Bank finance and regulation. Multi-jurisdictional survey. Thailand. Enforcement of security interests in banking transactions.

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1 Bank finance and regulation Multi-jurisdictional survey Thailand Enforcement of security interests in banking transactions Kowit Somwaiya LawPlus Ltd Part I types of security 1. What are the most common types of security in banking transactions in your jurisdiction (eg, standard security package)? Please provide a brief characteristic of each type of security. The types of the most common security in banking transactions in Thailand are mortgage, pledge, assignment and guarantee. Mortgage A mortgage is created by way of a written mortgage agreement registered with the authorities. 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 Department. 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. The mortgage agreement must be made in the Thai language. If it is made in a foreign language, a Thai translation must be held. The official form of the mortgage agreement in the Thai language must also be made. The title deeds and ownership documents for the mortgaged assets must be delivered to the mortgagee. The particulars of the mortgage must be recorded in the title deed or the ownership documents. The physical control of the mortgaged assets is not required to be delivered to the mortgage. A mortgage can be made by either the debtor or a third party, with or without consideration, in favor of the creditor. The amount of the mortgage can be higher or lower than the loan amount. Both Thai and foreign creditors can take mortgages as security of their loans. The mortgage amount must be specified in a sum certain or 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. Pledge

2 A pledge must be made in writing but it is not required to be registered or filed with any official authority. Normally the subject of a pledge is movable properties, securities documents and financial instruments, such as bills of exchange, promissory notes, certificates of deposits. The pledged assets must be physically delivered to the pledgee or a person designated by the pledgee to act as its representative or custodian of the pledged assets. A pledge creates preferential rights to the pledge as a secured creditor. Assignment A conditional assignment of claims or rights against a third party can be made as banking security. Assignments of property lease rights and accounts receivable are the most common. It is required that an assignment must be made in writing. A notice of assignment must be given to the debtor of the assigned claims unless his written consent is given. An assignment is made effective from day one but its enforcement is conditional upon the default of the debtor. Once the debtor is in default, the assignment will become enforceable. Guarantee A corporate guarantee issued by a company or a personal guarantee issued by one or several individuals is also a common type of banking security. It was popular before the Asian economy crisis in Lenders relied on the creditability and reputation of the shareholders, directors, sponsors or any persons related to corporate borrowers. Thus, their personal guarantees were acceptable. It was normal for a parent company to issue a corporate guarantee to secure the obligations of its subsidiary. But in the past recent years, a guarantee became less common as banks have realised that in an economic crisis, wealthy and well-known persons and established companies could become bankrupt. A guarantee must be made in writing as a unilateral agreement. It can be signed singly by the guarantor. The law does not prohibit the debtor to guarantee its own debt. But in practice, no bank ever accepts a guarantee of the debtor itself. A guarantee is not required to be registered or filed with any public office. 2. In relation to the following types of assets, please provide the types of security that can be created or granted in your jurisdiction and give details of any registrations required: (a) Real estate: A real estate can be mortgaged and the mortgage must be registered with the Land Office. (b) Charging assets (inventory, stock etc): Charging assets can be pledged by way of the warehouse master issuing a warrant with details of the stock. The warrant can then indorsed as evidence of the pledge of the stock. The pledge is not required to be registered or filed with any public office. (c) Movables: Movables in the form of ships or vessels of 6 tons or more or seagoing vessels of 60 tons gross or over can be mortgaged. Other movables can be pledged or assigned. (d) Shares:

