20 May

Asiamoney

May, 2000

HEADLINE: Debt restructuring regimes in Thailand

The de facto devaluation of the Thai baht on July 2, 1997, led to numerous corporate debt defaults, for which the Thai legislative or regulatory system was inadequate. Restructuring has since then proceeded under 3 general regimes: 1. CDRAC, 2. Bankruptcy Act, and 3. ad hoc.

BODY: The de facto devaluation of the Thai baht on July 2, 1997, led to numerous corporate debt defaults, for which the Thai legislative or regulatory system was inadequate. Restructuring has since then proceeded under three general regimes:

*CDRAC. The Bank of Thailand (BoT) issued Regulations for Debt Restructuring in June 1998, and established the Corporate Debt Restructuring Advisory Committee (CDRAC). This was followed by the Framework for Corporate Debt Restructuring, an Inter-Creditor Agreement and a Debtor-Creditor Agreement.

*Bankruptcy Act. Amendments No. 4 and No. 5 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 above two regimes. CDRAC contractual regime

1. CDRAC CDRAC determines policy to promote negotiation of debt restructuring between the private sector and financial institutions and administers generally such negotiations. It may seek cooperation and authority from the BoT

2. Framework In August 1998, CDRAC and the Thai Board ofTrade, the Federation of Thai Industries, the Thai Bankers' Association, the Association of Finance Companies and the Foreign Banks' Association approved the framework for non-judicial debt restructurings. Important principles included standstill and other covenants of creditors and debtors. These undertakings cover 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 similarly specified. In addition, the framework established a time schedule.

3. Inter-creditor and debtor-creditor agreements

On March 19, 1999, 63 Thai and foreign financial institutions signed the Inter-Creditor Agreement on Restructure Plan Votes and Executive Decision Panel Procedures (ICA). This agreewent established the basis on which financial institutions enter into a Debtor-Creditor Agreement on Debt Restructuring Process

Inter-Creditor Agreement

The ICA limits creditor participants to financial institutions. Thus trade and other creditors cannot formally participate. Also, potential debtors are limited to the 667 corporate entities that originally were listed with CDRAC, and such other corporate debtors as CDRAC were subsequently accepted. The agreement sets forth a process to formulate a restructuring plan and to obtain 'sufficient plan approval.

Debtor-Creditor Agreement

The DCA binds all creditors which adhere to the ICA and the debtors which adhere to the DCA. Thus only financial institutions and their debts are covered by the DCA. It also provides for the appointment ofa steering committee, for the debtor to provide information, and for the debtor not to take certain action without creditor approval.

Bankruptcy Act regime

1. 1998 and 1999 amendments

In April 1998 Bankruptcy Act Amendment No. 4 established a judicial process for reorganization of debtors. It also included 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 ofa creditors' committee to oversee plan administration. Uncertainty over judicial administration of Chapter 3I1 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 disfavoured the use of this alternative.

April 1999 Bankruptcy Act Amendment No. 5

New money

Creditors can 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 removed a substantial barrier, due to the opposite treatment of such advances in the past.

Creditor classes and voting

Sections 90/42, 90/42 (his), 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 (eg, 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 specifies the creditors that 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).

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.

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 are not met, the court may still approve the plan. However, the court's prior discretion to reject a plan has been reduced.

Rejection of contracts

The planner can refuse to accept a debtor's assets or rights under agreements if such assets or rights carry obligations greater than the benefits that may be derived. 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.

2. New Bankruptcy Court The Act on Establishment ofand Procedure for Bankruptcy Court of April 1999 established the Bankruptcy Court. The court opened on June 18, 1999, and now has jurisdiction over all bankruptcy cases. Appeals on reorganization cases are made directly to the Supreme Court (instead of first to the Court of Appeals).

Ad hoc arrangements and other alternatives

Informal contract negotiations between creditor groups and their debtors have often been thwarted by a variety of factors, including flong enforcement procedures. Thus, creditors have been reluctant to pursue debtors in the courts. Recent developments should, however, facilitate the enforcement of a creditor's claims against its debtor.These include the establishment ofthe Intellectual Property and International Trade Court in 1997 and amendments to the Civil Procedure Code in 1999.

Comparison of CDRAC, Bankruptcy Act and ad hoc elements

The contractual framework relates only to financial institutions. Such creditors may opt out of the process only if the debtor's financial institution debt exceeds Btl billion 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 90/113 and 90/14. For ad hoc procedures, consensus on a restructuring arrangement contractually binds only the agreeing creditors and their debtor. Under the CDRAC regime, 'sufficient plan approval' requires a 'special resolution' under section 6 of the Bankruptcy Act (see above).

The CDRAC regime and the Chapter 311 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.