Attachment I

The subject of today’s discussion grew out of a comment I made at the last Dataconsult International gathering when we had someone from the Revenue Department talking to us and the issue of the liability of directors came up.

While Khun Pornchai Wiwatpattarakul of International Legal Counsellors Ltd. and I are in the two best law firms in the country, we have approached this issue from two different perspectives. First, we will start by giving you some of the background as to just what a director is and then take you up to the imposition and explanation of what constitutes a civil offense.

For those of you who do have trouble with the Revenue Department from time to time, I should say that no director of any company has ever been put in jail because of the failure of their company to pay taxes. The Revenue Department wants money, not people in jail.

First, let me begin with an extract from a case which arose in my office in June 1992. Let’s call the company involved the Troy Company, and we have Mr. "C" who is the financial controller and Mr. "K" who is the managing director. I started off my presentation to them as to what the situation was they got into and what situation they were facing. This is a background paper on the case of the Customs Department versus Troy Company.

"Introduction: The Setting. Managing director and financial controller of major European manufacturer in Thailand facing imprisonment and fine for innocent clerical error in submission to agency of Thai Ministry of Finance. This is a dramatic headline thankfully not seen for a number of years since Esso’s managing director faced the same dilemma for the failure of a mid-level employee to file one of some 87 different reports required of the company. But because of another innocent error which occurred in March of 1990, that is two years before this report, in the preparation of one piece of paper of a package of otherwise correct documents, the above headline could indeed appear in the world’s press tomorrow. Thailand cringes under that kind of adverse publicity at any time. During this current decade of all out national effort to bolster Thailand’s image as an attractive place to invest after the violent political events of May 1992, such a news story could cast doubt on Thailand’s sincerity and its ability to cope with its administrative and legal inefficiencies."

Most of us felt a little tingle going down our backs at the possibility that one of us could become the accused in such cases. As directors of your companies in Thailand, what exactly are your legal obligations?

What actually is a director?

Firstly, in Thailand, limited liability companies are governed by the Thai Civil and Commercial Code. Such companies are required to be managed by a board of directors whose number under existing law can be anywhere from one upwards.

The principal duties of a director are to administer, to direct and manage the business affairs of the company including appointing and dismissing managers and employees and fixing the salaries and wages thereof, negotiating and concluding contracts on the company’s behalf, signing correspondence in the name of the company to purchase and sell, import and export supplies, merchandise, and equipment useful to the company in accordance with the powers enumerated in its memorandum and articles of association and in the applicable Thai laws.

In addition to attending board meetings, directors are responsible to submit and make appropriate annual reports and recommendations to shareholders with respect to anything affecting necessary corporate changes for the best interests of the company.

Directors may from time to time pay to shareholders interim dividends as appear to the directors to be justified by the profits and performance of the company, and, of course, interim dividends must then be confirmed by the shareholders.

In the ordinary course of business, directors have the authority to delegate any of their express or implied powers to such person or persons as they deem appropriate. For example, they may delegate certain of their power to a general manager under a power of attorney. However, with regard to certain powers such as director’s binding signatory authority, although it is legally permissible to delegate minor signatory authority, most government offices or agencies will not recognize such powers of attorney. Thus, the refusal to recognize this authority is not based on law but just on administrative practice. If you are dealing with customs, you can delegate to various designated people.

If you are dealing with various other agencies of the government, you can sometimes designate to your subordinates the authority, but you can never completely relieve yourself of the responsibility for the authority. Only the shareholders have the power to fix the number of directors and the remuneration of the director, and the directors have no authority to be able to fix their own remuneration under Thai law.

The appointment and removal of directors can be done only by general meetings of the shareholders. Thus, one director cannot fire another director. The directors, however, may fill a vacancy on the board of directors caused by a resignation, inability to serve, bankruptcy, or debt. At least one-third of the directors of a company must retire annually but such directors may be re-elected.

No director can serve for more than three years at a time, and under current practice, there are, as a generalization, no restrictions on foreigners being directors of Thai companies. However, there are sometimes limits on the number of foreign directors you can have in a company but that depends on the specific industry.

With regard to relations between the directors and the company, a director is not an agent of the company. He is considered to be a representative of the company, according to the law on juristic persons under the Civil and Commercial Code, as the will of a juristic person is declared only through its representatives. Thus, although there are a certain number of matters which are under the control of the shareholders, the directors declare the will of the limited company subject to the limitations as imposed in the memorandum and articles of association.

It is a general rule of law that directors must exercise their powers honestly, and in the best interests of the shareholders and the company. Thus, directors must exercise the judgement of careful businessmen, and they should not put themselves into a position whereby their duties and personal interests are likely to conflict with those of the company.

