-money security interests. However, in a similar effort to protect

consumers, it also does not allow a debtor to put up all consumer goods as collateral. Under

American law, to use consumer goods as collateral is valid, provided that the collateral is a

limited and discrete group of consumer goods. Therefore, to offer "all books held by Ung" as collateral is

valid under American law, whether the credit borrowed was used to purchase the goods or not.

Who may give collateral?

Question 7.27: Suppose Siphan, who is 10 years

old, wishes to purchase some clothing for his mother.

The clothing costs $80. Because the transaction

involves a consumer good, the only valid security

interest Siphan can create is a purchase-money

security interest. Therefore, as collateral, he offers

the clothing purchased with the loan money. Siphan

has sufficient rights in this collateral. Clearly, the

creditor is giving value in exchange for the

collateral. Lastly, assume that the security agreement

contains an adequate description of the collateral and

is in the form of a properly authenticated written

record. Has a security interest been created

according to the Draft Law?

Answer 7.27: On its surface, it seems that this

transaction has met all of the conditions of the Draft

Law for creating a valid security interest. However,

the purpose of this question is to remind the legal

official not to forget about the applicability of

ordinary Cambodian Contract Law. Under such law,

can a 10-year old boy enter into an enforceable

contract? It is doubtful. Remember that a security

agreement is, ultimately, a contract between parties.

Therefore, an otherwise legitimate security

agreement will not be valid if it disregards the

country's Law on Contracts.


��

What scope of protection does a security interest provide?Question 7.28: Suppose Sim, who operates a small

tourist company, has fallen on hard times. He

received loans from several banks, offering the same

collateral in each transaction: "All equipment used in

the operation of Sim's business." However, due to

SARS and the national elections, tourists have

avoided Cambodia, leaving Sim unable to repay his

loans on time. Mekong Bank, one of his creditors,

demands seizure of Sim's collateral, as provided in

their security agreement. Is the Mekong Bank

entitled to this collateral?

Answer 7.28: Sim and the Mekong Bank have

created a valid security interest. Thus, it would seem

that the latter is entitled to the former's collateral.

However, keep in mind the issues of Perfection and

Priority, both addressed in subsequent chapters.

Though Mekong is entitled to the collateral,

presumably other creditors are as well. Which

creditor ultimately has priority to the collateral is

determined by the Draft Law's provisions on

Perfection and Priority. The purpose of this question

is to remind that attachment (the creation of a valid

security interest) is only the first step in guaranteeing

the complete securitization of credit. Any creditor

which wants to guarantee its ability to seize

collateral must also go through the second step of

perfection.


1. Perfection of security interest

A. Means of perfection:

Perfection is the maximization of a secured party's rights in the collateral against third parties.

There are three means of perfection under this law.

� Filing. Filing a notice in a secured transactions filing office is the most common way to perfect a

security interest. In general, by filing a notice a secured party will have all the rights of the holder

of a perfected security interest for so long as the notice is effective.

� Possession. Possession of the collateral by the secured party is another means of perfecting a

security interest, if the collateral is goods, instruments, documents, certificated securities, or

secured sales contracts. Possession as a means of perfection can be seen as borrowing from the

traditional law on pledge. Under pledge law, the pledgee has greater rights in the collateral against

third parties (and against the debtor) while the pledgee has possession of the object of the pledge.

� Automatic perfection upon attachment. A security interest in consumer goods is automatically

perfected when it attaches to the consumer goods. The value of consumer goods is relatively low

and the number of security interests given in consumer goods (which must be purchase money

security interests) may be very high. The purpose of this rule is to relieve creditors and the filing

office of the volume and cost of filings with respect to goods of small value. Also, since security

interests in consumer goods are limited to purchase money security interests, general creditors

have no need to search the filing office for notices covering consumer goods. The law does not

prohibit the filing of a notice of a purchase money security interest in consumer goods, and there

might be value in doing so with respect to buyers of the consumer goods from the debtor, but a

security interest in consumer goods that has attached is perfected without filing.

A security interest is perfected whenever a security interest has attached and there is filing, possession,

or automatic perfection as permitted by this law.

If a secured party takes possession of collateral to perfect a security interest, the security interest is

Chapter

8 PPEERRFFEECCTTIIOONN AANNDDPPRRIIOORRIITTYY


perfected only while possession is held. If, however, a notice has been filed before or during the secured

party's possession, the security interest will remain perfected upon release of possession, provided that

the notice remains effective.

B. Perfection of proceeds: A security interest in proceeds is automatically perfected if the

security interest in the underlying collateral was perfected.

Money is a very liquid form of movable property. Consequently, if money is collateral the

secured party must take possession of the money. If, however, money is cash proceeds

from the sale, exchange, or disposition of collateral, possession is not necessary to perfect

a security interest in the money.

C. Perfection of serial numbered vehicles: A security interest in a serial numbered vehicle may

be perfected by filing a notice that describes the vehicle by serial number. A filing that describes the

serial numbered vehicle by serial number is not necessary to protect the secured party from other secured

parties or lien holders. A filing that describes the serial numbered vehicle by serial number has the

advantage of protecting the secured party from purchasers of the serial numbered vehicle. The purpose

of this rule is to permit buyers to conduct easy searches of filing office records to discover security

interests in vehicles such as automobiles, motorbikes, and boats.

Note: the definition of serial numbered vehicles does not include vehicles held as inventory by a dealer

of vehicles [PICTURE OF CAR DEALER] . A secured party who takes a security interest in the

inventory of an automobile dealer is not required to describe the vehicles by serial number to perfect the

security interest. Otherwise, an inventory financier would be required to file on a frequent basis to delete

and add serial numbers of vehicles that leave the possession and come into the possession of the dealer.

D. Perfection of documents of title: Goods in the hands of bailees who store or transport goods

are often covered by a warehouse receipt, bill of lading, or other documents. Both goods and documents

are movable property, and therefore may be collateral under this law. If goods are in the possession of a

bailee and if a document covering the goods has been issued, a security interest perfected in the

document is superior to a security interest perfected in the goods while the goods are in the possession

of the bailee. The purpose of this rule is to preserve and maximize the use and reliability of documents

of title. Note that the priority of a person who perfects a security interest in goods by filing before the

goods come into the hands of the bailee is unaffected. This rule favors only those security interests in

documents over security interests perfected in goods while the goods are in possession of the bailee who

issued the document.


E. Continuity of perfection

A security interest remains perfected continuously if at all times it is perfected by

some method authorized under the law.

The assignment of a security interest does not cause a gap in the continuity of the

security interest. For example, suppose X has a security interest in the accounts of Y,

perfected by filing. X assigns its interest in the accounts to Z. The security interest remains perfected,

continuously, without a new filing by Z.

F. Priority among security interests in the same collateral

General rule "first in time, first in right": The first person to file or perfect a security interest

has priority over other persons who have rights in the same collateral. There are limited

exceptions to the rule. Note that the rule is "first to file or perfect." This is because the

date of perfection may be later than the date of filing. The point is of great importance

to secured transactions law.

If two secured parties have a security interest in the same collateral and there is neither

filing nor perfection, the first security interest to attach to the collateral has priority.

Example 1:

• Jan 1: Sivann (SP#1) takes a security interest in all

equipment of Theany (Debtor), including

equipment acquired in the future. SP#1 files

notice.

• Feb 1: Sopheak (SP#2) takes a security interest in

all present and future equipment of Theany and

files a notice.

• Mar 1: Theany acquires new equipment.

• The security interests of Sivann and Sopheak in the

new equipment are perfected at exactly the same

time - the time at which the debtor acquires the new

equipment. Sivann has priority over Sopheak,

because Sivann was first to file.

Example 1:• Jan 1: Sovann (SP) takes possession of collateral.

• Feb 1: Sovann files a notice covering the collateral.

• Mar 1: Sovann delivers collateral to the debtor on

March 1.

• The security interest remains perfected and

perfection dates from January 1. There was no gap

in perfection because the security interest was at all

times perfected by an authorized means of

perfection.


A date of filing or perfection as to collateral is also a date of filing or perfection as to proceeds of the

collateral.

G. Priority of lien holder

The Draft Law allocates rights between the competing claims of secured parties and special creditors

such as lien holders. Examples of lien holders are tax authorities or judgment holders with a right to

seize collateral. Under this law, an administrator in an insolvency proceeding is a lien holder. Also, any

person with a general or special preference under other law is a lien holder.

The general rule is that a lien holder has priority if it is the first to file. Lien holders are required to file

notices to perfect their claims under this article in the same manner as secured parties.

H. Buyers of collateral

A security interest follows collateral, even though the collateral may be sold or exchanged or otherwise

disposed of by the debtor. A buyer of collateral takes the collateral subject to a security interest unless

the law says otherwise. If the buyer has no knowledge of the security interest, and if the security interest

is not perfected, the buyer takes the collateral free of a security interest.

Exception: An exception to the general rule is necessary for most buyers of goods from merchants in

the business of selling the goods. Notice should be taken of the definition of "buyer in the ordinary

course."

Example 1:• Theany owns an automobile.

• Jan 1: Sothy (SP#1) takes a security interest in

Theany's automobile. There is a written agreement

and the secured party gives value. The security

interest has attached to the auto, but there is neither

filing nor possession.

• Feb 1: Samy (SP#2) takes a security interest in the

same automobile. There is a written agreement and

the secured party gives value. The security interest

has attached to the auto, but there is neither filing

nor perfection.

• Sothy's security interest has priority over Samy

because it was the first to attach to the automobile.


A security interest in consumer goods is perfected automatically when it attaches to avoid unnecessary

costs for secured parties and the filing office with respect to goods usually of small value. Automatic

perfection protects the secured party from the claims of competing creditors, but leaves the secured party

exposed to a buyer who gives value for the collateral without knowledge of the security interest and

before it is perfected. Article 14(3) assures that if a secured party files a notice covering the consumer

goods, even though not required for protection against other creditors, the secured party will also have

priority over purchasers of the consumer goods from the debtor.

Example 1:

• Jan 1: Sopheak (SP) files notice covering

automobile of taxpayer.

• Feb 1: Taxpayer is delinquent; tax authority files

notice covering all property of taxpayer.

• Sopheak has priority over tax authority with respect

to the automobile. Tax authority has priority with

respect to other property of taxpayer.

Example 1:• Jan 1: Tax authority files notice covering all

property of delinquent taxpayer.

• Feb 1: Sopheak files notice covering automobile

of taxpayer.

• Tax authority has priority over SP's security interest

in the automobile.

Example 1:

• Jan 1: Dealer sells a television to Consumer on

credit, taking a security interest in the television.

Dealer does not file a notice.

• Feb 1: Consumer fails to pay taxes and the tax

authority files a notice covering the consumer's

movable property.

• Dealer's security interest was automatically

perfected and has priority over the tax authority's

claim.

Example 1:• Jan 1: Dealer sells a television to Consumer on


The security interest is automatically perfected

and dealer does not file a notice.

• Feb 1: Consumer sells television to neighbor.

• Consumer takes the television free of the security

interest under article 14(3).


A serial numbered vehicle may be perfected by filing a notice that describes the

vehicle in general terms or by serial number. A secured party that describes the

vehicle by serial number will have greater protection than the security party who

describes the vehicle in general terms.

A secured party will be protected against most creditors and lien holders by filing a notice describing a

serial numbered vehicle in general terms (for example, "Toyota automobile" or "All vehicles of the

debtor"). A secured party will not be protected, however, against a buyer of the vehicle unless the vehicle

is correctly described in a notice by serial number. The purpose is to give buyers of vehicles easy and

accurate means to determine whether a prior security interest exists in the vehicle by searching its unique

serial number.

Example 1:

• Jan 1: Bank takes a general security interest in all

movable property of the debtor, perfected by filing

on January 1. On that date, debtor's movable

property includes a Toyota vehicle. Bank files a

notice describing collateral merely as "all movable

property of the debtor."

• Feb 1: A judgment creditor files a notice with

respect to movable property of the debtor. Bank's

claim has priority over the judgment creditor's

claim with respect to debtor's movable property,

including the Toyota, under article 12 - first to file

wins.

• May 1: Debtor sells the Toyota to buyer.

• Buyer takes the Toyota free of the security interest

under article 14(4) because a search of the filing

office's records by serial number would not have

revealed the security interest in the Toyota.

Example 1:


movable property of the debtor, perfected by filing.

On that date, debtor's movable property includes a

Toyota vehicle. The notice describes the Toyota

correctly by serial number: T987654321.

• May 1: Debtor sells the Toyota to Buyer.

• Buyer takes the Toyota subject to the security

interest because a search of the filing office's

records by serial number would have revealed

Bank's security interest in the Toyota. Bank may

enforce the security interest in the Toyota against

Buyer.


I. Lessees of collateral

A lessee of goods takes its leasehold interest free of a security interest in the goods if the lessee receives

delivery of the goods without knowledge of the security interest and before it is perfected.

A lessee in ordinary course of business takes the leasehold interest free of a security interest in the goods

even if the security interest is perfected and even if the lessee knows of its existence.

