Amendments to the Civil and Commercial Code that will change the way guarantees and mortgages can be given were gazetted on Nov 13 and will take effect next Feb 11. The new laws are in favour of guarantors and will reduce the amount of risk lenders can shift to guarantors.
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 that are highly favourable to the lenders. The new laws will require lenders to remove certain terms from guarantees entered into in 2015 to prevent the guarantees from being void or unenforceable. Examples of these terms are set out below.
Often lenders require "all money" guarantees, which secure all amounts that 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 clearly to specify the duration and amount of the guaranteed obligation and to specify the main agreement that is being guaranteed — the guarantor's liability will be limited to the obligations specified in the guarantee, effectively preventing 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, but under the new laws a guarantee will be void if it seeks to prevent the guarantor from exercising its statutory right to disclaim liability for future transactions. This will effectively prevent 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, but 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. If the lender fails to comply with the notification requirement, it will lose its rights to recover interest, costs and 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 will be void.
The new laws will not affect guarantees given prior to next February, but guarantees entered into on or after Feb 11, 2015 will need to comply with the new laws, and lenders will need to ensure their standard form of guarantees is revised to take into account the new laws.
Failure to do so could result in guarantors successfully challenging the validity and enforceability of the guarantees.
This article was prepared by Chris Osborne, partner, Krit Julapanichakum, senior associate, and Jirada Kittayanukul, associate, at Watson, Farley & Williams.