A bill proposed by Thailand’s National Council for Peace and Order (NCPO), which has since been approved by the National Legislative Assembly (NLA), reduces the potential liabilities faced by persons in Thailand providing guarantees or mortgaging their real property for the benefit of borrowers’ creditors. The bill also requires creditors to take additional steps when enforcing guarantees and mortgages. In a summary to members of the NLA, the NCPO explained that its bill is necessary due to the fact that current Thai law is not sufficient to protect guarantors and mortgagors who are not primary obligors. According to the NCPO, guarantors and mortgagors are at a disadvantage when negotiating the terms of their guarantees and mortgages as they do not have sufficient bargaining power or financial advantage and are thus not protected in accordance with the spirit of Thai law.
This article will look at how the proposed bill will affect Thai guarantees, with a subsequent article addressing its impact on Thai mortgages. The bill is expected to take effect in 2015, ninety days after publication in the Royal Gazette.
Guarantor may not be made liable in the same manner as joint debtor
Under current Thai law, a person in Thailand may provide a guarantee to a creditor and also agree to be bound jointly with a primary obligor. Under such circumstances, the Thai guarantor is not entitled to certain common defences normally available to guarantors against creditors, including:
- requiring the creditor to first make demand on the primary obligor unless the primary obligor has been adjudged bankrupt,
- requiring the creditor to first make demand on the primary obligor if it can prove that the primary obligor has the means to perform and that such performance would not be difficult, and
- requiring the creditor to first collect against any real security pledged by the primary obligor.
Under the proposed bill, a Thai guarantor may not be liable in the same manner as a joint debtor or in the capacity as a joint debtor. Instead, creditors will have to choose beforehand whether to treat persons in Thailand as guarantors or joint debtors, but not both.
Obligations secured must be specified in guarantee
If the guarantee secures future or conditional obligations, then under the proposed bill the guarantee must provide details of the obligations, including:
- the objective and nature of the secured obligations,
- the maximum secured amount of the obligations, and
- the period of the secured obligations (unless the obligations consist of a series of transactions not limited in time).
Credit agreements typically have numerous obligations owed by the primary obligor, such as principal, interest, default interest, commitment fees, etc. which will have to be specified in the Thai guarantee once the bill is effective.
Notice required within 60 days following a default
Under the bill, a creditor will be required to give notice to the Thai guarantor within 60 days from a default in order to enforce the Thai guarantee. If the creditor fails to provide notice within such 60 day period, then the Thai guarantor shall not be liable for any obligations which may arise following the 60 day period. Under current Thai law, there is no such notice required to enforce a Thai guarantee.
This particular provision of the bill will have retroactive effect, meaning that notice within 60 days of a default will be required in order for a Thai guarantor to be liable for any obligations which may arise following such 60 day period.
Guarantor’s consent required for any deferral granted to borrower
In the event a creditor allows a borrower to defer performance of an obligation that originally was to be performed by a definite time, then under the bill the Thai guarantee will automatically terminate unless the guarantor consents to such extension. The guarantor consent must be made at the time the creditor grants the borrower a deferral, and provision in a guarantee providing for automatic consent of future deferrals will be unenforceable.
Creditors will now have to decide between (i) receiving a guarantee from the applicable Thai person or (ii) having such person become a joint debtor. For those creditors seeking Thai guarantees in future, careful consideration will need to be paid to the guarantee language in order to adequately specify the obligations being guaranteed and avoid treating the guarantor as a joint debtor. Creditors with outstanding Thai guarantees will need to keep in mind the retroactive effect of the 60 day notice requirement outlined above.