J. Notice with respect to purchase money security interest

Purchase money security interests are security interests held by sellers of goods on

credit, or lenders who lend money for the purchase of specific goods. Perfection of

purchase money security interests is normally accomplished by filing.

The purchase and sale of goods on credit would often be inconvenient if filing were

required prior to the time the buyer takes possession of the purchase. To be safe, for

example, the seller would require the buyer to wait for delivery until a filing is

completed. The Draft Law gives the purchase money creditor a five-day grace period

in which to file, after the debtor takes delivery of goods. The purchase money

creditor priority as if there had been a filing, for five days after the security interest attaches. The five-

day grace period gives the seller or creditor time to file a notice after the completion of the sale, without

delaying the delivery of goods to the buyer.

Example 1:

• Jan 1: Bank takes a general security interest in

movable property of Lessor, who is in the business

of leasing business equipment. The security

interest is perfected by filing. Lessor's inventory

includes a printing press.

• Lessor leases a printing press to printing company

for a period of two years.

• Lessee's rights in the printing press are not subject

to Bank's security interest. Bank cannot enforce the

security interest against the printing press during

the term of Lessee's lease. Lessee took its lease in

the ordinary course of business. Lessee had no duty

to search the filing office's records for notices

covering Lessor's inventory.

Example 1:

• On January 1, auto dealer and debtor sign a credit

sales contract with respect to a new Toyota; dealer

takes a security interest in the Toyota; debtor takes

delivery. (The security interest attaches.)

• Dealer's security interest has priority over the tax

claim and the interest of the buyer. Dealer filed a

notice within five days from the date the security

interest attached to the Toyota.


K. Disposition of collateral and proceeds

A debtor may dispose of collateral by selling or leasing it, or by disposing of it in some other manner.

A debtor may have a right to do so, or the debtor may have no right to do so. For example, a dealer would

normally have the right to sell inventory even though it is collateral. On the other hand, if a shop owner

sells a delivery truck that is collateral, the sale may violate a provision of the security agreement that

forbids sale of the collateral. In any case, the security interest continues in the collateral unless the law

says, or the parties agree, otherwise.

When collateral is disposed of, no matter what the circumstances, a security interest automatically

attaches to the proceeds of the disposition. In short, proceeds are anything received in exchange for the

collateral. The security interest in proceeds is perfected if the security interest in the collateral was

perfected.

• On January 3, the tax authority files a notice of a

tax claim, and debtor sells the car to buyer.

• On January 4, dealer properly files a notice to

perfect the purchase money security interest.

Example 1:• On January 1, auto dealer and debtor sign a credit

sales contract with respect to a new Toyota; dealer

takes a security interest in the Toyota; debtor takes

delivery. (The security interest attaches.)

• On January 3, the tax authority files a notice of a

tax claim, and debtor sells the car to buyer.

• On January 6, dealer properly files a notice to

perfect the purchase money security interest.

• Dealer's priority is measured from the time of filing

on January 6, after the filing of the tax notice and

after the sale to buyer. Dealer's security interest

has no priority over the competing claims to the

Toyota.

Example 1:

• Jan 1: Dealer has a security interest in X's

automobile, perfected by a filed notice covering

"automobiles of the debtor."

• Feb 1: X sells the auto to Y, receiving $5,000.

• May 1: X uses the $5,000 to purchase another

auto."

• Dealer had a perfected security interest in the cash

received for the auto from Feb 1 to May 1 because

Dealer's security interest in the original auto was

perfected, entitling Dealer to a perfected security

interest in the cash proceeds of the sale to X.

Dealer has a perfected security interest in the

second auto because it, too, is proceeds of the sale

and is covered by the filed notice which covers

autos in general.


The security interest in proceeds remains perfected continuously in many circumstances.

a. A perfected security interest in proceeds is perfected if the security interest in the underlying

collateral was perfected and the proceeds are already described in a filed notice or are cash

proceeds.

b. If the proceeds of collateral are not covered by a filed notice, the secured party may still obtain a

continuously perfected security interest in the proceeds. The secured party must amend the notice

covering the underlying collateral so that it covers the proceeds. The amendment must be filed

within twenty days after the debtor receives the proceeds.

L. Priority of purchase money security interests in equipment, livestock, and inventory

There are special priority rules for purchase money security interests. The

effect of the rules is that in many cases, the purchase money creditor will

have priority over goods even though a previous creditor has a perfected

security interest in the same goods. "Second to file, first in right." (Purchase

money credit is credit given for the purpose of purchasing specific goods; a

purchase money security interest is a security interest in those goods, given to secure the debt that

enabled the purchase.

A person who lends money for the purchase of specific equipment or livestock, and perfects a security

interest in the collateral, has priority over all other security interests, even those created and perfected

before the purchase money security interest was perfected. The purpose is to promote the sale of goods

on credit. Without the special priority, purchase money security interests would be subject to prior

security interests given to general creditors. Purchase money creditors would be required to search the

filing office's records before selling their own goods on credit, to be sure of first priority. This would add

Example 1:• Jan 1: Bank takes a security interest in all

movable property of Debtor, perfected byfiling a notice covering "all movable propertyof the debtor, including all movable propertyacquired in the future."

• May 1: Debtor purchases a motorbike fromLucky Leasing Company. The transaction iscredit sale. Lucky Leasing takes a securityinterest in the motorbike and perfects thesecurity interest by filing with in five days ofdelivery to Debtor.

• Lucky has a perfected security interest in themotorbike.

• Lucky Leasing's purchase money securityinterest has priority over Bank's prior securityinterest under article 18(1), even though Bankfiled first and Bank's notice covered Debtor'sfuture movables.


cost, complication, and delay in the sale of goods on credit.

A person with a perfected purchase money security interest in inventory may claim priority conflicting

security interests, even if created and perfected prior to the perfection of the purchase money security

interest.

The purpose is to encourage inventory financing by giving streamlining the process for purchase money

credit. However, the holder of the purchase money security interest in inventory must notify the holders

of prior security interests. Holders of prior security interests are found by searching the records of the

filing office.

There is a commercial reason for the requirement of notice in the case of inventory financing. Note that

there is no such notice requirement for purchase money creditors who finance equipment and livestock.

Under inventory financing transactions, general creditors are often bound to make periodic advances to

the debtor. If a debtor arranges purchase money credit for inventory, notice to the general creditor gives

the general creditor an opportunity to re-evaluate the credit risk. By contrast, general creditors who take

security interests in equipment or livestock are not usually bound to make future advances. The cost of

notice is not balanced by any advantage to the general creditor.

M. Priority of certain liens arising by operation of law

It is common that businesses provide materials or services with respect to movable property for which

payment is required. For example, a television repair shop might invest time and money to repair a

television for a customer. Other law may protect such persons by creating rights in the goods in favor of

the person who made the repairs. The Draft Law protects persons who hold such rights in movable

property against security interests, even if perfected, while the goods are in the possession of the person

who provided the materials or performed the services.

N. Fixtures

Note that notices to perfect security interests in fixtures are filed in the land registry established under

the 2001Land Law.

Definition: Fixtures are goods that are fixed, or intended to become fixed, to immovable property in such a

way that a property right arises in the goods under the land law. Fixtures may be immovable property by

nature or by purpose, as provide under the land law. Possible examples of fixtures are wells, generators,

pumps, elevators, windows, doors, air conditioners, and many other forms of movable property. Security

interests in fixtures may be created, perfected, and enforced under this law.


A security interest in building materials, such as bricks, lumber, and paint, ceases to

exist when the building materials are incorporated into an improvement upon

immovable property.

A secured party has priority with respect to a fixture if the person files a notice with

respect to the fixture before there is notice of the competing claim of an owner, mortgagee, or other

creditor. This is the familiar rule: first in time, first in right.

If machinery in a factory, office, or home, is readily removable, a security interest in the machinery has

priority if it was perfected before the machinery became fixtures.

A perfected purchase money security interest in a fixture has priority even over prior mortgages and

other claims. This rule is parallel to the special priority for purchase money security interests in

equipment and inventory. The purpose of the "super-priority" for purchase money security interests in

fixtures is to encourage the improvement of immovable property by promoting credit for such

improvements.

Exception: There is an exception to this special priority for mortgages taken to finance the construction

of an improvement on land.

Example 1:

• Bank #1 has a perfected security interest in well

equipment that is to be installed on land.

• Bank #2 takes a mortgage in the land after the

security interest is perfected.

• Bank #1's security interest has priority over Bank

#2's mortgage, but only to the extent of the value of

the well equipment.

Example 1:

• Bank-1 has a mortgage on Hotel, given to secure

money to purchase the existing property. The

mortgage is properly recorded in the land registry

as required by the land law

•.Bank-2 lends money to Hotel for the purpose of

purchasing and installing a new elevator. Bank-2

files a notice in the land registry.

• Bank-2 has priority over Bank-1's mortgage, to the

extent of the value of the elevator, even though the

mortgage was recorded before the security in the

elevator was perfected.


O. Crops

Growing crops may be collateral under the Draft Law. A secured party may take a security interest in

crops to secure an obligation, such as a loan for seed and fertilizer. A perfected security interest in crops

has priority over a claim that may arise under the land law, held by an owner of the land, or the holder

of a mortgage on the land where the crops grow.

P. Accessions

The draft law permits security interests in accessions. Further, a security interest in goods that become

an accession remains effective and can retain its status of perfection.

Q. Commingled goods

A security interest may not be created in commingled goods. Once the cake has been baked, a person

may not give a security interest in the eggs that went into the cake. If however, a security interest existed

in goods that become commingled, a security interest is created in any product or mass that results from

the commingling. A security interest in a person's rice becomes a security interest in the mass of rice

when the rice enters the container. A security interest in flour, eggs, and sugar becomes a security interest

in the cakes.

The security interest in the product or mass is perfected if the security interest in the goods was perfected

when the goods were commingled.

Definition: An accession is a good that becomes united with other goods in such a way that one can still

identify the original good. For example, an engine installed in an automobile is an accession, because the

identity of the original automobile remains clear.

Example 1:•.Debtor owns a Toyota that needs a new engine.

•.Debtor purchases a new engine on credit. Seller

perfects a security interest in the engine.

•.Debtor installs the new engine in the Toyota.

•.The engine is now an accession and the security

interest in the engine remains perfected

•.Upon default, Seller has a right to remove the

engine and dispose of it to satisfy Debtor's

obligation.

Definition: Commingled goods are goods that become united with other goods in such a manner that their

identity is lost. For example, if a person's rice is stored in a container with other people's rice, the person's

rice is commingled goods. If flour, eggs, and sugar are mixed with water and baked to create a cake, the

ingredients have become commingled goods.


Perfected security interests have priority over unperfected security interests in the product or mass that

results from commingling goods.

If there is more than one perfected security interest in a product or mass, the security interests rank

equally in proportion to the value of the collateral at the time it became commingled goods.

R. Purchase of secured sales contracts and instruments

The draft law establishes a special rule necessary to simplify and encourage credit sales and the buying

and selling of secured sales contracts and instruments. It gives certain purchasers of secured sales

contracts and instruments a special priority over security interests, even prior security interests that are

perfected. A purchaser qualifies for this special priority if the purchaser gives the seller new value for,

and takes possession of, the secured sales contracts or instruments (provided that the secured sales

contracts or instruments do not indicate that they have been assigned to another person).

S. Assignments

The draft law creates wide freedom to assign rights in intangible property such as accounts receivable

secured sales contracts and other forms of property.

A person may make a general assignment. A general assignment means an assignment of multiple rights,

or all rights. For example, suppose a television dealer has 500 customers who pay $50 per month for

televisions purchased from the dealer. Dealer may assign 25, or 50, or all 500 accounts to a creditor. An

assignment may include future accounts. In other words, the Dealer may promise that an obligation is

secured not only by the existing 500 accounts, but also by any accounts that may be opened by

customers in the future. This is in contrast to traditional law, which restricted assignments to a single

right to payment, and did not permit assignments of future receivables.

An assignee "steps into the shoes" of the assignor, assuming all the rights and duties of the assignor

under its agreement with an obligor on the account (the account debtor).

Example 1:

•.Bank #1 has a perfected security interest in Debtor-

1's rice valued at $400. Debtor-1 owes $400 to

Bank-1.

•.Bank #2 has a perfected security interest in Debtor-

2's rice, valued at $600. Debtor-2 owes $700 to

Bank-2.

•.The rice is commingled and the value of the mass of

rice declines to $900. Banks have perfected

security interests in the mass of rice that rank

equally.

•.Bank #1 is entitled to $360 (2/5 x $900) and Bank-

2 is entitled to $540 (3/5 x $900).


Under traditional law, an assignee could not enforce an assignment unless the obligor on the account was

notified of the assignment, or consented to the assignment. Under the Draft Law, the obligor on the

account need not be notified unless the assignee wishes the obligor to make payment to the assignee

rather than the assignor. If an assignee makes such a notice, it must be in writing.

