ASIAN DEVELOPMENT BANK

REGIONAL TECHNICAL ASSISTANCE

TA NO: 5795-REG

INSOLVENCY LAW REFORM

CASE STUDY FROM THAILAND

Punjaporn Kosolkitiwong
Dej-Udom & Associates Ltd

CaseBackground

In July 1997, the Board of X Company ("Company") commissioned an investigation into the affairs of the Company and accounting irregularities were discovered which are now the subject of criminal charges against a number of former employees. The financial position of the Company as determined following the investigation disclosed significant irregularities. Based on the investigation, it is alleged that the managing director and some former employees misappropriated approximately Baht 18,000 million from the Company. Following the investigation, the then CEO of the company resigned, and the financial creditors formed a Creditors Steering Committee ("CSC") to work with the company on a restructuring Plan. Uncertainty concerning the Company's future, lack of financial stability and the absence of necessary working capital over the following 12-month period adversely affected the Company's business.
On May 13, 1998, a request for business reorganization was filed with the Civil Court by six banks that are members of the CSC with the support of the Company.
On June 4, 1998 the Civil Court ordered accepting the business reorganization of the Company and appointed company W (an accounting firm) to be the Planner of Company. The role of the Planner is to prepare a reorganization Plan of the Company to be presented to creditors and the Court for their review and approval.
Apart from the Plan, the Planner appointed a representative to lodge a complaint against the managing director et al with the Economic Crime Investigation Office on grounds of misappropriation and fraud. The investigator found that the accountant used false documents to withdraw money for the directors' benefit. For example, the price specified in Purchase Agreements was higher than the actual purchase price. In addition, the Planner filed a case with the Central Labor Court against the directors demanding the return of the money they misappropriated from the Company. Prior to such filing, the Planner filed a petition with the Civil Court seeking permission to file the case with the Central Labor Court against the fraudulent directors. The Court ruled that filing the latter case would be a form of debt collection which is within the normal business and even the duty of the Planner under Section 90/25. The Planner was therefore entitled to file the case without specific permission from the Civil Court.
Moreover, the Planner used the Civil Court's ruling as a basis for filing a civil case against an auditing firm and a certain auditors, alleging that because of their unprofessional auditing, a misleading financial position was created causing damage and loss to shareholders and the Company. The lawyers representing the auditing firm/auditors defended the case on the grounds that the Planner had no right to file the case, as the Civil Court did not authorize the Planner to extend to the filing of cases against what are in effect, third parties. Hence, the filing of the case is not within the meaning of the normal business of the Planner, and the Planner has no authority to do act without the permission of the court and creditors of the Company under Section 90/25 .
On November 5, 1998, the Official Receiver called for a creditors' meeting to consider the Plan prepared by the Planner. There were 1,137 creditors who attended the meeting and were entitled to vote. The major creditors were Krung Thai Bank Plc, Bangkok Bank Plc and Union Bank Plc. At the time of voting, 1,106 creditors representing debt of Baht 6,647,237,190.82 voted for the Plan but 20 creditors representing debt of Baht 6,330,046,015.32 objected and asked the Planner to revise the Plan. The Planner did not agree to revise the Plan. The creditors' meeting therefore terminated the Planner's appointment under Sections 90/46 , 90/51 and 6 of the Bankruptcy Act, B.E.2541 as the vote did not meet with requirements of a special resolution.

1. Section 90/25 - Subject to Section 90/42 and Section 90/64, upon appointment of the Planner made by the court, the power and duties in managing the business and asset of the debtor and all legal rights of the debtor's shareholders, except the right to receive dividend, shall be vested to the Planner, and the provision of Section 90/12(9) shall apply to the Planner mutatis mutandis.
2. Section 90/46 - The resolution passed at the creditors' meeting approving the Plan must be a special resolution.
3. Section 90/51 - In the event that the Planner refuses to revise the Plan, either in part or in full, pursuant to the resolution passed at the creditors' meeting, if the creditors' meeting fails to pass a special resolution approving the Plan formulated by the Planner, the receiver shall ask the creditors' meeting if they want to appoint a new Planner. If the creditors' meeting passes a resolution to appoint a new Planner, the meeting shall discuss the selection of a new Planner that day. Any creditor present at the meeting or the debtor has the right to propose the name of a new Planner with a written consent of such person. If no creditor proposes the name of the new Planner, the receiver shall adjourn the meeting in order to select a new Planner within a period of not less than 3 days but not more than 7 days. The provisions concerning notification of the new meeting pursuant to paragraph of Section 44 shall apply mutatis mutandis.
4. Section 6 - "Special Resolution" means a resolution by a majority of creditors whose claims equal three quarters of the total claims of creditors present at the creditors' meeting in person or by proxy, and voting on such resolution.
5. Section 90/1 - "Plan administrator" refers to a person who manages the business operations and assets of the debtor pursuant to the operations reorganization plan.