Specific responsibilities of the directors are set forth in the Civil and Commercial Code under Section 1168, and they are as follows: that the payment for shares by the shareholders actually be made. You will find for example a number of companies will say they have fully paid up capital, but when you look into it, the capital has not been fully paid, and directors are responsible for ensuring that the capital as declared is paid.

The keeping of all books, records and documents as prescribed by law is where the civil offenses come in and we’ll get to that later. The proper distribution of dividends or interest as prescribed by law, the proper enforcement of resolutions of the general meetings of the shareholders. A director, being in a fiduciary relationship in the company cannot himself, without the knowledge and consent of the shareholders, enter into contracts with the company, and if he does, then he will be held accountable for all profits and losses made thereunder. That’s called self-dealing.

The exact status of the directors of a Thai company are hard to clearly define. As they are not servants of the company, but rather they are in a position of managers and representatives, and in some respects they are the quasi-trustees or quasi-agents of the company.

The directors' duties can be classified as two different capacities, the one fiduciary and the other various duties of care and skill with respect to the functioning of that company.

Criminal Liability

Liability of directors of a limited company may be unlimited, but to do so a statement to that effect must be inserted in the memorandum of association and I have yet to see a limited company that has that term of unlimited liability of the directors in it.

The civil liabilities terminate two years after the director ceases to hold office as a director.

As for criminal liabilities, a director or non-director manager is criminally liable in most situations, only when he commits a wrongful act intentionally, unless the law punishes an act committed by negligence, of which there are many, or punishes an act committed unintentionally, or an act not committed at all but for which vicarious liability is imposed by law, for which there are lots. For example a director is subject to certain penalties including fines and possible imprisonment if they negligently omit to make proper registrations of the company, say with the Ministry of Commerce, under a law known as the Act on Offences Concerning Registered Partnerships, Limited Partnerships, Limited Companies, Associations and Foundations (1956), as amended. Directors can be criminally liable as principal and then as sometimes are used in the statute, "employing person", propagating person, publishing person or accessory. However, with regard to criminal liability for tax offenses, the Revenue Code provides sanctions primarily against whoever commits a tax offense. A company director can be criminally liable jointly with the company for tax offenses under the Criminal Code though, and can also be liable as an employing person or as an accessory under the Penal Code. As I mentioned earlier, however, the Revenue Department has never used that power to collect tax.

We then get into the issue of criminal liability imposed because of statute which we lawyers refer to as a vicarious liability. In other words, you are liable just because you are a director unless, and there is an escape clause, you can show that you did not consent to a particular act or deed, or you had no knowledge of it. That is very difficult to prove.

There are a series of fifty-two laws which we have currently identified which impose vicarious criminal liability for acts or omissions of the company, and this liability is imposed on directors. The illustrious cases go back to 1985 with the managing director of Esso being subject to a term of imprisonment for one year, suspended for two years and a fine of B20,000 because one of 87 reports was not filed on time by his staff. That was followed by a companion case concerning Abbot Labs and another one concerning Revlon. Those were the three cases which made it to the newspapers. But there were something like 197 others that didn’t make it to the newspapers and that never went to court.

Revlon’s case got stopped fairly quickly because somebody saw the silliness of it. It had to do with six bars of soap that weren’t reported. In the case of Abbot Labs, I happen to be a director in that company and my sole connection with the case had to do with my signing of a power of attorney to appoint a mid-level manager to file the reports on time, which he did correctly for eight months, and then the government changed the ground rules and instead of requiring three pieces of paper they required four and the fourth one didn’t get filed until a couple of weeks later because in the changeover of the procedures this got missed.

Five years afterwards the Dika Court decided that I was criminally liable and there was a B30,000 fine which the company paid. The company did not pay all the legal fees! If it can happen to me, it can happen to you. The managing director of that company was pulled out because of that case and it disrupted the entire operation of the company for quite a while as the case went on for five years.

The consequences are, of course, significant, so what can be done about it?

Thai Ways and Why

by

Pornchai Wiwatpattarakul
International Legal Counsellors Ltd.

Mr. Lyman and I have different approaches to the question of criminal liability and the draft Administrative Errors and Omissions Sanction Act which we drew up as suggested means of resolving this situation represents a compromise on which we are both broadly agreed. I look at the problem from a historical and cultural perspective. In order to define an approach to solve this problem which I think unavoidably requires the cooperation and the understanding of the bureaucratic system in Thailand we need to see how the problem has evolved.