T. Rights of third parties

A term of a contract is unenforceable if it prohibits or inhibits the ability of a party to assign or sell rights

in intangible property. This rule preserves the rights of people to alienate intangible property freely, and

it simplifies the process of purchasing intangible property or taking security interests in it. Without this

rule, a financier who regularly buys secured sales contracts would be required to examine each contract

carefully to determine whether a term in the contract would void the sale, causing unnecessary delay and

expense that might even prohibit the transaction.

Example 1:

• Jan 1: Bank has a perfected security interest in the

inventory of Dealer. (The security interest covers

proceeds such as cash, secured sales contracts, and

accounts.)

• Dealer sells televisions on credit, creating secured

sales contracts. Dealer takes a security interest in

the televisions to secure payment.

• Aug 1: Finance Company and Dealer enter into an

agreement by which Finance Company will buy the

secured sales contracts from Dealer each day.

Finance Company pays Dealer a discount on the

money owed by Dealer's customers. In return,

Finance Company earns all the profit and assumes

the burden of collecting all payments. Finance

Company takes possession of the secured sales

contracts, which do not indicate the existence of

any assignment.

• Priority rule: Finance Company has priority over

Bank's security interest in the secured sales

contracts because it has given new value and taken

possession of secured sales contracts that do not

indicate any prior assignment. Finance Company

does not need to check filing office records to

discover Bank's security interest because the

priority extends to all conflicting security interests,

even those created and perfected before the

purchase by Finance Company.

• Note: It is probably in Bank's interest that Finance

Company purchases the secured sales contracts,

because the cash flow of Dealer is improved. Also,

the cash that Dealer receives from Finance

Company can be used to pay Bank more quickly,

and is also cash proceeds covered by Bank's

security interest. If, however, Bank wants to

prevent the sale of the secured sales contracts t o

financiers, Bank's security agreement may include

an assignment of the accounts and Bankmark the

secured sales contracts "Assigned to Bank." With

this warning, Finance Company will have no

special priority and will be unlikely to purchase the

secured sales contracts.


U. Subordination of priority

Secured parties, or other creditors entitled to priority under this law, may agree amongthemselves to modify their priority. In this event it is not necessary for notice to be givento the filing office.


Perfection of documents of titleQuestion 8.1:

• Jan 1: Sovann takes possession of collateral

• Feb 1: Sovann delivers collateral to debtor

• Mar 1: Sovann files a notice covering the collateral

Answer 8.1: In this case, the security interest was

perfected for the entire month of January, and also

March 1, but the security interest was not perfected

in February. Sovann assumes the risk that another

security interest could gain priority in the collateral.

Question 8.2:

• Jan 1: Sovann (SP#1) takes possession of collateral

• Feb 1: Sovann delivers collateral to debtor

• Feb 2: Sothy (SP#2) takes a security interest in

same collateral; files notice covering collateral.

• Mar 1: Sovann files a notice covering the collateral

Answer 8.2: Sothy's security interest has priority

over Sovann's security interest, dating from Feb 2

because of the gap in Sovann's perfection from

February 1 to March 1.

Priority among security interests in the same collateral

Question 8.3:

• Jan 1: Sothy takes a security interest in Theany's

automobile, perfected by filing.

• Feb 1: Samy takes a security interest in the same

automobile, perfected by filing.

• Mar 1: Theany sells the car for $5,000 in cash.

Sothy and Samy have perfected security interests in

the cash proceeds. Sothy's interest in the proceeds

has priority, dating from January 1.

Answer 8.3: The perfected security interest in the

cash proceeds requires neither filing nor possession

of the cash proceeds.


Buyers of collateral

Question 8.4: • Jan 1: Tax authority discovers that a taxpayer

is delinquent; fails to file notice.• Feb 1: Sopheak files notice covering

automobile of taxpayer.• Mar 1: Tax authority attempts to seize

automobile.

Answer 8.4: Sopheak has priority over taxauthority's claim because Sopheak was first tofile.

Question 8.5: • Secured party perfects security interest in

printer's printing press by filing.• Printer sells printing press to buyer.

Answer 8.5: Buyer takes printing press subjectto the security interest. Upon printer's default,secured party may enforce the security interestagainst buyer. Note that buyer's search of filingoffice records would have revealed the securityinterest.

Question 8.6:

• Secured party takes security interest in printer's

printing press without filing or taking possession.

• Printer sells printing press to buyer, who has no

knowledge of the security interest.

Answer 8.6: Buyer takes the printing press free of

the security interest because buyer had no

knowledge of the security interest and could not

have been warned of the security interest because it

was not perfected. If, however, the buyer knew of the

security interest at the time of the purchase, the

security interest would follow the printing press to

the buyer and secured party could enforce the

security interest against the buyer.

Question 8.7:

• Jan 1: Dealer sells a television to consumer on


• Jan 3: Dealer files a notice covering the television,

even though the security interest is automatically

perfected.

• Aug 1: Consumer sells television to neighbor.

Consumer takes the television subject to the

security interest under article 14(3).

Answer 8.7: Upon Consumer's default, Dealer

may enforce the security interest against the

television purchased by neighbor.


Question 8.8:

• Secured party has a perfected security interest in

the inventory of television dealer.

• Buyer buys a television from dealer.

Answer 8.8: Unlike the general rule, buyer takes the

television free of the security interest because buyer

buys the television from a person whose usual

business is to sell televisions.

The purpose of this rule is to promote the sale of

goods to buyers (buyers in the ordinary course of

business). The rule promotes sales by relieving

buyers of any fear that the goods they purchase may

be subject to a security interest. The rule relieves

buyers of any responsibility to check filing office

records for security interests in goods they want to

purchase from merchants.

Question 8.9:

• Secured party has a perfected security interest in

the inventory of television dealer (100 TV sets).

• Dealer sells 50 TV sets to a friend who operates a

TV Shop in another city.

Answer 8.9: Dealer's friend takes the television

subject to the security interest because the sale is not

a sale in the ordinary course of business. Dealer is

not in the business of selling inventory in bulk to

other dealers. SP's security interest follows the TVs

to Dealer's friend, and SP has a security interest in

the proceeds of the sale.

Lessees of collateral

Question 8.10:


movable property of the Manufacturer, perfected

by filing. Manufacturer's movable property

includes a Toyota vehicle. The notice describes the

collateral merely as "all movable property of the

debtor."

• May 1: Manufacturer leases the Toyota to Lessee

for a period of two years.

Answer 8.10: Lessee takes the Toyota free of the

security interest because a search of the filing

office's records by serial number would not have

revealed the security interest in the Toyota.

Question 8.11:

•Jan 1: Bank takes a general security interest in all

movable property of Manufacturer, perfected by

filing. The notice describes Manufacturer's Toyota

correctly by serial number: T987654321.

• May 1: Manufacturer (who is not in the business of

leasing autos) leases the Toyota to Lessee for a

period of two years.

Answer 8.11: Lessee takes the Toyota subject to the

security interest because a search of the filing

office's records by serial number would have

revealed bank's security interest in the Toyota. Bank

may enforce the security interest in the Toyota

against Lessee.


Question 8.12:

• Jan 1: Bank takes a general security interest in

movable property of Debtor, the operator of a

printing company. The security interest is perfected

by filing. Debtor's movable property includes a

printing press.

• May 1: Debtor leases one if its printing presses to

Lessee in another city for a period of two years.

Answer 8.12: Lessee takes the printing press

subject to Bank's security interest. If Lessee had

searched the filing office, Lessee would have

discovered the notice covering movable property of

Debtor.

Disposition of collateral and proceeds

Question 8.13:

• Jan 1: Bank takes a security interest in Debtor's

printing press, perfected by filing a notice

covering "all printing presses" of the debtor.

• May 1: Debtor trades the printing press for an

automobile. The automobile is proceeds of the

collateral.

• May 20: Bank amends the notice to cover the

automobile. The amendment is filed within 20

days of date on which Debtor received the

automobile.

Answer 8.13: The security interest in the automobile

is a perfected security interest in proceeds of the

printing press.

Note: If Bank failed to file a notice within 20 days,

Bank still has a security interest in the automobile but

it is not perfected. Bank may enforce the security

interest against Debtor but will likely lose in contests

between many other creditors.

Priority of purchase money security interests in equipment, livestock, and inventory

Question 8.14:

• Jan 1: Bank finances the inventory of

Supermarket. Bank promises to make monthly

advances of $10,000. Bank takes a security

interest in "all present and future inventory" of

Supermarket, and files a notice covering present

and future inventory.

• May 1: Supermarket obtains purchase money

credit from Nokia for the purpose of stocking and

selling Nokia mobile telephones. Nokia searches

the records of the filing office, finds Bank's notice,

notifies Bank that it intends to give purchase

money credit to Supermarket, and files a notice

covering its Nokia merchandise.

Answer 8.14: Nokia's security interest in Nokia

merchandise has priority over Bank's security interest

in future inventory of Supermarket, even though

Bank's security interest was created first and even

though Bank filed first.

Note: Nokia's special priority applies only to the

mobile phones. If Nokia's security interest covers

other inventory, Bank's security interest would have

priority with respect to the other inventory.


Question 8.16:

• Bank-1 lends money to Hotel Corporation for the

purpose of building a new hotel. A mortgage is

taken on the site of the new hotel, which will

extend to the hotel under the land law as the new

hotel is built. The mortgage is registered as

required by the land law and is identified as a

mortgage for the purpose of construction of a

building.

• Bank-2, after completion of the building (or even

during the construction of the building), lends

money to Hotel Corporation for the purpose of

adding an additional elevator to the original

building design. Bank-2 takes a security interest in

the elevator and files a notice as required under the

secured transactions law.

Answer 8.16: Bank-2 has a perfected purchase

money security interest, but no special priority under

this article over Bank-1 because Bank-1's mortgage

is a construction mortgage. Bank-2 will have priority

over claims against the elevator that arise later than

the date of filing with respect to the elevator.

AccessionsQuestion 8.17:

• Jan 1: Bank #1 perfects a security interest in

Debtor's Toyota.

• Aug 1: The Toyota needs a new engine. Bank #2

perfects a purchase money security interest in a

new engine, which Debtor purchases and installs.

Answer 8.17: The engine is now an accession and

Bank #2's security interest remains effective.

• Alternative Fact A - Dec 1: Debtor fails to pay

Bank-2. Bank-2's security interest has priority over

Bank-1's security interest because it is a purchase

money security interest perfected in accordance

with this law.

Bank-2 may remove the engine and dispose of it to

help satisfy the debt.

FixturesQuestion 8.15:

• Bank has a mortgage on the land and buildings of

Textile Factory.

• Leasing Company finances purchase of new

sewing machines, perfecting a security interest in

the machines before they are installed at Textile

Factory.

Answer 8.15: Leasing Company's security interest

has priority over the mortgage, to the extent of the

value of the sewing machines, because they are

readily removable machinery.


Alternative Fact B - Dec 1: Debtor fails to pay

Bank #1. Bank #1 seizes the automobile and sells it

to satisfy its debt.

Since Bank #2 has priority, Bank #1 must pay to

Bank #2 the secured obligation owed to Bank #2

(up to the value of the engine).


1. General provisions on default

Upon default, the secured party is entitled to enforce the security interest by

foreclosing on the collateral covered by the security agreement. Upon

default, the secured party has the right to take possession of the collateral, or

take control of it. This is in contrast to traditional rules that limit

enforcement to judicial seizure and possession by an arm of the judiciary or

the state. The secured party may take possession or control of the collateral

even if the security agreement is silent about the secured party's right to

possession or control.

The rights of the secured party under the secured transactions law are in addition to any rights the

secured party may have under other law. The secured transactions law does not replace or repeal any

other enforcement rights. There is no hierarchy of enforcement rights. There is no requirement that one

method of enforcement be exhausted before another is begun.

2. Collection rights of secured party

Upon default, and without recourse to judicial process, the secured party may immediately collect upon

any accounts that are collateral or proceeds of collateral. If necessary, the secured party may notify

account debtors (obligors on the accounts) that their duty is now to pay the secured party and not the

debtor.

In collecting the accounts of the debtor, the secured party must pay the debtor any amount collected in

excess of a secured debt, and the debtor remains liable for any amount collected below the amount of a

secured debt. If the transaction was a sale of accounts or secured sales contracts, the debtor is not entitled

to any surplus and is not liable for any deficiency unless the security agreement specifically says so.

Chapter

9 EENNFFOORRCCEEMMEENNTT OOFFSSEECCUURRIITTYY IINNTTEERREESSTT

Note: The Draft Law does not define default, nor does it state when and under what circumstances default

occurs. It is important to remember that the security agreement is a contract between parties. The parties to

a security agreement are free to agree upon the circumstances that trigger default.


3. Secured party's right to take possession after default

It is not necessary for the secured party to apply to the court for possession or control of the collateral

if the debtor agrees to transfer possession or control to the secured party. The debtor's consent must be

in writing, executed after the default.

