1. Introductory questions

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1 Survey on: Claw-back of Security in Insolvency Questionnaire - Thailand Completed by Kowit Somwaiya and Naddaporn Suwanvajukkasikij LawPlus Ltd Introductory questions 1.1 Please briefly describe the main type of security in your jurisdiction (per type of asset; per perfection technique; per type of secured obligation). Types of Security The main types of security in Thailand are mortgage, pledge, assignment and guarantee. (1) Mortgage: A mortgage is made in writing and registered with the official authorities. It can secure any type of obligation. A mortgage of real properties (land and buildings or any structures built thereon) must be registered with the Land Office that has jurisdiction over the land. A machinery mortgage must be registered with the Central Machinery Office in Bangkok. Before the machinery is mortgaged, it must be installed and its ownership must be first registered with the Central Machinery Office. A mortgage of ships of six tons gross and over or seagoing vessels of 60 tons gross and over can be made and it must be registered with the Harbor Department in Bangkok. A mortgage can be made by either the debtor or a third party, with or without consideration, in favour of the creditor. The amount of the mortgage can be higher or lower than the amount of the debt secured. Both Thai and foreign creditors can take mortgages as security of their loans. The mortgage amount must be specified as a definitive sum or a maximum amount must be mentioned. It can be in Thai Baht or in a foreign currency. A mortgage creates preferential rights for the creditors over the mortgaged assets. It is required to be enforced by a court order for auction of the mortgaged properties. (2) Pledge: A pledge must be made in writing but it is not required to be registered or filed with any official authority. The normal subjects of a pledge are movable properties, securities documents and financial instruments, such as bills of exchange, promissory notes and certificates of deposits. The pledged assets must be physically delivered to the pledgee or a person designated by the pledgee to act as its agent or custodian of the pledged assets. A pledge creates preferential rights to the pledgee as a secured creditor. It must be enforced by a court order for a public auction of the pledged properties. (3) Assignment: A conditional assignment of claims or rights against a third party can be made as security. Assignments of property lease rights and accounts receivable are the most common. An assignment must be made in writing. A notice of assignment must be given to the debtor of the assigned claims or his written consent must be obtained. An assignment is made effective from day one but its 1/7

2 enforcement is conditional upon the default of the debtor. Once the debtor is in default, the assignment will become enforceable. (4) Guarantee: A corporate guarantee issued by a company or a personal guarantee issued by one or several individuals is also a common type of security. It is normal for a parent company to issue a corporate guarantee to secure the obligations of its subsidiary. A personal guarantee is normally issued by shareholders, directors, sponsors or any persons related to corporate borrowers. A guarantee is not required to be registered or filed with any public office. 1.2 Please briefly describe whether your jurisdiction provides for a procedure of protection against creditors (usually initiated by a debtor at a time when the debtor is yet not insolvent) and if so what are its basic assumptions? There is no procedure of protection against creditors before the debtor is insolvent. But once a debtor has become insolvent and has entered into reorganization proceedings, an automatic stay against creditor rights applies with a few exceptions. Please see item 1.3 below. 1.3 Please briefly describe the types of insolvency proceedings contemplated by your legislation (liquidatory proceedings; reorganisation or recovery proceedings). Thailand has legislation on bankruptcy and reorganization proceedings. The substantive legislation for these proceedings is the Bankruptcy Act B.E as amended (the BA ). Bankruptcy Proceedings. A creditor can file a bankruptcy petition against a debtor if the debtor is insolvent, owes one or more creditors in a definitive sum more than one million Baht if the debtor is a natural person or more than two million Baht if the debtor is a juristic person. After the bankruptcy petition has been filed, the following proceedings normally take place: hearings of witnesses; temporary receivership on property of the debtor; appointment of an official receiver; filing of claims for debt payments by creditors within two months from the publication date of the permanent receivership order; bankruptcy order against the debtor if no composition can be agreed with the creditors; permanent receivership order; seizure of the property of the debtor; sale of the seized property by public auctions; distributions of the sale proceeds to creditors pro rata to their debts. Reorganization Proceedings. A reorganization petition can be filed for reorganizing an insolvent corporate debtor who owes one or more creditors a known sum, whether currently due or not, of not less than ten million Baht (around US$333,000). There must be reasonable grounds for, and the possibility of, reorganizing the debtor. After the court has accepted the petition for further proceedings, an automatic stay will take place and no parties concerned can take any action against the debtor or its essential assets until after completion or cancellation of the reorganization. After hearings of witnesses for the petition, if the court has found reorganization of the debtor feasible, the court will then appoint a planner to prepare and submit a reorganization plan to the official receiver within three months from the publication date of the court order appointing the planner. The plan can be for a period not exceeding seven years. Debt forgiveness or a haircut for both the principle amounts and accrued interests and a grace period for debt payment are common practices. 2/7

