Thailand: Corporate And Debt Restructuring In Thailand

Last Updated: 5 June 2001
Article by Cynthia Pornavalai

Sparked by the devaluation of the Thai Baht in July 1997, Thailand as well as its neighboring Asian countries are presently experiencing one of the worst economic recessions in their histories. Companies struggling to survive are unable to meet their debt obligations, while banks and other financial institutions are experiencing historical levels of non-performing loans. Clearly, the need for corporate restructuring amidst such a scenario is imperative. Thai legislators have been quick to respond to the need by enacting, among other economic laws, the Amendment to the Bankruptcy Act (Chapter 3/1) in 1998 and 1999. Said law provides the legal regime for a court-controlled corporate debt restructuring.

In addition to the above legislation, the Bank of Thailand ("BOT"), in cooperation with the Thai Bankers' Association, the Foreign Banks' Association, the Board of Trade, the Federation of Thai Industries, and the Association of Finance Companies, took the initiative in formulating a framework for an out-of-court corporate debt restructuring. The framework was signed by the aforementioned organizations in 1998. Popularly known as the Bangkok Approach, it is a non-binding set of guidelines on debt restructuring based on the London Approach and the HKMA Guidelines.

Recently, the BOT, together with local financial institutions, took further initiative in encouraging corporate debt restructuring by formulating a binding framework in the form of Debtor-Creditor and Inter-Creditor Agreements. These agreements were signed by sixty-five local and foreign financial institutions. Debtors as well as other financial companies that were not among the original signatories can become parties to these agreements by signing the Accession Agreements.

The following four articles examine these court-supervised and out-of-court frameworks for corporate reorganization in Thailand.

  • Bankruptcy Act Amendment 1999
  • The Bangkok Approach
  • Debtor-Creditor Agreement
  • Inter-Creditor Agreement

Bankruptcy Act Amendment 1999

Probably one of the most controversial bills in recent Thai legal history, the Bankruptcy Act Amendment 1999 was finally passed by the parliament on March 17, 1999. The Act itself does not contain any revolutionary legal concept to merit the intense attention that it got from the lawmakers, the government, and the captive public. It just happened to be an economically sensitive law passed at a time of great economic upheaval in Thai society. The result is obviously a document which is a product of compromise. Nevertheless, the 1999 Amendment to the Bankruptcy Act is a step forward and could always be used as a basis for further legal development.

The 1999 Amendment to the Bankruptcy Act is merely a refinement of the new principles established in the 1998 Amendment. The 1998 Amendment first introduced to Thai law the concept of corporate restructuring similar to Chapter 11 of the US Bankruptcy Law and the English Administration Regime. Prior to the 1998 Amendment, Thai bankruptcy law only recognized the dissolution of legal status of a natural or juristic entity when it became unable to meet its financial obligations as stipulated by law. A legal process whereby a cash-strapped company with a viable business could be revived was non-existent.

Although it had been put on hold for over a decade, the 1998 Amendment was passed in haste, leaving several issues unanswered for future legislation. The 1999 Amendment attempted to fill in those gaps. The following are the principal issues that the 1999 Amendment was ordained to clarify.

Monetary Thresholds (Sec. 9)

There remains no change with respect to the presumption of insolvency. However, the monetary thresholds for adjudication of bankruptcy were raised to Baht 1 million from Baht 50,000 for natural persons, and Baht 2 million from Baht 500,000 for juristic persons (Sec. 9).

The petitioning creditor's deposit for costs was raised from Baht 1,000 to Baht 5,000 (Sec. 11), while the bankrupt's deposit when filing a motion for the discharge of bankruptcy was set at no more than Baht 5,000 (Sec. 68).

Capital Injection

Under the old law, money which a lender lent to a borrower knowing that said borrower was insolvent could not be claimed pursuant to Sec. 94 (2). Said Sec. 94 (2) has been amended to allow the claim of creditors who extended funds to companies undergoing restructuring.

New Voting Groups Of Creditors For Approval Of Plan (Sec. 90/42 bis)

The 1998 Amendment did not classify the creditors into groups for the purpose of determining their voting rights for approval of the Plan. This raised the issue of the restructuring plan being controlled by the creditors owed the majority of the debt. The 1999 Amendment addressed this issue by setting up the following classes of creditors:

  1. Secured creditors having secured debt of not less than 15% of the total debts;
  2. Other secured creditors not included above;
  3. Unsecured creditors;
  4. Preferred creditors (i.e. creditors under Sec. 130 bis).

