Welcome to the third of our Asia restructuring and insolvency briefings - this note focuses on Thailand.
This briefing complements our other publications on corporate restructuring and the sale or purchase of distressed assets.
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What are the options for companies in financial difficulty in Thailand?
Reorganisations and bankruptcies are the major options for companies in financial difficulty in Thailand. Both are governed by the Bankruptcy Act BE 2483 (1940) as amended (“Act”). Under a 1998 amendment to the Act, a corporate rehabilitation process was introduced to allow restructuring through a Court process. Informal arrangements are also available in Thailand. These are by contractual agreement and rely on the co-operation and agreement of all the parties involved.
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How does contractual debt restructuring work?
Informal arrangements and voluntary restructuring are possible and common in Thailand; however they require the debtors’ and creditors’ cooperation in negotiating and agreeing any restructuring plan and legal agreements. They are also not binding on all creditors unless the creditors are parties to the process. Dissenting creditor(s) can either enforce their security rights or start civil proceedings (or bankruptcy proceedings). In practice a corporate debtor will often agree the terms of a restructuring with its principal secured and unsecured creditors first and then enter into separate arrangements with other unsecured creditors, such as trade creditors.
In most restructuring cases, unless small scale, reaching a consensus between the corporate debtor and creditors may prove difficult, especially where creditors have varying security rights. Given these limitations, informal voluntary restructuring is normally only applied in cases involving a small number of creditors.
The commencement of an informal debt rescheduling or corporate rescue does not initiate a moratorium or automatic stay of proceedings. This would only be possible where all the parties can agree a standstill where a moratorium is one of the agreed terms.
The company’s existing management is not normally affected by the initiation of an informal corporate rescue process, unless the creditors ask for a change in management. It is more common that a financial adviser is appointed to monitor the company’s cash flow and report to a steering committee of the creditors.
Following the 1997 Asian financial crisis, the Corporate Debt Restructuring Advisory Committee (“CDRAC”) was introduced by the Bank of Thailand. The CDRAC process was established as a mechanism to speed up debt restructuring to solve Thailand’s 1997 financial crisis. CDRAC is however no longer available.
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What are the formal procedures if an informal contractual arrangement cannot be agreed?
If a corporate debtor meets certain requirements it may commence a voluntary reorganisation, formally through a Court process, by issuing a petition for reorganisation under Chapter 3/1 of the Act. To do this a corporate debtor must be insolvent, have claims against it of not less than Baht 10 million (in aggregate) and it must show there are reasonable grounds and means to reorganise its business operations.
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How is a formal restructuring implemented?
The corporate debtor will submit a reorganisation petition to the Court and if it is accepted there is an automatic moratorium preventing all creditors from pursuing claims or enforcing security (similar to a US Chapter 11 petition), including prohibitions on:
- the filing of bankruptcy petitions or the making of a receivership orders;
- the filing or continuation of civil proceedings for a cause of action that occurred before the approval of the Plan (see the explanation of this term below) without the Court’s consent;
- the enforcement of judgment debts where judgment was obtained prior to the approval of the Plan;
- a creditor who is entitled to self-help from seizing or selling the property of the company; and
- secured creditors enforcing claims against collateral (without the Court’s consent).
The automatic moratorium remains in force until the date on which the Court dismisses the petition, repeals the business reorganisation order, cancels the business reorganisation process, or places the debtor into receivership; or until the expiration of the implementation period of the Plan or the date on which the implementation is successfully completed.
The Court will then set a hearing date to determine whether the petition should be approved or dismissed. At the hearing, the Court will also hear evidence from anyone who objects to the petition. If the petition is approved, the Court will appoint a planner who will prepare a business reorganisation plan (“Plan”) within three months of his appointment (this period can be extended twice, for up to one month each time, by application to the Court).
Once the Plan is prepared, it must then be approved by the creditors.
