Bankruptcy Law in the Kingdom
of Thailand
by
Cynthia
M. Pornavalai
November 17, 2008
I. INTRODUCTION
The 1997 Asian financial crisis had crippled
many Asian economies in its wake, but it had also left behind
it a lasting legacy to the economies that it ravaged. Faced with
sharp economic slowdown and a wave of corporate defaults, Thailand
revamped its banking and financial institutions including various
legal infrastructures. For one, it made a major amendment to its
antiquated bankruptcy laws to allow for corporate restructuring
similar to the United States' Chapter 11. The amendment, which
took the form of an additional section on Corporate Reorganization
under Chapter 3/1, took effect in 1998. Over the years, various
revisions have been made to fine-tune its provisions and principles.
While there is optimism that the present
financial crisis in the US will not affect the Asian economies
as it did in the late 1990s, it is nevertheless worthwhile to
review Thailand's bankruptcy laws in anticipation of harder times
ahead. This article examines the evolution of the Thai bankruptcy
law and its basic provisions.
II. THE THAI BANKRUPTCY SYSTEM
A. Bankruptcy Court
The inclusion of reorganization proceedings
in the 1998 Amendments necessitated specially trained judges with
an understanding of the process and appropriate knowledge of business
practices. As a result, the Establishment of Bankruptcy Court
and Procedure for Bankruptcy Cases Act was enacted in 1999. Following
such enactment, a specialized court, known simply as the Central
Bankruptcy Court, began operations on June 18, 1999. The Court
has jurisdiction over all bankruptcy cases, as well as all civil
matters pertaining to bankruptcy cases. More recently, the Central
Bankruptcy Court was given jurisdiction over criminal matters
pertaining to bankruptcy as well.
Prior to the 1999 Act, any civil court
in Thailand could hear bankruptcy cases. However, all bankruptcy
cases are now required to be heard by bankruptcy court judges.
Thus, filing bankruptcy petitions with other courts is no longer
allowed.
The Bankruptcy Courts are divided into
the Central Bankruptcy Court and the Regional Bankruptcy Courts.
The Central Bankruptcy Court has jurisdiction throughout the Bangkok
Metropolitan Area, but all bankruptcy cases which occur outside
such jurisdiction may be filed with the Central Bankruptcy Court.
However, the Central Bankruptcy Court may, at its discretion,
refuse to try any such cases. Regional Bankruptcy Courts may be
established under Acts which stipulate the respective jurisdictions
and locations of such Courts.
B. Bankruptcy Procedure
Bankruptcy procedures are governed by the
Bankruptcy Act, as amended; the Act for Establishment and Procedure
for Bankruptcy Court, as amended; the Rules on Bankruptcy Cases;
and the Civil Procedure Code.
1. Proceedings in the Court of First Instance
The Bankruptcy Court proceeds with the
trial of a case consecutively without adjournment, until completion
thereof, unless there is unavoidable necessity. Thereafter, the
Bankruptcy Court will make a judgment or issue an order as soon
as possible. In the event that a party fails to appear in Court
at any hearing, regardless of whether or not permission is given
by the Court, it will be deemed that the party is aware of the
court proceedings at that hearing. This proceeding is a substantial
departure from the practice current at the time of the enactment
of the 1999 Act whereby cases were generally heard on an installment
basis at one-month intervals.
2. Appeal
A judgment or order of the Bankruptcy Court
in respect of a business rehabilitation of a debtor, including
civil and criminal cases associated with such a case, may be appealed
to the Supreme Court within one month from the date when the judgment
or order is pronounced. Appeals are accepted by the Bankruptcy
Court which is responsible for passing them to the Supreme Court.
III. LIQUIDATION
- ABSOLUTE RECEIVERSHIP
A. Overview
Under Thai law, bankruptcy is an involuntary
act whereby the law causes the property of a company/debtor to
be distributed among its creditors.
B. Bankruptcy Process
1. Who can initiate a bankruptcy action
and against whom?