For the approval of the Plan, each group of creditors enjoys equal rights. According to the new law, the Plan must have been approved by a special resolution of a meeting of either (a) each group of creditors, or (b) a group of creditors (other than those described in Sec. 90/46 bis below) owed at least 50% of the total debt (Sec. 90/46).

These voting rules also apply to revisions to the Plan (Sec. 90/51, 90/54), removal of Plan Administrator (Sec. 90/68), and appointment of creditors' committee for implementation of the Plan (Sec. 90/55).

There are three types of creditors that are excluded from the aforementioned classification and are deemed to have accepted the Plan (Sec. 90/46 bis). These are:

  1. Creditors to be repaid in full within 15 days of the Plan, such that the debtors will be deemed to have never been in default;
  2. Creditors who will receive payment under existing contracts; and
  3. Subordinated creditors (Sec. 130 bis).

Approval Of The Plan (Sec. 90/58)

The blanket court discretion with respect to the approval of the Plan under the 1998 Amendment has been replaced with more objective rules. Under the 1999 Amendment, the Court shall consider the following when approving the Plan:

  1. the Plan contains material elements required by law; and
  2. repayments under the Plan would be more than on a winding up.

Cancelable Transactions

There are three kinds of transactions which the Court may cancel or set aside in accordance with the law, viz.:

  1. undue preference (Sec. 115);
  2. transfer at below market value (Sec. 114); and
  3. fraudulent transactions (Sec. 237, Civil and Commercial Code).

Under the old law, acts done three months before and after the application for the adjudication of bankruptcy were deemed done for undue preference. Transfer of assets at below the market value is considered one year before and after application for bankruptcy. The prescription period for cancellation of fraudulent transactions is ten years under the Civil and Commercial Code.

Under the 1999 Amendment, a new dimension has been added to the presumption of undue preference. In addition to the three-month rule in general, a one-year rule is applied for "insiders of the debtor". The new law provides that if the advantaged creditor is an "insider of the debtor", the Court can order the revocation of the transfer done one year before and after the application for bankruptcy (Sec. 115). The definition of a "debtor's insider" is provided in detail in the amended Sec. 6 of the Act. It includes, among others, the directors, managers, partners, and shareholders owning more than 5% of the shares, as well as their spouses and minor children, and juristic persons wherein they hold more than 30% of the equity.

With respect to transactions at below the market value (Sec. 114), the new law makes the presumption against the debtor.

Cancellation Of Onerous Contracts (Sec. 90/41)

Under the new law, the Court is empowered to cancel any transfer of property or any act done three months before and after the filing of motion for business restructuring which gives undue preference to a certain creditor. The period is extended to one year if the advantaged creditor is a "debtor's insider."

The Plan Administrator is further authorized not to honor any properties or contractual rights of the debtor having encumbrance in excess of benefits which were entered within two months from the approval of the Plan.

Preferred Creditors (Sec. 130)

The new law clarifies the preferential rights of the employees in the distribution of assets among creditors. Employees are now entitled to receive all monies for work done for the debtor who was their employer in accordance with the labor laws at the same preferential level as that of taxes.

Subordinated creditors, meaning creditors who have the right to receive payment after the other creditors, are ranked last among the preferred creditors.

Baht Conversion Of Foreign Currency (Sec. 90/31)

The new law makes it clear that the conversion of foreign currency is considered only for purposes of calculating the debts for the casting of votes and not for repayment of the debts. The 1998 amendment was vaguely worded, causing concern with respect to the devaluation or overvaluation of the debt resulting from foreign exchange fluctuations.

Discharge From Bankruptcy

Under the old law, discharge from bankruptcy was possible only after ten years from the adjudication of bankruptcy. As a result of a compromise between the lower and the upper houses, this period was reduced to three years, provided no fraud or dishonesty was involved.