3 Shares can be pledged. The pledge must be recorded in the company share register. Registration is not required. (e) Rights under contracts (receivables): Rights under contracts can be assigned. The assignment agreement must be signed by the assignor and the assignee. Consent must be obtained from the obligor of the assigned receivables or otherwise a written notice of assignment must be given to the obligor. Otherwise, the assignment will not bind the obligor. (f) Bank account: Bank account can be pledged. But it must be stated very clear in the pledge agreement that what was pledged was not the bank passbook of the bank account, but was the rights to receive the payment of the money deposited with the bank under the bank account. (g) Financial instruments (eg, securities): Financial instruments can be pledged. (h) Intellectual property: Intellectual property can be assigned as collateral of a bank loan. The assignment must be made in writing and registered with the Trademark Office in case of a trademark assignment or the Patent Office in case of a patent assignment. An assignment of copyright can be made in writing, but it is not required to be registered with the Copyright Office because there is no system for registering a copyright assignment. A copyright is established by law upon its creation. It is not required to be registered. (i) Plant and machinery: Plant and machinery can be mortgaged. The plant built on a plot of land can be mortgaged as part of the land mortgage. The machinery can be mortgaged if its ownership has been registered with the Central Machinery Department. Nonregistered machinery can be pledged provided that the machinery itself must be delivered to the creditor. It is a practice that the creditor appoints an executive of the corporate debtor or a third party to hold the physical control of the pledged machinery for and on behalf of the creditor. (j) Other assets. 3. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? Is the parallel debt clause concept recognised in your jurisdiction? Thailand does not recognise a concept of trust or a trustee. Section 1686 of the Civil and Commercial Code provides that establishing of a trust directly or indirectly by will or any juristic act shall have no effect unless otherwise by virtue of the provisions of the law solely for creation of a trust. But a trustee for securities issued by companies listed on the Stock of Exchange of Thailand can be appointed for the purpose of holding of such listed securities. For a mortgage of real property, machinery, ships and vessels, the creditors can appoint an agent to act for them, but the creditors names must be named as mortgagees under the mortgage agreements which are registered with the government offices.

4 Parallel debt concept is not recognised under the law of Thailand. An agent of the lenders in a syndicated loan can act only as a security agent. If only its name is registered as the mortgagee, its arrangement with the debtors as the security agent must be privately made. 4. Please explain the latest amendment to the law governing secured transactions in your jurisdiction. Are there any amendments which will be introduced in the near future (within one to two years) which might have an impact on the legal framework of secured transactions? Please also explain recent practical developments regarding secured transactions in your jurisdiction. There was no amendment to the law on secured transactions in Thailand in the past few years. But the law on escrow agents was passed in 2008 whereby commercial banks are licensed to act as escrow agents for commercial and financial transactions which are mainly involved with merger, acquisition, financing and corporate and debt restructurings. The government may submit to the Parliament in 2010 a draft of the law on floating charges. The government approved the draft in The draft is being reviewed by the Council of State. If this law is enacted, fixed and floating charges of movable assets will be possible. Part II enforcement of security 1. Please explain briefly general rules of enforcement of security indicated in answer to the Question 1 in Part I above (excluding rules in a bankruptcy or insolvency proceeding see Question 3 below). In your answer please explain whether specific security may be enforced only through judicial proceedings or whether extra-judicial methods are also available. Furthermore, please provide estimate of costs (if they create significant obstacle in enforcement, including taxes and any other duties/ costs) and timing for enforcing such security. Please also explain degree of difficulty (eg, burdensome formalities, whether enforcement requires actions of a state body) in enforcing security. Also please explain whether taking security by an entity from other jurisdiction influences possibility of establishing security and its enforcement. Enforcement of security in a situation whereby the debtor is not under either a bankruptcy or insolvency proceeding can be made either in court or outside the court. In case of a real property mortgage, a registered machinery mortgage and a ship or vessel mortgage, the security holder must always file a lawsuit in court against the debtor and the mortgagor after the debtor failed to perform its obligations. The lawsuit must be filed with a court of jurisdiction, i.e. the Civil Court, or the Intellectual Property and International Trade Court if the banking transaction was made with one or several foreign creditors. Once a final court judgment is given in favor of the creditor, then the creditor can have it enforced against the security assets by having them sold by a public auction. The debtor and mortgagor are entitled to oppose the public auction if the selling price at any auction is unreasonably lower than the normal forced sale price of the assets. The court has discretion to approve of reject the auction price in case where the debtor or the mortgagor opposed it. After the occurrence of the default, if all the parties agree that the mortgage will not be enforced in court, it is legally possible for the mortgaged assets to be foreclosed or disposed of otherwise. But the law does not allow the parties to agree on the date of the mortgage agreement that the mortgage will be enforced outside the court. Enforcement of a pledge of shares, movable assets and financial instruments must be made in court in the same manner as enforcement of the mortgage summarised above. Assignments of accounts receivable or any other types of claims against a third party can be enforced without filing a lawsuit in court. The assignee can simply give a default notice to the debtor and a demand notice to the obligor of the accounts receivable. Upon giving the said

