Bankruptcy Act.  Amendments nos. 4 and 5 to the Bankruptcy Act introduced reorganization proceedings as an option to liquidation proceedings.  The new Bankruptcy Court opened in June 1999. 

Ad hoc. Some debt restructurings have been completed on a voluntary consensual basis outside of the two regimes mentioned above.

CDRAC

On 22 June 1998, the Joint Public Private Consultative Committee adopted a resolution to establish CDRAC.  BOT order no. 215/2541 of 25 June 1998 then announced CDRAC’s establishment. 

CDRAC has the BOT Governor as chairman, an advisor to BOT as vice chairman, and the chairmen of the Thai Board of Trade, Federation of Thai Industries, Thai Bankers’ Association, Association of Finance Companies and Foreign Banks’ Association as members. 

CDRAC determines policy to promote negotiation of debt restructuring between the private sector and financial institutions and administers generally such negotiations.  It has the power to appoint sub-committees and may seek cooperation and authority from the BOT.

Framework

In August 1998, CDRAC and the Thai Board of Trade, the Federation of Thai Industries, the Thai Bankers’ Association, the Association of Finance Companies and the Foreign Banks’ Association approved the Framework.  It provided voluntary principles for non-judicial debt restructurings. 

Important principles of the Framework included standstill and other covenants of creditors and debtors. These undertakings cover commitments of senior management and financial officers, disclosure of financial and other key information of the debtor and analysis of alternative restructuring strategies. 

The Framework also provided that existing security rights are maintained and that new financing must receive priority.  Principles to apportion restructuring losses are likewise specified.  In addition, the Framework established a time schedule to achieve various actions in the process.

Inter-Creditor and Debtor-Creditor Agreements

On 19 March 1999, 63 Thai and foreign financial institutions signed the Inter-Creditor Agreement on Restructure Plan Votes and Executive Decision Panel Procedures (“ICA”).  Additional financial institutions have signed the ICA subsequently.

This agreement established the basis on which financial institutions enter into a Debtor-Creditor Agreement on Debt Restructuring Process (“DCA”) on a case-by-case basis with debtors which agree to have their debts rescheduled on the basis of that agreement and the procedures in the Framework.

The ICA limits creditor participants to financial institutions.  Thus trade and other creditors cannot formally participate. Also, potential debtors initially were limited to the 667 corporate entities which had been listed with CDRAC.  Later, other corporate debtors were brought into the CDRAC regime. 

The agreement sets forth a process to formulate a restructuring plan and to obtain “sufficient plan approval”.

The DCA binds all creditors who adhere to the ICA and the debtor which adheres to the DCA.  Thus only financial institutions and their debts are covered by the DCA. 

The DCA also provides for the appointment of a steering committee, for the debtor to provide information, and for the debtor not to take certain action without creditor approval.

Progress under the CDRAC Regime

702 corporate debtors (with debts exceeding 1 billion Baht) were targeted by CDRAC as candidates for the debt restructuring process.  Most of these companies are reported to have signed DCAs with their creditors.  As of 13 March 2000, CDRAC reported that 621 cases have been resolved - 259 cases by debt restructuring and 362 cases by resort to the courts.  The remaining 81 cases were still in the CDRAC process. 

A degree of confidentiality surrounds the CDRAC regime, and it is difficult to determine the progress being made on all targeted debtors, which include additional 5,010 small and medium sized target debtors under the Simplified Debt Restructuring Agreement.

BANKRUPTCY ACT REGIME

1998 and 1999 Amendments

In April 1998 Bankruptcy Act Amendment (No. 4) came into force.  It added a new Chapter 3/1 (Sections 90/1 through 90/90) to the original Bankruptcy Act of December 1940.  This amendment establishes a judicial process for reorganization of debtors.  It includes procedures for the appointment of a reorganization plan preparer (“planner”), approval of such a plan, appointment of the plan administrator and implementation of the plan. 

