Information on Secured Transactions

ASIAN DEVELOPMENT BANK

REGIONAL TECHNICAL ASSISTANCE

TA NO: 5795-REG

INSOLVENCY LAW REFORM

SECURED TRANSACTIONS

THAILAND

Punjaporn Kosolkitiwong
Dej-Udom & Associates Ltd

· Creation and Registration of Secured Transactions

This is not where the main problems lie in Thailand.
While perhaps an over-emphasis is placed upon completion of registration as a prerequisite for validity of secured transactions, the registration systems in place are relatively efficient.
Lending on security of land is widespread. The land title system does allow for some ambiguity over title, but has not acted as much of a fetter upon lending.
The taking of enforceable security is limited to the extent that ownership of such security is limited by restrictions on foreign ownership. As discussed elsewhere, there are still significant restrictions on foreign ownership and investment in Thailand.
Thai law does not currently recognise floating charges, which is a deficiency.

· Enforcement

The laws regarding enforcement of secured transactions have come under much criticism in recent years, in particular the foreclosure law. Limiting foreclosure to cases where the value of the property is less than the mortgage, and in particular, where interest has not been paid by the debtor for five years, is a severe and unnecessary limitation which self-evidently acts in the debtor's favor. It is therefore unsurprising that sale by public auction is the most common method of enforcement for mortgages, although this is an expensive and slow process. It is also the only permissible method of enforcement for pledges, another unnecessary restriction.
Enforcement in Thailand requires prior court order/approval, which is time-consuming and costly and should not always be required where there is a clear right to enforce. "Self-enforcement" is not recognized. This would be less of an issue if the courts proceeded expeditiously. Most courts are "overloaded" with cases, especially since the economic recession. In addition, it is the practice in Thailand only to allocate one or two days per month for the substantive hearing of cases. Big cases can therefore take years to complete, and the scope for debtor delay is considerable.

· Insolvency & Secured Creditor Interests

Where a debtor is the subject of Article 90 proceedings, an automatic stay on enforcement is placed upon unsecured and secured creditors alike. In addition, no secured creditor may enforce payment of debt against security unless otherwise approved by the Court with whom the petition for business rehabilitation is filed. Additionally, assets in the possession of the debtor that are material to the debtor's business operation, may not be repossessed by the owner. This may be viewed as overly harsh on secured creditors. The only option is to participate in the reorganization proceeding.
A recent amendment to the Bankruptcy Act has classified the groups of creditors as follows:-(Section 90/42 bis)

1. Each secured creditors whose debt is not less than fifteen per cent of total repayment of debts for business reorganization shall be set in each group.
2. Secured creditor who has not been grouped under (1) shall be set in one group
3. Unsecured creditors may be set in many groups. The unsecured creditors who have the same claim or benefit or likewise shall be in the same group.
4. The creditors under Section 130 ter shall be in one group.

The rights of creditors in the same group are equally treated unless the creditor receives disadvantaged treatment in such group accepts such treatment by giving a written consent.
Any creditor who believes that the grouping of creditors is not in accordance with these provisions may submit an application to the court within 7 days from the date of knowledge of such grouping. The court may then issue an order for re-grouping. The order of the court is final.

Emergency Financing for Insolvent Company

Before the introduction of the reorganization provisions of Article 90 in April 1998, a creditor allowed a debtor to incur debt in the knowledge that the debtor was insolvent, was not be entitled to receive payment of debt in a bankruptcy case. This understandably had the effect that no financial institutions or private enterprises agreed to grant financial aid to a debtor facing temporary financial liquidity problem.
With the passage of Amendment No.4 to the Bankruptcy Act and the introduction of the Article 90 reorganization provisions, the above rule was relaxed in respect of debtors undergoing reorganization, but did not extend to informal, out-of-court workouts. Amendment No. 5 addressed that issue in Section 94(2)
Section 94(2) provides that a creditor may not file a claim in the bankruptcy of the debtor in respect of a debt which the creditor allowed the debtor to create knowing that the debtor was insolvent at the time, is amended to permit a claim to be filed by a creditor in these circumstances provided it is created for the purpose of enabling the debtor's business to continue.