The Bangkok Approach: A Non-Binding Framework

The Framework for Corporate Debt Restructuring, popularly known as the Bangkok Approach, is a set of nineteen guidelines for corporate restructuring drafted and approved by the Board of Trade, the Thai Bankers' Association, the Association of Finance Companies, and the Foreign Banks' Association. Its objective is to set up a framework outside bankruptcy proceedings for the efficient restructuring of the corporate debt of viable entities for the benefit of creditors, debtors, employees, shareholders, and the Thai economy. It is non-binding and non-statutory and its general market acceptance is the basis of its existence. The guidelines may be amended or altered to serve the needs of the business and financial communities. Following is a short discussion of the nineteen principles contained therein.

Principle 1. "Any corporate debt restructuring should achieve a business, rather than just a financial restructuring to further the long-term viability of the Debtor."

This principle calls for a comprehensive, transparent, and achievable business plan which aims for the ongoing viability of the business. A prerequisite for determining the viability of a business is the appointment by the debtor of an accountant or other experts to undertake appropriate due diligence.

Principle 2. "Priority must be given to rehabilitate assets to performing status in full compliance with Bank of Thailand ("BOT") Regulations."

This principle refers to BOT Notifications 1837/2541 and 1838/2541 which set down the strategy that banks and financial institutions, respectively, can refer to when restructuring troubled debts. The Notifications essentially outline the rules for debt classification, loan loss provisioning after restructuring, and collateral valuation and appraisal. According to this second principle, financial restructuring must not be implemented by financial institutions merely to avoid debt classification or the maintenance of reserves or to evade income recognition rules according to the BOT Notification. Optional viable interest rates and payment schedules must be established, while debt-forgiveness or other non-traditional restructuring approach must be considered only as a last resort.

Principle 3. "Each stage of the corporate debt restructuring process must occur in a timely manner."

The Framework contains a suggested timetable for debt restructuring and establishes that a similar one be set out and met.

Principle 4. "From the first debtor-creditor meeting, if the debtor's management is providing full and accurate information on the agreed schedule and participating in all creditor committee meetings, creditors shall 'standstill' for a defined extendable period to allow informed decision to be made."

Standstill period may run for the lesser of 60 days or the time required to gather information and assess on a preliminary basis the commercial viability of the debtor. As the Framework is non-binding, any creditor may choose not to standstill and instead take action. However, said creditor must inform the lead bank of its intention.

On the creditor's side, standstill includes covenants against amendment of credit facility, taking of additional security, accelerating facilities, charging default interest, commencing collection in bankruptcy proceedings, and enforcing security except for set-off rights. Debtors, on the other hand, covenant not to incur expenses, dispose of any assets, lend money, enter into related parties transaction, create additional security, make any preferential payment, or enter into foreign exchange, swap or derivative transactions outside the ordinary course of its business.

Principle 5. "Both creditors and debtors must recognize the absolute necessity of active senior management involvement throughout the duration of the debt restructuring."

Principle 6. "A lead institution, and a designated individual within the lead institution, must be appointed early in the restructuring process to actively manage and coordinate the entire process according to defined objectives and deadlines."

Among the duties of a lead institution are liaising with advisors, resolving inter-creditor disputes, distribution of information, and the drawing up of an action plan and time frame for debt restructuring. A lead institution must have expertise, a working relationship with the debtor, and a substantial exposure to the debtor.

Principle 7. "In major multi-creditor cases, a steering committee representative of a broad range of creditor interests should be appointed."

Ideally, the steering committee should be a small group. None of its members has any authority to commit any creditor or the lead institution. It serves as both advisor and sounding board for the lead institution.

Principle 8. "Decisions should be made on complete and accurate information which has been independently verified to ensure transparency."

This principle sets down the duty of the debtor to provide information and answer questions when requested.

Principle 9. "In cases where accountants, attorneys, and professional advisors are to be appointed, such entities must have requisite local knowledge, expertise, and available dedicated resources."

These advisors are usually retained at the cost of the debtor. However, creditors may use independent advisors at their cost.

Principle 10. "While it is normal practice to request the debtor to assume all the costs of professional advisors, lead institutions, and creditors' committees, creditors have a direct economic interest and hence, a professional obligation to help control such costs."

Principle 11. "The Ministry of Finance ("MOF") and the BOT should be kept informed on the progress of all debt restructuring to aid the review and regulatory and supervisory framework and to facilitate corporate debt restructuring."