There are certain mandatory requirements that the Plan must contain. These include at a minimum:
- the reasons for the reorganisation;
- details of all the debtor’s assets, debts and other obligations at the time when the Court granted the reorganisation order;
- principles and methods for the reorganisation, which include:
- the reorganisation process;
- repayment of debts, extension of a maturity date, decrease of the amount of debts, and classification of creditors;
- decrease and increase of capital;
- creation of debts and obtaining more capital, including the source of capital and the conditions of such debts and capital;
- management of, and making profit from, property of the debtor; and
- conditions for paying dividends and other benefits;
- redemption of security (in case there are secured creditors) and liability of guarantors;
- solutions for the problem of temporary lack of liquidity occurring during the implementation of the Plan;
- methods for the transfer of claims or obligations;
- name, qualifications, and written consent of the proposed Plan administrator, as well as his remuneration;
- appointment and cessation from office of the proposed Plan administrator;
- period of implementation of the Plan, which shall not exceed five years; and
- rejection of any debtors’ property or contractual rights which are subject to obligations more onerous than the benefits that the debtor is entitled to receive.
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How can a company implement a Plan?
Once the Plan has been completed, the planner must submit it to the Official Receiver with sufficient copies for all creditors. The Official Receiver will then call a meeting of creditors in order to consider the Plan. The creditors are classified for the purposes of approving the Plan into relevant classes. If a creditor, the corporate debtor, or the planner wishes to modify the Plan, they must file a request to do so at least three days before the meeting. The Plan should be approved by a special resolution of each and every group of creditors, or a special resolution of at least one group of creditors who hold not less than 50 per cent of the total debts of the company. Special resolution means a resolution passed by a majority in number of a class of creditors present and voting (in person or by proxy) holding at least 75 per cent of the amount of the claims.
Assuming the Plan is approved by the creditors, the Official Receiver must report the result to the Court. The Court will then approve the Plan if it meets certain requirements, including that
- the Plan contains all the mandatory requirements (as outlined above);
- the proposal for debt repayment is in accordance with the sequence stipulated by law; and
- when the Plan is successfully implemented, the creditors should receive no less than they would have expected to receive if the Court had adjudged the company bankrupt.
Once the Plan is approved, control of the company passes to the plan administrator (who is normally, but does not have to be, the same person as the planner who prepared the Plan).
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How is the process different for an involuntary reorganisation?
In a situation where one or more creditors wish to start a reorganisation without the company’s cooperation, a creditor( or number of creditors) can file a petition with the Court if they are owed not less than Baht 10 million (in aggregate). The criteria and consequences for the filing of a petition are then the same as for voluntary reorganisations above.
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Who are and what are the powers of the Planner and the Plan Administrator?
Under ministerial regulations, all planners and plan administrators must have the required qualifications and be licensed. They also have to register and lodge a deposit with the Official Receiver. Such requirements will not however be applied in a case where the corporate debtor or its management is appointed as the planner or the plan administrator.
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What is the effect once the Plan is approved?
The Plan will become binding on all parties and the control of the debtor company passes to the plan administrator. The approved Plan does not however amend the liabilities of those who are jointly liable with the debtor or a guarantor of the debtor’s indebtedness existing prior to the date of the Court’s approval.
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What happens if the restructuring is not successful or is not a realistic choice?
If the reorganisation petition is not approved by the Court or the implementation of the Plan is unsuccessful, or where it is not a realistic option for the debtor company, the company may be wound up. There are two routes to achieve this: either by voluntary liquidation or compulsory liquidation.
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How does voluntary liquidation work?
The first step is for the directors of the company to call a meeting of the board to pass a resolution for a shareholders’ meeting to consider whether the company should be dissolved.
This is followed by the company then holding an extraordinary general meeting (“EGM”). The purpose of the EGM is to obtain a resolution to approve the dissolution of the company and to appoint a liquidator or liquidators.
Following the resolution (and within 14 days from the date of dissolution), the liquidator(s) must register the dissolution and the name(s) of the liquidator(s) of the company with the Department of Business Development of the Ministry of Commerce. The liquidator(s) must also notify the public, by placing two consecutive advertisements in a local newspaper, that the company is dissolved and that its creditors must apply for payment to the liquidator(s). Lastly the liquidator(s) will send a registered letter to the company’s known creditors(s) advising them that the company is in the process of dissolution and liquidation.
