19 July 2010
Thailand introduced reforms to its bankruptcy laws in 1998 in the aftermath of the 1997 Asian financial crisis. Those reforms introduced business reorganisation provisions similar to the Chapter 11 provisions of the US Bankruptcy Code. Further amendments have been made to the Thai bankruptcy laws, which are now governed by the Bankruptcy Act BE 2483 (1940) as amended by the Bankruptcy Act (No. 7) BE 2547 (2004).
This article considers the extent to which Thai Bankruptcy Law overrides the contractual rights of parties to arbitrate disputes. Two separate parts of Thai Bankruptcy Law are considered. These are:
- Business Reorganisation
Creditors can file a bankruptcy petition with the Bankruptcy Court if the debtor is insolvent (i.e., the debtor owes THB 1 million, in the case of individuals, or THB 2 million, in the case of corporate entities, and total debts exceed total assets). Under Thai law, a debtor is assumed insolvent if any of the events set out in Section 8 of the Bankruptcy Act occur (this assumption can be rebutted by proving solvency, which can normally be demonstrated with a simple balance sheet test).
If the debt arises out of a contract containing a valid arbitration clause, it is in the discretion of the Thai Bankruptcy Court to dispose of proceedings under the Arbitration Act. However, there is no precedent1 of a Thai court ordering the parties to arbitrate. Commencement of arbitration is considered a matter for the parties to undertake.
Under Section 14 of the Bankruptcy Act the court has the discretion to order the debtor to enter into "absolute receivership," in which case the interest and control of the debtor’s property will be vested with the Official Receiver (a government official) for distribution amongst its creditors.
On entering into absolute receivership a debtor is prohibited from doing any act relating to the assets without the consent of the court, the Official Receiver or following agreement at a creditor's meeting.
The effect of an order for absolute receivership on an arbitration which has already been commenced, or which is contemplated, is that it is the Official Receiver alone who has the power, pursuant to Section 22 (3), to “…compromise, come to settlement, or file actions, or defend actions, relating to the assets of the debtor.”
It is open for other creditors to join bankruptcy proceedings but Thai courts will not strike out bankruptcy proceedings to give effect to an arbitration agreement, after the granting of an order for absolute receivership.
From the date of the order for absolute receivership of a company, the Official Receiver controls the conduct of any dispute and is required to pursue only pending civil actions that involve the debtor's assets. On request by the Official Receiver, the court is empowered to "order the cessation of … the civil action or make any other order it may deem proper" (Section 25 Bankruptcy Act). A "civil action" under this section has been held by the Supreme Court to include arbitrations.
However, Section 27 of the Bankruptcy Act prescribes that a creditor can only seek repayment of its debt by complying with the procedure set out in the Act. In order to make any recovery, a claimant-creditor will need to file its proof of debt within two months of the order for absolute receivership or its claim will be extinguished.
Proceedings for a business reorganisation are governed by Chapter 3/1 of the Bankruptcy Act. They are similar to US Chapter 11 petitions in that they provide protections for corporate debtors. Proceedings can be commenced by filing a petition for restructuring by the debtor where creditors are owed in excess of THB 10 billion. When the Bankruptcy Court makes an order for the acceptance of the petition for reorganisation for hearing, the Bankruptcy Act provides for an automatic stay or moratorium of any action (including arbitration) against the debtor to recover any sums of money. Section 90/12 (4) provides:
Neither an action shall be taken against the debtor in a civil case ... nor a dispute in which the debtor may become liable or incur damage shall be submitted to arbitration for ... if the obligation arises before the day on which the court approves the plan.
In short, a stay under this section provides security for the debtor against any form of legal process. Indeed, Bankruptcy Act Section 90/12, paragraph 3, explicitly provides:
The judgment or order of the court or the arbitral award which is contrary to or inconsistent with the provision in any subsection of paragraph one shall not be binding on the debtor.
However, a creditor whose rights have been limited by the application of Section 90/12 can apply to the court for an order amending, modifying or terminating any limitation of their rights.
Where an automatic stay has been imposed that results in the expiration of a limitation period, Section 90/15 extends that limitation period by one year from one of the following events:
- the date of the successful completion of the plan
- the court orders dismissal of the petition for reorganisation
- a disposition of the case
- cancellation of the reorganisation order
- cancellation of the reorganisation process
- an order putting the debtor into absolute receivership
In practice, in the case of contemplated arbitration by a claimant-creditor seeking to recover any element of the debt from the assets of the debtor, the creditor will need to file a proof of debt. This avoids the uncertainty involving limitation periods. All creditors, including unsecured, secured and judgment creditors must file a proof of debt within one month of the date of the announcement of the Planner in the government gazette. It is the Planner who prepares the business reorganisation plan for the debtor (Plan) which must include, among other things:2
- reasons for the reorganisation
- details of assets, liabilities and other obligations of the debtor
- methods of the business reorganisation
- redemption of collateral
- action to be taken where debts are to be assigned
- solutions for lack of liquidity
- a time period for implementing the Plan
The Plan must be approved at a creditor's meeting and subsequently sanctioned by the court. Once sanctioned, the Plan becomes binding on all creditors.
In the event that a creditor fails to submit its proof of claim within the one month period, it loses all rights to recover any monies owed by operation of law.
A Thai court will uphold an arbitration agreement if bankruptcy proceedings have yet to commence. However, if the debtor is subject to absolute receivership, any creditor will need to file a proof of debt within two months of the order to avoid losing all rights to recover its debts.
Similarly, under a business reorganisation, any legal disputes, including arbitral proceedings, will be stayed. It is therefore important for a claimant creditor to file its proof of debt within one month of the appointment of the Planner to preserve its claims. Failure to participate within this one-month time period will result in any existing claims becoming automatically barred.
1. Thailand has a civil system of law with no binding precedents. In theory, interpretation of statute is made on each set of facts as presented to the court. However, court rulings are persuasive in providing guidance as to how a court will interpret a similar circumstance in the future.
2. A full list of the Plan's mandatory requirements is set out at section 90/42 Bankruptcy Act.