Chapter 3/1 provides voting procedures for approval of the plan, the planner and the administrator, specifies the scope and content of a plan, requires the debtor to disclose certain information and to cooperate, provides that the administrator replaces the debtor’s directors and shareholders during administration of the plan and allows for derogation from provisions of the Civil and Commercial Code and the Public Limited Companies Act.  It also permits the establishment of a creditors’ committee to oversee  plan administration. 

Uncertainty over judicial administration of Chapter 3/1 generally limited this alternative to “prepackaged” consensual arrangements between creditors and  debtors.  The requirement of certain decisions by a “special resolution” of the creditors (simple majority in number and three-quarters majority in amount) and the potential inclusion of all, potentially numerous, creditors also disfavored the use of this alternative. 

In April 1999 Bankruptcy Act Amendment (No. 5) came into force.  The major changes effected by the 1999 amendments are discussed below.

(1)    New Money

Section 94(2) now allows a creditor to file a claim for debts which it advanced, despite knowing that the debtor was insolvent, to allow the debtor to continue its business operations.  This was intended to remove a substantial barrier to new money, due to the opposite treatment of such advances in the past.

(2)    Creditor Classes and Voting

Sections 90/42, 90/42 (bis), 90/42 (ter) and 90/46 create classes of creditors, provide for equal treatment for creditors within each class, and prescribe revised voting procedures in approving a reorganization plan. 

Each secured creditor with at least 15% of the total debt forms a separate class, and all other secured creditors form a class.  Unsecured creditors are grouped according to similar interests (presumably, such as suppliers, subordinated lenders, bondholders, etc., although there is uncertainty as to the application of such classes and the principle of equality of treatment).  Section 130 creditors (e.g., those owed taxes or wages) also form a class. 

The previous voting by “special resolution” of all creditors has been replaced by a minimum voting requirement of such a resolution by any creditor class and one-half of all debt.  This substantially facilitates creditor decisions.   

Section 90/46 (bis) of the revised Act specifies creditors deemed to have accepted a reorganization plan.  These include creditors that will be brought and kept current in debt service payments, those which will be repaid upon the implementation of the plan, and those which are privileged under Section 130 (see above).

(3)    Preference Periods

Sections 90/41 and 115 provide a preference period of three months for  transactions between unrelated parties, and one year if the creditor is related to the debtor. 

(4)    Court Approval of Plans

Section 90/58 sets out the criteria that  require a court to approve a reorganization plan.  The plan must contain all the information specified in Section 90/42, which is considerable.  Also, any disadvantageous treatment of a creditor or alteration of the legal ranking of its claims must have its consent. 

Under a restructuring plan, all creditors must also receive no less than they would have if the debtor were declared bankrupt.  If the requirements under Section 90/42 are not met, the court still has discretion to approve the plan.  However, the court’s prior discretion to reject a plan has been reduced.

(5)    Rejection of Contracts

Section 90/41 (bis) allows the planner to refuse to accept a debtor’s assets or rights under agreements if such assets or rights carry obligations greater than the benefits which may be derived.

(6)    Currency Conversion

Section 90/31 has been amended to specify that the conversion of debt denominated in a foreign currency is for voting purposes only.  This removes the prior uncertainty as to whether conversion was mandatory for debt collection and other purposes. 

The 1999 amendments also include less important amendments. 

The Central Bankruptcy Court ruled in the landmark TPI case on March 15, 2000 that “insolvency”, a condition precedent to reorganization proceedings under the amended Bankruptcy Act, does not simply mean negative net worth but rather the debtor’s inability to service their financial obligations.  This ruling cleared a major legal uncertainty.  It is believed that it will speed up the pace of debt restructuring cases, which will contribute to a fall in NPL levels.

The Act on Establishment of and Procedure for Bankruptcy Court, B.E. 2542, was published in April 1999. This Act established the Bankruptcy Court as a specialized court, and sets forth rules governing its procedure.  The court opened on June 18, 1999.  It now has jurisdiction over all bankruptcy cases, which were formerly heard by the Court of First Instance. Appeals on reorganization cases will be made directly to the Supreme Court (instead of first to the Court of Appeals).

Additional Reforms

A number of problems have been experienced in the introduction of reorganization proceedings, and amendments have been proposed to address these problems.

