New Thai Statute Blends Chapter 11 with Singapore Practices

A new Thai law governing business reorganization became effective on April 10, 1998. Eleven years in the making,

the law is welcomed by business sectors in Thailand and abroad as an efficient option to help tackle the current

situation where many viable companies are in financial trouble. The new law is incorporated into the existing

Bankruptcy Act of 1940 as a new chapter‹Chapter 3/1. This article highlights the key elements of the new law.

</p><h3>The Development</h3>

<p>The Thai government

realized in 1988 that the existing bankruptcy law, derived from the old English law of 1914, did not adapt well to

current conditions. The Ministry of Justice established a bankruptcy law reform committee to undertake the research

and propose amendment. One main point of agreement was the need to "humanize" the bankruptcy law. The laws of

a number of countries were considered, including chapter 11 from the U.S. Bankruptcy Code and the English

Administration under the Insolvency Act of 1986. Business practices in Singapore were also taken into account. The

committee incorporated a variety of concepts while being sensitive to Thai business culture. The bill went through a

number of amendments before final adoption last year.

</p><p>Fifteen large cases already

have been filed under the new law, including a case involving Alphatec Electronics Public Company Ltd. (ATEC),

a major electronics firm with debts estimated at 20 billion baht (US$570 million). The plan for the ATEC case was

approved by a creditors' meeting early last month.<br>

</p><h3>The Process</h3>

<p>The process of business

reorganization under the new law is more like a hybrid of chapter 11 and the Judicial Management of the Singapore

law. In short, this can be described as the court supervision of the financial restructuring of a troubled company. The

new provisions contain very detailed provisions on reorganization procedure. The law is intended to prevent

businesses from being driven into unnecessary bankruptcy due to temporary liquidity problems. In order to solve the

problems, the law subjects indebted enterprises to a reorganization proceeding if a creditor or the debtor files a

petition with the court and if the debtor owes at least 10 million baht (about US$290,000) to one or more creditors.

Reorganization is provided for companies both private and public, and for other enterprises as may be provided by

ministerial regulations.

</p><p>Upon filing the petition, the

moratorium or automatic stay under §90/12 goes into effect, preventing secured and unsecured creditors from

pursuing their debts, enforcing their civil judgment or filing a bankruptcy petition against the debtor, except to

participate in the reorganization proceeding. A court trial will be set to decide if the reorganization order is to be

issued. The trial must be conducted expeditiously. If the court is satisfied that the debtor is insolvent and has the

potential for achieving success through restructuring, the court will issue the reorganization order. Once the order is

issued, the court will have to appoint a planner to form a reorganization plan. The planner also will have the power

to run the business during the reorganization under the supervision of the official receiver and the court.

</p><p>The proposed plan must be

put to a vote by creditors within three months after the appointment order and must be approved by a special

resolution of creditors with the requisite number of votes in support. Only the creditors who have filed their proofs of

claim with the official receiver within one month of the publication of the appointment of the planner have the right

to vote. If the plan receives approval from creditors, it will be submitted to the court for confirmation. Motions

against the confirmation may be filed on the basis that there is unfair treatment of creditors.

</p><p>The details of each plan

could vary depending on the problems and status of the business. A composition can be provided for in the plan, as

well as a capital reduction or increase. The time period for the plan is five years, but it may be extended by the

court. If the process fails to help the business, the court can declare the enterprise bankrupt, and liquidation under the

bankruptcy law will follow.

</p><h3>Automatic Stay</h3>

<p>The moratorium, or

automatic stay, is the major element of the reorganization law at the outset of the case and is very wide in scope.

The court can allow the enforcement against security if it can be shown that there is no sufficient protection of the

rights of secured creditors. This approach is in line with the concept of adequate protection in many jurisdictions.

During the stay, but before the reorganization order is issued, the existing management can still have the control of

the company, subject to the limitation that it can only conduct its ordinary course of business. To do something

beyond this requires leave of court.

</p><p>The stay will be effective

until (a) the expiration of a period of time for implementation of the plan, (b) the date on which the plan is

accomplished successfully or (c) the date on which the court dismisses the petition, disposes of the case, repeals the

order for a business reorganization, cancels the reorganization or issues a receiving order.

</p><h3>Management</h3>

<p>With the concept of

appointing someone as a planner, the law attempts to balance the interests of the shareholders and creditors. The

concept under chapter 11 to give priority to the debtor to form a plan and the concept under the English

Administration to appoint an independent licensed practitioner to take over control of the company both influence

the Thai legislation.

</p><p>Although §90/16 provides

that the Minister of Justice may prescribe ministerial regulations relating to the registration and qualifications of

the planner, there is no such regulation in place at this time. The debtor may have the edge over creditors if it

proposes the planner. The law provides that if there is more than one person proposed, the one proposed by the

debtor should be the planner, unless creditors with two-thirds of the debt vote otherwise. Therefore, it is correct to

say that management may or may not change hands during the plan formation period.

</p><p>Once the plan is completed

and submitted to the creditors' meeting, there might be another possible change of the management. The one who

will have the power to run the business in accordance with the plan is called a plan administrator. The plan must

state who the plan administrator is. It is accepted that the planner and the plan administrator may not be the same

person.

</p><p>The plan administrator must

prepare a report of plan implementation and submit it to the official receiver every three months. The removal of the

plan administrator for wrongdoing or fraud can be done by a court order. Creditors may change the plan

administrator through the amendment of the plan.

</p><h3>The Plan</h3>

<p>The new law gives a plan

formed within this scope advantages over one done for the purpose of an informal workout. First, the interest of

equity holders is limited. All the powers relating to the decision-making on the future of the company are now

shifted to creditors. This includes the powers to decide to reduce and increase the capital. Conversion of debt into

equity is also allowed.

</p><p>The credit given to the

company under the plan enjoys a priority over existing unsecured debts. It is very unfortunate that the superpriority

was not adopted by the legislation. However, if the process of setting up a specialized bankruptcy court, which is

still pending, becomes a reality, there could be further amendment on this issue.

</p><p>The plan is deemed accepted

by the creditors if a majority of creditors whose claims equal three-quarters of the total claims of creditors present at

the creditors' meeting vote for such plan by proxy or in person. All creditors will have to vote together in one group

without classification. There is legislation by the Ministry of Justice that proposes to adopt the principles of

classification of creditors and voting by classes. This will enable the planner and the court to divide creditors into

classes, and the voting will better represent the real needs of each class.

</p><h3>The Future</h3>

<p>The Thai government has

initiated another bill to amend the bankruptcy law on the issue of the rules for classification of claims and voting by

classes, as well as objective rules for the confirmation of a plan, among other changes. It is well accepted that further

change will be needed. As in the United States, the specialized court concept is another proposal to be considered.^{<small><a href="#1" name="1a">1</a></small>}

Other aims are for the inclusion of the voluntary arrangement, consumer bankruptcy, the reduction in the stigma

associated with bankruptcy and the preparation for cross-border cases. Thus, Thailand joins the long list of nations

this decade that have modernized their bankruptcy laws.

</p><hr>

<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} On Feb. 12, Thailand's Senate passed a bill that would enable the government to establish a specialized bankruptcy court. The bill was scheduled to go to the lower House of Parliament for a vote. The legislative session ends March 22. <a href="#1a">Return to article</a>