Principle 12. "The role of the Corporate Debt Restructuring Committee ("CDRAC")"

The CDRAC's role is to follow up developments in debt restructuring, review and implement policies, and act as an independent intermediary in the restructuring process in difficult cases.

Principle 13. "Creditors' existing rights must continue."

Secured creditors holding collateral properties that are necessary for the continued operation of the debtor's business should not be required to surrender such properties without adequate compensation. Those creditors holding non-essential assets may, however, independently negotiate with the debtor for voluntary liquidation of said assets.

Principle 14. "New credit extended during the restructuring process above existing exposures as of the standstill date on reasonable terms in order that the debtor may continue operations must receive priority status based on title-orientated security, inter-creditor agreements, or indemnities."

Principle 15. "Lenders should seek to lower their risk and hence their requisite returns, through an improved security package and profitability-based benefits rather than increased interest rates and imposition of restructuring fees."

Principle 16. "Debt trading is appropriate under certain conditions but the selling creditor has the professional obligation to ensure the buyer does not have a detrimental effect on the restructuring process."

The seller must inform the buyer of the most current status of the restructuring and that previously decided issues will not be reopened for further negotiations due to buyer's participation.

Principle 17. "Restructuring losses should be apportioned in an equitable manner which recognizes legal priorities between the parties involved."

The debtor is called upon to absorb losses while creditors are required to share losses among other creditors of similar status, pro rata to their existing exposure.

Principle 18. "Creditors retain the right to exercise independent commercial judgment and objectives but should carefully consider the impact of any action on the Thai economy, other creditors, and potentially viable debtors."

Principle 19. "Any of the principles on implementing policies contained in this framework can be waived, amended, or superseded in any particular restructuring with the consent of all participating creditors."

Debtor-Creditor Agreement On Debt Restructuring Process

Against the backdrop of the Bangkok Approach, the Debtor-Creditor Agreement sets out a binding process and timetable by which all multilateral restructurings are to be conducted. It aims to expedite and facilitate the procedure for restructuring plan approval by all creditors with debtor's participation. Recently signed on March 19, 1999, its term lasts until December 31, 2000. Thereafter, the parties may opt out of this Agreement. Two of its unique features are its forum for mediation and imposition of penalties on creditors that fail to vote for or against the plan. Following are the main provisions of the Debtor-Creditor Agreement.


The parties to the Debtor-Creditor Agreement are the corporate debtors listed in the list of troubled debt restructuring cases of the Corporate Debt Restructuring Advisory Committee ("CDRAC"), and the sixty-five financial institutions that signed this Agreement. Other debtors and financial institutions may become party by executing the Accession Agreement. The Bank of Thailand ("BOT") as well as the CDRAC acknowledged the Agreement.

Convening Of First Meeting Of Creditors

Either the creditors, debtor, or the CDRAC may call the First Meeting of Creditors by sending the required notice.

Lead Institution And Steering Committee

The Agreement requires the appointment of a Lead Institution at the First Meeting of Creditors. The Lead Institution must have the requisite experience in debt restructuring, a significant exposure to the debtor, as well as a professional working relationship with the management of the debtor. It is tasked to organize the restructuring process, lead negotiations, liaise with all the parties, help resolve inter-creditor issues, and distribute information among the creditors.

At the request of the Lead Institution or at least two creditors, all the creditors may vote to appoint a Steering Committee.

Provision And Confidentiality Of Information

The Agreement requires the timely provision by debtor of the required information, documents, and business plan. Moreover, the debtor's management must make itself available to answer questions when requested by the Lead Institution of the Steering Committee. All such information as well as the proceedings of restructuring must be kept in strict confidence.


The Agreement provides for the debtor to give "standstill negative covenants" in order to protect the participating creditors. Essentially, said negative covenants include the assumption of additional debts, making of new investments, disposing of assets, lending of money or making guarantee, and entering into related party, foreign exchange, swap or derivative transactions outside of its ordinary course of business. The debtor is further prohibited from making preferential payments and initiating any action against a creditor for remedy or enforcement of any right.

With respect to the covenant of the creditor, the Agreement stipulates the suspension by the creditor of default interest from the date of Debtor's Accession to the approval of the plan.


In order to facilitate the settlement of material issues arising between the debtor and any of the creditors, the debtor, together with the Lead Institution or the Steering Committee, may request the CDRAC to appoint a mediator from the list of mediators compiled by CDRAC and approved by the Association of Finance Companies, the Board of Trade, the Federation of Thai Industries, the Foreign Banks' Association, and the Thai Bankers' Association.

