NEW PROTECTION FOR THAI GUARANTORS AND MORTGAGORS 11 FEBRUARY 2015

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1 BRIEFING NEW PROTECTION FOR THAI GUARANTORS AND MORTGAGORS 11 FEBRUARY 2015 AMENDMENTS TO THE THAI CIVIL AND COMMERCIAL CODE COME INTO EFFECT TODAY. THESE CHANGES AFFECT THE WAYS GUARANTEES AND MORTGAGES CAN BE GIVEN. BANKS AND OTHER LENDERS NOW NEED TO REVISE THEIR STANDARD TERMS AND CONDITIONS FOR GUARANTEES AND MORTGAGES TO CONFORM TO THE NEW LAWS. Amendments to the Thai Civil and Commercial Code ( CCC ) which change the way guarantees and mortgages can be given come into effect today despite vocal opposition by major Thai banks. THE NEW LAWS ARE IN FAVOUR OF GUARANTORS AND MORTGAGORS AND WILL SUBSTANTIALLY REDUCE THE AMOUNT OF RISK LENDERS CAN SHIFT TO THIRD PARTIES PROVIDING SECURITY TO THE LENDER. The new laws are in favour of guarantors and mortgagors and will substantially reduce the amount of risk lenders can shift to third parties providing security to the lender. The new laws apply to personal guarantors and mortgagors as well as corporate guarantors and mortgagors. Bank lenders are affected as well as non-bank lenders. The new laws specify a number of mandatory provisions which the parties cannot contract out of. Guarantees and mortgages entered into which differ from the mandatory provisions will be void: the new laws do not limit the invalidity to the offending provision and the entire contract of mortgage or guarantee will be void, not just the offending provision. Failure by a lender to comply with the new provisions can limit the amount of costs and expenses recoverable by the lender. Banks and other lenders now need to revise their standard terms and conditions for guarantees and mortgages to conform to the new laws lenders using old

2 1 Watson Farley & Williams BANK LENDERS ARE AFFECTED AS WELL AS NON-BANK LENDERS. standard forms which do not conform to the new laws will reap a large number of void guarantees and mortgages. The new laws do not have the effect of invalidating guarantees or mortgages which have been entered into prior to February 2015, but failing to take into account the new enforcement requirements could result in lenders losing their entitlement to interest. Guarantees It is a common feature of the Thai banking industry for banks and other lenders to require a guarantee before extending loan finance to a borrower and many guarantees are drafted on terms which are highly favourable to the lenders. The new laws require lenders to remove certain terms from guarantees to prevent the guarantees from being void or unenforceable. Examples of some of these terms are set out below. LENDERS USING OLD STANDARD FORMS WHICH DO NOT CONFORM TO THE NEW LAWS WILL REAP A LARGE NUMBER OF VOID GUARANTEES AND MORTGAGES. EFFECTIVELY PROHIBITING ALL-MONEY GUARANTEES. Often lenders require all money guarantees which secure all amounts which are owed at any time by the borrower with the result that the guarantor could become liable for new loans taken out by the borrower after the date of the guarantee and the obligations of the guarantor could continue for an indefinite period. The new laws require guarantees to clearly specify the duration and amount of the guaranteed obligation and also to specify the main agreement which is being guaranteed: the guarantor s liability is now limited to the obligations specified in the guarantee, effectively prohibiting all-money guarantees. One exception to the requirement to specify duration is when the guarantee secures amounts payable under a series of transactions, in which case the current law entitles the guarantor to disclaim liability for future transactions by giving notice to the lender. Lenders often require guarantors to agree not to issue such notice, however under the new laws a guarantee is void if it seeks to prevent the guarantor from exercising its statutory right to disclaim liability for future transactions. This effectively prevents a lender from obtaining an enforceable guarantee for a series of future transactions. When borrowers experience difficulty repaying, lenders will often reschedule loan payments by extending the time in which the borrower can repay the loan. Guarantors are often asked to provide consent in advance to any such loan rescheduling however under the new laws this will no longer be effective. If a lender grants an extension to the borrower without obtaining the agreement of guarantor at the time of the extension, the guarantee will be discharged. If a borrower is in default of its payment obligations, the new laws change the way in which a lender can enforce a guarantee and will require the lender to notify the guarantor of the default within 60 days. Lenders failing to comply with the notification requirement lose their rights to recover interest and costs & expenses against the guarantor incurred after the 60 day notice period. Guarantors are also frequently asked to be jointly liable with the borrower as this entitles the lender to claim against the guarantor without first having to commence proceedings against the borrower. The new laws prevent a lender from requiring a guarantor to be jointly liable with the borrower and any guarantee contravening this requirement is void.

