Thailand is currently facing challenges as a result of a global economy under pressure from the COVID-19 pandemic, leading numerous companies to struggle with insolvency. Some companies will be facing this stress in multiple jurisdictions with current travel restrictions hindering their ability to deal with any resultant crisis in person. Even companies previously thought “too big to fail” face a position where their liabilities exceed their assets, rendering them technically insolvent which poses a threat to their intellectual property, goods, assets, claims, and employees around the world. Stakeholders such as administrators, creditors, company executives, and directors must therefore consider how to deal with insolvency proceedings across multiple jurisdictions.
An insolvent corporation may have one primary insolvency proceeding which can either be in the jurisdiction where the company was originally incorporated or one with more robust insolvency laws, such as those of an EU member state or the United States. Alternatively, the corporation may seek recognition from its primary jurisdiction while simultaneously pursuing the cooperation of courts in other jurisdictions. This is the philosophy behind the United Nations Commission on International Trade Law’s (“UNCITRAL”) Model Law on Cross-Border Insolvency (also known as the “Model Law”), which has been designed to facilitate cross-border insolvency proceedings.
The UNCITRAL approach specifies that national courts should administer corporate insolvency in a way that allows international cooperation or mutual recognition of legislative, executive, and judicial acts.[1] The UNCITRAL approach suggests that the court handling the main proceedings in the corporation’s primary jurisdiction ought to cooperate with courts in other jurisdictions that are also dealing with the corporation’s insolvency proceedings.
Thailand’s current insolvency laws and practices
While the UNICTRAL model law has been adopted in many jurisdictions, Thailand has not yet agreed to this model.
With major international insolvencies in Thailand such as that of Thai Airways, the lack of universal cross-border insolvency regulations are challenging for foreign creditors. According to the Bangkok Post, the Thai government is aware of this issue and is making efforts to help insolvent corporations navigate regulatory difficulties ahead of any planned rehabilitation.[2], In the case of Thai Airways, plans have been announced by Thailand’s Ministry of Foreign Affairs to notify authorities in jurisdictions where Thai Airways operates about the carrier’s rehabilitation plans to prevent its aircraft from being impounded by overseas creditors. This unprecedented move may be an indication that Thailand is starting to embrace a more universalist approach to cross-border insolvencies.
Until Thailand takes steps to amend its current legislation, regulations surrounding bankruptcy and insolvency continue to be governed by The Bankruptcy Act 2483 B.E. (1940) and its corresponding amendments – the most recent being No. 10 dated 2561 B.E. (2018).
Under Section 90/3 of the Bankruptcy Act No. 8, business rehabilitation in Thailand is invoked when the creditor(s) or authorized government agencies file a petition to the Central Bankruptcy Court.[3] Sometime after the petition has been submitted, the Court will arrange a preliminary hearing to consider two issues: (i) whether a debtor should be allowed to pursue a business rehabilitation, and (ii) to appoint a ‘Plan Preparer’ (“Planner”) who will develop the debtor’s rehabilitation plan. Creditors who oppose a debtor’s application for rehabilitation may challenge the petition up to three days before the preliminary hearing on the grounds that the debts declared by the debtor are not legitimate or that the petition for rehabilitation was filed in bad faith.
The rehabilitation plan developed by the Planner must subsequently be approved by a majority of creditors collectively holding no less than two-thirds of the total debt of the creditors present at the meeting, which must be over half of the company’s total debt.
Once the court issues an order for rehabilitation, creditors are required to notify the officer about their debt within a month after the Planner has been appointed and published in the Royal Thai Government Gazette. This is a very ambitious schedule for foreign creditors particularly since all documents, including the debt repayment application, must be completed in Thai. Supporting documents in any other language must be translated by an authorized translator, and debt repayment applications made outside Thailand must be notarized. Thai regulations, as they currently stand, allow no concessions for foreign creditors.
Protections via ‘automatic stay’
A key element of Thailand’s approach to insolvency is the concept of an ‘automatic stay’ which is effectively an injunction that protects debtors from legal actions, including the seizure of assets, taken against them by creditors. Modeled after Chapter 11 proceedings in the United States, an automatic stay is used to allow the debtor to continue running its business while the rehabilitation process is taking place. Recently, Thai Airways was granted an automatic stay on 27 May 2020 by the Central Bankruptcy Court to prevent creditors from seizing aircraft so that the carrier can continue to offer flights, earn revenue, and repay their creditors.
Creditors are also protected during this period by an automatic hold upon the assets of the debtor, whereby substantial restrictions are placed on the debtors’ ability to dispose of, distribute, or transfer its assets. This automatic hold also limits a debtor’s ability to enter into lease arrangements, repay existing debts, incur new debts, and undertake any action affecting the debtor’s property unless the court deems such action necessary to continue business operations. The application of the “Absolute Priority” rule is also designed to stop certain creditors from being favored over other creditors. Those that violate these restrictions will be subject to criminal penalties.
