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Thailand’s rehabilitation laws in danger of losing integrity

Proposed ministerial regulations regarding the regulation of planners appointed under Thailand’s rehabilitation laws are likely to threaten the ability of creditors to obtain an independent and transparent assessment of a debtor’s financial position and restructuring options.

The ministerial regulations may force major accounting firms to withdraw from providing planner services or insist on indemnities from creditors – something that has been strongly resisted by creditors to date.

The rehabilitation process involves a planner being appointed to an insolvent company to take over the control and management of a company for a period while the planner prepares a rehabilitation plan for creditors and the court to approve. The planner can be a natural person, a corporate, a group of persons, a creditor or the debtor’s executives.

Subsidiaries of accounting firms selected by creditors or subsidiaries of the debtor are commonly appointed as planners. Special purpose subsidiaries are used in order to limit possible legal liabilities, which are potentially huge. A growing trend is for joint appointments where representatives of the creditors and the debtor are jointly appointed as planners or each hold shares and directorships in a special purpose vehicle appointed as planner. This co-operative rehabilitations technique is viewed as a face saving approach which allows the debtor’s management to remain in control of day to day operations while creditors are comforted by having their own representatives exercising ultimate control.

Many may be astonished that the courts have allowed debtors to act as their own planners. This has occurred even though the Bankruptcy Act does not indicate that the debtor itself can be the planner.

In many jurisdictions, it is acknowledged that independent planners perform services deserving of protection from spurious claims particularly from debtors seeking to prevent thorough investigations of their affairs or frustrate the rehabilitation process. In contrast, the proposed ministerial regulations indicate that in Thailand the focus is on the protection of debtors.

The ministerial regulations provide for licensing arrangements for planners and specify certain qualification criteria including Thai nationality. The planners are also required to provide general security and case-specific security. If an action is brought against the planner the security can be used to compensate those who suffer damage from the planner’s actions. The proposal is that the amount of case-specific security will depend on the level of debts of the debtor. The amounts begin at the equivalent of a few thousand dollars for small cases and extend to hundreds of thousands for large cases.

Remarkably, these security requirements do not apply if the debtor or an executive of the debtor is appointed as the planner. The logic behind this provision is presumably that it is the debtor that is being protected.

The proposed regulations will affect the way in which accounting firms provide their services in the area and will probably embolden debtors to insist on appointing themselves as planners. Creditors will have little choice but to agree as they may have difficulty finding independent planners willing to put up security. Even if they do, the rehabilitation law also indicates a preference to planners selected by the debtors. If the debtor proposes a planner that planner will be appointed unless creditors holding at least two-thirds of the total debts vote for another planner. This can mean that the debtor’s planner will be appointed even though most creditors support another planner.

In an aggressive rehabilitation, independent planners will be extremely reluctant to put up hundreds of thousands of dollars in security particularly if they suspect the debtor is likely to oppose their fee applications and sue them for any action they take. The brave that do accept appointments will probably act overly conservatively to protect their security bond.

The danger of having the debtor or its executives appointed as planner is that it heightens the potential for fraudulent debtors to cheat their creditors. The law and the proposed ministerial regulations do not have sufficient regard to the fact that persons involved in the debtor’s business may have had contributory part in the debtor’s insolvency and may be involved in fraud.

The appointment of a planner should provide creditors with the ability to obtain an independent and transparent assessment of the company’s position and its potential. The proposed ministerial regulations will probably reduce the possibility of this occurring. The “stick” which rehabilitation provides to creditors to coerce recalcitrant debtors into acting sensibly in debt restructuring negotiations could be broken. The return of the “Thai strategic debtor”, a debtor who is able to pay but chooses not to because there is little or nothing its creditors can do to obtain payment, may well be one result. Non-performing loans may well increase and the recovery of the Thai economy could be further jeopardized.