Upon default, a secured party has a right to speedy court order giving possession or control of the

collateral to the secured party. The court proceeding is limited in scope to proof of a security agreement

covering the collateral and proof of an event of default.

4. Secured party's disposal of collateral after default

After default, a secured party has the right to dispose of the collateral. Disposal may be by sale, lease,

license, or other method. A secured party might sell the collateral in parts, or as a whole. The secured

party might dispose some of the collateral at one time, and some at other times.

Disposition of the collateral may be arranged in a public forum, or privately. If the disposition is public,

the secured party may buy the collateral. The debtor is entitled to reasonable notice of the disposition,

provided that notice is practicable under the circumstances. The debtor may waive the right to notice. If

another secured party with an interest in the same collateral notifies the secured party of its interest, the

secured party must give notice to the other secured party in advance of the disposition.

5. Consequences of disposal

When the secured party has sold or received other value for the collateral, the proceeds are applied first

to expenses of the disposition of the collateral. Then, proceeds are applied to the secured debt. The

debtor remains liable for any deficiency. If any proceeds remain, they are next applied to other debts

secured by the collateral, provided that the secured party has received notice from the other secured

party. Finally, any remaining proceeds are to be returned to the debtor.

Purchasers of the collateral take all rights to the collateral, including the ownership right. Purchasers

need not be concerned that they will take the collateral subject to any other security interest or claim.

Otherwise, purchasers would be deterred from purchasing collateral and prices would be depressed to

the detriment of the debtor and the secured party.

6. Retention of collateral

Under some circumstances, a secured party may wish to keep the collateral rather than dispose of it. If

so, the secured party must propose terms to the debtor and to any other secured party with an interest in


the collateral who has given notice. The debtor may object within twenty days, and any other secured

party entitled to notice may object within twenty days. If there is objection, the secured party must

proceed to dispose of the collateral in accordance with this law or other law. If there is not objection, the

secured party may keep the collateral in accordance with the terms of the proposal.

7. Debtor's right to redeem collateral

The debtor may take the collateral back from the secured party in certain circumstances. The debtor

must fulfill all obligations secured by the collateral. The debtor must pay any reasonable expenses

incurred by the secured party in taking possession and preparing the collateral for disposition. All this

must occur before the secured party has disposed of the collateral or entered into a binding contract for

the disposition.

8. Secured party's liability for failure to comply with this law

The secured party has the right to possession of the collateral and the right to dispose

of the collateral. In some circumstances, the secured party may have the right to

keep the collateral. The secured party must exercise these rights in a fair manner.

The standard of fairness is "commercial reasonableness." The debtor, or any other

person harmed, may take action against the secured party if treatment of the

collateral is not commercially reasonable. Courts may enforce the obligation to

behave in a commercially reasonable manner.

The "commercially reasonable" standard requires that the secured party act in the same manner as any

prudent person who deals in property of a similar nature. It is not necessary that the secured party obtain

the best possible price for the collateral. Neither the debtor nor any other person may attack a sale, lease,

or other disposition of collateral merely because of evidence that a better price could have been obtained

in a different place or at a different time. If however, the sale of collateral at a particular place and time

was not commercially reasonable, the secured party is in violation of its duties under this Draft Law.

Example Explanations

• Secured party is in possession of ten cows that are

repossessed collateral. Secured party takes the

cows to the weekly cattle auction where buyers

from around the province regularly come to

purchase cows. The secured party agrees to accept

the market price of the cows on the date of the

auction. Auction records show that cows sold at a

higher price the week before and the week after

the sale of the collateral. The sale is commercially

• The sale of the cows may not have been

commercially reasonable if the secured party

delivered the cows to the auction too late for fair

consideration by buyers, or if the cows had not

been fed properly in advance of the auction. The

sale may not have been commercially reasonable

if the secured party attempted to sell the cows on

at the auction site on a day other than the regular

date of the auction.


9. Most Common Chronology of Events after Default


reasonable, even though a higher price would have

been received if the secured party had taken the

cows to auction earlier or later. The secured party

acted in a manner consistent with other people in

the business of buying and selling cows.

These are examples of failure to act in a manner

consistent with reasonable business practices

among sellers of cattle.

Debtor defaults

Secured party repossesses the collateral

Secured party remits to Debtor any surplus or requests from Debtor any

deficiency payments.

Secured Party organizes disposal of collateral or Secured Party petitions

to retain possession of collateral.

If the collateral is the following, secured party must repossess and organize disposition: 1. Goods 2. Secured Sales Contracts 3. Documents

4. Instruments, or 5. Money.

If the collateral is an accoun t, another kind of intangible or right to repayment,

secured party may move directly for satisfaction of debt by requiring obligors on the accounts or rights to repayment to pay secured party directly.

Sale of collateralQuestion 9.1: In the event of default of a secured

transaction, what happens if there is a difference

between the amount of the secured debt and the

amount of the proceeds collected in the disposition?

Answer 9.1: If the amount secured party collects on

the collateral exceeds the amount of the original

debt, the secured party is obligated to pay the

difference to the debtor.

If the amount secured party collects on the collateral

is less than the amount of the original debt, the

debtor owes the secured party the difference, unless

otherwise agreed. Be careful about these three final

words. They are written into the Draft Law to

indicate that the parties may contract around the

respective provision. For example, a debtor and

secured party may decide to include a clause in their

security agreement that doesn't require the debtor to

pay any difference to the secured party in the event

of default.


Question 9.2: In a sale of accounts or sale of secured

sales contract, what happens if there is a difference

between the amount of the debt and the amount of

the proceeds collected after default?

Answer 9.2: The seller of the account or the debtor

in a secured sales contract is entitled to any surplus

or liable for any deficiency, if the security agreement

so provides. In other words, the parties to the

transaction must include such a clause in the security

agreement if they want a right/obligation to arise in

the event of a surplus or deficiency.

Right of redemptionQuestion 9.3: Does the debtor have the right to

redeem the collateral after secured party seizes it for

disposal?

Answer 9.3: Yes. The debtor may redeem the

collateral, even after it has been seized by the

secured party, provided the following measures are

taken:

a. All obligations secured by the collateral are

fulfilled.

b. All expenses reasonably incurred by the

secured party in preparation for the collateral's

disposition are paid.

c. Redemption must occur before the secured

party has disposed of the collateral or entered

into a contract for its disposal.

d. Redemption must occur before the obligation

of the debtor has been discharged.

Collection rightsQuestion 9.4: What collection rights does the Draft

Law give, if the collateral in question is an account

or other right to payment?

Answer 9.4: Secured party can proceed directly

against the collateral without recourse to the

Judiciary.

The secured party may, on his own, inform the

account debtors that they should pay him directly,

rather than the debtor.

Possession of collateralQuestion 9.5: Can the secured party keep possession

of the collateral in satisfaction of the debtor's

obligation?

Answer 9.5: Yes, in certain circumstances. The

secured party may retain the collateral in full or

partial satisfaction of the debtor's obligation,

provided the following steps are taken.


a. The secured party must propose to the debtor

and all other secured parties from whom he has

received a written claim of interest in the

collateral the terms under which he would retain

the collateral.

b. If the secured party receives an objection to his

proposal within 20 days after the proposal was

sent from one entitled to receive the proposal,

then he cannot retain the collateral in

satisfaction of the obligation. Rather, the

secured party must dispose of the collateral

through other means provided by the Draft Law.

c. If the secured party does not receive such

objection within the required time frame, he

may retain the collateral in satisfaction of the

debtor's obligation.

Disposition of collateralQuestion 9.6: What responsibilities does the

organizer of the collateral disposition have?

Answer 9.6: If the debtor does not waive his right

to be informed and if the collateral is not perishable

or does not threaten to decline quickly in value:

• The organizer must give the debtor "reasonable

notice" of the time and place of any public sale.

• The organizer must give the debtor "reasonable

notice" of the time after which any private sale or

other private disposal is made

The organizer must inform any other secured party

from whom he has received a written record of an

interest in the same collateral in advance of the

disposition. The organizer, when disposing of the

collateral, must at all times act in a "commercially

reasonable" manner.


• The "commercial reasonableness" standard

requires the secured party to act in the same

manner as any prudent person who deals in

property of a similar nature as the collateral.

• Disposition is not commercially unreasonable

merely because a better price could have been

received at a different time or location.

• Disposal is commercially reasonable if the method

of disposal has been approved in any legal

proceeding.

Question 9.7: May the secured party buy the

collateral at its disposal sale?

Answer 9.7: The secured party may purchase the

collateral, offered either in a public, execution sale or

private sale.

Question 9.8: After disposition, what is the order in

which expenses are to be paid off?

Answer 9.8: The proceeds of disposal are to be

applied in the following order:

a. Reasonable expenses incurred in the disposition

of the collateral. These include expenses for

storing and preparing the collateral for disposal

and the legal expenses of the secured party.

b. Satisfaction of the debt, as provided for in the

security agreement.

c. Satisfaction of the debt secured by any

subordinate interest in the collateral, if the

primary secured party receives a written

demand, along with reasonable proof of interest,

from holders of subordinate property interests in

the collateral before distribution of the proceeds

is complete.


Question 9.9: After possession/control, how should

the secured party dispose of the collateral?

Answer 9.9: Upon default, the secured party has

considerable latitude in disposing the collateral. The

secured party may dispose of some of the collateral

at one time and the remainder at another, if he so

wishes.

After default, the secured party may:

• Sell all or part of the collateral;

• Lease all or part of the collateral;

• License all or part of the collateral;

• Retain in certain circumstances all or part of the

collateral; or

• Otherwise dispose of all or part of the collateral.

Disposal can be made privately or publicly in an

execution sale. Disposal can be made in one or more

contracts.

Rights and remedies of secured party

Question 9.10: If the debtor defaults, what rights

and remedies is the secured party entitled to?

Answer 9.10: The right to possession or control of

the collateral, whichever the secured party prefers.

The secured party, itself, has the right to seize

possession or control of the collateral. This is in

contrast to traditional law, which allowed only an

arm of the judiciary or State to seize and possess the

collateral.

The secured party may take possession or control of

the collateral even if the security agreement is silent

regarding the secured party's right to take possession

or control.

Judicial proceeding not required: For the secured party

to take possession or control of the collateral without

legal proceedings, the debtor must give his consent in

writing after the default.


................

Judicial proceeding required: If the debtor does not

give his consent in writing after default, the secured

party must, in order to gain possession or control of

the collateral, apply to the court. The courts must

issue an expedited order, allowing the secured party

to take possession or control. The judicial hearing is

limited to two questions: Does a security agreement

exist between the debtor and secured party? Has

there been at least one instance of default by the

debtor? If the answer is yes to both of these

questions, the courts will issue an order granting

possession or control, whichever is preferred by the

secured party, to the secured party.

Multiple enforcement remedies

Question 9.11: If the secured party has multiple

enforcement remedies, which ones take precedence?

Answer 9.11: There is no hierarchy of rights and

remedies under the Draft Law. All rights and all

remedies may be pursued simultaneously. There is

no requirement that one method of enforcement be

exhausted before another has begun. Therefore, the

secured party may pursue at the same time and in no

particular order enforcement remedies under the

Draft Law, under the security agreement or under

any other law.


1. Objectives and duties of the filing office

The secured transactions filing office has two simple purposes: (1) to warn prospective creditors of prior

claims to movable property and intangibles, and (2) to establish a priority date by which

competing claims to the same property are resolved. The advantages of the secured

transactions filing office are:

1 Simplicity. A simple notice containing minimal information is filed.

2 Transparency. Pledges, assignments, transfer of title, are not hidden from prospective

creditors, who otherwise must discount loans and increase rates to cover unknown risks.

3 Low cost. Fees tentatively estimated at not more than 12,000 riels per filing will be enough

to maintain the filing office, at no cost to the Cambodian taxpayer. There are no costly formalities, such

as witnesses or notary requirements.

To achieve these objectives, the Filing Office receives records (Notices and Notices of Lien) for filing,

search requests. It then creates and maintains accounts for customers, issues confirmation statements,

receipts for fees, search reports, and receives fees for its services. In processing the notices of security

interests and liens, the Filing Office must carefully follow the procedures mandated by the secured

transactions law. As these records are public records, the Filing Office must provide public access

expeditiously and without discrimination.

Chapter

10 SECURED TRANSACTIONS FILINGOFFICE

The Concept of the Filing Office is Tested and Proven

1 The secured transactions filing office is not an experiment. There is a wealth of experience to draw

upon. Modern secured transactions law originated in the United States in the 1950s. Each state has a

filing office. Millions of transactions worth many billions of dollars have relied upon these filing offices

through good economic times and bad, for large transactions and small, for rich and poor creditors and

debtors. Traders from countries, rich and poor, all over the world, do business with the United States in

reliance upon this system. It is trusted as a known quantity in day-to-day business.


2 . InputsA. Notices of Security Interests.

Creditors or their agents usually deliver the notices to the Filing Office for filing. Types of the notices

include:

(i) Initial notice, with duration of five years from the date of filing. An

initial notice contains identification of the filer, the secured party

(creditor), the debtor, and a description of the collateral.

