Overview of Thai Bankruptcy Reorganization Law
Bankruptcy laws often require courts and parties to make hard choices. In a bankruptcy there is simply not enough money to satisfy everyone, and difficult decisions must be made about who gets what. In a bankruptcy, property is seized, reputations are ruined, contracts are dismembered and jobs are lost.
Thai law only provided for the liquidation of bankrupt parties up until the late 1990s and this procedure was used very infrequently. Following the 1997 financial crisis in Southeast Asia, however, Thai bankruptcy laws were dramatically changed to permit the reorganization of financially distressed business debtors and provide for the creation of specialized bankruptcy courts.
A Thai bankruptcy reorganization proceeding is vaguely similar to a Chapter 11 under the U.S. Bankruptcy Code, except that, as written at least, it provides for greater creditor participation in the management of a business in reorganization proceedings and preparation and approval of the plan or reorganization. Thai bankruptcy reorganization proceedings contain other provisions tailored to meet the requirements of other features of Thai law. They also contain provisions, often borrowed from reorganization provisions laws of other jurisdictions, which make Thai bankruptcy proceedings very different from U.S. bankruptcy proceedings.
Commencement of Proceedings
A Thai bankruptcy reorganization proceeding begins with the filing of a petition for reorganization. The petition should show that: (1) one or more creditors is owed not less than Baht 10 Million; (2) the debtor is insolvent; and (3) there are reasonable grounds and prospects to reorganize the debtor. After the petition is filed, a bankruptcy Court reviews the petition. If the Court accepts the petition, it will issue an order accepting the petition and schedule a hearing date to examine the petition.
Once the Court issues an order accepting the petition, an “automatic stay” comes into effect. The automatic stay bars all lawsuits, the enforcement of judgments, dissolution actions, license revocations, business suspension orders, bankruptcy liquidation proceedings, and enforcement of security, utility suspensions and certain other action against the debtor. Although the automatic stay of a Thai bankruptcy court is not as broad as the automatic stay of a U.S. Chapter 11 proceeding, it is fairly effective in blocking any effective collection against the debtor.
Creditors whose rights have been affected by the automatic stay may seek an order amending, annulling or modifying the automatic stay if the restrictions of the automatic stay are not necessary for the business reorganization or do not sufficiently protect the rights of secured creditors. The Bankruptcy Act lists arrangements that are deemed sufficient protection of secured creditors. These provisions are similar, but not identical, to the relief from automatic stay provisions of U.S. Bankruptcy law. Further, the scope of property that can be mortgaged under Thai law is limited in scope (there is nothing even remotely similar to a UCC-1 in Thailand), and the remedies available to secured creditors in Thailand vary considerably from those available to secured creditors in the U.S. For very general high level information on Thai mortgage law, click here.
Examination Hearing and the “Insolvency” Requirement
The Court will examine the petition to determine if (i) the debtor is insolvent, (ii) a good candidate for reorganization, (iii) a creditor is owed not less than Baht 10 Million, and (iv) if the petition was filed in good faith. At the end of the hearing, the Court will either dismiss the petition or issue an order for the business reorganization of the debtor (the Reorganization Order).
The insolvency requirement has been the subject of a fair amount of controversy. Thai Courts determine insolvency by measuring assets against liabilities. This is a balancing test where a company is considered insolvent if its liabilities exceed its assets.
After the Reorganization Order is issued, but before the “Planner” is appointed by the Court, the Court will appoint a “Temporary Manager”, which can be one or more persons and even the existing managers of the debtor itself to take over the management of the debtor. The Temporary Manager will be under the supervision of the Receiver, a Court officer who reports to the Court.
The “Plan Preparer”
Thai law does not expressly provide that a ‘debtor-in-possession’ will manage a company in bankruptcy proceedings or prepare the plan of reorganization. Instead, Thai law provides that a Plan Preparer exercise such powers. A Plan Preparer wields considerable power since it essentially manages the debtor until the reorganization plan is approved (or the reorganization proceedings dismissed), prepares the plan of reorganization and exercises considerable influence over who is selected to administer the plan of reorganization (provided one is ultimately approved).
