Call for updated bankruptcy criteria

NEVER before has the state of the country depended so crucially on the outcome of a single court case.

The Central Bankruptcy Court is deliberating a landmark insolvency case: Creditors vs Thai Petrochemical Industry Plc. At the heart of the issues raised at the court hearing yesterday was whether TPI is indeed insolvent or not.

TPI owes 148 creditors a combined US$3.5 billion.

The creditor banks, led by Bangkok Bank, International Finance Corp and the Export-Import Bank of the US, told the court that it should declare TPI insolvent because TPI's liabilities exceed its assets by Bt100 billion. TPI, controlled by Prachai Leopairattana, countered that it could not be declared insolvent because its assets exceed liabilities by Bt28 billion.

The big question is how will the court approach the criteria for judging the "insolvency" of a company.

This case will set an important precedent. As pointed out by Dr Pisit Lee-ahtam, Deputy Finance Minister, there has not yet been a clear decision as to how to define insolvency under Thai law. A ruling on this case that follows standard international practices will be a positive step to expedite the economic recovery process, he suggested.

TPI can argue that its assets are still greater than its liabilities, but this might not have been the case had it not declared a debt moratorium during the economic crisis. By refusing to service its debts, TPI has been able to accumulate cash at a rate of Bt4 billion a month - totalling Bt48 billion last year - to add to its assets.

If TPI is declared insolvent, Prachai would lose his shirt. A ruling against him would pave the way for the creditors to take over control of his company. If the ruling is in the petrochemical giant's favour, it will come under a rehabilitation plan which will give the debtor court protection so the company can continue to rescue its operations.

The Thai Bankruptcy Act, originally passed in 1940, defines bankruptcy as the state of a debtor that could be proven as having "excessive indebtedness". Between 1940 and 1997 there were a handful of bankruptcy cases that required the court to interpret the criteria used in judging if indebtedness is excessive. The Thai Supreme Court has deliberated on three major bankruptcy cases and interpreted the definition of insolvency as "liabilities being greater than assets".

According to the World Bank's Thailand Economic Monitor (February 2000), the Thai court relies on this interpretation to allow valuations of assets beyond the audited balance sheet, including the recognition of capitalised future income streams and cash flows.

The report said: "However, the interpretation does not allow for a consideration of a vital aspect of a well-accepted and practised criterion for insolvency, namely, the ability of a debtor to meet, from its own resources, debts as they fall due. As a result, corporate debtors whose assets exceed liabilities but unquestionably lack the ability to pay their debts as they fall due cannot be reorganised, except through consensual proceedings."

This strict interpretation of the criterion of insolvency poses a dilemma for creditors. They lack an effective means to encourage a debtor corporation to volunteer for reorganisation. On the other hand, debtors are reluctant to apply for reorganisation because they are required to admit to insolvency, with all the negative consequences.

The TPI case will not only become a measure of Thailand's financial and corporate sector reform, but will also reflect the extent to which the Thai legal infrastructure can cope with a modern market economy.

BY THANONG KHANTHONG