3 NEW PROTECTION FOR THAI GUARANTORS AND MORTGAGORS 2 Mortgages Lenders often require a third party to grant a mortgage over its assets if the borrower has insufficient assets to provide security and it is common practice to require a mortgagor to also provide a guarantee in addition to the mortgage. LENDERS CAN NO LONGER REQUIRE A MORTGAGOR TO PROVIDE A GUARANTEE. Lenders can no longer require a mortgagor to provide a guarantee: lenders must choose only one and any attempt to require both will result in the guarantee being void even if the guarantee is in a separate agreement from the mortgage. The new laws change the way in which a lender can enforce a mortgage and will require the lender to provide the borrower with at last 60 days notice to perform prior to enforcement and to provide a copy of the notice to the third party mortgagor within 15 days of delivering the notice to the borrower. If the lender fails to comply with the notification requirement, it loses its rights to recover interest and costs & expenses against the mortgagor incurred after the 15 day period. The new laws also entitle a third party mortgagor to insist on the sale of the mortgaged property at any time after the secured obligation becomes due if there are no other mortgages or preferential rights on the property, in which case the mortgagee is obliged to carry out a sale by auction within one year of receiving notice from the mortgagor. Affected laws in more detail The tables below identify the new provisions of the CCC relating to guarantees and mortgages, compared with the superseded provisions. The text is an English summary and it is highly recommended that lenders review the original Thai wording (preferably with their Thai legal advisors) prior to placing reliance on any of these changes. GUARANTEES Current law Section 681. Suretyship can be given only for a valid obligation. A future or conditional obligation may be secured for the event in which it would have effect. An obligation, resulting from a contract which under mistake or incapacity does not bind the debtor, can be validly secured if the surety at the time when he binds himself knows such mistake or incapacity. New law Section 681. Suretyship can be given only for a valid obligation. A future or conditional obligation may be secured for the event in which it would have effect but the purpose, type, amount of guaranteed money, the period of such obligation must be specified. Except the suretyship for a series of transactions under section 699 may not specify the period. The guarantee agreement must clearly specify the obligation or the main agreement which is being guaranteed. The guarantor shall be liable only to such obligation or agreement. An obligation, resulting from a contract which is conducted under mistake or incapacity does not bind the debtor, can be validly secured if the surety at the time when he binds himself knows such mistake or

4 3 Watson Farley & Williams incapacity. Section 681/1. An agreement which binds the guarantor to be jointly liable with the debtor or as joint debtors is void. Section 694. In addition to the defences which the guarantor has against the creditor, he can also set up defences which the debtor has against the creditor Section 698 The guarantor is discharged as soon as the obligation of the debtor is extinguished by any cause whatsoever Section 699 The suretyship for a series of transactions without limit of time in favour of the creditor can be terminated by the guarantor for the future by giving notice to the creditor to that effect. In such case the guarantor is not liable for transactions done by the debtor after the notice has reached the creditor. Section 686. As soon as the debtor is in default, the creditor is entitled to demand performance of the obligation from the surety. Section 685/1. Any agreement in relation to guarantee which is different from section 681 paragraph 1, 2 and 3, section 694, section 698 and section 699 is void. Section 686. As soon as the debtor is in default, the creditor must notify the guarantor within sixty days since the default date and the creditor cannot, in any case, demand performance of the obligation from the guarantor before he receives such notification. The foregoing however shall not prevent the guarantor to pay the debt when it is due. If the creditor fails to notify the guarantor within the time specified in paragraph 1, the guarantor is discharged of the interest and reimbursement including any charges accessory to it which is incurred after such period. When the creditor demands performance of the obligation from the guarantor or the guarantor is entitled to pay the debt as specified in paragraph 1, the guarantor may pay all debt or pay debt in accordance with the conditions and procedures that the debtor has with the creditor before the debtor is in default. The guarantor may pay debt only for the part he is liable to. Section 701 paragraph 2 must apply mutatis mutandis. During the period of payment by the

