McKinney professor instructs Cambodian officials on new laws

The adage of pulling yourself up by the bootstraps is a failed metaphor if there are no boots or straps in the first place.

This is a common problem in developing nations, where access to credit is often hard to come by. In such cash-strapped societies, only a small group with existing collateral can start and maintain their own businesses.

That was the very problem one Indiana University Robert H. McKinney School of Law professor sought to address late last year when she traveled to Southeast Asia for a four-day conference.

Nguyen

Professor Xuan-Thao Nguyen conducted training workshops for legal professionals from Dec. 25-28 in Phnom Penh, Cambodia. Nguyen directs the IU McKinney Center for Intellectual Property Law and Innovation.

The workshop was attended by 36 appellate judges, 30 prosecutors, and officers from the Cambodia Ministry of Justice, the Royal Academy of Judicial Professions, Ministry of Commerce and banks from across the nation.

It was the first such training in the nation for judges on secured transactions law.

The reason for Nguyen’s presence at the conference was simple: The country’s legal structure has never dealt with anything like it before.

Changes in the law

Nguyen has worked with the World Bank International Finance Corp. on secured transactions in China, Vietnam and the Mekong Region for the past six years.

She said in the past, the lack of available collateral in these countries meant those who sought to start or expand their businesses had no access to the credit they so desperately needed. She said this disparity meant countries such as Cambodia couldn’t compete with other countries in the international marketplace.

“Families (have) no money,” she said. “You need to buy equipment, but you need credit to buy equipment.”

In the past few years, efforts have been underway to address this problem. According to the Secured Transaction Reform Project, Cambodia passed a new Law on Secured Transactions in 2007, which has a wide definition of collateral and includes the equipment and the raw materials themselves.

Nguyen said these changes mean that businesses would have the ability to get their operations moving by hiring workers.

“The lenders can also take a security interest in account receivables as well,” she said. “So, we create a whole new economy with that. … What’s really big is that everything can be used as collateral.”

The origin of the old laws

The old ways die hard, however. Nguyen said the difficulty in countries such as Cambodia often rise from entrenched interests.

She said the Civil Code of Cambodia, the existing legal framework, was structured on the Japanese Civil Code. In turn, the Japanese code — which was first put into use in 1898 — was modeled on the German Civil Code.

Nguyen said the United Nations Commission on International Trade Law created model laws to create separate secured transactions laws in developing nations such as Cambodia.

“Those of us who teach secured transaction law and have worked in this space … have seen how it works (and have) advocated objectively (that) we believe that this sort of secured transaction law works very well,” she said.

When Cambodia made the leap a few years ago, it created a system whereby the new secured transactions law exists alongside the pre-existing Japanese- and German-inspired civil code.

Nguyen said this means creditors and lenders in Cambodia now have a choice: If the contract language refers to the existing civil code, then that is used. If they instead want to use the secured transactions law, then that will govern the contract.

She said that even though the existing civil code was written in arcane language that may not have anticipated the realities of the 21st century, legal professionals in Cambodia had their reservations.

“Judges in Cambodia have been trained under (the civil code) because the government adopted the Japanese law,” she said. “The law professors teach that law. Who wants to learn a new law? They might be out of their expertise.”

How it works here

Nguyen said another reason Cambodia’s legal framework was so hard to modify was that the different branches of law were traditionally contained together within the civil code. She said unlike countries such as the United States where each branch of law has its own code, places such as Cambodia don’t move forward easily.

“What happens when you have a big body of law? It does not change when the society keeps changing so much,” she said.

Schantz

Frost Brown Todd attorney Matt Schantz works primarily with intellectual property matters, including patent and trademark applications and technology licenses.

He said in his experience, secured transactions law in America applies to businesses of all sizes and gives creditors a certain amount of peace of mind that they will be made whole if the borrower defaults.

“There’s bankruptcy law, (but) that might just mean that I get to share in whatever crumbs are left of your company when you decide to fold,” he said. “And that doesn’t help me (as the lender) feel confident in my lending decision here.”

Under American laws, publicly filed financing statements offer a clear order as to who has first secured interest in whatever collateral is offered. A second mortgage on a home is analogous, said Schantz.

Scherer

“It helps the lender have a more comfortable position that they’re not going to lose their shirt,” he said.

Bingham Greenebaum Doll partner Tom Scherer concentrates his practice in bankruptcy, restructuring and creditors’ rights. He said the cost to gain access to secured credit was much less than for unsecured credit, such as a credit card, for that very reason.

“We have a system that is pretty advanced and makes the granting of secured credit cheap, easy and efficient,” he said. “Therefore, the lenders who are in that market can loan money at lower rates.”•