IPIT Court

The IPIT Court was established pursuant to a law in October 1996, and opened in December 1997.  The jurisdiction of the court is broad and includes civil claims relating to financial instruments and international services.  The Chief Justice of the Supreme Court has held that lending is a service.  The IPIT Court thus has jurisdiction over claims brought by foreign lenders against their domestic borrowers.  That court also has jurisdiction over the enforcement of security which relates to such claims. 

Cases before the court are heard by at least two judges and one associate judge.  The court judges are judicial officials, while the associate judges are not, but the latter must meet certain qualifications, notably with regard to knowledge and expertise in such matters.  An individual judge may also take actions or issue orders relating to a court proceeding, while the court’s decision on a case is by majority of the judges. 

Rules regarding evidence in the court are more flexible than those in the civil courts.  Also, the court is to hold hearings on a continuous basis, without postponements, until completed.  Thus these court proceedings are more rapid than proceedings in the civil courts.  Also, an appeal from a decision of the IPIT court is directly to the Supreme Court, rather than to the Court of Appeals.  As a result, the entire procedure should be expedited. 

Notwithstanding the potential use of the IPIT Court, complications relating to enforcement of security, notably mortgages of real property and of registered machinery and the pledge of physical property and shares remain.  These include the practical impossibility of disposing of an industrial unit to one potential buyer, because of the separate procedures required to realize and enforce a mortgage of real property, a mortgage of machinery and a pledge of assets.  It is also difficult to exercise step-in-rights or to perfect conditional assignments of contract rights, notably because some licenses and permits are not transferable, and they require the holder to fulfill certain requirements. 

An order by the Bankruptcy Court accepting the filing of a Section 90 Bankruptcy Act request for restructuring plan stays all other completing procedures under Section 90/12 of the Act.  Those procedures would include enforcement measures and interim orders of the IPIT Court or a general civil court.

Economic Reform Legislation

Progress has been made in enactment of new legislation to speed up court and enforcement procedures:

COMPARISON OF CDRAC, BANKRUPTCY ACT AND AD HOC ELEMENTS

Binding Nature

The contractual framework relates only to financial institutions. Thus the process imposes contractual obligations only on financial institution creditors to encourage them to reconcile differences among themselves and between themselves and the debtor. CDRAC creditors may opt out of the process only if the debtor’s financial institution debt exceeds one billion Baht and if the arbitration process under the ICA becomes applicable. 

In contrast, a Chapter 3/1 Bankruptcy Act procedure legally binds all creditors, whether financial institutions or not, without the possibility of opting out.  Under section 90/12, secured creditors may not be allowed to enforce rights for so long as the plan is in place, or they may be subject to discretionary acts of the court under sections 90/13 and 90/14. 

For ad-hoc procedures, consensus on a restructuring arrangement contractually binds only the agreeing creditors and their debtor. 

Voting Rights

Under the CDRAC regime, “sufficient plan approval” requires a “special resolution” under section 6 of the Bankruptcy Act, i.e., a majority of all creditors and three-fourths of all debts.  The ICA does qualify the reference to a special resolution by the phase “as amended (or any amended or succeeding definition…)”.  This would appear intended to adopt the less stringent requirement under revised section 90/46 of the Bankruptcy Act. However, the section 6 definition has not been superceded for purposes of the agreement. 

Exclusivity or Combination

The CDRAC regime and the Chapter 3/1 Bankruptcy Act regime could each be conducted separately and exclusively.  It would also be possible to begin under the contractual framework and, upon agreement being reached between the financial institution creditors and the debtor, for the restructuring plan to be imposed upon all creditors by a Section 90 proceeding, if the required majorities under section 90/42 bis can be obtained.  In that event, all creditors would be bound.

Tax Implications

Debt restructuring poses a number of tax, accounting and registration issues. During the past year, the Revenue Department and other regulatory agencies have announced numerous measures to facilitate restructuring. These measures are beyond the scope of this paper.  They address subjects including income tax, transfer fees, VAT, accounting standards, etc.  Their applicability often depends upon the type of restructuring regime and classification of creditor.