(ii) Amendment. An amendment permits the alteration of information in the

initial notice or a prior amendment.

(iii) Continuation statement. A continuation statement, filed within six

months of the expiration of a notice, extends the notice for an additional

five years.

(iv) Correction statement. A correction statement is filed to call attention to information in a notice that

a party believes to be incorrect.

(v) Termination statement. A termination statement terminates the notice with respect to the person

who files the termination statement.

B. Notices of liens

The Filing Office also receives Notices of Liens or other interests in movable property, including

(i) Notices of tax liens, which is held by an agency of the government of the Kingdom of Cambodia.

(ii) Notices judgment liens, which is issued by the courts to specify the right to execute upon movable

property of a judgment debtor.

(iii) Notices of insolvency proceedings, which specifies a bankruptcy administrator's power over

movable property of a person.

Notices filed by "lien holders" have a five-year duration, just as notices of security interests, and may

be amended, continued, and terminated in the same manner as for security interests.

2 Canadian provinces adapted U.S. law to their purposes, beginning over a decade ago. Canadian drafters

learned from some American mistakes. They built filing offices using new technology that far exceed

the quality of the American systems, and have met with great success.

3 Upon the collapse of the Berlin wall, international organizations contemplated the best ways to assist

transitional economies in a fresh start. Secured transactions law, built upon a modern filing office for

security interests in movables, was seen as the tested and proven model to follow.


C. Search Requests.

The Filing Office receives requests for information from its records. Search requests are submitted based

on one of the following criteria: identification number of an individual debtor, name of a debtor who is

not an individual, filing number of an initial notice, or serial number of a collateral.

D. Fees.

The Filing Office receives fees for some services such as the filing of notices of security interests and

some notices of liens.

3. OutputsThe Filing Office issues the following:

(i) a confirmation statement for each record filed. The confirmation statement: (a) identifies the filer;

(b) reports all data committed to the Filing Office records; (c) provides the unique file number for

an initial notice, and in the case of subsequent filings, the number of the subsequent filing; and (d)

provides the time and date of filing;

(ii) a written statement that gives the reason for refusal in the event that the Filing Office refuses to

file a record presented for filing;

(iii) statements of account for fees owed;

(iv) receipts for fees paid;

(v) search reports conforming to the requirements of the law, containing information on all notices,

including amendments, continuations, terminations, and the like, related to the search criteria

supplied by the searcher

4. Administrative tasks

The Filing Office creates and maintains accounts for customers. All users will have an account in the

system, consisting of simple contact information. Some accountholders will have privileges that others

do not. For example, some accountholders may be authorized to pay fees on a monthly basis, upon

receipt of a monthly statement. The Filing Office must issue statements, apply payments, generate

reports, and perform other routine tasks consistent with good business practices for public service. That

is, it must be equipped to generate administrative reports, and follow careful plans for data back up,

security, and disaster recovery.

The duties of the filing office are minimal. The filing office must assign a unique number to each notice,

assign the date and time of filing, assign the lapse date of an initial notice, and store records in a manner

that relates amendments and other filings to the correct original notices. The index must be maintained


by debtor name. Records of notices must be maintained for ten years after the lapse date of the notices.

The filing office has no regulatory role. The filing office does not

examine notices to determine that they are correct, valid, or in

conformance with the law. The contents of notices are simple, requiring

only identification of the creditor and the borrower and a general

description of the collateral. The Filing Office will not receive copies of

loan agreements, and will have no power to review documentation for

veracity, conformance to the law, or authenticity. Filing fees are

expected to be small.

This policy is important, and crucial to the success of the secured transactions law. Notices relate to

private transactions governed by private agreements, generally in the private sector. Public information

about the transaction is best limited to the minimum information necessary to accomplish the purposes

of the filing office: warning and priority. If the filing office regulates the transaction by requiring more

information, it may deter, distort, or improperly influence the transaction.

5. Review of existing registries

A. Land Registry

The land registry records the interests of people with in rem rights in land. If security interests can be

taken in fixtures, minerals, and timber, the security interests must be publicized just as is necessary for

security interests in equipment, inventory, and receivables. The question, however, with respect to land-

related collateral, is "where to file?" In the case of land-related collateral, the land registry is a better

choice than the secured transactions Filing Office. People who search the record for interests in land

should be confident that they will find all interests recorded there. They should not be burdened with

two searches if that burden can be avoided.

Coordination with the land registry for filing notices of security interests in land-related collateral can

likely be accomplished administratively, without amendment to the land law. Meetings with land

registry officials were held to facilitate this process.

B. Other Registries

There are registries in Cambodia for movable property such as automobiles, motorbikes, aircraft, and

boats. These registries serve regulatory purposes, or provide evidence of ownership. In no case does any

of these registries serve to record the existence of property rights other than ownership in the movables

(i.e. security interests, mortgages, or other security rights).


* * * * *

REFERENCES AND BIBLIOGRAPHY


Draft of 5 March 2004Chapter 1 - General Provisions

Article 1 Purpose and rules of construction

Article 2 Scope

Article 3 Definitions

Article 4 Security interest

Article 5 Secured obligation

Article 6 Collateral

Article 7 Effectiveness of security agreement

Article 8 Collateral in secured party's possession

Article 9 Attachment of security interest to collateral

Chapter 2 - Perfection and Priority

Article 10 Perfection of security interest

Article 11 Continuity of perfection

Article 12 Priority among security interests in the same collateral

Article 13 Priority of lien holder

Article 14 Persons taking collateral

Article 15 Lessees of collateral

Article 16 Notice with respect to purchase money security interest

Article 17 Disposition of collateral and proceeds

Article 18 Priority of purchase money security interests in equipment, livestock, and inventory

Article 19 Priority of certain liens arising by operation of law

Article 20 Fixtures

Article 21 Crops

Article 22 Accessions

Article 23 Commingled goods

Article 24 Purchase of secured sales contracts and instruments

Article 25 Assignments

Article 26 Rights of third parties

Annex

A DDRRAAFFTT LLAAWW OONN SSEECCUURREEDDTTRRAANNSSAACCTTIIOONNSS


Article 27 Future advances and future collateral

Article 28 Subordination of priority

Chapter 3 - Filing

Article 29 Filing office

Article 30 Submissions to the filing office

Article 31 Authority of the Ministry of Commerce

Article 32 Rights of the people with respect to the filing office

Article 33 Contents of initial notice

Article 34 Name of debtor and secured party

Article 35 Effect of changes

Article 36 Duration of notice & effect of lapse

Article 37 Amendment of notice

Article 38 Continuation of notice

Article 39 Termination of notice

Article 40 Effectiveness of notice

Article 41 Claim concerning inaccurate or wrongfully filed notice

Article 42 Filing office duties

Article 43 Information from filing office

Article 44 Filing with respect to collateral related to land

Article 45 Fees

Chapter 4 - Enforcement

Article 46 General provisions on default

Article 47 Collection rights of secured party

Article 48 Secured party's right to take possession after default

Article 49 Secured party's disposal of collateral after default

Article 50 Consequences of disposal

Article 51 Retention of collateral

Article 52 Debtor's right to redeem collateral

Article 53 Secured party's liability for failure to comply with this law

Article 54 Certified texts

Chapter 5 - Concluding provisions

Article 55 Effective date


Chapter 1 - General Provisions

Article 1. Purpose and rules of construction

1. The purpose of this law is to promote economic activity through a unified and modern set of rules

on securing obligations with collateral as described in article 6 of this law.

2. If there is a conflict between a provision of this law and a provision of any other law, this law shall

govern unless the other law specifically cites or amends the conflicting provision of this law.

Article 2. Scope

1. This law applies to:

a. all transactions where the effect is to secure an obligation with collateral as defined in article

6 of this law, including pledge, transfer of title, consignment, and assignment;

b. the sale of accounts and secured sales contracts; and

c. the lease of goods for a period greater than one year.

2. This law applies to the transactions identified in paragraph 1 regardless of the form or terminology

used in the agreement, and whether the ownership right is held by the secured party or the debtor.

3. Cambodian law on capacity to contract, agency, fraud, duress, mistake, and bankruptcy supplement

the provisions of this law.

4. Notwithstanding paragraphs 1and 2 of this article, this law does not apply to:

a. the transfer of a claim for compensation of an employee;

b. a sale of accounts or secured sales contracts as part of a sale of a business out of which they

arose;

c. an assignment of accounts, secured sales contracts, or instruments which is for the purpose of

collection only;

d. an assignment of a right to payment under a contract to an assignee that is also obligated to

perform under the contract; and

e. an interest in a deposit, checking, savings, passbook, or other cash account, except as provided

as to proceeds.

Article 3. Definitions

Note: In this article, terms are presented in English alphabetical order as an aid to the reader. In the

official Khmer text, terms are presented in their proper Khmer order. In this text, the number in

brackets after the defined term refers to the order in which the definition is found in the Khmer text.

1. "Account" [11] means any right to payment for goods sold or leased or for services rendered which


is not evidenced by an instrument or secured sales contracts.

2. "Assignment" [29] means the transfer from one person to another, in whole or in part, of any right

in an account, secured sales contract, document, instrument, or other right to payment. The person

who makes the assignment is the assignor. The person who takes the assignment is the assignee.

3. "Authenticate" [4] means to execute or adopt a name or symbol, manually or otherwise, with

present intent to identify the authenticating party or to adopt or establish the authenticity of a record.

4. "Consumer goods" [16] means goods used primarily for personal, family, or household purposes,

except serial numbered vehicles.

5. "Consignment" [18] means a transaction, regardless of form or terminology, in which a person (the

consignor) delivers goods to a merchant (the consignee) for the purpose of sale and:

a. the merchant deals in goods of that kind under a name other than the name of the consignor;

b. the merchant is not an auctioneer;

c. the goods are not consumer goods prior to delivery to the merchant; and

d. the transaction does not create a security interest that secures an obligation.

6. "Debtor" [8] means the person who owes payment or other performance of the obligation secured,

whether or not the person owns or has rights in the collateral, and includes the seller of accounts or

secured sales contracts, the consignee of goods, and the lessee of goods under a lease subject to this

law.

7. "Document" [32] means a document of title, or a receipt such as a bill of lading, dock warrant, and

warehouse receipt, issued by a person in the business of transporting or storing goods.

8. "Equipment" [31] means goods that are not farm products, inventory, or consumer goods;

9. "Farm products" [1] means goods of a debtor engaged in farming, other than standing timber, which

are:

a. crops grown, growing, or to be grown;

b. aquatic goods produced in aquacultural operations;

c. livestock, born or unborn;

d. supplies used or produced in a farming operation; or

e. products of crops or livestock in their unmanufactured state;

10. "Fixture" [13] means goods that are fixed to immovable property, or are intended to become fixed

to immovable property, in a manner that causes a real right to arise under the land law of 2001.


11. "Guarantee" [5] means a secondary obligation that consists of a an obligation to pay, or an issuer's

obligation to pay under a letter of credit, and that supports the payment or performance of an

account, secured sales contract, document, instrument, or other intangible property.

12. "Goods" [15] means all things that are movable when a security interest attaches. The term includes

fixtures, timber to be cut and removed for sale, the unborn young of animals, crops grown, growing,

or to be grown including crops that grow on trees, vines, or bushes. The term does not include

accounts or secured sales contracts, money, documents, or instruments.

13. "Instrument" [25] means a record that evidences a right to the payment of money, that is not itself

a security agreement or lease, and that is of a type which is in ordinary course of business

transferred by delivery with any necessary endorsement or assignment. The term includes a

certificated security.

14. "Inventory" [27] means goods held for sale or lease, or goods that are raw materials, work in

process, or materials used or consumed in a business;

15. "Lease of goods for a period greater than one year" [2] means:

a. a lease of goods for a stated duration of more than one year;

b. a lease of goods for an indefinite term even though the term may ultimately be determined as

less than one year;

c. a lease of goods initially for a term of one year or less if the lessee, with the consent of the

lessor, retains uninterrupted or substantially uninterrupted possession of the leased goods for

more than one year after the lessee first acquired possession of the goods, but the lease does not

become a lease for a term of more than one year until the lessee's possession extends beyond

one year; or

d. a lease of goods for a term of one year or less where the lease provides that it is renewable

for a period that may exceed one year.

16. "Lessee in the ordinary course of business" [30] means a person who in good faith and without

knowledge that the lease is in violation of the ownership rights or security interest or leasehold

interest of a third party in the goods, leases in ordinary course from a person in the business of

selling or leasing goods of that kind. "Leasing" may be for cash or by exchange of other property.

17. "Lien holder" [12] means:

a. a person who obtains a right in a secured party's collateral, or a right to seize a secured party's

collateral, by action of any officer of the Royal Government of Cambodia, or any officer of the

Kingdom of Cambodia, including any officer of the judiciary or an administrator or temporary

administrator in an insolvency proceeding.


b. a person with a general preferential right or a preferential right over specific movables under

any other law.