5 notice and demand, if the obligor fails to comply with the demand, the assignee will have no choice but to file a lawsuit with the court to enforce its rights as the assignee against the receivables. 2. Please explain briefly specific features (if any) of enforcement of security established over following types of assets: (a) Real estate: The mortgage of a real state must be enforced in court as part of the enforcement of the obligations of the debtor. The debtor must first have been in default and the legal action has been filed to enforce the loan including the property mortgage. The mortgaged assets must be sold by a public auction. The proceeds from the auction sale are then applied to payment of the loan obligations. (b) Charging assets (inventory, stocks etc): The pledge of inventory and stocks must be made under a court proceeding as part of the lawsuit to enforce the principal debt. The pledged assets must be sold by a public auction and the proceeds from the sale are paid to the creditor after deduction of expenses and applicable taxes and stamp duties (if any). It is not allowed for the parties to agree in advance (before the occurrence of the default by the debtor) to enforce a pledge otherwise than by court proceedings. Thus, the parties cannot agree, for example, before the default by the debtor that the creditor can foreclose the pledged assets instead of selling them by a public auction. Of course, after the default by the debtor, the parties can agree to enforce the pledge outside the court. (c) Fixed charge over movables: A pledge of movables is enforced in the same manner as the pledge of inventory and stocks under 2 (b) above. Thailand does not have law on fixed charges. (d) Shares: A pledge of shares can be enforced in the same manner as enforcement of the pledge of inventory under 2 (b) above. (e) Rights under contracts (receivables): An assignment of accounts receivable can enforce outside the court. The parties can agree in advance on how to enforce the assignment. It is a practice for the creditor to notify the debtor of its default and then give a demand notice to the obligor under the receivables to make payments of the receivables directly to the creditor. The notice and the demand are normally given by registered-answered mail to ensure that the creditor has evidence showing that the notice and the demand have been given, just in case it is necessary for the creditor to enforce the assignment in court because the obligor of the receivables does not make payments as demanded. (f) Bank accounts: A pledge of bank accounts can be enforced in the same way as outlined in 2 (b) above. (g) Financial instruments (eg, securities):