Looking back just over a hundred years to the reign of King Rama IV we see the traces of the current situation. Thailand, then Siam, was not yet a modern nation state in the form that we have today, but was still very much a serfdom with the power concentrated in the person of the king and with a small number of people helping in the administration of the country. As such it was difficult for the court to look into every aspect of the country and the activities in which the people were engaged. The only way for the administration to be able to run itself efficiently was to grant concessions or franchises to the lesser feudal landlords to administer the jurisdiction of the King. In those days, much as in Europe, the obligations which the people owed to the monarch were very few. The first one of course was to pay taxes, secondly to render free labor to the rulers and thirdly to be a loyal subject. Any breach of these three obligations would be regarded as a serious offence punishable by death or imprisonment. In the particular context of Thailand and the franchising of the power, we may recall that in the good old days the lesser feudal lords who were awarded all these franchises of power and jurisdiction didn’t also get the so-called salaries from the palace, but made their own livings out of their own jurisdiction or sub-jurisdictions.

All that they had to do was ensure that the minimum target was met by each requirement from Bangkok, and the rest was theirs. To have this sub-division of feudal power was very like having a personal asset and the power was inherited within the families of the feudal lords all the way down to their descendants provided that they did not commit any act of disloyalty or breach of their obligations to the King. Power is thereof very much like a piece of personal asset which you make a living out of. Therefore for the feudal lords to have administered the sub-division of power of the King, they couldn’t possibly administer it evenly for all the citizens within their jurisdiction so that personal favors were common in those days because all the feudal lords had to do was meet the minimum target set by Bangkok for each jurisdiction, and anything above that could be kept. Let us suppose that an amount of unpaid tax it could be negotiated and settled. In those days people didn’t think of it as being anything wrong or improper, but it was the same as any other obligation.

This then is what we have therefore inherited and what still exists in the bureaucratic system, moderated as it is by the reforms of King Rama V, equivalent to Britain’s Victorian era, and subsequently. Corporate entities were at that time unknown. Everyone conducted business on his or her own account with his or her responsibility. In those days the creation of a company was done by a charter granted by the King and with a Royal seal affixed. There was no general company law to allow the creation of companies through a formal registration system. The only good point was the limited liability.

The Bureaucrat Factor

In the perception of the people in the bureaucratic system, the people who were in charge of the companies were the owners of the business investment. It was still very much a personal business matter as opposed to the modern form which involves shareholder investors and executives employed as professional salary-earning managers. In this modern context by comparison to the old situation, the managers are somewhat detached from the ownership. Their personal interest is not closely connected to the ownership of the investment unlike in the good old days before the concept of cooperation was introduced into Thai law.

A hundred years ago the thinking behind the law was different because the people who owned the investment were responsible for the investment. This thinking is still prevalent today in the minds of our bureaucrats. There are several big groups of companies in Thailand which are ultimately owned by families of wealthy merchants and businessmen. It is not quite the same as the public listed companies in the UK or in the US in which business executives are really employees of a sort.

From a Thai perspective making these people liable for breaches of law by the corporations is not unjustifiable. This is the point where the foreign business community and the Thai business community depart from each other. I very much sympathize with Mr. Lyman and members of the foreign business community and their reaction to this inequitable enforcement of civil obligations, but there are differences which are not quite in place in Thailand in terms of the style of business management and the ownership of business organizations. On the whole, this is both a real and a theoretical justification of the present situation and explains the criminalization of civil obligations created under statutes.

When we look at this issue from this historical and sociological perspective, we see that from the point of view of the bureaucrats there are still justifications for the criminalization of civil obligations, but that is not to say that there are no problems here at all. There are problems which concern the inequity in the indiscriminate enforcement of these legal obligations and these problems are not with the law itself, which I think is O.K., but there is something wrong with the law enforcement mechanism and the people who are in charge of it.

Having gone through all this history and sociological reasoning we can start defining an approach to solving the problem. Although Mr. Lyman and I struck a compromise in the drafting of our statute there remains a fundamental difference in our opinions. That fundamental difference centers around my personal thinking that to remove all the obligations from the criminal law will be met with a strong, unquenchable opposition from the bureaucrats. The way forward, I think, is to reason with them one by one, offence by offence, obligation by obligation, in detail, to determine which of these obligations should and should not be subject to criminal sanctions under the law.

This exercise obviously requires a great deal of time and effort, whereas at the time when we were drafting our act we were under pressure to come up with a solution before a deadline or we would miss the term of the Anand administration. We didn’t have enough time to analyze each offence individually, one by one, so we simply grouped the laws into three, and in fact the work is not yet complete.