18. "Notice" [26] means a record filed or presented for filing in a filing office. The term includes

amendments, continuation statements, and termination statements on file or presented for filing.

19. "Obligor on an account" [9] means the person who is obligated on an account, secured sales

contracts, or other intangible property.

20. "Other intangible property" [17] means any movable thing or right other than goods, accounts,

secured sales contracts, documents, instruments, and money.

21. "Person" [19] means a natural person or a juridical person recognized by Cambodian law.

22. "Person in the ordinary course of business" [20] means a person who buys goods from a person in

the business of selling goods of that kind, if the buyer buys in good faith and without knowledge

that the sale violates the rights of another person in the goods.

23. "Proceeds" [21] means whatever is acquired upon the sale, lease, license, exchange, or other

disposition of collateral; whatever is collected on, or distributed on account of, collateral; rights

arising out of collateral; to the extent of the value of collateral, claims arising out of the loss or

nonconformity of, defects in, or damage to the collateral; and to the extent of the value of collateral

and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss

or nonconformity of, defects in, or damage to the collateral.

"Cash proceeds" means proceeds that are money, checks, funds on deposit in banks, and the like.

24. "Purchase" [3] means to take as a buyer, a donee, a person receiving security such as a secured party

or mortgagee, or by any other voluntary transaction creating an interest in property. A person who

takes by purchase is a "purchaser."

25. "Purchase Money Security Interest." [28] A security interest is a purchase money security interest

to the extent that it is:

a. taken or retained by the seller of goods to secure all or part of its price; or

b. taken by a person other than the seller who, by making an obligation, gives value to enable the

debtor to acquire rights in or the use of goods, if such value is in fact so used.

26. "Record" [10] means information that is inscribed on a tangible medium or that is stored in an

electronic or other medium and is retrievable in perceivable form. A notice, amendment,


continuation statement, or termination statement is a record, if delivered to the filing office in a

medium authorized by the filing office.

27. "Secured party" [22] means a lender, seller or other person in whose favor a security interest is

created under a security agreement, including a person to whom accounts or secured sales contracts

have been sold, a consignor, and a lessor of goods under a lease subject to this law.

28. "Secured party on the notice" [23] is a person whose name is provided as the name of the secured

party or a representative of the secured party in an initial notice or an amendment that has been filed.

A person remains a secured party on the notice until the filing of an effective amendment which

omits the name of the secured party, or until the filing of an effective termination statement by the

secured party on the notice, or upon the lapse of the notice with respect to the secured party on the

notice.

29. "Secured sales contract" [6] means a record that creates a monetary obligation and a security interest

in, or a lease of, goods.

30. "Security Agreement" [7] means an agreement that creates or provides for a security interest.

31. "Serial numbered vehicle" [24] means the following, when not held as inventory of a debtor: a

motor vehicle, a trailer, an aircraft, or a motorized boat.

32. "Value." [14] A person gives value for rights if he acquires the rights

a. in return for a binding commitment to give credit, whether or not drawn upon; or

b. as security for or satisfaction of a pre-existing claim, in whole or in part; or

c. by accepting delivery pursuant to a pre-existing contract for purchase; or

d. in return for anything given in exchange, or for any promise.

Article 4. Security interest

1. A security interest is a real right in collateral that secures performance of an obligation.

2. Any person may give a security interest, and any person may take a security interest under this law,

except as provided in paragraph 3 of this article.

3. No security interest other than a purchase money security interest may be created in goods that are

consumer goods when held by a debtor.

4. A security interest may not be deemed invalid because the debtor has the right to use, possess, sell,

exchange, commingle, or otherwise dispose of the collateral.

Article 5. Secured obligation

1. A security interest may secure one or more obligations, which may be described specifically or in


general terms.

2. Secured obligations may be monetary or non-monetary obligations.

3. Secured obligations may be governed by Cambodian law or foreign law, although the provisions of

this law shall also apply.

4. A security interest may secure future obligations, whether mandatory, conditional, or optional.

5. Upon agreement of the parties, a security interest may secure pre-existing obligations.

Article 6. Collateral

1. Collateral may be goods or movable things of any nature.

2. Collateral may be intangible property, including rights and claims and other intangible property.

3. Collateral may be fixtures.

4. Collateral may be in existence or may arise in the future.

5. Collateral may be located anywhere, within or outside of Cambodia.

6. Collateral includes accounts and secured sales contracts that have been sold, consigned goods,

leased goods, and proceeds of collateral.

7. A description of collateral is sufficient if it reasonably identifies what is described. A description

of collateral may be expressed in general terms, except as required with respect to serial numbered

vehicles. A description such as "all assets" or "all movable property" of the debtor is sufficient,

except with respect to consumer goods.

Article 7. Effectiveness of security agreement

1. A security agreement must be in the form of a written record. A security agreement may be found

in multiple records when read together.

2. A security agreement is effective according to its terms between the parties, against purchasers of

the collateral, and against creditors, except as otherwise provided in this law.

3. A security agreement may relate to more than one security interest.

Article 8. Collateral in secured party's possession

1. A secured party shall use reasonable care in the custody and preservation of collateral in the secured

party's possession.

2. Unless otherwise agreed, if collateral is in the secured party's possession:

a. reasonable expenses shall be charged to the debtor and secured by the collateral, including the

cost of any insurance, and payment of taxes or fees associated with the collateral;

b. the risk of accidental loss or damage is on the debtor to the extent of a deficiency in any

insurance coverage;

c. the secured party may hold as additional collateral any fruits, except money, received from the

collateral and shall apply money to reduce the secured obligation, unless the money is remitted

to the debtor.


Article 9. Attachment of security interest to collateral

1. A security interest attaches to collateral and becomes enforceable against the debtor and third parties

with respect to the collateral only if:

a. the debtor has authenticated a security agreement that provides a description of the collateral;

b. value has been given by the secured party to the debtor; and

c. the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured

party.

2. Unless otherwise agreed, the attachment of a security interest in collateral gives the secured party

the right to security in proceeds as provided in this law.

Chapter 2 - Perfection and Priority

Article 10. Perfection of security interest

1. A security interest is perfected when it has attached to the collateral and all of the applicable

requirements of this article are satisfied.

2. A notice must be filed in accordance with this law to perfect a security interest, unless this article

provides otherwise.

3. A purchase money security interest in consumer goods is perfected when it attaches and without the

filing of a notice.

4. A security interest in goods, instruments, documents, or secured sales contracts may be perfected

by filing or by the secured party's taking possession of the collateral.

5. A security interest is perfected by possession from the time possession is taken and continues only

so long as possession is retained.

6. A security interest in money may be perfected only by the secured party's taking possession of the

money, except for cash proceeds.

7. A security interest in a serial numbered vehicle may be perfected by a notice that describes the serial

numbered vehicle generally or by serial number.

8. A security interest, other than a security interest in money, may be perfected by filing before, during,

or after a period of possession by a secured party.

9. The filing of a notice is not necessary to perfect a security interest in proceeds.

10. While goods are in the possession of a bailee that has issued a document covering the goods, a

security interest in the goods may be perfected by perfecting a security interest in the document.

Any security interest in the goods otherwise perfected during the period that goods are in the

possession of the bailee is subordinate to the security interest perfected in the document.

11. Perfection of a security interest in collateral also perfects a security interest in a guarantee

supporting the collateral. The filing of a notice is not necessary to perfect a security interest in a

guarantee.

12. Perfection of a security interest in a right to payment or performance also perfects a security interest

in a mortgage on immovable property securing the right to payment.


Article 11. Continuity of perfection

1. A security interest is perfected continuously if it is first perfected in one manner and later perfected

in another manner, without an intermediate period when it is not perfected.

2. If a secured party assigns a perfected security interest, a notice need not be filed under this law to

continue perfection of the security interest against creditors of the debtor and transferees from the

debtor.

Article 12. Priority among security interests in the same collateral

1. Security interests in the same collateral have priority according to time of filing or perfection,

except as otherwise provided in this law.

2. Priority is measured from the time of the first notice filed covering the collateral, or the time the

security interest is first perfected, whichever is earlier, if there is no period thereafter when there is

neither filing nor perfection.

3. The first security interest to attach has priority among security interests for which there is neither

filing nor perfection.

4. A date of filing or perfection as to collateral is also a date of filing or perfection as to proceeds of

the collateral.

Article 13. Priority of lien holder

A security interest has priority over the rights of a lien holder unless a notice of the rights of the lien

holder is filed according to this law:

1. before the security interest is perfected; and

2. before a notice covering the collateral is filed.

Article 14. Persons taking collateral

1. A person takes collateral free of a security interest if the person gives value for the collateral without

knowledge of the security interest and before it is perfected. If the collateral is tangible, the person

must also take delivery of the collateral without knowledge of the security interest and before it is

perfected.

2. Notwithstanding paragraph 1, a person in the ordinary course of business takes goods free of a

security interest in the goods, even if the security interest is perfected and even if the person knows

of its existence.

3. Notwithstanding paragraph 1, a person who buys goods that are consumer goods of the seller takes

the goods free of a security interest whether or not the security interest is perfected, if the person

buys without knowledge of the security interest and before a notice is filed that covers the consumer

goods.

4. Notwithstanding paragraph 1, a person who buys a serial numbered vehicle takes the serial

numbered vehicle free of a security interest only if the person bought without knowledge of the

security interest and the serial numbered vehicle was not described, or was incorrectly described,


by serial number in a filed notice.

5. Notwithstanding paragraph 1, a person who buys farm products:

a. takes the farm products free of any security interest if the farm products are bought for use as

consumer goods;

b. takes the farm products free of a security interest if the person buys the farm products other

than for use as consumer goods, gives value for the farm products and receives delivery without

knowledge of the security interest and before it is perfected.

6. A transferee of money takes the money free of a security interest unless the transferee acts in

collusion with the debtor in violating the rights of the secured party.

7. A transferee of proceeds that are funds from a deposit, checking, savings, passbook, or other cash

account takes the funds free of a security interest in the funds or the account unless the transferee

acts in collusion with the debtor in violating the rights of the secured party.

Article 15. Lessees of collateral

1. A lessee of goods takes its leasehold interest free of a security interest in the goods if the lessee

receives delivery of the goods without knowledge of the security interest and before it is perfected.

2. Notwithstanding paragraph 1, a lessee in the ordinary course of business takes the leasehold interest

free of a security interest in the goods even if the security interest is perfected and even if the lessee

knows of its existence.

3. Notwithstanding paragraph 1, a lessee takes a serial numbered vehicle free of a security interest

only if the lessee leased without knowledge of the security interest and the serial numbered vehicle

was not correctly described by serial number in a filed notice.

Article 16. Notice with respect to purchase money security interest

If a person files a notice with respect to a purchase money security interest in goods before or within 5

days after the debtor receives delivery of the goods, the security interest has priority over the rights in

the goods of a buyer, lessee, or lien holder which arise between the time the security interest attaches

and the time of filing.

Article 17. Disposition of collateral and proceeds

1. A security interest continues in collateral notwithstanding sale, lease, license, exchange, or other

disposition of the collateral, except as otherwise provided in this law or agreed upon by the parties.

2. Upon the disposition of collateral, a security interest attaches to proceeds of the collateral, except

as otherwise provided in this law or agreed upon by the parties.

3. A security interest in proceeds is a continuously perfected security interest if the security interest in

the original collateral was perfected but it becomes unperfected twenty days after the debtor

receives the proceeds unless:

a. a filed notice covers the original collateral and the proceeds are cash proceeds or proceeds of a

nature described in the notice; or


b. the security interest in the proceeds is perfected before the expiration of the twenty day period.

Article 18. Priority of purchase money security interests in equipment,

inventory, and livestock

1. A perfected purchase money security interest in equipment has priority over a conflicting security

interest in the same equipment and also has priority in its proceeds, if the purchase money security

interest is perfected when the debtor receives possession of the equipment or within five days

thereafter.

2. A perfected purchase money security interest in inventory or livestock has priority over a

conflicting security interest in the same inventory or livestock if:

a. the purchase money security interest is perfected when the debtor receives possession of the

inventory or livestock; and

b. the purchase money secured party notifies in writing the holder of the conflicting security

interest if the holder had filed a notice covering the same types of inventory or livestock before

the time of a notice filed by the purchase money secured party. The notification must describe

the inventory and state that the person giving the notification has or expects to acquire a

purchase money security interest in inventory or livestock of the debtor.

Article 19. Priority of certain liens arising by operation of law

A right of retention established by law in goods has priority over a perfected security interest while the

goods are in the possession of the person holding the right of retention if:

1. the right of retention is created in favor of a person in possession of the goods to secure payment

for materials or services with respect to the goods; and

2. the materials or services are provided in the ordinary course of business.

Article 20. Fixtures

1. A security interest may be created in goods that are fixtures and may continue in goods that become

fixtures.

2. A security interest in ordinary building materials ceases to exist when the building materials are

incorporated into the immovable property.