Ultimately, the Court holds considerable power over these injunctions and has the ultimate authority to grant exceptions. Likewise, they also have the authority to void bilateral agreements between a debtor and creditor that are contrary to the terms of the rehabilitation plan and associated injunctions. This gives the court discretion over what agreements need to be honored and which are to be declared null and void.
Prospects for cross-border insolvency proceedings in Thailand
Before the current global economic recession, the Thai government showed little interest in introducing or updating legislation to reflect Thailand’s position as a leading foreign investment destination in Southeast Asia and to better facilitate cross-border insolvency proceedings. This has led to difficulties in pursuing assets in Thailand, particularly since judgments made by foreign bankruptcy courts are not recognized by the courts of Thailand.
This territorial approach by the Thai Bankruptcy Court imposes limitations on businesses in Thailand not only in terms of resolving international insolvencies but also in maintaining investor confidence through legal certainty and minimizing transaction costs. In the example of Thai Airways, on top of pursuing restructuring proceedings through the Thai Courts, Thai Airways and their representatives also need to start proceedings in jurisdictions where their creditors reside to extend the bankruptcy protection that they have been granted in Thailand. This disjointed approach add levels of complexity for foreign creditors and incurs additional transaction costs for these proceedings. Further, as Thailand follows the civil law (codified law) system, each case stands alone and is contingent on the judge’s interpretation for each case.
A classic example of the difficulties surrounding multi-jurisdictional bankruptcies was that of Lehman Brothers Holding Inc. which filed for Chapter 11 bankruptcy proceedings in the United States in 2008 following the subprime mortgage crisis. This was the largest of its kind in United States history involving over USD 600 billion in assets. Having over 7,000 legal entities in 40 countries,[5] the filing initiated by the group resulted in more than 80 bankruptcy proceedings around the world, many of which remain unresolved. This can be attributed to the lack of legislation that dealt with group insolvencies in multiple jurisdictions – a gap that has been identified and addressed by UNCITRAL’s Model Law.
Another case worth examining is the bankruptcy proceedings of Japan Airlines in 2010. Though Japanese courts had only partially implemented the UNCITRAL Model Law when the Japanese Cross Border Law was introduced in 2000 (specifically those concerning the recognition of main proceedings in foreign jurisdictions, stays on creditor action, and the administration of assets in Japan for distribution), the fact that foreign creditors were afforded the same rights as local creditors provided security over the former’s assets. Further, by approaching Japan Airlines’ proceedings as a ‘collective action’, other relevant jurisdictions that had implemented the Model Law recognized the Japanese proceedings, giving the airline access to stays on creditor action, the realization of local assets, and deferrals on asset transfers (albeit with certain reservations).
While the UNCITRAL Model Law may assist in addressing the shortcomings of Thailand’s bankruptcy regulations, implementation is a long way off. One potential issue is that Thailand would need to enter into bilateral or multilateral agreements to recognize judgments made in other jurisdictions. Another probable challenge would be political resistance in recognizing and enforcing judgments made in foreign courts which could be perceived as ceding control and sovereignty away from Thai courts.
Conclusion
While Thai bankruptcy regulations follow some of the basic tenets of international insolvency and restructuring, it falls short of addressing the complexities of cross-border proceedings. The Thai Bankruptcy Act’s focus on domestic creditors raises the question on how foreign creditors will be able to secure their assets in Thailand given that the Thai Act gives no specific guidance on cross-border insolvency proceedings, regardless of whether or not Thailand is the center of main interests (“COMI”).
Thailand needs to pursue mechanisms that make cross-border proceedings easier while adopting new cross-border regulations that involve recognizing judgments made in foreign jurisdictions. Distributing Thailand-based assets to foreign creditors will also be met with challenges under other laws. As mentioned above, the Thai government has expressed its willingness to address the complexities of cross-border insolvency proceedings in cases like Thai Airways, but the details remain to be seen. It will also be interesting to see the long-term effects of the possible changes on investor confidence.
[1] “Is there a principle of Modified Universality in Insolvency in the Cayman Islands?” Chancery Bar Association, published 2015.
[2] “More help for Thai Airways,” Bangkok Post (published 5 June 2020), (available at https://www.bangkokpost.com/thailand/general/1929496/more-help-for-thai-airways).
[3] Section 90/3 Bankruptcy Act No. 8.
[5] Lehman Brothers press release 26 May 2009, retrieved from http://dm.epiq11.com/misc/LBHI/Document/GetDocument/1315906.
