|
|
| • EXCH RATES |
|
Baht/$ 35.05/10 (Bid/Ask)
|
GOLD |
12400
-400
|
|
The Finance Lawyer
WIROT POONSUWAN
Business reorganisation can be classified as a debt restructuring agreement that goes through a special court process in Thailand and differs from a debt restructuring agreement negotiated and concluded out of court. Significantly, guarantors in a reorganisation have no rights.
Chapter 3/1 of the Thai Bankruptcy Act regarding business reorganisation, conceptualised in 1998 after the US Chapter 11, has laid out a principle that still holds true: Guarantors, who often own the debtor company, do not have any right in the reorganisation of the debtor.
A provision of Chapter 3/1 states that court approval of a business reorganisation plan does not alter the liability of the guarantor. Hence when the plan offers a haircut, or reduction in debt, to the debtor, the benefit of the haircut will not extend to the guarantor, who will continue to be fully liable. This is an exception to the traditional legal principle that cuts a guarantor's debt in the same amount that the principal debt is reduced.
Business reorganisation plan: Other provisions of Chapter 3/1 allow the liability of the guarantor to be included in a reorganisation plan, but many such plans simply omit to mention anything about the guarantor, in the belief that any creditor who is part of the plan can always bring legal action against the guarantor for payment. Such belief is well-grounded under the law but is rarely carried out as creditors prefer to seek co-operation from guarantors to restructure a debtor's obligations.
Among various classes of creditors - financial, trade creditors and so on - the money generated from the revived business will be distributed, but not to the guarantor. Because he has a contingent or conditional liability toward the main creditor, the guarantor has a future claim against the debtor dependent upon his payment to the main creditor on behalf of the debtor.
There are two lines of contingent liability here. The first is that of the guarantor toward the creditor dependent on the debtor's failure to pay the main creditor. The second is the contingent liability of the debtor toward the guarantor dependent upon the guarantor paying the main creditor, in the absence of which payment the guarantor remains as a contingent creditor. As a contingent creditor, the guarantor will not be included in any class of creditors and will be excluded from the plan.
Guarantor's new leverage: However, guarantors do have some powerful new leverage, if not necessarily a right. With the legal landscape transformed by the Bankruptcy Act 2004, guarantors have unprecedented bargaining power to deter creditors from taking legal action.
The 2004 law grants individual guarantors a three-year automatic discharge from bankruptcy. This implies that if a creditor files a bankruptcy lawsuit against the guarantor to render him bankrupt, he will stay bankrupt for only three years before he is automatically discharged, and all of the debt along with it. Unfortunately, corporate guarantors don't get to enjoy the reprieve.
To demonstrate how the debt discharge works in favour of the guarantor, let's say he owed $300 million to some creditors under a series of letters of guarantee. At the end of three years his bankruptcy will be over, helping him to discharge all of the $300 million and to be totally free of all other debt. His massive debt would disappear at the rate of $100 million a year.
The Bankruptcy Act 2004 has wiped out banks' leverage to pressure guarantors, as major shareholders and management of the debtor company, to restructure the debtor's debt as banks want, with bankruptcy likely as a tool. The automatic discharge is a lawsuit deterrent - banks would feel reluctant to do the guarantor a favour by suing him.
Guarantor's competition with creditor: In line with the guarantor's covenant in his letter of guarantee not to compete with the creditor, Chapter 3/1 contains a provision requiring the guarantor not to compete with the creditor in filing a claim with the official receiver against the debtor in order to be paid under a business reorganisation plan. The provision states quite clearly that the guarantor cannot file his claim after the creditors have filed theirs. The guarantor's future claim against the debtor for the former's contingent liability toward the main creditor comes second after the principal debt.
The no-competition-with-the-creditor rule is endorsed by two Supreme Court judgments, one as recently as 2006. In practice, most guarantors make certain they have done their part by submitting the claims anyway, just to be brushed off by the official receiver shortly after that.
Wirot Poonsuwan is a former chairman and managing partner of Clifford Chance Wirot as well as a former partner of Baker & McKenzie in Bangkok. He now has his own firm, Poon & Poon, Attorneys at Law. He can be reached at wirotp@poonandpoon.com
Prev
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Next
