Recently, I met with one of my private equity and family office clients in Hong Kong. We were discussing among others investment into the property Thai commercial property market.
The discussion was about the GFC of 2008, and how they saw the impact on global economies in a way not like the great recession of the 1930’s, and how it impacted Thailand. They were concerned about the legal system and exit strategies for a proposed land deal to build a mixed use hotel/condominium in Phuket.
I was working in a law office at the time of the GFC namely carrying out property transactions, and establishing corporate structures for HNWI. I remember by comparison to the Asian financial crisis of 1997, the downturn had not impacted Thailand to the extant of the US and UK. Having learned many lessons from the past, the Thai government reformed the banking sector adopting conservative lending practices, developed cash driven property sector, a local bond market with an increase in domestic savings, making the country less dependent on foreign funds. In all, a significant difference from events preceding 1997.
In addition, the kingdom revamped its bankruptcy laws to establish a new bankruptcy court and introduced reorganization provisions for juristic persons similar to those of Chapter 11 of the US Bankruptcy Code. These amendments enabled an insolvent corporation to restructure its debts and trade out of its financial woes. Heralded as a success by legal scholars the number or reorganization cases reaching the new Bankruptcy Court peak in 2000 to 100 and the amount of debt being restructured grew to around 4 billion Thai Baht in the same year and continued this trend.
We agreed that insolvency and bankruptcy laws are an important development in modern day capitalism- a stabilizing economic force on the one hand, and the essential link between trade and investment aand arguably a key mechanism for averting a future crisis on the other.
With regard to property as with any commercial transaction, it instills confidence that the market is a safe investment and balances the interest and rights of creditors, debtors with equitable outcomes if something should go wrong. Among others, it ensures that liability will fall on those responsible for the company’s demise or it can be resurrected if project is deemed financially viable.
However as they as many foreign investor are not familiar with the Thai property sector before pursuing a deal, or a luxurious house or apartment do need to consider where they stand when a developer gets into trouble, or goes broke, the project stalls, or worse is facing failure. Particularly if the property has been mortgaged by a bank and construction has also been financed upfront by the buyer’s money.
Adding to the investor/s concern is the bottom line question, will they get their money back and more so if they live outside of Thailand. Or will they be liable in the event of a default. So then, what are the legal options available besides litigation-consumer protection or even dispute resolution measures? What happens if the developer runs away to another jurisdiction, can they be served process to appear in a Thai Court? Can a creditor buyer file a bankruptcy petition against the debtor developer? The answer is yes they can.
Directors Duties and Thai Bankruptcy Law
Without boring my clients with undue technical details, I explained that under section 1100 of the Commercial and Civil Code, the liabilities of a company director may be unlimited and terminates after the expiration of 2 years. They have a positive duty to conduct the affairs of the company with the diligence of a ‘careful business man’ and must vacate office if they become personally bankrupt or incapacitated. Furthermore bankruptcy procedures in Thailand for corporate and personal insolvency are governed by the amended 1940 Bankruptcy Act, the Act for the Establishment and Procedure for Bankruptcy Court, as amended; the Rules on Bankruptcy Cases; and the Civil Procedure Code-namely sections 1247 – 1273.
Presumption of Insolvency
Although bankruptcy is an involuntary act in Thailand, the creditor buyer has the onus to prove the developer company is insolvent and the debts are greater than the debtor’s assets. Under Thai law, any creditor owed more than Baht 2 million by a corporate debtor or more than Baht 1 million by an individual debtor may file a bankruptcy action against such debtor. In hearing a Bankruptcy action on petition by a creditor, the court must determine the factual matters to find debtor insolvent. If so, the court will order the debtor under absolute receivership. If not proved and the debtor furnishes evidence of their ability to pay in full, or if there are any other grounds to adjudicate the debtor as solvent, the court will dismiss the petition.
This said, the Bankruptcy Act provides a presumption of insolvency where the debtor has committed the following acts.
1) The debtor transfers assets or rights in management of his assets to others, for the benefit of all the debtor creditors within or outside Thailand.
2) The debtor transfers his assets dishonestly or with fraudulent intent within or outside Thailand.
3) The debtor transfers an asset or creates any right over such asset, which may be deemed a preferential transfer if the debtor were declared bankrupt within or outside Thailand.
4) The debtor delays payment in order to prevent a creditor from receiving payment by, (a) leaving Thailand and or remains outside Thailand; (b) removes his assets from the jurisdiction of the Court; or (c) consents to a judgment ordering payment of money which he does not pay; leaves the premises in which they have resided or hides him or herself in any premise, or absconds or leaves and closes the place of business.
5) The debtor’s assets have been attached under a writ of execution, or there are no more assets for which attachment is possible. (7) The debtor declares to the Court in any action that they cannot pay his debts. (8) The debtor informs any of his creditors that he cannot pay his debts. (9) The debtor receives demand letters from his creditors not less than twice, at intervals of not less than 30 days, and does not pay the debts.
In addition, once the creditor discovers that the debtor has committed any one of the aforementioned acts, the creditor buyer is then eligible to file a bankruptcy petition against the developer.
Avoiding Bankruptcy
If debtor wants to avoid being adjudged bankrupt or discharged from bankruptcy, they can make what is known as composition with creditors. Enshrined in the law, it enables debtors to come to a settlement for the satisfaction of his debts by repayment of all or part of the debts thereof.
In practice they may submit a proposed composition in writing to the receiver within seven days after the date of submitting an explanation of matters relating to their business affairs, or within such period the receiver prescribes. Following this, the receiver then convenes a meeting of the creditors to consider whether such proposal will be accepted. However, the acceptance is not binding on all creditors until the Court approves the composition. The Court can also approve a composition if the debtor offers security for repayment of an amount of at least one-quarter of the total unsecured debt for which creditors can claim repayment.
Our discussion went well and these savvy investors understood my message, that the Thai systems works as long as your investment ticks all the legal boxes. This said there is no substitute for rigorous due diligence on the deal, investigations of the developers, legal and financial structures.
In the next part, I will discuss out of court company restructuring and elaborate on reorganization plans. Furthermore if all fails how to serve documents compelling a debtor company director who leaves Thailand to appear in a Thai court.