Understanding the Lender’s Rights on Pledged Assets in Cambodia

• 20 March 2021
• Local News
• 8787 Views

A pledge is a transaction in which borrowers give possession right of either their movable or immovable property to lenders as collateral to secure a debt or loan. As a lender/lender, besides being able to possess the property, what other rights do you have on the pledged asset? Can the lender sell the pledged asset if the borrower defaults on the debt?

According to the Civil Code and Land Law, the lender has rights on the pledged property as follows:
– Occupy/possess the pledged property
– Hold the pledged property in case the borrower defaults the debt
– Gain benefit from the pledged property and may deduct that from the debt
– Put the pledged property into another pledge contract with agreement from the borrower
– Put the pledged property into another pledge contract without the agreement of the borrower, but the lender must be responsible for any damages

The most important point that both lender and borrower must know is that in case the borrower defaults on the debt, the law strictly prohibits the lender from selling the pledged property on his/her own. The sale is also prohibited even when the borrower agrees to do so while entering into a contract. (Article 827 of the Civil Code)

In case the borrower is unable to repay the debt, the lender must file a lawsuit so that the court can issue a foreclosure sale order.

The prohibition of selling pledged property without a court order is first to protect the rights of other lenders. In some cases, the borrower has used the property as collateral with several lenders. Thus, it is up to the court to decide which lenders get which amount from the sale.

Second, the prohibition is to protect borrowers, who are were sometimes forced by one of the lenders to agree to sell the pledged property against their own will.

Moreover, in order to go through the foreclosure procedure with the court, the property must first be registered with the competent authority. This procedure gives chance to all lenders to show up and confront the borrower.

During the foreclosure sale period, if the price of the foreclosed land without a building is higher than the price of land with a building, the lender can demand the building to be demolished before the sale.

Nonetheless, one should not confuse pledge with hypothec. A pledge is a transaction in which the borrower gives possession rights (and other rights as mentioned above) to the lender. However, hypothec is a transaction in which immovable property is also used as the collateral for a loan, but the lender has no possession right on the property. (Articles 816 and 843 of the Civil Code).

For example, a mortgage in most cases is the loan in form of hypothec, in which borrowers still have the right and benefit from their property as usual. The lender/bank only holds the title of that property without having any ownership transferring.

• Laws and Regulation