Any creditor owed more than Baht 2 million
by a corporate debtor or more than Baht 1 million by an individual
debtor may file a bankruptcy action against such debtor. However,
the debtor must first be proven insolvent. Under Thai law, a debtor
shall be presumed insolvent if any of the following events occurs:
(a) the debtor transfers assets or rights
in management of his assets to another person, for the benefit
of all his creditors;
(b) the debtor transfers his assets dishonestly or fraudulently;
(c) the debtor transfers an asset or creates any right over it,
which may be deemed a preferential transfer if the debtor were
declared bankrupt;
(d) the debtor, in order to avoid paying creditors, (i) leaves
Thailand or remains outside Thailand; (ii) removes his assets
from the jurisdiction of the Court; or (iii) consents to a judgment
ordering payment of money which he does not pay;
(e) the debtor's assets have been attached under a writ of execution,
or there are no more assets for which attachment is possible;
(f) the debtor declares to the Court in any action that he cannot
pay his debts;
(g) the debtor informs any of his creditors that he cannot pay
his debts;
(h) the debtor submits proposals for compromising on his debts,
to any two or more of his creditors; or
(i) the debtor receives demand letters from his creditors not
less than twice, at intervals of not less than 30 days, and does
not pay the debts.
2. Composition
(a) Composition prior to Bankruptcy
If both the creditors and the debtor wish
to avoid a long, protracted and adversarial bankruptcy action,
a composition during bankruptcy may be an attractive alternative.
So, whenever the debtor desires to come to a settlement for the
satisfaction of his debts by repayment of a part, or in any other
manner, he may submit his proposed composition in writing to the
receiver within seven days after the date of submission of his
explanation of matters relating to his business, or within such
period the receiver prescribes. The receiver then calls a meeting
of the creditors to consider whether such proposal shall be accepted.
The acceptance will not bind all creditors until the Court passes
an order approving the composition.
The Court is not permitted to approve a
composition in which no provision is made for repayment of debts,
according to the order prescribed by the law relating to the division
of the assets of a bankrupt. Further, the Court is not permitted
to approve a composition of no benefit to creditors generally,
or which gives preferential treatment to some creditors, or which
indicates any fact which, if the debtor became bankrupt, would
prevent the debtor from being discharged from bankruptcy. In the
last case, however, there is an exception. The Court can approve
such a composition if the debtor posts security for repayment
of an amount of at least one-quarter of the total unsecured debt
for which creditors can claim repayment.
Once the composition is approved by the
creditors and the Court, it becomes binding on all creditors.
However, a composition does not cause a person who is jointly
liable with the debtor or who is a guarantor to be released from
his liability.
If the debtor fails to repay his debt as
agreed in the composition, if there is likelihood that such repayment
will be delayed, or if such composition was obtained by fraud,
then on the report of the receiver or on the motion of any creditor,
the Court is empowered to terminate the composition and adjudge
the debtor as bankrupt.
(b) Composition after Bankruptcy
After the Court's adjudication of bankruptcy,
the debtor may (again) submit a proposal for a composition. However,
if the debtor's previous composition was unsuccessful, he is not
allowed to do so again within 3 months from the date the last
failed. If the Court approves the composition, it is empowered
to terminate the bankruptcy and may order the restoration of the
power of the debtor to manage his business.
3. Discharge from Bankruptcy
A bankrupt may be discharged from bankruptcy
by court order or by automatic discharge. The debtor may submit
an application by way of a motion to the Court asking for an order
of discharge from bankruptcy. The discharge will be granted if
at least 50% of the assets have been paid to creditors and the
bankrupt is not a dishonest person. Dishonesty will be presumed,
for example, if the bankrupt carries on business knowing he is
unable to pay his debts, if he has given preference to any creditor,
if he has embezzled, or if he has engaged in borrowing that constitutes
public fraud. In any event, a bankrupt who has been discharged
from bankruptcy by court order still has the duty to assist in
the realization and distribution of his assets, as the receiver
may require. If he does not so assist, the Court may withdraw
the discharge from bankruptcy.
An individual, and not a business, may
also be discharged from bankruptcy based on the tolling of automatic
discharge periods which start running as of the date a debtor
is adjudged bankrupt. A bankrupt will be automatically discharged
after three years. However, if such a person has had a previous
bankruptcy within five years, the automatic discharge period will
be extended to five years. Also, in cases of dishonest bankrupts,
the court may extend the period to ten years. However, for such
bankrupts, the court is empowered to shorten the period to five
years in cases of special circumstances on the request of the
bankrupt or the receiver. Finally, in cases of public fraud, the
automatic discharge period is a full ten years.