Three Possible Solutions

I think that there are at least three ways in which we can solve this problem without saying that our ultimate aim is to remove all these civil obligations from the criminal law jurisdiction altogether. In the end the differences may be no more than in the wording. Mr. Lyman started of by saying that we should get these obligations out of the criminal court jurisdiction and from the police stations so that we don’t get finger printing and photographing for police records as a common criminal.

The approach that I would like to suggest at this gathering which I think will in the end help to remove a large number of these obligations from the jurisdiction of the criminal court involves firstly reasoning with the bureaucrats as to which of these obligations should in fact be subject to criminal law sanctions. The second thing is to consider the circumstances of the breaches of these obligations to decide whether or not they do in fact justify criminal law sanctions or justify some kind of exemption from or defence against criminal law sanctions. At the moment in the statutes we see that the rebuttal of the presumption of guilt imposed on the corporate directors and managers is pretty much a generalized exemption and not so well defined that it can readily be used as a defence. We simply say that if a company is in default of such an obligation the directors and mangers responsible are presumed to be guilty unless and until they can prove to the satisfaction of the court that they are not directly involved in the commission of such an offence or did not acquiesce in the activity.

The way forward, I think, is to try to modify, to amplify the exceptions with such concrete factors as are readily provable before the court so that we can use this as a defence to the police or the courts to persuade them to withdraw or modify the charges levelled. With these modifications we can use the proper informal route to settle a case before it goes to the court. Probably we could have settled it at the stage when we first deal with the police.

The question then is how to define the terms of rebuttal of an accusation and the available defences. This is a matter yet to be worked out in detail with reference to the actual circumstance under which businesses operate. Whether the negligence or forgetfulness of mid-level clerks should remain the responsibility of the directors should remain is the issue, and if we look into some of the current draft statutes you will see that this line of thinking is now being manifested in the drafting of the various provisions.

The third measure that can be used to sort the legislation, and this might seem rather drastic and perhaps unacceptable to some of us, is to make the management or executive level of employees jointly responsible with the corporate entity, in instances where the corporate entity is in default. If we can prove that a certain business executive or manager is assigned to look after the operation to ensure that this company complies with this or that obligation written in the statute, although he or she is not a director, they should be obliged to make sure that obligation is performed as a personal responsibility. That employee cannot then say that he is not responsible for his deeds and everyone has to work together to make sure that the bureaucratic system can trust us. Once we make the employee responsible for the default of the company as much as the director, we can amend the law to say that the police and the prosecution authorities cannot discriminate between employees and directors. If they are going to prosecute both should go together.

In the past we have had the situation where the police and prosecution authorities have often gone after the directors who are wealthier and have a big face to save, unlike the employee. I think the fact that the police would have to prosecute both the employees and the directors would make the police think twice more often as to whether they should proceed with a prosecution.

With the combination of all these three measures, I think it will in the end help alleviate the hardship, or the unfairness that the foreign business community may feel that it suffers.

The measures I have suggested may sound blunt but the aim is to work out a way that will help us to establish a kind of trust and faith that the bureaucratic system can have in the business community that they are in earnest to administer the system efficiently. In time, after these measures, are administered for a while, we would have established grounds for saying that the suggestions were workable and so let's remove the criminal liability from these statutes altogether. We have to go forward step by step. If we attempt to do it in one go, our proposals will be thrown out because the bureaucrats have the political justification that threats of criminal law sanctions works and works well.

The Political Dimension

In the end, the ultimate measure, is political participation in the process of scrutinizing proposals by the authorities to enact new statutes. That is the fundamental safeguard in the system because the people never have a chance until granted by the Anand administration to criticize either proposals or existing statutes. I think this is even more important than the other three measures because it is a preventative measure, and the business community, both Thai and foreign, should join hands to work together to demand this right to participate in the legislative process initiated by the various government authorities before the draft statutes are put to Cabinet or to the Juridical Council.

During the time I worked at the Juridical Council, my senior officials told me that if I received a phone call, to ask for information on the progress in the drafting of a piece of legislation, do not answer them. They told me that it was a secret matter, although the papers where not stamped " confidential". There is no real logic for this, it is simply that the bureaucrats distrust the business sector in case it is trying to gather some kind of intelligence which will be used to do something unworthy or to take business advantage of a particular disclosure.

We should work together towards a more open governmental system, towards getting a part to play in the legislative process to prevent more creations of civil obligations as criminal offences. This was once done when there was a joint committee which criticized the various pieces of legislation which affect the business community and their activities. This is a good point for the foreign business community to inject into the bureaucratic thinking and out of their sub-consciousness that the formation and style of business management has changed. There are large sections of the business activities which are operated by professionals who are detached from the ownership of the business investment. These people should not be treated like common criminals.