Thai loan security: new act may lead to increase in lending

• Thailand's new Business Security Act was published on 5 November 2015. This provides a new form of legal security for loans in Thailand. A further provision related to enforcement and registration will come into effect on 2 July 2016.
• Thailand currently has limited legal security. The new rules will enable a business to be used as security. This will bring Thailand in line with other jurisdictions.
• This is likely to lead to an increase in lending as banks will be able to offer loans to clients that could not previously guarantee their loans.
• Banks will need to ensure they comply with all the provisions of the new law. If a lender fails to comply with some provisions of the new law they may lose their rights in relation to the properties that were provided as security.

Introduction

The Business Security Act B.E. 2558 (2015) (BSA) introduced an additional form of registrable security which can be taken over all of the assets used in a business or certain prescribed classes of assets, some of which could not, previously, be used as security. Prior to the BSA coming into force, the only legitimate forms of security were mortgages and pledges. This gave rise to serious limitations in financing arrangements in that certain assets (which, by their nature or for practical reasons, cannot be delivered into the possession of the lender (e.g. contractual rights)) could not be utilised as security. Enactment of the BSA should allow the full economic value of such assets to be utilised as security, giving greater flexibility and capacity for project companies and small-to-medium enterprises to obtain needed financing.

When:

With the exception of certain administrative provisions, which came into force on 6 November 2015, the principal operative provisions of the BSA will come into force on 2 July 2016.

Summary of Key Features

Eligible participants

• Any individual or juristic person (Thai or non-Thai) can provide security under the BSA (Security) to secure its own obligation or the obligations of another person (Security Providers).
• Currently, Security can only be provided to Thai licensed insurance companies and financial institutions, which include a Thai bank, that is a subsidiary of a foreign bank and a branch of a foreign bank (Lenders). The BSA permits other eligible Lenders to be prescribed in future ministerial regulations.

Eligible assets

• Security can be taken over the “Business” or “Specific Assets”.
• “Business” means all assets used in the Security Provider’s business and all rights relating to such business, which are transferable to a third party to enable the recipient to continue to operate the business immediately after enforcement.
• “Specific Assets” means any of the following:
  • contractual rights, except for any right represented by an instrument;
  • movable property used in the Security Provider’s ordinary course of business, including machinery, inventory or raw materials;
  • immovable property, but only if the Security Provider conducts real estate business;
  • intellectual property; and
  • other assets to be prescribed in future ministerial regulations.

Principal requirements and obligations

• The Security Provider and the Lender must enter into a written security agreement and such security agreement must be registered with the Department of Business Development, the Ministry of Commerce. Delivery of the Specific Assets or the Business to the Lender is not required.
• The Lender, with the written consent from the Security Provider, is responsible for registration of the security agreement and any amendments thereto . Any amendment which is not registered cannot be used against a third party acting in good faith.
• Registration of security agreement with respect to the Security iver the “Business” requires, among others things, the appointment (jointly by the Security Provider and the Lender) of an administrative receiver which is licensed by the Director-General of the Department of Business Development (Administrative Receiver).
• The Security Provider must prepare and maintain a list of secured assets, including assets subsequently acquired to replace any of the original secured assets (collectively the Secured Assets) and allow the Lender or its agent to inspect the Secured Assets at any time on at least 3-day prior notice.
• The Lender must confirm the outstanding amount of the debt to the Security Provider within 15 days after receipt of a written request from the Security Provider. The Lender must also provide to the Security Provider its written consent to release the Security on the termination of the underlying transaction to which the Security relates. The Lender is liable for any damage suffered by the Security Provider if the Lender does not provide confirmation of the outstanding amount of the debt or written consent to the release of the Security, within the prescribed time.
• The Security Provider remains liable for any damage resulting from loss or depreciation of the Secured Assets, unless the Security Provider can prove that such damage was not due to the fault of the Security Provider.
• The BSA prescribes criminal penalties if the Security Provider, in bad faith, devalues, transfers, hides, destroys, damages or fails to render any Secured Asset.