3. Readily removable factory, office machines, domestic appliances or other things that may be used

separately from land and buildings are not fixtures. Priority in these movable things is not

determined by this article and is not affected by the rights of an owner or mortgagee with respect to

land.

4. A security interest in fixtures is subordinate to all other real rights in immovable property, except as

provided in this article.

5. A perfected security interest in fixtures has priority over the interest of the owner of immovable

property a lien holder, or a mortgagee notwithstanding any provision in the mortgage, if


a. a notice is filed before the filing of a notice of the interest of the lien holder as required by this

law, or before the mortgage or interest of the owner is registered in the appropriate registry of

immovable property;

b. the security interest is a purchase money security interest given by the debtor before the goods

become fixtures, and a notice is filed before the goods become fixtures or within five days

thereafter.

The priority established in subparagraph "b" of this paragraph is not effective against a construction

mortgage. A mortgage is a construction mortgage to the extent that it secures an obligation to pay

for the construction of an improvement on immovable property, if the mortgage is registered in

accordance with the land law of 2001 and if the mortgage indicates that it secures such an

obligation.

6. On default, a secured party who has priority under this article may remove fixtures from immovable

property.

a. A secured party that removes fixtures shall promptly reimburse any mortgagee other than the

debtor for the cost of repair of any damage to the immovable property.

b. The secured party need not reimburse the mortgagee or owner for any diminution in value

caused by the absence of the goods removed or by any necessity for replacing them.

c. A person entitled to reimbursement may refuse permission to remove until the secured party

gives adequate assurance for the performance of the obligation to reimburse.

Article 21. Crops

A perfected security interest in crops growing on immovable property has priority over a conflicting

interest of the owner or a mortgagee if the debtor is in possession of the immovable property or has an

interest in the immovable property that is registered in accordance with the land law of 2001.

Article 22. Accessions

1. "Accession" means goods that are physically united with other goods in a manner such that the

identity of the original goods is not lost.

2. A security interest may be created in an accession and continues in collateral that becomes an

accession. If a security interest is perfected when the collateral becomes an accession, the security

interest remains perfected in the accession.

3. On default, a secured party may remove an accession from other goods if the security interest in

the accession has priority over the claims of every person having an interest in the whole.

4. A secured party that removes an accession shall promptly reimburse the holder (other than the


debtor) of any interest in the whole or the other goods whose interest is superior to that of the

secured party for the cost of repair of any physical injury to the whole.

a. The secured party need not reimburse for any diminution in value of the whole caused by the

absence of the accession removed or by any necessity for replacing it.

b. A person entitled to reimbursement may refuse permission to remove until the secured party

gives adequate assurance for the performance of the obligation to reimburse.

Article 23. Commingled goods

1. In this article, "commingled goods" means goods that are physically united with other goods in such

a manner that their identity is lost in a product or mass.

2. A security interest may not be created in commingled goods. However, a security interest may

attach to a product or mass that results when goods become commingled goods.

3. If collateral becomes commingled goods, a security interest attaches to the product or mass.

4. If a security interest in collateral is perfected before the collateral becomes commingled goods, the

security interest that attaches to the product or mass is perfected without the need for filing a notice.

The priority of the security interest in the product or mass is measured from the time of perfection

of the security interest in the collateral that became commingled.

5. If more than one security interest attaches to the product or mass, the following rules determine

priority:

a. a security interest that is perfected has priority over a security interest that is unperfected at

the time the collateral becomes commingled goods;

b. the first security interest to attach to the product or mass has priority among unperfected

security interests; and

c. if more than one security interest is perfected, the security interests rank equally in proportion

to the value of the collateral at the time it became commingled goods.

Article 24. Purchase of secured sales contracts and instruments

A purchaser of secured sales contracts or an instrument has priority over a conflicting security interest

in the secured sales contracts or instrument and also has priority with respect to the proceeds of the

secured sales contracts or instrument if:

1. in the ordinary course of the purchaser's business, the purchaser gives new value and takes

possession of the secured sales contracts or instrument; and

2. the secured sales contracts or instrument does not indicate that it has been assigned to the person

holding the conflicting security interest.


Article 25. Assignments

1. A person may assign all or part of the person's rights in accounts, secured sales contracts,

instruments, and other intangible property.

2. An assignment may be a general assignment, including future accounts, secured sales contracts,

instruments, and other intangible property.

3. The assignee is subject to all the terms of the agreement between the obligor on an account and

assignor.

4. No information to the obligor on an account shall be required for attachment, perfection or

enforcement of a security interest arising from an assignment. Failure to inform the obligor on an

account of an assignment has only the effects specified in this article.

5. If information of an assignment is required to be given to the obligor on an account, the information

shall be in writing, shall identify the rights assigned, and shall be authenticated by the assignor or

the assignee, but need not disclose any of the terms or conditions of the assignment.

6. An obligor on an account shall perform his obligation by paying the assignor until, but not after, the

obligor on an account is informed that the amount due or to become due has been assigned and that

payment is to be made to the assignee.

7. After being informed of an assignment, the obligor on an account shall perform his obligation by

paying the assignee, and not the assignor. However, if requested by the obligor on an account, the

assignee shall furnish timely and sufficient proof that the assignment has been made, and unless the

assignee complies, the obligor on an account may perform his obligation by paying the assignor

even if the obligor on an account has received a notice of assignment.

Article 26. Rights of third parties

An agreement between a secured party and a debtor is unenforceable if it prohibits or restricts the sale

or assignment of an account, lease, or secured sales contract.

Article 27. Future advances and future collateral

1. If a perfected security interest secures an obligation by the secured party to make future advances,

the rights of a lien holder have priority over the security interest to the extent the security interest

secures advances made after the secured party has actual knowledge of the interest of the lien holder

or more than twenty days after a notice of the interest of the lien holder is filed in the filing office,

whichever occurs first.


2. If a filed notice describes collateral in which the debtor may acquire rights in the future, that notice

shall not be effective against the rights of an administrator or, where applicable, a provisional

administrator appointed under the insolvency law, with respect to collateral acquired after a notice

is filed in the filing office pursuant to any provision of the insolvency law.

Article 28. Subordination of priority

A person entitled to priority under this law may agree to modify or forego the priority. No filing is

necessary with respect to such an agreement.

Chapter 3 - Filing

Article 29. Filing office

A secured transactions filing office is hereby established in the Ministry of Commerce.

Article 30. Submissions to the filing office

The secured transactions filing office is the place to file

1. a notice of a security interest in collateral subject to this law except collateral designated in article

44; and

2. a notice of the interest of a lien holder.

Article 31. Authority of the Ministry of Commerce

1. The Ministry of Commerce has power to issue regulations as provided in this article.

2. Regulations of the Ministry of Commerce shall not contradict the provisions of this law, or the

purpose of this law to promote economic activity.

3. Regulations may prescribe the means by which fees authorized by this law may be paid.

4. The Ministry of Commerce shall permit the filing of notices and the searching of records by

electronic means. The Ministry of Commerce may adopt regulations permitting the submission of

notices and searches requests by other means, to be converted to electronic records. The electronic

records of the filing office shall be the official records of the filing office.

5. If the Ministry of Commerce permits the submission of notices and search requests by means other

than electronic means, the Ministry of Commerce may prescribe forms for the submission of the

notices and search requests.

Article 32. Rights of the people with respect to the filing office

1. Information contained in notices filed pursuant to this law are public records.


2. Indexes and other records created by the filing office with respect to the notices, in any form or

medium, are public records.

3. Any person, without discrimination, has a right to inspect and obtain copies of any records held by

the filing office.

Article 33. Contents of initial notice

1. An initial notice is sufficient if it:

a. identifies the debtor and provides a mailing address;

b. identifies the secured party or an agent of the secured party and a mailing address; and

c. describes the collateral covered by the notice. In addition, a notice must provide a

description of the relevant immovable property if it covers timber to be cut, minerals to be

extracted, or fixtures.

2. A person is entitled to file an initial notice only if the debtor authorizes the filing in an authenticated

record. The authenticated record need not be contained in the notice.

3. By authenticating a security agreement, a debtor authorizes the filing of an initial notice or

amendment covering the collateral described in the security agreement, and proceeds of the

collateral, whether or not the security agreement expressly covers proceeds.

4. A notice may be filed before a security agreement is concluded or before a security interest attaches

to collateral.

5. A notice substantially complying with the requirements of this chapter is effective, even if it is

insufficient under this article, unless the insufficiency makes the notice seriously misleading. A

notice that fails to sufficiently provide the name of the debtor is seriously misleading.

Article 34. Name of debtor and secured party

1. A notice sufficiently provides the name of the debtor when, in Latin characters and Arabic

numerals:

a. the debtor is a natural person on the records of the Ministry of the Interior and the notice

contains the nine digit identification number of the natural person as displayed on the person's

Khmer Nationality Registration Card;

b. the debtor is a natural person and not a citizen of Cambodia, and the notice contains the name

of the person as indicated on the person's passport and the name of the country that issued the

passport;

c. the debtor is a juridical person organized under the company law of Cambodia or recognized

under other Cambodian law, and the notice contains the name of the debtor as shown on the

company law registry or the name recognized under other Cambodian law;

d. the debtor is a foreign juridical person qualified to do business under the company law of


Cambodia, if the notice provides the name of the debtor as shown in the company law registry

of Cambodia;

e. the debtor is a foreign juridical person not registered of the company law of Cambodia, and the

notice contains the name of the debtor as shown on the appropriate registry in the country of

the foreign juridical person's origin;

2. A notice that sufficiently provides the name of the debtor is not rendered ineffective by the presence

or absence of a trade name or other name of the debtor. A notice that provides only the debtor's

trade name does not sufficiently provide the name of a debtor.

3. A notice may provide the name of more than one debtor and the name of more than one secured

party.

4. The failure to indicate on a notice that a person is an agent of the secured party does not affect the

sufficiency of a notice.

Article 35. Effect of changes

1. A filed notice remains effective with respect to collateral that is sold, exchanged, leased, licensed,

or otherwise disposed of and in which a security interest continues, even if the secured party knows

of or consents to the disposition.

2. If a debtor changes its name so that a filed notice becomes seriously misleading, the notice is

effective to perfect a security interest in collateral acquired by the debtor before or within four

months after the change. The notice is effective to perfect a security interest in collateral acquired

by the debtor more than four months after the change only if an amendment to the notice is filed

within four months of the change that corrects the name.

3. Except as provided for a change of debtor name under paragraph 2, above, a notice remains

effective if, after the notice is filed, a change of circumstances renders the notice seriously

misleading.

Article 36. Duration of notice & effect of lapse

1. A filed notice is effective for a period of five years after the date of filing.

2. The effectiveness of a filed notice lapses on the expiration of the five year period unless, before the

lapse, a continuation statement is filed.

3. Upon lapse, a notice becomes ineffective and any security interest that was perfected by the notice

becomes unperfected, unless the security interest is perfected without filing.


4. If the security interest becomes unperfected upon lapse, it is deemed never to have been perfected

against a prior or subsequent purchaser of the collateral for value.

Article 37. Amendment of notice

1. An initial notice may be amended by one or more amendments. An amendment must:

a. identify the initial notice by its file number;

b. identify the secured party on the notice who authorizes the amendment;

c. indicate that it is an amendment to the notice; and

d. provide all of the information required of an initial notice, completely restating the notice in a

manner that reflects the amended state of the notice.

2. If an amendment adds collateral covered by a notice, or adds a debtor to a notice, it is effective if

the debtor authorizes the filing in an authenticated record. By authenticating a security agreement,

a debtor authorizes the filing of an amendment, covering the collateral described in the security

agreement, and proceeds of the collateral, whether or not the security agreement expressly covers

proceeds.

3. If there is more than one secured party on the notice, the amendment is effective if a secured party

authorizes the filing in an authenticated record.

4. An amendment that adds collateral is effective as to the added collateral only from the date of the

filing of the amendment.

5. An amendment that adds a debtor is effective as to the added debtor only from the date of the filing

of the amendment.

6. An amendment other than an amendment to add collateral or add a debtor is effective only if a

secured party on the notice authorizes the filing in an authenticated record.

7. An amendment is ineffective if it purports to delete all secured parties and fails to provide the name

of a new secured party, or purports to delete the names of all debtors and fails to provide the name

of a debtor not previously covered by the notice.

8. If there is more than one secured party on the notice, each secured party may authorize the filing of

an amendment.

9. An amendment authorized by one secured party on the notice does not affect the rights of another

secured party on the notice.

10. The filing of an amendment does not extend the period of effectiveness of a notice.


Article 38. Continuation of notice

1. The period of effectiveness of a notice may be continued by filing a continuation statement that:

a. identifies the initial notice by its file number;

b. identifies a secured party on the notice who authorizes the continuation statement; and

c. indicates that the effectiveness of the notice, with respect to the secured party who authorized

the filing, is to be continued.

