Debt Restructuring: The Art of Possible

It is perhaps timely and worthwhile to consider and review the business reorganization procedures introduced via amendments to the Bankruptcy Act B.E. 2483.

The business reorganization procedures seek to maximize returns for creditors while easing the burden of debtors. This allows businesses to re-focus their energies on growth.

For a business reorganization to work to the advantage of creditors, the debtor and the employees of the debtor it requires co-operation, trust and transparent dealings. While a business reorganization can take place in situations where the creditors and the debtor are adversaries, this will not be to the advantage of any party.

Harsh and realistic decisions have to be taken at the outset. Creditors are required to reconsider their expectations in regards to the proceeds that are to be expected from the business reorganization. Similarly debtors, more particularly the executives and shareholders, have to maturely resolve to accept the loss of control over assets and perhaps loss of control over the business itself.

Many of the international accountancy firms and others have been appointed as the ‘planner’ for debtor companies, to prepare the debt restructuring plan and to supervise its implementation by the debtor. The planner is appointed by the Court to perform his duties impartially and fairly.

How should planners go about their work? From our experience, planners may encounter varying degrees of support from debtors in the restructuring process. In some cases, the cooperation and assistance from the debtor may be very helpful: it other cases cooperation may be minimal and there may even be downright hostility to the planner.

Planners need to collect a lot of information about debtors: land and assets owned, debts owed, existing security over the debtor’s assets and information about the debtor’s subsidiaries and associated companies. The planner is obliged to collect as much information as he can, in order to understand the debtor’s business, its assets and income, and consider how these can best be arranged or structured to repay debts owed.

How should planners go about collecting information? Apart from asking direct questions of the debtor company, information may be available form other sources. The annual accounts and annual report of the company, and company brochures and literature will contain information about the debtor’s business, its assets owned and subsidiary and associated companies. Company searches will yield useful information about the company’s shareholders and directors and may provide clues to identify cross shareholdings and directorships in associated companies. Other indirect sources may be useful, such as trade directories.

How should the planner assess this information? First of all, the planner must decide whether the information collected has enabled him to create a clear picture of the debtor company and its business activities, assets and debts. If the information collected is insufficient or incomplete, he will also need to ask questions of the debtor to clarify ambiguities or inconsistencies in information that has been discovered. The planner needs the cooperation of the debtor company in this process. Cooperation by the debtor will also enable the debtor to play a positive role in its own restructuring. This should therefore persuade the debtor to be reasonable in providing information to the planner. If there is obstruction or hostility, this may only lead to erroneous decisions being made in the formulation of the restructuring plan, and ultimately the debtor itself will bear the consequences of this. A spirit of cooperation should apply to both the planner and the debtor in their dealings with each other.

The concept of business reorganization is comparatively new to Thailand. Of course it is a well established practice world-wide. The practice of business reorganization in Thailand does have some unique considerations particularly in the areas of taxation and foreign business ownership rules and other regulations.

A further difficulty experienced by the planner of business reorganization is in dealing with the local legal system, government departments and agencies. Experience has shown that while the business reorganization laws and regulations are intended to smooth the way for the restructuring of a business that officials may be reluctant to depart from their established practices. For example the transfer of real estate holdings is normally subject to a transfer tax and special business tax. Royal Decree No. 340 (B.E.2541) has granted exemptions for these and other business reorganization related taxes. The planners involved in business reorganization should be wary to ensure that the way that the transfer of assets from a debtor to the favour of creditors takes advantage of this and other exemptions.

The comparatively recent introduction of business restructuring concepts in Thailand does mean that it is not yet quick nor effortless. Successful business reorganization requires consideration of creditors’ desire to maximize return in the shortest possible time, debtors’ wishes to ensure they will return to viability whilst also trying to preserve good employee and trading partner relationships all while remaining within the provisions of laws and regulations. All this requires a balance input between foreign trained and local expertise.