Probably
one of the most controversial bills in recent Thai legal history, the Bankruptcy
Act Amendment 1999 was finally passed by the parliament on March 17, 1999. The
Act itself does not contain any revolutionary legal concept to merit the intense
attention that it got from the lawmakers, the government, and the captive public.
It just happened to be an economically sensitive law passed at a time of great
economic upheaval in Thai society. The result is obviously a document which is
a product of compromise. Nevertheless, the 1999 Amendment to the Bankruptcy Act
is a step forward and could always be used as a basis for further legal development.
The
1999 Amendment to the Bankruptcy Act is merely a refinement of the new principles
established in the 1998 Amendment. The 1998 Amendment first introduced to Thai
law the concept of corporate restructuring similar to Chapter 11 of the US Bankruptcy
Law and the English Administration Regime. Prior to the 1998 Amendment, Thai bankruptcy
law only recognized the dissolution of legal status of a natural or juristic entity
when it became unable to meet its financial obligations as stipulated by law.
A legal process whereby a cash-strapped company with a viable business could be
revived was non-existent.
Although
it had been put on hold for over a decade, the 1998 Amendment was passed in haste,
leaving several issues unanswered for future legislation. The 1999 Amendment attempted
to fill in those gaps. The following are the principal issues that the 1999 Amendment
was ordained to clarify.
Monetary
Thresholds (Sec. 9)
There
remains no change with respect to the presumption of insolvency. However, the
monetary thresholds for adjudication of bankruptcy were raised to Baht 1 million
from Baht 50,000 for natural persons, and Baht 2 million from Baht 500,000 for
juristic persons (Sec. 9).
The
petitioning creditor's deposit for costs was raised from Baht 1,000 to Baht 5,000
(Sec. 11), while the bankrupt's deposit when filing a motion for the discharge
of bankruptcy was set at no more than Baht 5,000 (Sec. 68).
Capital
Injection
Under
the old law, money which a lender lent to a borrower knowing that said borrower
was insolvent could not be claimed pursuant to Sec. 94 (2). Said Sec. 94 (2) has
been amended to allow the claim of creditors who extended funds to companies undergoing
restructuring.
New
Voting Groups of Creditors for Approval of Plan (Sec. 90/42 bis)
The
1998 Amendment did not classify the creditors into groups for the purpose of determining
their voting rights for approval of the Plan. This raised the issue of the restructuring
plan being controlled by the creditors owed the majority of the debt. The 1999
Amendment addressed this issue by setting up the following classes of creditors:
-
Secured creditors having secured debt of not less than 15% of the total debts;
-
Other secured creditors not included above;
- Unsecured
creditors;
- Preferred
creditors (i.e. creditors under Sec. 130 bis).
For
the approval of the Plan, each group of creditors enjoys equal rights. According
to the new law, 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 revisions to the Plan (Sec. 90/51, 90/54), removal
of Plan Administrator (Sec. 90/68), and appointment of creditors' committee for
implementation of the Plan (Sec. 90/55).
There
are three types of creditors that are excluded from the aforementioned classification
and are deemed to have accepted the Plan (Sec. 90/46 bis). These are:
-
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;
-
Creditors who will receive payment under existing contracts; and
-
Subordinated creditors (Sec. 130 bis).
Approval
of the Plan (Sec. 90/58)
The
blanket court discretion with respect to the approval of the Plan under the 1998
Amendment has been replaced with more objective rules. Under the 1999 Amendment,
the Court shall consider the following when approving the Plan:
-
the Plan contains material elements required by law; and
-
repayments under the Plan would be more than on a winding
up.
Cancelable
Transactions
There
are three kinds of transactions which the Court may cancel or set aside in accordance
with the law, viz.:
-
undue preference (Sec. 115);
- transfer
at below market value (Sec. 114); and
- fraudulent
transactions (Sec. 237, Civil and Commercial Code).
Under
the old law, acts done three months before and after the application for the adjudication
of bankruptcy were deemed done for undue preference. Transfer of assets at below
the market value is considered one year before and after application for bankruptcy.