2. A continuation statement may be filed only within six months before the expiration of the five-year

period of the notice.

a. Upon timely filing of a continuation statement, the effectiveness of the notice continues for a

period of five years commencing on the day on which the notice would have become

ineffective in the absence of the filing.

b. The effectiveness of a notice is continued only with respect to the secured party who authorized

the filing of the continuation statement.

c. Upon the expiration of the new five-year period, the notice lapses with respect to the secured

party unless, before the lapse, another continuation statement authorized by that secured party

is filed. Succeeding continuation statements may be filed in the same manner to continue the

effectiveness of the notice.

Article 39. Termination of notice

1. The effectiveness of a notice may be terminated by filing a termination statement that:

a. identifies the initial notice by its file number;

b. identifies a secured party on the notice who authorizes the termination statement; and

c. indicates that the notice is no longer effective with respect to the interest of the secured party

who authorized the filing.

2. Within 20 days after the secured party receives a written demand by the debtor, the secured on a

notice shall file a termination statement if:

a. there is no outstanding secured obligation and no commitment to make an advance, incur an

obligation, or otherwise give value; or

b. the debtor did not authorize the filing of the initial notice; or

c. the notice covers accounts or secured sales contracts that have been sold but as to which the

obligor on an account or other person obligated has discharged its obligation.

3. A termination statement effectively terminates the interest of a secured party on the notice only if

the filing is authorized in an authenticated record by that secured party. Upon the filing of an

effective termination statement, the notice to which the termination statement relates becomes

ineffective with respect to the authorizing secured party.


Article 40. Effectiveness of notice

1. An initial notice, amendment, continuation statement, or termination statement is effective at the

time it is discoverable on the records of the filing office by a person who requests information from

the filing office as provided in article 43.

2. Filing does not occur with respect to a record that a filing office refuses to accept because:

a. in the case of an initial notice, the record does not provide the information required by this law;

b. in the case of an amendment, the record does not provide the information required by this law,

or the record identifies an initial notice whose effectiveness has lapsed;

c. in the case of a continuation statement, the record does not provide the number of the initial

notice, or was not delivered within the permitted six-month time period; or

d. in the case of a termination statement, the record does not provide the number of the initial

notice.

3. The filing office may not refuse to file a notice for a reason other than set forth in paragraph 2 of

this article, except that the filing office may refuse to file a notice due to tender of less than the

required filing fee.

a. A record presented to the filing office with the required filing fee, but which the filing office

refuses to accept for a reason other than one set forth in this article, is effective as a filed record

except against a purchaser of the collateral that gives value in reasonable reliance upon the

absence of the record from the files.

b. If a filing office refuses to accept a record for filing, it shall promptly communicate the fact of

and reason for its refusal to the person that presented the record.

4. A filed notice is effective only to the extent that it was filed by a person authorized to file it under

this law.

5. A notice authorized by one secured party on the notice does not affect the rights of another secured

party on the notice.

6. The failure of the filing office to index a record correctly does not affect the effectiveness of the

record.

Article 41. Claim concerning inaccurate or wrongfully filed notice

1. A person may file in the filing office a correction statement with respect to an indexed notice under

the person's name if the person believes that the record is inaccurate or was wrongfully filed.

2. A correction statement must:

a. identify the record to which it relates by the file number assigned to the initial notice;


b. indicate that it is a correction statement; and

c. provide the basis for the person's belief that the record is inaccurate and indicate the manner

in which the person believes the record should be amended to cure any inaccuracy or provide

the basis for the person's belief that the record was wrongfully filed.

3. The filing of a correction statement does not affect the effectiveness of a notice.

Article 42. Filing office duties

1. For each notice filed, the filing office shall:

a. assign a unique number to the filed record;

b. create a record that bears the number assigned to the filed record and the date and time of

filing; and

c. maintain the filed record for public inspection.

2. The filing office shall index an initial notice by the name of the debtor and shall index all filed

records relating to an initial notice in a manner that associates the initial notice and all filed records

relating to the initial notice. For notices containing serial numbers of serial numbered vehicles, the

filing office shall maintain an index of serial numbers.

3. The filing office shall maintain the capability to retrieve a record by the name of the debtor and by

the file number assigned to the initial notice to which the record relates, and that associates an initial

notice and all filed records relating the initial notice with one another. For notices containing the

serial number of a serial numbered vehicle, the filing office shall maintain the capability to retrieve

a record by the serial number of the serial numbered vehicle.

4. The filing office shall maintain records of lapsed notices for a period of ten years beyond the date

of lapse.

5. The duties of the filing officer are merely administrative. The contents of notices are drawn from

private agreements authorized by this law and general laws of Cambodia which do not require the

approval or consent of anyone other than the parties. Therefore, the filing office has no authority

to examine notices to determine their sufficiency, authenticity, or validity.

Article 43. Information from filing office

1. The filing office shall communicate the following information to any person that requests it:

a. whether there is on file on a date and time specified by the filing office, any notice that

designates a particular debtor and has not lapsed with respect to all secured parties;

b. the file number, and the date and time of filing of each notice;

c. the name and address of each secured party on each notice;


d. the description of collateral contained on each notice or amendment; and

e. the file number, and the date and time of filing of each record relating to each notice, and

identification of the record as an amendment, continuation statement, correction statement, or

termination statement.

2. A request may be made to search the records of the filing office by any of the following criteria:

a. the file number of a notice;

b. the serial number of a serial numbered vehicle;

c. the identification number of a debtor who is an individual and a citizen of Cambodia; or

d. the name of a debtor who is not an individual and a citizen of Cambodia.

3. In complying with its duty, the filing office may communicate information in any medium.

However, if requested, the filing office shall communicate information by issuing a written

certificate that can be admitted into evidence in the courts of Cambodia without extrinsic evidence

of its authenticity.

Article 44. Filing with respect to collateral related to land

1. Notwithstanding the provisions of article 30, the place to file a notice to perfect a security interest

is the registry established by the land law of 2001 if the collateral is fixtures, minerals to be

extracted, or timber to be cut.

2. Notices filed under this article shall be in accordance with rules established by the Ministry of Land

Management, Urban Planning, and Construction.

Article 45. Fees

1. The fee for filing an initial notice, amendment, continuation statement termination statement,

correction statement, or for the preparation of a certified search report is the equivalent of USD 3.00

in Khmer riels, payable in a currency prescribed by the Ministry of Commerce.

2. Notwithstanding paragraph 1, there is no fee for a search report obtained by any person using the

electronic services of the filing office.

3. There shall be no fees for other services provided pursuant to this law.


Chapter 4 - Enforcement

Article 46. General provisions on default

1. The parties to a security agreement are free to define default with respect to the agreement.

2. Upon default, the secured party shall have:

a. the right to possession or control of the collateral, as the secured party prefers, even if the

security agreement is silent about possession or control;

b. other rights and remedies provided in this law;

c. other rights and remedies in the security agreement; and

d. rights and remedies under other law.

3. The secured party may pursue any or all of its remedies simultaneously.

4. If the collateral is accounts or other intangible property, the secured party may proceed directly

against the accounts or other intangible property, without judicial action, but subject to any

applicable provisions of this law on assignments or collection rights.

5. If the collateral is a document, the secured party may proceed as to the document or as to the goods

covered by the document.

6. When a secured party has obtained an order granting possession, the priority in the collateral is

measured from the date of filing of the notice, or perfection of the security interest, whichever is

earlier.

7. If collateral is sold at an execution sale, the secured party may buy the collateral at the sale.

Article 47. Collection rights of secured party

1. Upon default with respect to accounts or other rights to payment, the secured party may proceed

directly against the accounts.

2. Upon default, with respect to accounts, secured sales contracts, or other rights to payment, or

whenever agreed by the debtor, the secured party is entitled to notify an obligor on an account or

the obligor on any other right to payment to make payment to the secured party, and also to take

control of any proceeds.

3. If the security interest secures a debt, the secured party shall pay the debtor any amount collected

in excess of the secured debt. Unless otherwise agreed, the debtor owes to the secured party the

difference between the secured debt and the amount collected.


4. If the transaction was a sale of accounts or secured sales contracts, the debtor is entitled to any

surplus and is liable for any deficiency only if the security agreement so provides.

5. The secured party may act under this article without recourse to judicial process.

Article 48. Secured party's right to take possession after default

1. Upon default, the secured party may take possession or control of collateral without legal

proceedings if the debtor has agreed in writing after default.

2. Upon default, the secured party shall be entitled to a special, expedited order from the court granting

the secured party possession or control over the collateral.

a. Issues at the hearing are limited to the existence of a security agreement covering the collateral

and at lest one event of default.

b. If the service of a bailiff or other official is required to dispossess the debtor of the collateral,

the secured party shall pay a fee not to exceed the equivalent of USD 20.00 in Khmer riels.

3. If the security agreement so provides, the secured party may require the debtor to assemble the

collateral and make it available to the secured party at a place to be designated by the secured party

which is reasonably convenient to both parties.

4. A secured party may render equipment unusable without removing it from its location, and may

dispose of collateral on the debtor's place of business, residence, or any other location where the

collateral is found.

Article 49. Secured party's disposal of collateral after default

1. After default, a secured party may sell, lease, license or otherwise dispose of any or all of the

collateral.

2. Disposal of the collateral may be made publicly or privately, and may be made in one or more

contracts.

3. Disposal may be as a unit or in parcels and at any time and place and on any terms consistent with

the secured party's duties under this law.

4. The secured party shall give the debtor reasonable notice of the time and place of any public sale

or the time after which any private sale or other intended disposal is to be made, unless collateral is

perishable or threatens to decline speedily in value. The debtor may waive the right to be informed.


5. The secured party shall inform any other secured party from whom the secured party has received

a written record of an interest in the collateral.

6. The secured party may buy at any public or private sale.

Article 50. Consequences of disposal

1. The proceeds of disposal shall be applied in the following order to:

a. The reasonable expenses of retaking, holding, preparing for disposal, and disposing of the

collateral, including reasonable attorneys' fees and legal expenses incurred by the secured

party;

b. the satisfaction of debt secured by the security interest;

c. the satisfaction of debt secured by any subordinate security interest in the collateral if a

written demand is received before distribution of the proceeds is completed and the holder of

a subordinate security interest gives reasonable proof of the interest.

2. The secured party shall account to the debtor for any surplus, and, unless otherwise agreed, the

debtor is liable for any deficiency.

3. When collateral is disposed of by a secured party after default:

a. the disposal transfers to a purchaser who gives value all rights in the collateral, and

discharges the security interest and any subordinate security interest or privilege, if the

purchaser acts in good faith; and

b. the registrar of any registry maintaining records of ownership of the collateral, such as the

registrar of ownership rights in serial numbered vehicles, shall issue a new title to the

purchaser for value, and if the registrar requests, the secured party shall provide authorization

for the issuance of the new title in the form of the court order granting possession to the

secured party, or the written agreement of the debtor to surrender possession to the secured

party, executed after default.

Article 51. Retention of collateral

1. A secured party may, after default, propose to retain the collateral in full or partial satisfaction of

the obligation.

2. The proposal shall be given to the debtor and to any other secured party from whom the secured

party has received a written claim of an interest in the collateral.

3. If the secured party receives objection in writing from a person entitled to receive notice within

twenty days after the notice was sent, the secured party must dispose of the collateral as provided

in this chapter.


4. If no objection is received within the twenty-day period, the secured party may retain the collateral

in satisfaction of the debtor's obligation in accordance with the proposal.

Article 52. Debtor's right to redeem collateral

1. Unless otherwise agreed in writing after default, the debtor or any other secured party may redeem

the collateral by fulfilling all obligations secured by the collateral and expenses reasonably incurred

by the secured party in retaking, holding and preparing the collateral for disposal, including

reasonable attorneys' fees and legal expenses.

2. Redemption shall take place before the secured party has disposed of collateral or entered into a

contract for its disposal or before the obligation has been discharged.

Article 53. Secured party's liability for failure to comply with this law

1. If the secured party does not comply with the requirements of this chapter, disposal of collateral

may be ordered or restrained by a court on appropriate terms and conditions.

2. In disposing of collateral, the secured party shall at all times act in a commercially reasonable

manner.

3. If the disposal has occurred, the debtor or any person entitled to be informed or whose security

interest has been made known to the secured party prior to the disposal has a right to recover from

the secured party any loss caused by a failure to comply with this law.

4. A sale is not commercially unreasonable merely because a better price could have been obtained by

a sale at a different time or in a different method from the time and method selected by the secured

party.

5. A sale is commercially reasonable if the secured party disposes of the collateral in conformity with

commercial practices among dealers in that type of property.

6. If a method of disposal of collateral has been approved in any legal proceeding, the disposal shall

conclusively be deemed as commercially reasonable, but no such approval is required by this law.

Article 54. Certified texts

The initiator of this law, the Ministry of Commerce, may certify a translation of the law in the English

language, for the purpose of promoting economic activity by assisting a broader number of people to

understand and use the law, and to assist in resolving any ambiguity in the law.


Chapter 5 - Concluding provisions

Article 55. Effective date

This law shall take effect upon the first date of operations of the filing office established in chapter 3, as

certified by decree of the Ministry of Commerce.

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