A new Planner was appointed at the next creditors' meeting. The new Planner presented a revised Plan to the creditors at the meeting. The revised Plan was accepted by creditors with claims sufficient to meet the special resolution requirement. The new Planner was also appointed to be the Plan Administrator of the Company [Section 90/1]. Some minority creditors did not agree to appoint the new Planner, as it was obvious that the new Planner was an affiliate company of the previous Planner. They testified to the Court that the new Planner' s name was similar to the previous Planner's name and the directors of the new Planner were almost the same as the former Planner. The Court decided that it was a different entity and ordered held that the appointment of the new Planner was legal. The new Planner then ratified all the previous Planner's actions. The new Planner also submitted a ratification and appointment letter to the Court in the civil case against the auditing firm/auditors, who opposed such ratification.

Issues:
1. The Cause of Insolvency of the Company
2. Corporate Governance
3. The Role of the Auditor
4. The Authority and Duty of the Planner and Plan Administrator
5. The Involvement of Creditors

1. The Cause of Insolvency of the Company

X is a large public company with substantial income. Although much of the Company's debt is denominated in foreign currency, so too is its income. Hence, the sharp depreciation of the Baht from mid-1997 and concomitant economic recession were not the primary causative factors of the Company's insolvency. If even part of the alleged fraudulent and dishonest conduct of the Company's directors and employees is correct, it is reasonable to surmise that the Company would not be insolvent were it not for such conduct.

2. Corporate Governance

X is administered by a group of directors against whom very serious allegations of misconduct have been raised. Notwithstanding the seriousness of the allegations, the directors remain at large and most are still involved in various business activities. Some of the directors are from major creditor banks. The Managing Director's whereabouts are currently unknown, but his legal representatives have appeared on his behalf at the hearings for the delivery of the Plaintiff's evidence. The apparent scale and duration of the misconduct is evidence of real standards of corporate governance as opposed to the legal standards and requirements. Enforcement rather than legislative change is the key issue. One aspect of enforcement is shareholder apathy in pursing irregularities and exercising their powers to remove directors and change the company's policy and direction. There are a substantial number of "proxy" shareholders, who hold shares on behalf of foreigners in order to comply with foreign ownership laws, which is one explanation for this shareholder apathy.

3. The Role of the Auditor

Similarly, serious allegations have been raised concerning the role of X's auditors. The filing of the civil case by the Planner against the auditors is unprecedented. If judgment is awarded in favor of the Planner, it will have a material effect on accounting standards and the exercise of the duties of the shareholders. The old Planner in the reorganization case is itself an accounting/auditing firm. The new Planner is directly linked to the old Planner, even though it is a separate legal entity. Hence, speculation as to the motivation for filing the case has surfaced. However, if the end result is accountability for negligent and/or fraudulent auditors, not only will justice have been served, it will create a much needed precedent.

4. The Authority and Duty of the Planner and Plan Administrator

The X case has raised interesting issues concerning the authority and duty of the Planner. If there is jurisdictional acceptance by the Civil Court of Planner's right to pursue the claim against the auditors, it will be a very broad interpretation of the statutory powers of the Planner under the Bankruptcy Act. It is noteworthy that the amounts claimed in both cases against the directors and auditors is the same, and awards would mean "double judgements". The Planner has taken a robust approach in the exercise of its authority. While there is no prohibition under the Bankruptcy Act of the same entity being appointed as both Planner and Plan Administrator, arguably such an appointment does not accord with what was envisaged by the legislators as the involvement of separate entities in the respective roles.

5. The Involvement of Creditors

Creditors play a pre-eminent role in the reorganization process under Section 90 of the Bankruptcy Act No.4, as opposed to shareholders. The bottom line of any proposed Plan is that it must gain the support of creditors representing at least 75% of total creditor claims at the time of voting. This is not an easy task when there are 1,137 creditors and the Planner's/Company's success in soliciting this requisite level of support is an accomplishment in itself. Whether the Plan can be successfully implemented remains to be seen. The exercise of the creditors right to reject the Plan, and the refusal of the Planner to amend the Plan, leading to the termination of the Planner's appointment, are curious given the subsequent de facto reappointment of the Planner under a new corporate guise. An explanation lies in the mandatory requirements under Section 90/51 of the Bankruptcy Act and the time required to negotiate acceptable amendments to the Plan.