Cambodia Company Dissolution & Liquidation

In recent years, Cambodia’s legal and regulatory landscape has seen significant changes, particularly in the area of company liquidation and de-registration. Historically, the process of winding up a company in Cambodia was informal and lacked a clearly defined procedure, often leaving companies and their directors in a state of uncertainty. However, with the promulgation of the Law on Amendment of the Law on Commercial Enterprise on January 29, 2022, the Cambodian government has introduced a more structured framework to govern the voluntary liquidation and de-registration of companies. This article delves into the intricacies of the current process, outlining the new requirements and their implications for businesses operating in Cambodia.

Before the 2022 amendment, the process of liquidating a company in Cambodia was somewhat nebulous. Companies that wished to cease operations and dissolve their legal existence had to rely on a general, informal practice that was not underpinned by robust legal provisions. Typically, a director of the company was appointed as the liquidator, tasked with overseeing the winding-up process, settling debts, and distributing any remaining assets to shareholders. This approach, while functional to some extent, was fraught with legal ambiguities and often left room for disputes and inconsistencies.

The absence of a formalized procedure also meant that there were no standardized requirements for record-keeping, reporting, or the involvement of third-party professionals in the liquidation process. Consequently, the liquidation and de-registration of companies in Cambodia were prone to delays, inefficiencies, and legal challenges.

The 2022 Law on Amendment: Key Changes and Requirements

The introduction of the Law on Amendment of the Law on Commercial Enterprise in January 2022 marked a significant shift in how company liquidations are conducted in Cambodia. One of the most notable changes introduced by the amendment is the requirement for a liquidator to be appointed by the shareholders of the company. This appointment is no longer a mere formality but must now involve an Auditing and/or Accounting Firm that is licensed by the Accounting and Auditing Regulator (ACAR).

This new requirement serves several purposes:

  1. Professional Oversight: By mandating that the liquidator be a licensed auditing or accounting firm, the Cambodian government aims to ensure that the liquidation process is conducted with a high degree of professionalism and transparency. Licensed firms are expected to adhere to strict ethical standards and are subject to oversight by regulatory bodies, thereby reducing the risk of malpractice or negligence during the liquidation process.
  2. Enhanced Accountability: The involvement of a licensed firm also introduces a higher level of accountability. The liquidator is now responsible for preparing and signing a Liquidation Report, which must confirm the accuracy and completeness of the information contained therein. This report is a critical document that provides a comprehensive overview of the company’s financial position at the time of liquidation, including details of its assets, liabilities, and any distributions made to shareholders.
  3. Record-Keeping Obligations: Another significant change brought about by the 2022 amendment is the requirement for the liquidator to maintain the company’s accounting records, financial statements, and other relevant documents for up to 10 years following the de-registration of the entity. This long-term record-keeping obligation ensures that there is a clear and accessible trail of the company’s financial activities leading up to its dissolution. This requirement is particularly important in cases where legal or tax-related issues may arise after the company has been de-registered.

The Liquidation Process: Step-by-Step

The process of liquidating a company under the new legal framework involves several key steps, each of which must be carefully managed to ensure compliance with the law:

  1. Resolution by Shareholders: The first step in the liquidation process is for the shareholders of the company to pass a resolution to wind up the company. This resolution must specify the appointment of a licensed auditing or accounting firm as the liquidator.
  2. Appointment of the Liquidator: Following the shareholders’ resolution, the appointed firm assumes the role of liquidator. The firm is responsible for managing the entire liquidation process, including the settlement of debts, distribution of assets, and preparation of the Liquidation Report.
  3. Preparation of the Liquidation Report: The liquidator must prepare a comprehensive report that details the company’s financial status at the time of liquidation. This report must be signed by the liquidator and submitted to the relevant authorities as part of the de-registration process.
  4. Settlement of Liabilities: Before any assets can be distributed to shareholders, the liquidator must ensure that all of the company’s liabilities have been settled. This may involve negotiating with creditors, paying off outstanding debts, and resolving any legal disputes.
  5. Distribution of Assets: Once all liabilities have been settled, the remaining assets of the company can be distributed to the shareholders in accordance with the company’s articles of association or the liquidation plan.
  6. De-registration of the Company: After the liquidation process has been completed, the liquidator must submit the necessary documentation to the Ministry of Commerce to formally de-register the company. This marks the official dissolution of the company as a legal entity.
  7. Ongoing Record-Keeping: Even after the company has been de-registered, the liquidator is required to maintain the company’s records for a period of 10 years. This ensures that any future inquiries or disputes can be addressed with reference to the original documentation.