Selection of the Plan of Plan Preparer
1. Court Appointment: The Court can appoint a plan preparer directly if there is no objection to the plan preparer named in the petition or a party has objected, but not nominated an alternative planner.
2. Eligible Creditor Votes: Any creditor who completes the appropriate form and presents evidence satisfactory to the Receiver of his status a creditor may vote for the planner preparer. If the debtor or any other creditor objects, the Receiver will decide the creditor is allowed to vote and in what amount. In practice, disputes have occurred about whether a debt is bona fide for voting purposes.
3. Voting for a Plan Preparer: At the creditors’ meeting, if the debtor has notproposed a Plan Preparer, then a simple majority of the creditor votes (the amount of votes equaling the amount of debt) may elect the Plan Preparer. If the debtor proposes a Plan Preparer, that proposed Plan Preparer shall be appointed unless not less than two-thirds of the creditors’ votes override the debtor’s nomination.
4. Court Approval of the Elected Plan Preparer: If a Plan Preparer is elected at the creditors’ meeting and the Court approves the elected Plan Preparer, the elected Plan Preparer is appointed. If, however, a Plan Preparer is not elected at the creditors’ meeting or the Court disapproves of the elected Plan Preparer, the Court shall order the Receiver to call a second creditors’ meeting or order that the Restructuring Order be dismissed.
All creditors of the debtor must file a “Creditors’ Claim” within one month after the order for appointment of the Plan Preparer is published. The debt must have arisen before the date of the Restructuring Order, but the debt need not be matured and can be conditional. Creditors may set-off debts owed to the debtor at the time of the Restructuring Order. The debtor, a creditor or the Planner may object to a particular Creditors’ Claim and the Receiver will decide on such objection after inquiry. The Receivers’ findings may be appealed to the Court.
Important Practice Note for Foreign Creditors and their Counsel
Filing a claim in a Thai bankruptcy proceeding is much more document intensive than filing a claim in a U.S. bankruptcy proceeding. Complicating matters further, a number of foreign creditors have claimed that they did not actually learn of the bankruptcy reorganization proceedings in Thailand until after the deadline for filing a creditors’ claim had passed.
Within three months to five months of the date the Plan Preparer’s appointment, the Plan Preparer must submit a proposed Reorganization Plan to the Receiver with copies to the creditors and debtor. In practice, this deadline is frequently extended.
Prior to amendments made to the Bankruptcy Act in April of 1999, there was no classification of creditors. Starting in April of 1999, Thai law provided for the grouping of creditors into classes. Creative organization of classes has made it easier to procure plan approval.
A Reorganization Plan requires creditor approval. New amendments enacted in April of 1999 make it easier to obtain creditor approval of a Reorganization Plan. Under the new amendments, there are two alternative means of obtaining creditor approval of a Reorganization Plan:
– A majority of the number of creditors, which majority represents at least 75% of the total debts at a meeting of each class of creditors.
– A majority of the number of creditors, which majority represents at least 75% of the total debts in one class of creditors and approval of at least 50% of the total debts voting in meetings of each class of creditors.
Court Approval of Plan
After the Reorganization Plan is approved at the creditors’ meeting, it is presented to the Court for approval. The April 1999 amendments limit the Court’s discretion to reject a Reorganization Plan by providing for more objective criteria for approving or rejecting a plan.
If and when the Court approves the Reorganization Plan and as a part of that plan appoints the “Plan Administrator”, the management powers of the Plan Preparer pass to the Plan Administrator in the same manner as such power previously passed to the Plan Preparer from the temporary or interim manager.
Other Features of Reorganization Proceedings
Thai bankruptcy proceedings also allow courts to set aside preferential transfers and the rejection or acceptance of executory contracts. The concepts are similar, but not identical to those found in U.S. bankruptcy law.