The liquidation process will then begin. If, at any stage in the above process, it becomes apparent that the debtor’s liabilities exceed its assets, then the liquidator must apply to the Court to have the debtor declared bankrupt.
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What does the liquidator do?
The purpose of the liquidator is to liquidate the assets of the company and pay its creditors. As soon as possible the liquidator will prepare a balance sheet and have it examined and certified by the auditor. He will then summon a general meeting to approve, by a simple majority resolution, the balance sheet.
The liquidator will then proceed with the liquidation and must report his activities and the status of the accounts of the liquidation to the Department of Business Development every three months until the liquidation is completed.
After the liquation is completed, the liquidator summons a general meeting to approve the liquidation accounts. The liquidator will than register a resolution of the meeting approving the accounts and the completion of the liquidation with the Department of Business Development.
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How is a compulsory liquidation started?
A creditor may file a bankruptcy petition against a company under the Act where the debtor is insolvent, the petitioning creditor(s) is/are owed not less than Baht 2 million and the debt is a liquidated amount which is due immediately, or which can be determined.
A secured creditor may file a bankruptcy petition against a corporate debtor only when:
- the creditor is not prohibited from enforcing payment against property of the debtor other than the security; and
- the creditor states in the petition that, if the debtor becomes bankrupt, the security will be surrendered for the benefit of all creditors, or has assessed that the value of the security is insufficient to cover the debt by an amount of not less than Baht 2 million.
Under the Act a company will be presumed to be insolvent if it:
- transfers property or rights to manage its property to a person for the benefit of its creditors, irrespective of whether such transfer is carried out within or outside Thailand;
- transfers or conveys its property with deceptive intent, or by fraudulent acts, irrespective of whether such transfer or conveyance is carried out within or outside Thailand;
- transfers its property or creates any right in rem against its property such that, if the debtor becomes bankrupt, such transfer creates what would be deemed a preference to a creditor, irrespective of whether such act is carried out within or outside Thailand;
- carries out acts in order to delay the payment of a debt, or prevent a creditor from receiving payment of the debt, including closing its place of business, removing property out of the jurisdiction of the Court, or rendering itself liable to be bound by a judgment ordering payment of money for which the debtor should not be liable;
- has its property attached under a writ of execution, or there is no property of the debtor which may be attached for payment of the debt;
- informs the Court in any case that it is unable to pay its debts;
- notifies any of its creditors that it is unable to pay its debts, or submits a proposal for composition of its debts to any two or more of its creditors; or
- receives notices from a creditor demanding payment of a debt not less than twice, at intervals of not less than thirty days, and the debtor fails to pay the debt.
These are only presumptions; the company can rebut them by proving that it is solvent. This is normally achieved by reference to the company’s audited accounts to show that it has assets that exceed its liabilities.
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How is a compulsory liquidation different from a voluntary liquidation?
After the Court grants an order for liquidation, the control of the debtor’s estate passes to the Official Receiver (this is a government official), who must call a creditors’ meeting to discuss any proposal by the company. If no proposal is put forward or it is rejected, the Court must adjudge the debtor bankrupt, and the Official Receiver is empowered to manage the property of the bankrupt for distribution amongst all creditors.
In a bankruptcy, the liquidator is always the Official Receiver. After a bankruptcy order is made, the handling any claims which the debtor company may have is passed to the Official Receiver exclusively.
After the debtor company is adjudicated bankrupt, the Official Receiver is permitted to sell the debtor company’s assets (either on a going concern or on a piecemeal basis) by way of public auction or, with the approval of the creditor’s committee (if appointed), by other means.
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Can the Thai Court issue a winding-up order for a foreign company?
A foreign bankruptcy order has no effect on the debtor’s assets in Thailand. Thai law does not provide for the recognition of foreign judgements, although a foreign judgment may form part of the evidence in a case brought against the debtor in Thailand on the same matter. It will be considered ‘best evidence’ if it is a final judgment given by a Court of competent jurisdiction and is not contrary to Thai public policy. Thailand is not a signatory to any international treaties on insolvency or the recognition of foreign judgments.
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