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*Out-of-Court
or Court-Supervised Restructuring?
by
Cynthia
M. Pornavalai
Tilleke
& Gibbins R.O.P.
Good afternoon, ladies and gentlemen. It is a great pleasure for
me to be invited to speak in your esteemed organization. When my colleague
Pascale, who's one of your board members, invited me to speak before you on restructuring
and bankruptcy, I was a bit in a quandary. The topic is a media favorite,
and one that every seminar company in Thailand and in the region has most probably
exploited to the seams. I believe that like the steamy stories of
the rich and famous that are for months and months pounced upon us by the media,
almost everyone must probably be now experiencing the signs of restructuring story-fatigue.
My
apologies, but for a professional working in this field my expertise does not
expand that widely to other areas. If you would therefore bear with
me for the next few minutes, I'll endeavor to share with you a different perspective
of corporate and debt restructuring.
As
indicated in the announcement distributed by the Chamber, I'd like to touch on
the issue of the merits and demerits of a court restructuring and out-of-court
restructuring.
Basically,
when we talk of restructuring, we're actually talking of 2 types: one is debt-restructuring
and the other is corporate restructuring. Debt-restructuring is the narrower
concept of restructuring whereby only the debts are restructured - meaning renegotiated,
rescheduled. These are most of the restructuring cases that we see being
done by banks and financial institutions with their debtors having NPLs. This
narrow scope restructuring may proceed to the more comprehensive type, i.e. business
restructuring. This involves the temporary or permanent reorganization of
the company's business or management to ensure its survival.
In Thailand, both these types of restructuring are actively being pursued. There
are 2 distinct means adopted for pursuing either type of restructuring:
1.
Out-of-court Restructuring
Under
this category we have 3 main sub-classifications:
a. Informal Restructuring
Informal restructuring is more on the debt restructuring type. It
is usually done between the banks/financial institution and their borrowers having
NPLs. These are usually based on bilateral contracts between the financial institution/creditors
and the borrowers. There is no set guideline, other than the specific policies
of the creditor, nor is there a third party intervention. Recent Bank of Thailand
("BoT") statistics show that as at end of June there are already 75,937 cases
of completed debt restructuring worth Baht 565 Billion. However, this figure appears
to be only a trickle of the present total financial institution NPLs reportedly
hovering at around Baht 2.7 trillion level.
As
most of you are already familiar with, in March this year, the BoT together with
local and foreign financial institutions formulated a binding framework in the
form of Debtor-Creditor and Inter-Creditor Agreements. A committee under the BoT,
called the CDRAC (an acronym for the Corporate Debt Restructuring Advisory Committee)
was established to monitor the restructuring process and facilitate negotiation
among all parties. Under this system, there are 2 groups of debtors classified
according to the complexity of their restructuring cases: Group 351 + Group 316.
Deadlines for signing by debtor is June 1 for Group 351 and June 21 for Group
316. According to recent statistics: in Group 351 only 129 companies signed as
at deadline; 115 companies may have to proceed to court restructuring, 41 companies
are already in court (i.e. being sued), while 66 companies did not sign - meaning
that they face threat of litigation, or are already out from NPL status.
c.
SET - Rehabco Restructuring Process
Early
this year a number of listed companies were suspended trading in shares by the
Stock Exchange of Thailand (SET) due to the balance sheet deficits. The SET put
these companies under the Rehabco category which, as at today, totals 46 companies.
The Rehabco process provides restructuring requirements and where such requirements
are met and the company becomes profitable again, suspension will be lifted and
trading will resume. The SET itself does not process the restructuring itself
unlike the CDRAC, and in most cases the Rehabcos undergo either informal or formal
restructuring themselves.
2.
Court-Supervised Restructuring
The second
means of restructuring is through the court under the
new Bankruptcy Act. I'm sure most of you here are already
familiar with this process, whereby either the debtor
company or its creditor (including bank and suppliers)
may file a petition with the court for corporate restructuring.
The court then appoints the Planner who will prepare
the corporate restructuring plan which will be presented
to creditors for vote and approval. In the meantime,
the Planner takes control of the company during the
planning period while creditors submit their claims
and such claims are processed. Since the law was enacted
in April of last year and amended in April of this year,
there have only been a total of 26 filings. Out of this,
only 14 have been approved. The rest have either been
dismissed, withdrawn or are in the process of appeal.
The total repayment amount is approximately Baht 65.6
million. This seems to be just a drop in the bucket
of the restructured debt under formal restructuring.
We
now ask why there is such a heavy bias among debtors and creditors in Thailand
to go through formal court restructuring. The law has apparently been tightened
to address some holes in the system. Allow me therefore to look into the merit
and demerits of these two means of restructuring.
| | Advantages |
Disadvantages |
A.
Out-of-Court
Restructuring | | |
| 1.
Informal | -
Based on mutual agreement
- Not time consuming as no legal processes are
involved
- Not under a restrictive framework
|
-
For cases involving large number of creditors and type
of loans, difficult to agree on plan
- Delays in negotiations
- Must have 100% agreement of all parties
|
| 2.
CDRAC |
-
Simple and quick under definite guidelines
- Neutral parties must be appointed, e.g., Accountant,
Financial, Legal Advisors to ensure fair treatment of
all
- Everyone has access to same information
- Mediation system
available
- Companies remain in control |
-
Does not cover trade creditors, suppliers and
debenture holders who may, but can't be forced to join
|
| 3.
SET Rehabco |
-
Framework for companies to go out-of-court
restructuring
- Companies can remain listed
- Ensure plan is feasible
|
-
Plan preparation
- Time consuming involving a lot of parties
- No certainty of lifting of SET's suspension
even after finalization and implementation of plan
| |
B. Court |
-
Better than liquidation, i.e. more returns
- Under Court supervision - transparency and fair
treatment
- Business may continue to operate
- Automatic stay of all legal actions
- Additional capital injection protected
- Definite time and obligation
- Court can void preferential and fraudulent transfers
- Discharge
debtor for debt |
-
Non-approval of creditor results in court's cancellation
of restructuring order
- Management loses control
- Expensive/time
consuming
- Non-completion of business reorganization according
to Plan may result in absolute receivership
- Overall viability of business called into question/including
business relationship and transactions
- Much publicity
- Distribution in shorter time is unlikely
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*Text
of speech made at the Thai-Canadian Chamber of Commerce Luncheon Meeting on August
25, 1999 at the Oriental Hotel, Bangkok.
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