The Agreement provides a mechanism by which the appointed mediator may be challenged and replaced on grounds of lack of impartiality and independence.

Debt Trading

Any creditor may sell a portion or all of its credits to a third party, provided that such third party is duly informed of the current status of the workout and that previously decided issues are not subject to negotiations.

Voting On Proposed Plan; Implementation Of Approved Restructuring Plan

All creditors are required to vote for or against a proposed plan within the schedule set forth by the Agreement, failing which penalties are imposed on them (c.f. item #9 below). The creditors are further made to covenant to support the approved plan requiring them to vote in its favor at any creditors' meeting or court proceedings, including under Chapter 3/1 of the Bankruptcy Act.

Breach Of Agreement

Consequences of breach by the debtor of the terms and conditions of the Agreement include immediate termination upon receipt of notice, or without notice, upon the occurrence of three unremedied breaches or failure to execute Debtor's Accession. In any such event, the creditors agree to seek collection of debt through the court and/or immediate liquidation or reorganization of the debtor under Chapter 3/1 of the Bankruptcy Act.

Breach by the creditor of its duty to vote for or against the proposed plan according to the workout schedule will result in it being imposed fines of up to 10% of its claims, but not less than Baht 500,000. Breach of other covenants by the creditor will only subject it to a warning letter from the BOT.

Amendments To Framework

The Agreement provides for three additional clauses to the Restructuring Framework (Bangkok Approach). One is with respect to the management of the debtor. The amendment stipulates that the existing management should be retained. However, where feasible, creditors should be given the option to be represented on an equitable basis on the debtor's board of directors. The second amendment is with respect to the sale of assets. Any sale of assets must yield the most immediate commercial return. Such sale may be made to third parties, or special purpose vehicles established for the benefit of the creditors, such as asset management companies or property mutual funds. The third additional clause is related to debt-to-equity conversions in a workout. The amendment provides that a debt-to-equity conversion must always be considered as a "last resort" and should be used only where it results in greater than liquidation value for creditors.

Inter-Creditor Agreement

The Inter-Creditor Agreement was signed simultaneously with the Debtor-Creditor Agreement on March 19, 1999 by the same group of financial institutions party to said Debtor-Creditor Agreement. Chronologically, it comes after the Debtor-Creditor Agreement in the restructuring process. It covers the votes of creditors if and when the proposed restructuring plan is developed under the Debtor- Creditor Agreement.

The main provisions of the Inter-Creditor Agreement are as follows:

Voting On Proposed Plan And Plan Approval Levels

The creditors are required to cast their votes for or against the proposed plan within the stipulated time frame. If the proposed plan is not approved by special resolution (75% of the total claims) but more than 50% of the total claims or the number of voting creditors, CDRAC may appoint an Executive Decision Panel (see item #2 below) to approve or reject the proposed plan. However, if the proposed plan is not approved by at least 50% of the total credits of all voting creditors or at least 50% of the number of voting creditors, the creditors may enter into court action for collection of debt or file for bankruptcy or restructuring under the Bankruptcy Act.

Executive Decision Panel

This is composed of three executives appointed from three separate lists of executives proposed by each of the Thai Bankers' Association, the Foreign Banks' Association, and the Association of Finance Companies, approved by all such three associations and submitted to CDRAC. The decisions of the Executive Panel shall be binding and final on all the creditors. A creditor may, however, elect not to be bound by this decision or the Agreement as whole, if the debtor's total credits to all creditors of any kind exceed Baht one billion in principal obligations.

If the proposed plan is accepted by the Executive Decision Panel, all creditors, except those electing not to be bound, must support the approved plan in any future proceedings, including a court-approved plan under the Bankruptcy Act. On the other hand, if the said plan, or a subsequent modification of it by creditors owed 26% of the claim, is rejected by the Executive Decision Panel, the creditors may enter into court action for collection of debt or file for bankruptcy or restructuring under Chapter 3/1 of the Bankruptcy Act.

Enforcement Mechanisms

The Agreement imposes penalties of up to 50% of the creditor's claim in the workout for a material breach of the Inter-Creditor Agreement by a creditor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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