The prescription period for cancellation of fraudulent transactions is ten years
under the Civil and Commercial Code.
Under
the 1999 Amendment, a new dimension has been added to the presumption of undue
preference. In addition to the three-month rule in general, a one-year rule is
applied for "insiders of the debtor". The new law provides that if the advantaged
creditor is an "insider of the debtor", the Court can order the revocation of
the transfer done one year before and after the application for bankruptcy (Sec.
115). The definition of a "debtor's insider" is provided in detail in the amended
Sec. 6 of the Act. It includes, among others, the directors, managers, partners,
and shareholders owning more than 5% of the shares, as well as their spouses and
minor children, and juristic persons wherein they hold more than 30% of the equity.
With
respect to transactions at below the market value (Sec. 114), the new law makes
the presumption against the debtor.
Cancellation
of Onerous Contracts (Sec. 90/41)
Under
the new law, the Court is empowered to cancel any transfer of property or any
act done three months before and after the filing of motion for business restructuring
which gives undue preference to a certain creditor. The period is extended to
one year if the advantaged creditor is a "debtor's insider."
The
Plan Administrator is further authorized not to honor any properties or contractual
rights of the debtor having encumbrance in excess of benefits which were entered
within two months from the approval of the Plan.
Preferred
Creditors (Sec. 130)
The
new law clarifies the preferential rights of the employees in the distribution
of assets among creditors. Employees are now entitled to receive all monies for
work done for the debtor who was their employer in accordance with the labor laws
at the same preferential level as that of taxes.
Subordinated
creditors, meaning creditors who have the right to receive payment after the other
creditors, are ranked last among the preferred creditors.
Baht
Conversion of Foreign Currency (Sec. 90/31)
The
new law makes it clear that the conversion of foreign currency is considered only
for purposes of calculating the debts for the casting of votes and not for repayment
of the debts. The 1998 amendment was vaguely worded, causing concern with respect
to the devaluation or overvaluation of the debt resulting from foreign exchange
fluctuations.
Discharge
from Bankruptcy
Under
the old law, discharge from bankruptcy was possible only after ten years from
the adjudication of bankruptcy. As a result of a compromise between the lower
and the upper houses, this period was reduced to three years, provided no fraud
or dishonesty was involved.
The
Bangkok Approach: A Non-Binding Framework
The
Framework for Corporate Debt Restructuring, popularly known as the Bangkok Approach,
is a set of nineteen guidelines for corporate restructuring drafted and approved
by the Board of Trade, the Thai Bankers' Association, the Association of Finance
Companies, and the Foreign Banks' Association. Its objective is to set up a framework
outside bankruptcy proceedings for the efficient restructuring of the corporate
debt of viable entities for the benefit of creditors, debtors, employees, shareholders,
and the Thai economy. It is non-binding and non-statutory and its general market
acceptance is the basis of its existence. The guidelines may be amended or altered
to serve the needs of the business and financial communities. Following is a short
discussion of the nineteen principles contained therein.
Principle
1. "Any corporate debt restructuring should achieve a business, rather than just
a financial restructuring to further the long-term viability of the Debtor."
This
principle calls for a comprehensive, transparent, and achievable business plan
which aims for the ongoing viability of the business. A prerequisite for determining
the viability of a business is the appointment by the debtor of an accountant
or other experts to undertake appropriate due diligence.
Principle
2. "Priority must be given to rehabilitate assets to performing status in full
compliance with Bank of Thailand ("BOT") Regulations."
This
principle refers to BOT Notifications 1837/2541 and 1838/2541 which set down the
strategy that banks and financial institutions, respectively, can refer to when
restructuring troubled debts. The Notifications essentially outline the rules
for debt classification, loan loss provisioning after restructuring, and collateral
valuation and appraisal. According to this second principle, financial restructuring
must not be implemented by financial institutions merely to avoid debt classification
or the maintenance of reserves or to evade income recognition rules according
to the BOT Notification. Optional viable interest rates and payment schedules
must be established, while debt-forgiveness or other non-traditional restructuring
approach must be considered only as a last resort.