Whether discharge takes place via court
order or automatically, an order for discharge is published in
the Government Gazette and at least one daily newspaper. Such
means of discharge do not release from liability a person who
is a partner with the bankrupt, who is jointly liable with the
bankrupt, or who guarantees or is in the position of a guarantor
of the bankrupt. Similarly, neither means of discharge will release
tax debt nor those debts arising from dishonesty or fraud.
C. Proceedings in the Case where the Debtor
is an Ordinary Partnership, a Limited Partnership, a Limited Company,
or any other Juristic Person
Where the debtor is a juristic person,
aside from creditors being able to file a bankruptcy action shown
above, the liquidator of such juristic person may also submit
a petition to the Court asking that such person be adjudged bankrupt
if it appears that the contribution of shares has been fully paid
up and the assets are insufficient to cover the debts. The Court
then issues an order placing the juristic person immediately under
absolute receivership, and the meeting of creditors shall appoint
one creditor to have the rights and duties as that of a petitioning
creditor. He, as well as the receiver, may file a motion for the
adjudication of bankruptcy of persons who are found to be unlimited
partners in such juristic person without filing a new action.
The Court may then order a temporary receivership of the assets
of any such person or persons. The petitioning creditor may be
required to give security against loss in such amount as the Court
may deem proper. If it appears later that the person was or is
not an unlimited partner, the Court will terminate the receivership
and if such person filed a motion to the Court, the Court has
the power to order that the petitioning creditor who asked for
the receivership pay compensation to such person in a sum as the
Court may consider proper, or it may order that the receiver make
such payment out of the assets of the juristic person.
IV. BUSINESS REORGANIZATION
A. Overview
The proceedings for business reorganization
are governed by Chapter 3/1 of the Act. The procedures under Chapter
3/1 start with the filing of a petition for restructuring by the
debtor, the creditor(s) owed more than Baht 10 million, or a relevant
government authority. When the Court approves the application
for restructuring, it gives the debtor protection by declaring
an automatic stay which restricts the ability of creditors to
take action against the company to recover any sums owing to them.
The stay prevents any form of legal process being commenced or
continued against the company. The stay also prevents creditors
from filing dissolution or bankruptcy petitions. After the Court's
approval of the application, the creditors are next required to
select a plan preparer to draft a rehabilitation plan. The creditors'
choice of plan preparer must be approved by the Court. Within
one month after the Court's appointment of the plan preparer,
all creditors must submit their claims. The plan preparer must
then draft the plan, which must be submitted to the creditors
for their consideration, within three months. The creditors may
approve the plan through a special resolution passed by the creditors
who are grouped into various categories. Once approved by the
creditors, the plan is submitted to the Court for its final approval.
From the time the Court approves the plan, it becomes binding
on all creditors. The plan is then implemented within a five-year
time frame after the Court's approval, with two one-year extensions
allowed. Within this time frame, if the Court decides that the
plan is not successful, it may order its termination and/or put
the company under absolute receivership, leading to bankruptcy
proceedings.
B. Filing of Petition for Business Reorganization
1. Who can initiate a business reorganization
action and against whom?
The debtor, or the creditor or creditors
owed more than Baht 10 million, or a relevant government authority,
may file a petition for reorganization of the debtor's business
regardless of whether a lawsuit for bankruptcy has been filed
against the debtor. However, it must be established that the debtor
is insolvent and that there is reasonable ground and prospect
to reorganize the business.
Filing a petition for reorganization will
not be allowed in the event that:
(a) the Court has ordered the debtor to
be under absolute receivership; or
(b) the Court or the registrar has ordered a dissolution or revocation
of the registration of juristic person of the debtor, a registration
of dissolution of such juristic person is made, or the juristic
person must be dissolved for other reasons.
2. Specifics of the Petition
The petition for business reorganization
must clearly set out:
(a) the insolvency of the debtor;
(b) list and address of all creditors to whom the debtor is indebted
alone or altogether for an amount of at least Baht 10 million;
(c) reasonable grounds and prospects to rehabilitate the business;
(d) the name and qualifications of the plan preparer; and
(e) a letter of consent of the plan preparer.
If a creditor is the petitioner, it shall
annex the data of other known creditors; if the debtor is the
petitioner, it shall annex the list of all of its existing assets
and debts, including data of the creditors.