3 Then secured and unsecured creditors must apply for payment of debts within one month from the date on which the order for appointment of the planner is published. After the official receiver has received the business reorganization plan from the planner, the official receiver will call a meeting of the creditors to consider the plan. If the plan is accepted, the creditors may also appoint a creditors committee to act for all the creditors in supervising and monitoring operations of the debtor under the plan. The acceptance of the plan is completed when the court approves it and confirms the appointment of the plan administrator. The plan administrator must reorganize the debtor under the plan. If the reorganization is successful under the plan, the court will order cancellation of the reorganization. The court cancellation order will release the debtor from all debts which could have been claimed under the plan and the debtor s management can resume its operation and the debtor s shareholders can resume their rights under the law. 1.4 Please briefly describe the types of claw-back actions available in your jurisdiction. Please address, in particular, any of the following questions: (1) Is claw-back automatic or does it require a positive assessment of the existence of the relevant conditions by the court or the receiver? Claw-back is not automatic. It must be requested in court by a creditor or an official receiver as a result of a fraudulent act or an undue preference transaction and approved by the court (Sections of the Civil and Commercial Code (the CCC ) and Sections 90/40, 90/41, of the BA). The creditor or the official receiver has to prove to the court that the debtor committed the fraudulent act in relation to a transfer of its assets or entered into an undue preference in paying a particular creditor knowing that the fraudulent act would prejudice his creditors. A claw-back does affect a third party enriched by a fraudulent act if he did not know that the act would be prejudicial to the creditor except in the case of a gratuitous act (Section 116 of the BA). (2) Does your legislation differentiate between transactions (including the granting of security) with consideration and without consideration? Fraudulent transactions without consideration (gratuitous acts) can be cancelled even though the person enriched by the act did not know that the act was prejudicial to creditors of the debtor. If a fraudulent transaction is made for consideration, it can be clawed back only if both the debtor and the person who received the transfer of the assets under the fraudulent transaction know that the transaction would prejudice the creditors of the debtor. The above applies to a debtor giving security interest with or without consideration. 3/7

4 (3) Does your legislation differentiate, in cases of security in general, between security taken concurrently with the granting of the secured debt and security taken in a different period of time? No. Security taken at the time of granting the secured debt and security taken later are given the same rights and protection under the law. In practice, it is normal for a creditor to require additional security after the granting of the secured debt if and when the value of the original security depreciated or reduced. But it should be noted that a security taken during the period of one year before the date on which an insolvency proceeding is filed against the debtor can be subject to a possible cancellation by other creditors or the official receiver on the grounds of a fraudulent transaction (Sections 90/40 and 114 of the BA). A security interest created by the debtor for a creditor in prejudice against other creditors during the period of three months before the date on which an insolvency proceeding is filed against the debtor can be subject to cancellation on the grounds of an undue preference (Sections 90/41 and 115 of the BA). (4) Are there special provisions for intra-group transactions and transactions between related parties? 2. Specific questions Section 6 of the BA defines parties related to a debtor as insider of the debtor. These include directors and shareholders of the debtor and their spouses, legal entities that own the debtor or are owned by the debtor (more than 30% of ownership). Under Sections 90/41 and 115 of the BA, undue preference transactions between the debtor and related parties are subject to a longer period of claw-back. If an undue preference is made in favour of any creditor related to the debtor, it can be cancelled if it is made within one year before the insolvency action filing date or any date after the insolvency action filing date. 2.1 Is claw-back subject to specific rules with respect to any type of security available in your jurisdiction? If so, please describe any such rules. No. The provisions on cancellation of fraudulent acts and undue preference transactions under the BA apply to all kinds of security transactions and all kinds of assets on which security interests are created. The specific rules as provided in Sections 90/40, 90/41 and 113 through 116 of the BA read as follows:- Section 90/40. The Planner, the Plan Administrator or the Official Receiver may, by motion, apply to the Court to revoke fraudulent acts according to the Civil and Commercial Code. If the juristic act being requested to be revoked occurred within one year prior to the date the Petition is filed and afterwards or was a gratuitous gift or the debtor receives less than reasonable consideration, it shall be presumed that the Creditor or person receiving benefit from such act is aware that the Creditor was subject to undue preference. Section 90/41. When it appears that a transfer of property or any act performed or consented to be performed by the Debtor during the period of three months prior to the filing of the petition and afterwards with the objective of giving undue preference to any Creditor, then the Planner, the Plan Administrator or the Official Receiver may apply to the Court by motion. The Court has power to order revocation of such transfer or act. 4/7