Principle
3. "Each stage of the corporate debt restructuring process must occur in a timely
manner."
The
Framework contains a suggested timetable for debt restructuring and establishes
that a similar one be set out and met.
Principle
4. "From the first debtor-creditor meeting, if the debtor's management is providing
full and accurate information on the agreed schedule and participating in all
creditor committee meetings, creditors shall 'standstill' for a defined extendable
period to allow informed decision to be made."
Standstill
period may run for the lesser of 60 days or the time required to gather information
and assess on a preliminary basis the commercial viability of the debtor. As the
Framework is non-binding, any creditor may choose not to standstill and instead
take action. However, said creditor must inform the lead bank of its intention.
On
the creditor's side, standstill includes covenants against amendment of credit
facility, taking of additional security, accelerating facilities, charging default
interest, commencing collection in bankruptcy proceedings, and enforcing security
except for set-off rights. Debtors, on the other hand, covenant not to incur expenses,
dispose of any assets, lend money, enter into related parties transaction, create
additional security, make any preferential payment, or enter into foreign exchange,
swap or derivative transactions outside the ordinary course of its business.
Principle
5. "Both creditors and debtors must recognize the absolute necessity of active
senior management involvement throughout the duration of the debt restructuring."
Principle
6. "A lead institution, and a designated individual within the lead institution,
must be appointed early in the restructuring process to actively manage and coordinate
the entire process according to defined objectives and deadlines."
Among
the duties of a lead institution are liaising with advisors, resolving inter-creditor
disputes, distribution of information, and the drawing up of an action plan and
time frame for debt restructuring. A lead institution must have expertise, a working
relationship with the debtor, and a substantial exposure to the debtor.
Principle
7. "In major multi-creditor cases, a steering committee representative of a broad
range of creditor interests should be appointed."
Ideally,
the steering committee should be a small group. None of its members has any authority
to commit any creditor or the lead institution. It serves as both advisor and
sounding board for the lead institution.
Principle
8. "Decisions should be made on complete and accurate information which has been
independently verified to ensure transparency."
This
principle sets down the duty of the debtor to provide information and answer questions
when requested.
Principle
9. "In cases where accountants, attorneys, and professional advisors are to be
appointed, such entities must have requisite local knowledge, expertise, and available
dedicated resources."
These
advisors are usually retained at the cost of the debtor. However, creditors may
use independent advisors at their cost.
Principle
10. "While it is normal practice to request the debtor to assume all the costs
of professional advisors, lead institutions, and creditors' committees, creditors
have a direct economic interest and hence, a professional obligation to help control
such costs."
Principle
11. "The Ministry of Finance ("MOF") and the BOT should be kept informed on the
progress of all debt restructuring to aid the review and regulatory and supervisory
framework and to facilitate corporate debt restructuring."
Principle
12. "The role of the Corporate Debt Restructuring Committee ("CDRAC")"
The
CDRAC's role is to follow up developments in debt restructuring, review and implement
policies, and act as an independent intermediary in the restructuring process
in difficult cases.
Principle
13. "Creditors' existing rights must continue."
Secured
creditors holding collateral properties that are necessary for the continued operation
of the debtor's business should not be required to surrender such properties without
adequate compensation. Those creditors holding non-essential assets may, however,
independently negotiate with the debtor for voluntary liquidation of said assets.
Principle
14. "New credit extended during the restructuring process above existing exposures
as of the standstill date on reasonable terms in order that the debtor may continue
operations must receive priority status based on title-orientated security, inter-creditor
agreements, or indemnities."
Principle
15. "Lenders should seek to lower their risk and hence their requisite returns,
through an improved security package and profitability-based benefits rather than
increased interest rates and imposition of restructuring fees."
Principle 16. "Debt trading is appropriate under certain conditions but the selling
creditor has the professional obligation to ensure the buyer does not have a detrimental
effect on the restructuring process."
The
seller must inform the buyer of the most current status of the restructuring and
that previously decided issues will not be reopened for further negotiations due
to buyer's participation.