3. Automatic stay
When the Court approves the application
for reorganization, it gives the debtor protection by declaring
an automatic stay which restricts the ability of creditors to
take action against the company to recover any sums owing to them.
The stay prevents any form of legal process being commenced or
continued against the debtor. The stay also prevents creditors
from filing dissolution or bankruptcy petitions. Once the automatic
stay commences, it means a severe limitation for the secured creditor
on the enforcement of its securities. Basically, a secured creditor
cannot file an action in a civil case against a debtor in respect
of the debtor's assets without the Court's approval. If there
has already been a judgment, the execution of such judgment over
the assets of the debtor cannot also be carried out without the
Court's dispensation. In order to apply for an amendment or annulment
of the limitation, the secured creditor will have to prove that
the stay or limitation is not necessary for the business reorganization,
or that the rights of secured creditors are not sufficiently protected.
On the other hand, the protection shall be deemed sufficient if
there has been a repayment of debt to secured creditors in an
amount equal to the amount of decrease in the value of the assets
used as security, if security has been given to secured creditors
so as to compensate for the original security in an amount equal
to the decrease in the value of assets used as security, or if
secured creditors have consented to, or the Court approves, any
other procedure which will allow the secured creditors to receive
repayment for their claims at the value of the assets used as
security at the time the petition for business reorganization
was submitted, including interest and contractual benefits, on
termination of the procedure(s).
C. Plan Preparer, Plan Administrator
and Receiver
1. Plan Preparer
When the Court approves the application
for reorganization, a plan preparer must be appointed to make
a plan for reorganization of the business.
The plan preparer need not have any special
qualifications. It may be a company or a committee, and since
there is no such formal occupation as a professional insolvency
specialist in Thailand as exists in other jurisdictions, the plan
preparer can practically be any person, company or committee nominated
by the debtor or creditor, and approved by the Court.
The plan preparer has the two-fold function
of continuing the business and preparing a plan. His roles are
very broad and powerful. Once appointed by the Court, the powers
and duties of the debtor's directors in managing the business,
as well as all the legal rights of the debtor's shareholders (except
the right to receive dividends), are vested in the plan preparer.
In this way, the plan preparer is given a wide range of administrative
powers to enable him to take over the business effectively.
Primarily, the party requesting reorganization
has the prerogative in appointing the plan preparer. If there
are no objections from the debtor or creditor, the Court, if it
is of the opinion that the person is suitable to be the plan preparer,
will appoint the person nominated by the petitioner. However,
if there are objections from either the debtor or creditor, the
debtor then gets the prerogative to nominate the plan preparer.
If the debtor does not do so, a meeting of the creditors will
be called by the receiver. The receiver will then publish an advertisement
fixing the day, time and place of the meeting of the creditors
for the purpose of selecting the plan preparer at least seven
days in advance in at least one daily newspaper. He will also
notify the debtor and all known creditors.
In nominating a plan preparer in the meeting
of the creditors, a letter of consent from the nominated person
must first be supplied. However, if the debtor proposes a plan
preparer to which the creditors object, the creditors may only
override the debtor's choice and replace him with their own nominee
if they are owed at least two-thirds of the debt. Voting is limited
to creditors who have requested repayment under the business reorganization.
In order of priority, the parties that
have the right to appoint a plan preparer are first, the petitioner;
second, the debtor; then third, the creditor. It can be seen that
the creditor does not have absolute power in choosing the plan
preparer, albeit this is not of much concern to large creditors
who can unilaterally control the procedures for nominating the
plan preparer. However, it poses a problem for small creditors
who have a smaller voice or none at all.
If the Court has ordered a business reorganization
but has not yet appointed a plan preparer, all legal rights of
the debtor's shareholders shall be suspended with the exception
of the right to receive dividends. Said rights shall be vested
in the interim executive or the receiver, as the case may be,
until a plan preparer is appointed.
