Amendments to aid in debt restructuring
Thanong Khanthong offers a convenient guide to understanding the new bankruptcy laws and foreclosure laws.
1) Why is the government trying to push out amendments to the new bankruptcy law, bankruptcy court and foreclosure law at this time?
Indeed, a need to overhaul Thailand's bankruptcy law is long overdue. The law was promulgated in 1940. The last time it was amended was in April this year when clauses covering improvement of bankruptcy procedures and a plan for reorganisation similar to the US Chapter 11 were included. The whole idea is aimed at helping Thai companies to rehabilitate and to continue to operate and hire workers. So far there have been 11 cases of reorganisation, three of which have been approved by the court. The amount of money involved is between Bt50 and Bt60 billion, with the employment of 4,000 workers at stake.
The new law will establish a specialised court dealing with bankruptcy cases, similar to the intellectual and property court and the labour court. As for the new foreclosure laws, they are designed to speed up the foreclosure process, preventing debtors from continuing to delay making repayments or transferring their assets to the creditors even after the court has ruled that the debtors have lost the case. With the present foreclosure process, some cases drag on for 10 years with the creditors failing to obtain their money even though the court has ruled in their favour.
However, this is an abnormal time that Thailand is facing. If the country does not have effective bankruptcy procedures, it will be difficult to unlock more than Bt2 trillion in bad debts in the banking system and restructure part of them into good loans. Thailand's economic recovery hinges on corporate debt restructuring.
2) What is the spirit of the bankruptcy laws? Does it tilt towards creditors or the debtors?
The underlying spirit of the law is to reduce the damaging effects inflicted by the current bankruptcy laws. If a company is bankrupt and is liquidated, the new law seeks to provide protection for the workers in claiming damages from their employers. It also strengthens the bargaining power of the debtors by allowing them to seek court protection through filing for reorganisation to rehabilitate business. The weakness of the present law is that it only focuses on the liquidation process, trying to squeeze everything from the debtors to repay the debts proportionately to the creditors.
Three broad principles are taken into consideration in drafting the new bankruptcy laws. First, the amount of damaged money in a bankruptcy case that warrants a court attention must involve at least Bt500,000, up from Bt50,000, for individuals and at least Bt1 million, up from Bt500,000, for companies. This will reduce the number of people or companies being affected by bankruptcy.
Second, the new law facilitates the debt restructuring process. The present law does not allow creditors to inject money into a rehabilitated company if that company has become a problem loan, for the new money will not be protected. The new law recognises the new money, which helps the liquidity of a rehabilitated company, and provides protection to the creditors or new investors as having the first claim of rights.
Third, the new law is likely to speed up the debt restructuring process by making it tougher for creditors to veto a debt restructuring plan. Now it needs at least three-quarters of creditor rights to the debts or half of the total number of creditors to approve a debt restructuring plan. Otherwise, it can be blocked by other creditors. The new law will try to organise creditors into different groups, making it easier for the creditors and the debtors to work together to pass the reorganisation plan.
3) Is it true that if the bankruptcy amendments are passed, it will bankrupt all Thais and lead to a grand sale of Thailand to the foreigners?
The Justice Ministry argues that the new bankruptcy laws are designed to protect the number of bankruptcies from rising, help companies to restructure their debts and continue to operate and safeguard employment opportunities for Thai workers. The fears of selling Thailand cheap to foreigners are based on the ongoing auctioning of the bad assets of the 56 insolvent finance companies.
Foreigners who have the money have been buying creditor rights from the insolvent finance companies and are now the creditors of Thais. Given the non-performing loans in the banking system at Bt2.4 trillion, this means that at least Bt1.2 trillion of this will be irrecoverable bad debts that will have to be liquidated, restructured or go the bankruptcy courts.
If foreigners bid for most of these assets from the banks, they will become the creditors. However, debtors, who are obligated, legally and morally, to repay the money they have borrowed, can never change their debt status in the old laws or the new laws.
4) How will the new bankruptcy laws affect an average Thai, who has lost his job and his only asset left is his home?
The new law will be lenient on the debtors. The amount of money involved in a bankruptcy case for individuals must reach at least Bt500,000, up from Bt50,000, and for companies at least Bt1 million, up from Bt500,000. This will also help reduce the number of cases in the court room.
The law is also aimed at giving more bargaining power to workers when it comes to claiming their benefits from their bankrupt employers. Previously, tax officials had priority in claiming tax owed to the government from a bankrupt company. The new law will provide equal rights of the workers to the tax officials in claiming damages.
Normally, when an individual or a company defaults on the debts, there will be talks of compromise or an out-of-court settlement with the creditor. If the talks fail, the creditor can either sue the debtor under the civil code, which is more common, or bankruptcy law. The creditors resort to bankruptcy law only when the amount of money involved or liabilities is larger than the assets of the debtors and that they would really like to force the debtors into repaying the loans. Once a judge decides an individual is bankrupt, his future is finished.
To protect an individual from losing everything in the bankruptcy case, the law will allow him to keep Bt100,000 -- up from the present law of Bt3,000 -- for some decent living.
5) Will prior personal guarantees still be applied after the new bankruptcy laws are passed?
Personal guarantees will continue to stand. Laws cannot be passed to change the status of personal guarantee or the debtors. However, the amendments in the law will offer some clemency to the person providing the guarantee by capping his debt to the amount agreed in the debt restructuring plan, which will involve the creditors' agreeing to forgive part of the loans, or in banking jargon, taking a hit by doing a hair-cut.
In Thailand or in traditional Asian practice, banks or the creditors normally require a personal guarantee -- of a third party -- before approving a loan to a debtor. Since lending is based on collateral and personal relationship, personal guarantee comes into play in most, if not all, loan applications.
If a debtor fails to repay the loans, the banks can also go after the person providing the guarantee and force him to repay the loans or the unpaid portions of the loans. The present law requires the person giving the guarantee to be fully responsible for the debts although he might provide the guarantee in good faith and never benefit from the debts.
6) Will the foreclosure law allow the creditors to squeeze everything from the debtors in a speedier process in their favour?
The new foreclosure law is largely unchanged from the present because for debtors can go through the lower court, the appeal court and the supreme court to fight for their cases, which represent a normal procedure. However, procedural delays have been addressed with relevant changes to the Civil Procedure Code.
The foreclosure process comes into play when a borrower defaults on a mortgage loan agreement. If the debtor is ruled to be in default, the courts can order surrendering the property to pay off creditors. At present, this process can take 10 years if a debtor wants to prolong the case. He can appeal it or block it through a complicated web of procedures.
The new foreclosure laws will speed up the process by allowing the debtor, after losing a bankruptcy case through the three courts, to resist surrendering the assets at the lower court, which will also be equipped with faster procedures to transfer assets.