Principle
17. "Restructuring losses should be apportioned in an equitable manner which recognizes
legal priorities between the parties involved."
The
debtor is called upon to absorb losses while creditors are required to share losses
among other creditors of similar status, pro rata to their existing exposure.
Principle
18. "Creditors retain the right to exercise independent commercial judgment and
objectives but should carefully consider the impact of any action on the Thai
economy, other creditors, and potentially viable debtors."
Principle
19. "Any of the principles on implementing policies contained in this framework
can be waived, amended, or superseded in any particular restructuring with the
consent of all participating creditors."
Debtor-Creditor
Agreement on Debt Restructuring Process
Against
the backdrop of the Bangkok Approach, the Debtor-Creditor Agreement sets out a
binding process and timetable by which all multilateral restructurings are to
be conducted. It aims to expedite and facilitate the procedure for restructuring
plan approval by all creditors with debtor's participation. Recently signed on
March 19, 1999, its term lasts until December 31, 2000. Thereafter, the parties
may opt out of this Agreement. Two of its unique features are its forum for mediation
and imposition of penalties on creditors that fail to vote for or against the
plan. Following are the main provisions of the Debtor-Creditor Agreement.
Parties
The
parties to the Debtor-Creditor Agreement are the corporate debtors listed in the
list of troubled debt restructuring cases of the Corporate Debt Restructuring
Advisory Committee ("CDRAC"), and the sixty-five financial institutions that signed
this Agreement. Other debtors and financial institutions may become party by executing
the Accession Agreement. The Bank of Thailand ("BOT") as well as the CDRAC acknowledged
the Agreement.
Convening
of First Meeting of Creditors
Either
the creditors, debtor, or the CDRAC may call the First Meeting of Creditors by
sending the required notice.
Lead
Institution and Steering Committee
The
Agreement requires the appointment of a Lead Institution at the First Meeting
of Creditors. The Lead Institution must have the requisite experience in debt
restructuring, a significant exposure to the debtor, as well as a professional
working relationship with the management of the debtor. It is tasked to organize
the restructuring process, lead negotiations, liaise with all the parties, help
resolve inter-creditor issues, and distribute information among the creditors.
At
the request of the Lead Institution or at least two creditors, all the creditors
may vote to appoint a Steering Committee.
Provision
and Confidentiality of Information
The
Agreement requires the timely provision by debtor of the required information,
documents, and business plan. Moreover, the debtor's management must make itself
available to answer questions when requested by the Lead Institution of the Steering
Committee. All such information as well as the proceedings of restructuring must
be kept in strict confidence.
Covenants
The
Agreement provides for the debtor to give "standstill negative covenants" in order
to protect the participating creditors. Essentially, said negative covenants include
the assumption of additional debts, making of new investments, disposing of assets,
lending of money or making guarantee, and entering into related party, foreign
exchange, swap or derivative transactions outside of its ordinary course of business.
The debtor is further prohibited from making preferential payments and initiating
any action against a creditor for remedy or enforcement of any right.
With
respect to the covenant of the creditor, the Agreement stipulates the suspension
by the creditor of default interest from the date of Debtor's Accession to the
approval of the plan.
Mediation
In
order to facilitate the settlement of material issues arising between the debtor
and any of the creditors, the debtor, together with the Lead Institution or the
Steering Committee, may request the CDRAC to appoint a mediator from the list
of mediators compiled by CDRAC and approved by the Association of Finance Companies,
the Board of Trade, the Federation of Thai Industries, the Foreign Banks' Association,
and the Thai Bankers' Association.
The
Agreement provides a mechanism by which the appointed mediator may be challenged
and replaced on grounds of lack of impartiality and independence.
Debt
Trading
Any
creditor may sell a portion or all of its credits to a third party, provided that
such third party is duly informed of the current status of the workout and that
previously decided issues are not subject to negotiations.
Voting
on Proposed Plan; Implementation of Approved Restructuring Plan
All
creditors are required to vote for or against a proposed plan within the schedule
set forth by the Agreement, failing which penalties are imposed on them (c.f.
item #9 below). The creditors are further made to covenant to support the approved
plan requiring them to vote in its favor at any creditors' meeting or court proceedings,
including under Chapter 3/1 of the Bankruptcy Act.