5 If a creditor who has been given undue preference is an Insider to the Debtor, the Court has the power to order revocation of the transfers or acts under the first paragraph performed during the one year period prior to the filing of the petition and any time thereafter. The revocation of the transfer or the act performed in accordance with this Section shall not affect the right of third persons who acquire in good faith and with consideration prior to the filing of the petition. Section 113. The Official Receiver can apply by motion to the Court to cancel fraudulent acts under the Civil and Commercial Code. Section 114. For the juristic act subject to cancellation due to a fraudulent act under Section 113 occurring within one year prior to the bankruptcy petition and anytime thereafter, a juristic act entered into on a gratuitous basis, or a juristic act entered into by the Debtor in exchange for an unreasonably low consideration, there shall be a presumption that such juristic act is an act entered into by the Debtor and the beneficiary knowing that it is prejudicial to Creditors. Section 115. Transfers of property, or any act done by the debtor, or permitted to be done, during the three months prior to an application to make him bankrupt, and afterwards, with the intention to give undue preference to a creditor; the Court is empowered to cancel such transfers or acts on the application of the Official Receiver by way of motion. If a creditor who has been given undue preference is an Insider to the Debtor, the Court has the power to order revocation of the transfers or acts under the first paragraph performed during the one year period prior to the filing of the petition for Bankruptcy and any time thereafter. Section 116. The provisions of Section 115 shall not affect the rights of third parties acquired in good faith in exchange for consideration prior to the bankruptcy petition 2.2 Are there any total or partial exemptions from claw-back, depending on (for example): Exemptions of claw-backs are only (1) the time limit of one year for a fraudulent act, (2) the time limit of three months for an undue preference transaction (except for the transaction with the Insider of the Debtor, which has a one-year limit), (3) the third party enriched by a fraudulent act or an undue preference transaction, but acting in good faith (not knowing the fact of the fraud or the undue preference) and paying consideration. Please see 1.4(1) & (2) and 2.1 above. 5/7

6 2.3 How does your legal system address the claw-back of quasi-security transactions, e.g. a sale of a property in return for a price payable in instalments may hide a financing transaction secured by the property; which legal regime applies in this case: that of the claw-back of security, or that of the termination of pending (sale and purchase) agreements? The provisions of the BA and the CCC on claw-backs discussed above apply to all kinds of fraudulent and undue preference transactions, no matter they are financing transactions, security creations, sales of assets, acts of gifts, debt forgiveness, transfers of claims, assignments of rights, etc. 2.4 What are the legal consequences of the claw-back for the parties involved? For example: (1) Is an agreement, deed or transaction subject to claw-back invalid or just ineffective between the debtor an the party to the agreement; A transaction subject to a claw-back is valid between the parties but is voidable. Thus, it can be cancelled and clawed back by a creditor or the official receiver pursuant to the rules and procedures under the BA and the CCC discussed above. (2) To what extent can claw-back affect the successful exercise or enforcement of security rights as may have occurred prior to the adjudication in bankruptcy (e.g. claims cashed by the secured lender under a security assignment of receivables prior to the adjudication in bankruptcy)? Is there any difference between the case of self-enforcing security (e.g. the cashing of claims referred to above) and a court-driven enforcement (e.g. the enforcement of a mortgage)? The successful exercise of self-enforcing security and court-driven enforcement of security rights prior to the adjudication in bankruptcy does not protect such rights from a claw-back if such security rights were created as a result of a fraudulent or undue preference transaction. The only few exemptions are the time limits and the act in good faith of the enriched party discussed above. 2.5 What are the rights of the parties involved once the claw-back had been enforced (as a result of operation of law or court ruling)? The proceeds from the claw-back must be distributed to all creditors of the debtors pro rata to their claims (Section 239 of the CCC). The parties affected by the claw-back can appeal against the claw-back order (Section 28 of the Act for the Establishment of and Procedure for Bankruptcy Court B.E. 2542). 2.6 What is the claw-back regime for security granted by third parties/in respect of third party indebtedness? Please analyse from the perspective of the insolvency of the debtor and of the insolvency of the third party grantor of security. Does the possibility for the third party grantor to act in recourse against the insolvent debtor make a difference? If the security is granted by a third party as a grantor of security to secure obligations of the insolvent debtor but the third party is not insolvent, the security transaction will not be subject to a claw-back in the insolvency proceedings against the insolvent debtor. But the said security transaction can be subject to a claw-back by a creditor or any interested party under the civil proceedings against the third party grantor under Section 237 of the CCC. If the security is clawed back under the civil proceedings, then such creditor of the third party or such interested party will step into the shoes of the third party security grantor in recourse against the insolvent debtor to recover the security assets as part of the insolvency 6/7

7 proceedings against the insolvent debtor. If such third party later becomes insolvent itself (no matter the debtor is insolvent or not), such security transaction can then be subject to a claw-back in the insolvency proceedings against the third party grantor. The persons who are entitled to file a claw-back petition in this case are any creditor of the third party or the official receiver, but not the third party itself. 2.7 What is the claw-back regime for security which has been agreed (i.e. the relevant security agreement has been executed) but not yet perfected at the time of the adjudication in bankruptcy of the debtor/grantor? If the security has been agreed but has not yet been perfected (for example, by way of registration with the relevant authorities where required), such security transaction is actually not valid as such and, as a result, if any security asset has been delivered or transferred to the secured creditor, it will be subject to recovery as undue enrichment by the security grantor or any interested party, but not as a claw-back (Section 406 of the CCC). 2.8 Other? As the matter of practice, creditors of an insolvent debtor obtain security or enforce their security interests first and let other creditors or the official receiver claw them back later. The same practice applies when creditors decide to receive repayment of debts or exercise a self-enforcing debt recovery by a set-off against any cash in an account that the insolvent debtor may have with them. 7/7