2. The Plan Administrator
The plan administrator is principally vested
with the duties of managing the business and assets of the debtor
according to the business reorganization plan. His appointment,
tenure, qualifications and compensation are specifically contained
in the plan. His duties commence upon the Court order approving
the plan. He may propose a revision of the plan and/or an extension
of the plan implementation period. Such extension may be made
only two times at no more than one year each. If, however, it
is clear that the plan has almost been fulfilled, the plan administrator
may request an extension as long as necessary. The plan administrator,
pursuant to the plan, may request the Court to permit the amendment
or the establishment of new Articles of Association or a new Memorandum
of Association of the debtor. The law requires him to report regularly
to the receiver and the Court with regard to the implementation
of the plan. Specifically, he has to let the Court know of his
views as to whether the reorganization of the business has been
completed.
3. The Receiver
The receiver is a government official.
He acts in an administrative capacity, being responsible for calling
meetings and receiving claims for payment. Such meetings include
the creditors' meeting for selecting the plan preparer and creditors'
meeting to consider the plan. Before the formal appointment of
the plan preparer, the receiver is also vested with the duty to
take over the business of the debtor. During plan implementation,
the receiver is entrusted with the duty of supervising the actions
of the plan administrator, who can be removed by the Court at
the receiver's recommendation. Generally, where the plan preparer
or plan administrator for any reason does not exist, his rights
and duties fall on the receiver.
D. Claim for Repayment
The law stipulates that all applications
for repayment must be made within one month after the Court's
appointment of the plan preparer is published. All creditors,
including secured, unsecured, and judgment creditors, must file
according to the same procedures. If a creditor eligible for repayment
does not apply within this period, he forfeits his right to receive
payment, unless the plan provides otherwise, or the Court cancels
the business reorganization order. The debts for which repayment
can be claimed will only be those that occurred before the Court
issued the reorganization order, regardless of whether the debt
has matured or is conditional. For debts that were created between
the time that the Court issued the order to reorganize the business
and the appointment of the plan preparer, the creditors have rights
according to the time periods stipulated in the plan without having
to apply for repayment of debt under business reorganization.
These creditors must, however, send a letter to the plan preparer
asking him to issue a letter for their claim prior to the meeting
to discuss the plan. As for the actual repayment of debts, the
receiver has the authority to authorize payments. However, debts
that can be repaid are limited to those that have not been opposed
by the plan preparer, the other creditors, or the debtor. If any
person opposes an application filed, the receiver shall investigate
the matter and issue approval, partial approval, or dismissal
of such application. Any objections to the orders issued by the
receiver may be filed with the Court within 14 days after learning
of the issued order.
For foreign creditors, of particular concern
is the currency of payment. If the debt applied for is in foreign
currency, the amount must be converted into Thai Baht. The computation
shall be based on the exchange rate on the day the Court issued
the order to reorganize the business. In these times of fluctuating
exchange rates, one can envision the huge amount of gains or losses
that could be made just because of this particular rule.
New creditors, or those injecting fresh
funds into the company for its reorganization, are given the right
to repayment in accordance with the plan. This procedure is one
of the major changes to the old bankruptcy law. Under the 1940
Act, a new creditor lent money at his own risk. This was because
the 1940 Act prohibited the repayment of a debt created when the
creditor was aware of the debtor's insolvency. This particular
provision of the 1940 Act was one of the primary issues making
business restructuring virtually infeasible. The 1998 and 1999
Amendments addressed this issue by allowing the new creditor to
have the right to repayment in accordance with the plan. However,
unlike other jurisdictions where new creditors enjoy "super
priority", the Thai legislation does not automatically entitle
these new creditors to have priority over all other creditors.
E. Annulling a Juristic Act Already
Executed
The plan preparer or receiver may ask the
Court to cancel a fraudulent act pursuant to the Civil and Commercial
Code by filing a motion to that effect. If the juristic act subject
to this motion arose within the period of one year before the
date of filing of the petition, if it is a gratuitous act, or
if it is an act in which the debtor received compensation in an
amount less than appropriate, it is deemed an act which the debtor
and the person who was enriched thereby had the knowledge that
it would prejudice third creditors. If it appears that there was
a transfer of assets committed within three months before the
petition or thereafter, with the intent to put a creditor in an
advantageous position, the Court has the power to order the cancellation
of such act. If the person taking advantage is an insider of the
debtor, cancellation can be effected if the act was done within
one year before the petition was filed.