Breach
of Agreement
Consequences
of breach by the debtor of the terms and conditions of the Agreement include immediate
termination upon receipt of notice, or without notice, upon the occurrence of
three unremedied breaches or failure to execute Debtor's Accession. In any such
event, the creditors agree to seek collection of debt through the court and/or
immediate liquidation or reorganization of the debtor under Chapter 3/1 of the
Bankruptcy Act.
Breach
by the creditor of its duty to vote for or against the proposed plan according
to the workout schedule will result in it being imposed fines of up to 10% of
its claims, but not less than Baht 500,000. Breach of other covenants by the creditor
will only subject it to a warning letter from the BOT.
Amendments
to Framework
The
Agreement provides for three additional clauses to the Restructuring Framework
(Bangkok Approach). One is with respect to the management of the debtor. The amendment
stipulates that the existing management should be retained. However, where feasible,
creditors should be given the option to be represented on an equitable basis on
the debtor's board of directors. The second amendment is with respect to the sale
of assets. Any sale of assets must yield the most immediate commercial return.
Such sale may be made to third parties, or special purpose vehicles established
for the benefit of the creditors, such as asset management companies or property
mutual funds. The third additional clause is related to debt-to-equity conversions
in a workout. The amendment provides that a debt-to-equity conversion must always
be considered as a "last resort" and should be used only where it results in greater
than liquidation value for creditors.
Inter-Creditor
Agreement
The
Inter-Creditor Agreement was signed simultaneously with the Debtor-Creditor Agreement
on March 19, 1999 by the same group of financial institutions party to said Debtor-Creditor
Agreement. Chronologically, it comes after the Debtor-Creditor Agreement in the
restructuring process. It covers the votes of creditors if and when the proposed
restructuring plan is developed under the Debtor- Creditor Agreement.
The
main provisions of the Inter-Creditor Agreement are as follows:
Voting
on Proposed Plan and Plan Approval Levels
The
creditors are required to cast their votes for or against the proposed plan within
the stipulated time frame. If the proposed plan is not approved by special resolution
(75% of the total claims) but more than 50% of the total claims or the number
of voting creditors, CDRAC may appoint an Executive Decision Panel (see item #2
below) to approve or reject the proposed plan. However, if the proposed plan is
not approved by at least 50% of the total credits of all voting creditors or at
least 50% of the number of voting creditors, the creditors may enter into court
action for collection of debt or file for bankruptcy or restructuring under the
Bankruptcy Act.
Executive
Decision Panel
This
is composed of three executives appointed from three separate lists of executives
proposed by each of the Thai Bankers' Association, the Foreign Banks' Association,
and the Association of Finance Companies, approved by all such three associations
and submitted to CDRAC. The decisions of the Executive Panel shall be binding
and final on all the creditors. A creditor may, however, elect not to be bound
by this decision or the Agreement as whole, if the debtor's total credits to all
creditors of any kind exceed Baht one billion in principal obligations.
If
the proposed plan is accepted by the Executive Decision Panel, all creditors,
except those electing not to be bound, must support the approved plan in any future
proceedings, including a court-approved plan under the Bankruptcy Act. On the
other hand, if the said plan, or a subsequent modification of it by creditors
owed 26% of the claim, is rejected by the Executive Decision Panel, the creditors
may enter into court action for collection of debt or file for bankruptcy or restructuring
under Chapter 3/1 of the Bankruptcy Act.
Enforcement
Mechanisms
The
Agreement imposes penalties of up to 50% of the creditor's claim in the workout
for a material breach of the Inter-Creditor Agreement by a creditor.
For
further information, please contact Mrs.
Cynthia Pornavalai, Partner & Head of Banking and Finance
Group, Tilleke & Gibbins (e-mail cynthia.p@tillekeandgibbins.com).
©1999
Tilleke & Gibbins, Bangkok, Thailand
