By Douglas Mancill
Security is collateral that is provided to guarantee fulfillment of an obligation. The obligation is often a debt, but this is not always the case. The term “mortgage” is often used interchangeably with the term “security”. From the perspective of a creditor, the primary value of security is that a secured creditor should, in theory, be able to force a sale of the collateral and use the proceeds to pay the secured debts ahead of other creditors (although in many jurisdictions bankruptcy and reorganization proceedings often place limitations upon such rights). Security can take many forms; in some jurisdictions security interests are not only available against real estate, but also against inventory, accounts receivable, equipment and even intangible property such as intellectual property rights. The types of property that can be mortgaged in Thailand in comparison to other jurisdictions, however, are quite limited. In this article, we discuss some forms of security available in Thailand, the limits to such security, and the enforcement of security.
Overview of Thai Mortgage Law
The general law governing mortgages is set forth in the Thai Civil and Commercial Code (CCC). A mortgage is a contract whereby the mortgagor (debtor) assigns property to the mortgagee (creditor) as security for the performance of an obligation, without delivering the property to the mortgagee. A mortgage must be in writing, must specify the property mortgaged and must be registered by the competent government official. Immovables, such as land and buildings, of any kind can be mortgaged. In addition, certain types of movable property, such as machinery, can be mortgaged if they are properly registered.
Mortgages Over Land and Buildings
A mortgage over land does not extend to the buildings erected by the mortgagor on such land after the date of the mortgage, unless there is a specific clause in the mortgage contract to the contrary, and for that reason, it is customary to have such a clause in the contract. In the absence of such clause, a mortgage over buildings erected or constructions made on or under the land of another person do not extend to such land, and vice versa. In other words, buildings and other immovables may be mortgaged separately from mortgages of land. A mortgage over a building must be registered with the competent government agency.
Limitations on Who Can Hold Security
Thailand has limitations on who can hold security and those limitations can be found in Thailand’s Financial Institution Act, B.E. 2551.
Laws other than the Credit Foncier Act provide that banks, insurance companies and finance companies licensed in Thailand are also permitted to accept mortgages as security for loans. Foreign banks and financial institutions may also register as mortgagees in Thailand upon production of evidence of their incorporation, licensing by the relevant foreign governmental authority and relevant corporate powers and authorizations for conducting the transaction. Foreign companies (which are neither banks nor financial institutions) can also register as a mortgagee for a single, one-time, transaction provided, however, that the Land Department receives a specific ruling upon request from the Ministry of Finance for that foreign company to do so. Although such rulings will generally be issued in due course, it often results in substantial delay in the mortgage registration. Finally, Thai and foreign individuals can have mortgages registered in their favor.
There are limitations on the right of ordinary Thai companies that are not licensed as a credit foncier company, bank, or finance company to hold mortgages. An ordinary Thai company can obtain a mortgage against land only if it can establish that the underlying debt or obligation to be secured by the mortgage on land is not the ” lending of money” or other type of business covered under the Credit Foncier Act or under the laws relating to banking, finance or securities business. In practice there are only two very limited situations where an ordinary Thai company could obtain a mortgage:
- as security for the hire-purchase or installment sale of goods or other situation where the lending of money is not involved; or
- in a situation where a company employs an individual, the company can request that the individual provide a mortgage on his own immovable property as security for the due performance of his duties to the employer.
The Machinery Registration Act provides that the owner of machinery must first register his ownership of machinery before he can register a mortgage on his machinery. A mortgagee does not have any legally enforceable rights until the entire registration process (both for ownership registration and for mortgage registration) is completed, and this process can be quite document and time intensive.
Other Forms of “Security” or Quasi – Security
Other possible methods of obtaining a security interest or “quasi-security interest” in movable property under Thai law are as follows:
Pledge. A pledge is created when a movable property is delivered by one person (the pledgor) to another (the pledgee) to secure the performance of an obligation. “Delivery” generally means physical possession by the pledgee or a third party. Thai law provides that a pledge is extinguished when the pledged property returns into the possession of the pledgor. Shares and instruments (such as promissory notes and bills of exchange) can be pledged under Thai law. Indeed share pledges are a common form of security.
To enforce a pledge, a licensed auctioneer must sell the property at public auction; however, no court order is required for such sale. Thai law prohibits parties from entering into agreements before an obligation becomes due which provide that the pledgee shall become the owner of the pledged property or dispose of it other than by public auction when there is a breach. In other words, the public auction requirement cannot be waived.
Hire-Purchase. The owner of property can enter into a written contract whereby the property is let out on hire with a promise to sell it to, or that it shall become the property of, the hirer, conditioned on the hirer making a certain number of payments. The owner may terminate the contract in case of default of two successive payments and three successive payments if the property is a car, motorcycle, or electrical equipment under the Consumer Protection Act, or breach of any material part of the contract, in which case all previous payments are forfeited to the owner who is entitled to resume possession of the property. Where a particular company sells movable property such as machinery, hire-purchase contracts are an effective method of maintaining security in the machinery.
Conditional Sale. A sale can be made subject to a condition or to a time clause. For example, the seller of certain machinery can provide in the sales contract that title to the machinery will not vest until the purchaser has paid the full purchase price to the seller.
Sale with Right of Redemption. This is a sale under which the vendor has the right to buy back the property and in so doing to offset the repurchase price against any monies still due to the vendor under the original sale and purchase transaction. However, the right of redemption cannot be exercised later than ten years after the time of sale in case of immovable property, and three years after the time of the sale in case of movable property and the redemption price must not exceed the rate 15% per year.
Preferential Rights. Under the CCC, a seller of movable goods has a preferential right to obtain payment of the sales price and interest in respect thereof from the purchaser of the goods, and this right is exercisable against the goods in priority to the rights of other creditors of the purchaser.
But this should all change dramatically when the Business Security Act comes into effect. Click here for more information.