F. The Plan
1. Specifics of the Plan
At a minimum the plan must contain:
(a) the reasons for reorganizing the business;
(b) details concerning the assets, liabilities, and other binding
obligations of the debtor at the time the Court orders business
reorganization;
(c) principles and methods of business reorganization;
(d) redemption of collateral in the case where there are secured
creditors and liabilities of a guarantor;
(e) ways to solve problems stemming from a temporary lack of liquidity
during plan implementation;
(f) action to be taken in cases in which a claim or debt is assigned;
(g) the name, qualifications, and letter of consent of the plan
administrator as well as information about his compensation;
(h) the appointment of the plan administrator and his release
from the position;
(i) time period in which the plan will be implemented, which must
not exceed five years; and
(j) the refusal of assets of the debtor or refusal of contractual
rights, in a case in which the assets of the debtor or contractual
rights have obligations which exceed the benefits to be derived
there from.
2. Creditors Meeting for Approval of the
Plan
The plan preparer, after having been officially
appointed by the Court and announced in the Government Gazette,
will proceed to draft the plan. This task must be completed within
three months, with two possible extensions of one month each.
The plan is then sent to all related parties. After receiving
the plan, the receiver will call a meeting of the creditors in
order to discuss whether to accept the plan or how to revise it.
A creditor, the debtor, or the plan preparer may request revision
of the plan by submitting an application to the receiver at least
three days in advance of the meeting.
The resolution approving the plan must
be a special resolution passed by the creditors according to their
classifications as explained below.
(a) Secured creditors having secured debts
of not less than 15% of the total debts;
(b) Other secured creditors not included above;
(c) Unsecured creditors;
(d) Preferred creditors (i.e. creditors under Sec. 130 bis).
For the approval of the plan, each group
of creditors enjoys equal rights. The plan must have been approved
by a special resolution of a meeting of either:
(a) Each group of creditors, or
(b) A group of creditors (other than those described in Sec. 90/46
bis below) owed at least 50% of the total debt (Sec. 90/46).
These voting rules also apply to actions
to revise the plan, remove the plan administrator, and appoint
the creditors' committee for implementation of the plan. There
are three types of creditors that are excluded from the aforementioned
classification and are deemed to have accepted the plan. These
are:
(a) Creditors to be repaid in full within
15 days of the plan, such that the debtors will be deemed to have
never been in default;
(b) Creditors who will receive payment under existing contracts;
(c) Subordinated creditors (Sec. 130 bis).
3. Proceedings after the Court Accepts
the Business Reorganization Plan
Once the Court accepts a plan, it becomes
binding on all creditors. The plan administrator is principally
vested with the duties of managing the business and assets of
the debtor according to the business reorganization plan. His
appointment, tenure, qualifications and compensation are specifically
contained in the plan. The plan is then implemented within a five-year
time frame, which begins running on the Court's approval of the
plan. Two one-year extensions are allowed. If, however, it is
clear that the plan has almost been fulfilled, the plan administrator
may request an extension as long as necessary. The law requires
him to report regularly to the receiver and the Court with regard
to the implementation of the plan. Specifically, he has to let
the Court know of his views as to whether the reorganization of
the business has been completed.
4. Plan Implementation--Creditors' Committee
During this time, the creditors may pass
a resolution to appoint a committee of creditors to monitor plan
implementation. The committee of creditors must include at least
three but not more than seven members. They must be from the group
of creditors, or those assigned by the creditors, to act on their
behalf. No one creditor may have more than one representative.
G. Termination/Absolute Receivership
If the Court does not approve the plan,
or decides to terminate the business reorganization and decides
not to place the debtor company under receivership, but instead
merely terminates the restructuring plan, the company is restored
to its former state. This means that all rights and liabilities
of the former shareholders and directors are reinstated. In such
circumstances, the stay is lifted, reinstating all rights and
liabilities of the former shareholders and directors. Secured
creditors may then decide to foreclose on the debtor's assets.
In the event that the Court orders absolute
receivership, the day that the Court accepts the petition for
consideration shall be deemed as the day that it is requested
that the debtor be adjudged bankrupt. The creditors must first
apply for repayment with the receiver within two months following
the date of publication of absolute receivership. For creditors
residing outside Thailand, deadline is extended by another two
months.
For
further information, please contact Mrs.
Cynthia Pornavalai, Partner, Corporate and Commercial Department,
Tilleke & Gibbins (e-mail cynthia.p@tillekeandgibbins.com).
©2008
Tilleke & Gibbins, Bangkok, Thailand