Principal advantages

• The BSA introduced a new form of registrable security that can apply to types of assets over which a security interest could not, previously, be taken, and which are in addition to existing security arrangements under the Civil and Commercial Code (CCC).
• The BSA prescribes enforcement procedures for Security over the Business which does not involve costly and time consuming court proceedings. Disputes in respect of an Enforcement Event can be settled by the Administrative Receiver, and the sale of the Business can be conducted by the Administrative Receiver. However, there are certain disputes which will require a court order, including any request to remove the Administrative Receiver for fraud or where the Security Provider refuses to deliver the Secured Assets.  
• Prior to enforcement, the Security Provider is generally free to deal with the Secured Assets. For instance, the Security Provider retains the right to use, sell or mortgage the Secured Assets, unless otherwise agreed between the parties. However, the Security Provider cannot pledge the Secured Assets.

Ranking and transfer to third parties

• Any Lender holding a Security under the registered security agreement is a secured creditor under the bankruptcy act. Ranking between any registered Security and rights of other secured creditors are determined in accordance with timing of the registration.
• Other than in the prescribed circumstances set out below, holders of a Security under the registered security agreement retain a preferential right over Secured Assets which have been transferred to a third party, over the rights of unsecured creditors of the third party recipient:
  • Secured Assets which are, by their nature, subject to turnover on a regular basis and used in the ordinary course of business (Turnover Assets) can be transferred to a third party unencumbered, provided that such transfer was made:
    • in the ordinary course of business; or
    • with the consent of the Lender.
  • Secured Assets which are not Turnover Assets can be transferred to a third party unencumbered, provided that:
    • the third party pays for and obtains such Secured Assets in good faith; or
    • such transfer was made with the consent of the Lender.

Enforcement

Enforcement is in accordance with the terms of the security agreement, which would ordinarily prescribe various events of default, entitling the Lender to take enforcement action (Enforcement Event). Any Security provided by a Security Provider to secure another person’s obligations must be on a non-recourse basis. That is, any agreement which purports to hold such Security Provider liable for any shortfall after enforcement of the Security is void.

Enforcement of Security over Specified Assets

• The Lender can enforce the Security over any Specific Assets by way of foreclosure, but only if (i) the value of the Specific Assets is equal to or greater than the amount of the debt due and (ii) interest on the debt has not been paid for five years. Enforcement of Security by mean of foreclosure will cause the underlying debts to be extinguished, which means that the debtor will not be liable for any shortfall after the foreclosure.Alternatively, the Lender can enforce the Security by way of a sale by public auction.
• Enforcement begins with the Lender serving a written notice of an Enforcement Event (Enforcement Notice) on the Security Provider. After which the Security Provider can no longer deal with the Secured Assets and the Lender will be entitled to take possession of the Specific Assets.

Enforcement of Security over Business

• The Lender can enforce the Security by way of a sale of the Business by the Administrative Receiver.
• Enforcement begins with the Lender serving an Enforcement Notice on the Administrative Receiver. After which the Administrative Receiver sends a notice to the Security Provider and the Lender informing them of the date, time and location for investigation of the Enforcement Event. The investigation must be held within 7 days after receipt of the Enforcement Notice and must be completed within 15 days after the commencement date of investigation.
• If, after the investigation, the Administrative Receiver notifies the Security Provider and the Lender of its decision to enforce the Security of the Business:
  • the Security Provider must deliver the Business, including documents representing or evidencing title to the relevant assets, related rights and liabilities within 7 days after the relevant notice; and
  • the power to operate the secured Business, will vest in the Administrative Receiver, until the Administrative Receiver sells the Business.

Co-existing security

• Where the same asset is subject to both a Security and a mortgage, and enforcement action under the mortgage has commenced, the Lender can (after an Enforcement Event has occurred) at any time, during the court proceeding, seek a court order to suspend such proceeding in order to enforce the Security under the BSA. However, during execution of the enforcement judgement by the executor, if an Enforcement Event has occurred, the Lender cannot require the mortgagee to take enforcement action under the BSA.
• Where the same asset is subject to both a Security and a mortgage, the mortgagee can make use of the enforcement procedure under the BSA on its own (if an Enforcement Event has not occurred) or (if the Enforcement Event has occurred) must join the Lender in enforcing the Security under the BSA at any time prior to execution of the enforcement judgement by the executor.

Conclusion

Although there will be benefits to both the Security Providers and Lenders in unlocking the value of certain assets for financing arrangements, there are certain obligations imposed on both Security Providers and Lenders (as discussed above) to be considered. There are also certain procedural and practical issues to be clarified in future, including whether the preparation (by the Security Provider) and the registration (by the Lender) of changes to the list of Secured Assets are to apply to Turnover Assets, which will probably change daily.