5 NEW PROTECTION FOR THAI GUARANTORS AND MORTGAGORS 4 Section 691. If the surety is bound jointly with the debtor, he has not the rights mentioned in Sections 688, 689 and 690. guarantor in paragraph 3, the creditor cannot call for more interest incurred because of the default of the debtor during such period. The payment of debt by a guarantor in this section does not affect the rights of the guarantor in section 693. Section 691. In the event that the creditor has performed any action which causes to reduce the amount of guaranteed debt including interest, reimbursement or any charges accessory to it, if (i) the debtor repays the reduced debt or (ii) the debtor partially repays the reduced debt but the guarantor repays the rest of the debt or (iii) the debtor fails to repay the reduced debt but the guarantor recovers the reduced debt whether the payment is overdue, the guarantor shall be discharged. Any agreement which causes more burden to the guarantor than as specified in paragraph 1 is void. Section 700. If suretyship has been given for an obligation which is to be performed at a definite time, and the creditor grants to the debtor an extension time, the surety is discharged. The surety is not discharged if he agreed to the extension of time. Section 700. If suretyship has been given for an obligation which is to be performed at a definite time, and the creditor grants to the debtor an extension time, the surety is discharged unless he agreed to the extension of time. An agreement that the guarantor has made in advance as regards his consent to the extension of time before the creditor grants an extension time is not enforceable. MORTGAGES Current law Section 727. If a person has mortgaged his property as security for the performance of an obligation by another person, the provisions of Sections 697, 700 and 701 concerning Suretyship shall apply mutatis mutandis. New law Section 714/1. A contract of mortgage is void on account of its differing from provision of Section 728, Section 729 and Section 735. Section 727. The provision of Section 691, Section 697, Section 700 and Section 701 shall apply, mutatis mutandis, in case of a person who has mortgaged his property as security for the performance of an obligation by another person. Section 727/1. In no case shall a mortgagor, who has mortgaged his

6 5 Watson Farley & Williams Section 728. For enforcement of mortgage the mortgagee must notify the debtor on writing to perform his obligation within a reasonable time to be fixed in the notice. If the debtor fails to comply with such notice, the mortgagee may enter an action in Court for a judgment ordering the mortgaged property to be seized and sold by public auction. Section 729. In addition to the remedy provided in the foregoing section, the mortgagee is entitled to claim foreclosure of the mortgage, subject to the following conditions: (1) The debtor has failed to pay interest for five years; (2) The mortgagor has not satisfied the Court that the value of the property is greater than the amount due; and (3) There are no other registered mortgages or preferential rights on the property as security for the performance of an obligation by another person, be liable in an obligation in excess of the value of property mortgaged at time of enforcement of mortgage or foreclosure of the mortgage. An agreement which may cause a mortgagor to be liable in excess of those provided in paragraph one or which may cause a mortgagor to be liable as a guarantor is void, whether it is an agreement attached to the contract of mortgage or in a separate contract. Section 728. For enforcement of mortgage, the mortgagee must notify the debtor in writing to perform his obligation within a reasonable time which shall not be less than 60 days from the date the debtor has received the notice. If the debtor fails to comply with such notice, the mortgagee may enter an action in Court for a judgment ordering the mortgaged property to be seized and sold by public auction. Under paragraph one, if it is a case of a mortgagor who has mortgaged his property as security for the performance of an obligation by another person, the mortgagee must deliver such notice to a mortgagor within 15 days from the date of delivery of the notice to the debtor. If the mortgagee fails to proceed with the prescribed action within 15 days, the mortgagor shall be discharged from liabilities in interest and compensation due by the debtor on account of the obligation and all charges accessory to it from the day after the lapse of 15 days from such date. Section 729. For the enforcement of mortgage stipulated under Section 728, if there is no other mortgage or preferential rights on the same property, the mortgagee is entitled to claim foreclosure of the mortgaged property, subject to the following conditions in lieu of sell by public auction: (1) The debtor has failed to pay interest for five years; and (2) The mortgagee has satisfied the