Implications for Businesses and Stakeholders

The new legal requirements for company liquidation in Cambodia have significant implications for businesses, shareholders, and other stakeholders. For businesses, the involvement of a licensed auditing or accounting firm adds a layer of professionalism and reliability to the liquidation process. However, it also introduces additional costs, as these firms typically charge fees for their services. Companies considering liquidation must, therefore, factor in these costs when planning their exit strategy.

For shareholders, the new requirements provide greater assurance that the liquidation process will be conducted fairly and transparently. The mandatory preparation of a Liquidation Report ensures that shareholders have access to detailed information about the company’s financial status, which can help prevent disputes and ensure that the distribution of assets is carried out in accordance with the law.

Finally, the long-term record-keeping obligations imposed on liquidators are a crucial safeguard for both the government and other stakeholders. By maintaining access to the company’s financial records for up to 10 years, the Cambodian authorities can more effectively monitor compliance with tax and legal requirements, even after the company has ceased to exist.

A business cannot be terminated without government intervention. The general dissolution of a business in Cambodia is governed by relatively new laws and guidelines from the Ministry of Commerce. A company ceases to exist on the date shown in a certificate of dissolution issued by the Ministry. The courts can supervise the liquidation process if the Ministry or another party requests. Banking and insurance businesses are subject to separate procedures.

What are the tax consequences of terminating a business?

Terminating a business requires obtaining a certificate of tax clearance from the General Department of Taxation of the Ministry of Economy and Finance. Before issuing the certificate, the General Department of Taxation will audit the company’s tax records to determine whether taxes are owed.

What procedures and costs are involved in termination? How long does it take?

In the first instance, an application is submitted to close the company at the General Department of Taxation with a view to obtaining a “Tax Clearance Certificate” (which can thereafter be submitted to the Ministry of Commerce for the purposes of the liquidation application). A preliminary audit will be conducted by the appointed auditor notwithstanding whether the company has complied with all the tax filing requirements. In rare cases a comprehensive audit will also be required. Note that this can be a lengthy process, and can take up to six months before a Tax Clearance Certificate is issued.

Once a Tax Clearance Certificate has been obtained, an application for closing the company in the commercial register must be filed at the Ministry of Commerce. Once this application has been processed, the Ministry of Commerce will issue a “Certificate of Closing”. Typically, it takes one to two months from the submission of the liquidation application to the Ministry of Commerce, to when the Certificate of Closing is finally issued.

What is the legal ground for opening insolvency proceedings against a person or business entity?

A petition to open insolvency proceedings can be filed if the debtor fails to pay debts of 5 million Riel, or about US$1,250. In general, a petition to open insolvency proceedings can be filed by a debtor, one or more creditors, the Ministry of Commerce or the public prosecutor.

Are there provisions governing order of priority in the payments of debts in case of liquidation? Is reorganization of a business allowed under Cambodian law?

Companies seeking to liquidate must pay debts according to the following priority:

  • Employee wages, administrator’s remuneration and fees, administrative courts fees;
  • Secured claims up to a certain value;
  • State taxes whose notice is not filed; and
  • All other admissible unsecured claims.

Reorganizing a debtor’s business is subject to the judgment of the court and the company’s creditors.

Is it routine to carry out a bankruptcy search of an individual or a company?

The Law on Insolvency is only recently enacted and there is not yet an operational mechanism for a bankruptcy search in Cambodia. It is not possible to undertake a reliable and expeditious bankruptcy search through the Cambodian courts.

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