6 A pledge of shares, debentures, warrants, bills of exchange, promissory notes and other financial instrument can be enforced in the same way as outlined in 2 (e) above. (h) Intellectual property: An assignment of trademarks or patents can be enforced by the assignor registering the assignment upon default of the debtor. The registration must be made with the Trademark Office or the Patent Office. (i) Plant and machinery: Enforcement of a plant and machinery mortgage must be made as outlined under 2 (a) above. (j) Other assets. 3. How does a commencement of bankruptcy or insolvency proceeding influence the rights of the security holder to enforce its rights? In bankruptcy or insolvency proceedings, what are the suspect periods is claw-back possible, and what other types of rights (tax debts, employees, etc) have preference over security granted? Please explain briefly specific features (if any) of enforcement of security established over the following types of assets in a bankruptcy or insolvency proceeding: Subject to the automatic stay in the insolvency proceedings for rehabilitation (also called reorganisation ) of the debtor or the absolute receivership over the security assets of the debtor in the bankruptcy proceedings, the security holder can freely enforce its rights against the security assets once the debtor is default. Once an insolvency case is filed and accepted against the debtor, the automatic will take place and the secured creditor cannot freely enforce its security assets. It needs to file a petition with the court for a release of the security assets from the automatic stay on the grounds that the security assets are not essential to the business reorganisation of the debtor or the creditor s rights as the secured creditor are not sufficiently protected under the automatic stay. In a bankruptcy case, the secured creditor can still enforce its security assets without claiming for payment from the asset pool of the debtor but the creditor must allow the official receiver to examine the details of the security assets (Section 95 of the Bankruptcy Act B.E as amended). Or it can file a claim for sharing payments from the asset pool of the debtor and agree to release its security for sharing with other creditors. Otherwise it can file a claim for payment from the asset pool of the debtor, without releasing the security assets, for the difference between the amount of its claims and the proceeds from enforcement of the security assets. The claims for payments from the asset pool must be made within 2 months from the publication date of the absolute receivership, or within 4 months from the said date in case of a foreign creditor, if permitted by the official receiver. If the debtor made any payment of the debt to the creditor or transferred any assets or created any rights to the creditor without consideration or with consideration of a value less than the fair market value within a period of one year before the insolvency or bankruptcy petition date or thereafter, such transactions can be subject to cancellation or a claw-back as a fraudulent transaction under Sections 113 and 114 of the Bankruptcy Act. If the debtor received any payment of the debt or made any transaction with a creditor within three months before the filing date of the petition or thereafter knowingly that such payment

7 or transaction will prejudice other creditors, such payment or transaction can be subject to cancellation on the grounds of an undue preference under Section 115 of the Bankruptcy Act. Under Section 130 of the Bankruptcy Act, the rights of the creditors to receive payments from the asset pool of the bankrupt debtor are junior to the payments of expenses related to the administration of the assets of the debtor, the expenses of the official receiver, the lawyer fees, the court fees, the State taxes and the employee wages. 4. Are there any specific features or problems of enforcement proceedings if the security is granted to a trustee or security agent or the parallel debt structure is used? As the names of the creditor must be entered into the security agreement even though the creditor was represented by an agent when the security agreement was created, in practice it is not a problem for the creditor acting by itself or as represented by the agent to claim its rights for payments in an insolvency proceeding or a bankruptcy case. 5. Please explain the latest amendments to the law governing secured transaction in your jurisdiction in relation to a bankruptcy or insolvency proceeding. Are there any amendments which will be introduced in the near future (within one to two years) which might have impact on the legal framework of the enforcement of secured transactions in the light of insolvency law? Please also explain recent practical developments regarding secured transactions in your jurisdiction in relationship to insolvency law. Since 1997, the Bankruptcy Act of Thailand has been amended four times in 1998, 1999, 2000, and The 1998 amendment was to add a chapter of business reorganisation. The change in 1999 was to further revise the provisions on the cancellation of fraudulent and undue preference transactions, business reorganisation plans, groups of creditors, amendment of business reorganisation, plan, etc. The 2000 amendment was mainly on the procedures for the official receiver. The 2004 amendment was on how to vote and to count votes in creditors meetings, cancellation of bankruptcy and the court s fees in bankruptcy cases. The government appointed a committee to prepare a further amendment to the Bankruptcy Act effective in The committee is amending the provisions on allocation of payments to creditors as fees for gathering of assets. As the economy in general has recovered from the 1997 economic crisis, the volume of the insolvency and bankruptcy cases has reduced substantially. Most of the major cases filed with the court in the period of five years during 1997 to 2002 have completed their business reorganisations under five or seven year plans. Only a few plan administrators have asked for extensions of the terms of their plans. On the bankruptcy cases, in the past few years, creditors who claimed for payments in the bankruptcy cases of their debtors began to receive payment parts of their claims. But the percentages of the repayment were very low.