7 NEW PROTECTION FOR THAI GUARANTORS AND MORTGAGORS 6 same property. Section 735. When the mortgagee intends to enforce the mortgage against the transferee of a mortgaged property, the latter must be served with a written notice one month before the enforcement of the mortgage. Section 737. The transferee may remove the mortgage at any time, but if he has been notified by the mortgagee of the mortgagee's intention to enforce the mortgage, he Court that the value of the mortgaged property is less than the amount due. Section 729/1. At any time after the obligation becomes due, if there are no other registered mortgage or preferential rights on the same property, the mortgagor is entitled to notify the mortgagee in writing for the mortgagee to carry out sale of the mortgaged property by public auction with no requirement to enter into an action in Court. The mortgagee shall carry out sale of mortgaged property by public auction within one year from the date of receiving such letter of notification. It shall be deemed that the letter of notification from the mortgagor is the letter of consent to sale by public auction. If the mortgagee fails to carry out sale of mortgaged property by public auction within the period prescribed in paragraph one, the mortgagor shall be discharged from liabilities in interest and compensations due by the debtor on account of the obligations and all charges accessory to it after the lapse of the said time. On enforcement of the mortgage, the mortgagee must appropriate the net proceeds to the extinction of the obligation and accessories and must return the surplus to the mortgagor or any person entitled to it. If the proceeds are less than amount due, it shall be carried out in accordance with provision in Section 733. In case the mortgagor is a person who mortgaged his property as security for performance of an obligation by another person, the mortgagor shall be liable to the extent as specified in the provision of Section 727/1. Section 735. When the mortgagee intends to enforce the mortgage against the transferee of a mortgaged property, the mortgagee shall notify the transferee with a written notice no less than 60 days before the enforcement of the mortgage. Section 737. The transferee may remove the mortgage at any time, but if he has been notified by the mortgagee of the mortgagee s intension to enforce the mortgage, he

8 7 Watson Farley & Williams must do so within one month thereafter. Section 744. A mortgage is extinguished: (1) By extinction of the obligation secured, otherwise than by prescription. (2) By release of the mortgage granted in writing to the mortgagor. (3) By the mortgagor being discharged. (4) By the mortgage being removed. (5) By auction sale of the mortgaged property by order of the Court as a result of enforcement or removal of mortgage. (6) By foreclosure of the mortgage. must remove the mortgage within 60 days from the date of receipt of the notice. Section 744. A mortgage is extinguished: (1) By extinction of the obligation secured, otherwise than by prescription. (2) By release of the mortgage granted in writing to the mortgagor. (3) By the mortgagor being discharged. (4) By the mortgage being removed. (5) By auction sale of the mortgaged property by order of the Court as a result of enforcement or removal of mortgage or by auction sale of the property under Section 729/1. (6) By foreclosure of the mortgage. CONTACTS Should you like to discuss any of the matters raised in this Briefing, please speak with one of the authors below or your regular contact at Watson Farley & Williams. CHRIS OSBORNE Partner Bangkok cosborne@wfw.com KRIT JULAPANICHAKUM Associate Bangkok kjulapanichakum@wfw.com JIRADA KITTAYANUKUL Associate Bangkok jkittayanukul@wfw.com All references to Watson Farley & Williams and the firm in this publication mean Watson Farley & Williams LLP and/or its affiliated undertakings. Any reference to a partner means a member of Watson Farley & Williams LLP, or a member or partner in an affiliated undertaking, or an employee or consultant with equivalent standing and qualification. The transactions and matters referred to in this publication represent the experience of our lawyers. This publication is produced by Watson Farley & Williams. It provides a summary of the legal issues, but is not intended to give specific legal advice. The situation described may not apply to your circumstances. If you require advice or have question or comments on its subject, please speak to your usual contact at Watson Farley & Williams. This publication constitutes attorney advertising LON KW KW 11/02//2015 Watson Farley & Williams 2015 wfw.com