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Out-of-Court Debt Restructuring as an Alternative to Business Reorganisation Proceedings

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Out-of-Court Debt Restructuring as an Alternative to Business Reorganisation Proceedings

When a company becomes financially distressed to the point of insolvency, often the suggested route is to file for bankruptcy or business reorganisation proceedings under Thailand’s Bankruptcy Act 1940, as amended, (the “Bankruptcy Act”). However, businesses may want to consider another informal alternative to the remedies provided under the Bankruptcy Act before proceeding with the court action, i.e. an out-of-court debt restructuring process with its creditors. This alternative route offers its own benefits and drawbacks compared to the said traditional court proceedings, whereupon each business must consider the options based on its own circumstances.

  • 1. Brief Overview of an Out-of-Court Debt Restructuring Process

An out-of-court debt restructuring process is an option where the financially troubled debtor and its creditors negotiate to reach an agreement to modify the debtor’s obligation to its creditor; with the purpose to preserve and recover the business situation of the debtor before filing for bankruptcy or business reorganisation with the court becomes necessary.

As the process is contractual in nature, it may be initiated by either the debtor or the creditor when the financial situation of the debtor becomes untenable. For example, the debtor may approach one or more of its principal financial creditors to propose its restructuring plan. which would be potentially more beneficial for both parties, rather than risking an uncertain and costly bankruptcy litigation process. If the creditors agree, it is suggested that they are encouraged to organise themselves into an ad-hoc committee in order to negotiate with the debtor.

Unlike a business reorganisation case1 there is no legal provision that provides an automatic stay (i.e. an automatic stay is an automatic injunction that halts actions by creditors, with certain exceptions, to collect debts) in an out-of-court debt restructuring process. Therefore, at the beginning of the process, the creditors must agree on a forbearance agreement (i.e. forbearance is a temporary postponement of payments granted by a creditor instead of forcing the debtor into foreclosure or default) which prohibits each creditor from exercising its own rights against the debtor outside of the restructuring process.

The success of an out-of-court debt restructuring process largely depends on the willingness of the creditors to cooperate, both with the debtor and with each other. A successful debt restructuring process would necessarily involve concessions made on each creditor’s part to some extent, while the debtor must commit to negotiating a viable restructuring plan and implementing such plan in its business operation.

Subject to the existing agreements and applicable non bankruptcy law, typically, an out-of-court debt restructuring process may seek consent of the involved parties to deleverage the debtor’s financial obligations by extending the debt maturity dates, lowering the rate of interest, exchanging existing debt for new debt, moratorium (i.e. a legal authorisation to debtors to postpone payment), refinancing, or other financial remedies through the amendment of existing contract terms or the execution of a new agreement between the parties involved.

The alternative to the said debt restructuring process is the formal court proceedings of a business reorganisation case. In such regard, the debtor and creditors need to weigh-up the advantages and disadvantages of the two alternatives. This is an important decision because, if an out-of-court debt restructuring process seems more appealing to the creditor rather than bankruptcy litigation, the creditor may be more inclined to cooperate with the restructuring process. There are many aspects which might be considered, as discussed below.

  • 2. Advantages and Disadvantages of an Out-of-Court Debt Restructuring Process

The first and most obvious advantage of an out-of-court debt restructuring process is that an out-of-court process offers an alternative to debt restructuring without the potentially high cost of court proceedings in a business reorganisation case, which all parties involved may have to bear. A successful out-of-court debt restructuring process can provide a resolution to the financial status of the debtor, which is free of court-related costs such as professional fees relating to litigation and investment of time for the management of both parties in the litigation process, as well as there being no public exposure in a court case.

Another noticeable advantage of an out-of-court debt restructuring process over court proceedings is its contractual characteristic, which makes it more flexible in nature: the relationship between the parties in the restructuring negotiation, such as the payment which the debtor is allowed to make during such process; confidentiality of the negotiation process; and a short but extendable forbearance period that provides ample opportunity for the parties to opt out of the negotiation to pursue other legal remedies may be designed and agreed upon by both parties. Furthermore, the resulting agreement between the debtor and each creditor is not subject to court supervision2 meaning that terms of the restructuring agreement - which might not otherwise be allowed under the business reorganisation - are possible under an out-of-court debt restructuring process.

Moreover, an out-of-court debt restructuring process can mitigate uncertainty over the outcome of a bankruptcy litigation. Due to the fact that the number of parties involved in such process is limited compared to court proceedings, where all creditors and interested parties may get involved, the restructuring process is more likely to be accomplished on the terms agreed upon between the debtor and the participating major creditors.

On the other hand, there is no provision under Thai law to encourage all the creditors to engage in the debt restructuring process just like in the business reorganisation case3 therefore, an out-of-court restructuring process may not ensure the finality of all potential claims that various unparticipating creditors might hold against the debtor.

As such, the likelihood of a successful out-of-court debt restructuring negotiation is low if one or more significant creditors do not participate or consent to the restructuring terms. For example, there may be creditors who refuse to give concessions from their existing rights but will benefit from a financially healthier debtor in a successful restructuring process, or creditors who withhold their consent in the hope of receiving their payment in full from the other creditors who want the restructuring process to move forward. There is no provision of the law that binds the dissenting minority creditor(s) to the restructuring plan as is the case in a business reorganisation process4 therefore, other participating creditors may compel these dissenting creditors through more persuasive restructuring terms or other leverages.

Another point is the fact that there is no legal provision for automatic stay in an-out-of-court debt restructuring process. This may be more beneficial to the creditors as they may continue to be paid upon the agreed terms while leaving the creditors with other alternative remedies if the restructuring negotiation is not going well. In contrast, this may be viewed as a disadvantage for the debtor who faces many litigation threats and requires the protection of automatic stay.

With the said benefits and drawbacks of an out-of-court debt restructuring process in mind, while it may be generally desirable for all parties involved to seek an amicable out-of-court solution to the restructuring issue rather than a potentially lengthy, costly and time-consuming court process, ultimately, it is up to the business decisions of the debtors and creditors to choose their preferred solutions depending on their own specific circumstances (e.g. the number of major creditors, types of underlying claims and reputational risk).

  • 1 See, Section 90/12 of the Bankruptcy Act.
  • 2 Section 90/58 of the Bankruptcy Act, and in particular, the Supreme Court Decision no. 4272-4273/2546, which establishes the court’s authority to review the subject matter of the business reorganisation plan.
  • 3 Section 90/26, 90/27, and 90/61 of the Bankruptcy Act
  • 4 Section 90/46 of the Bankruptcy Act

This is intended merely to provide a regulatory overview and not to be comprehensive, nor to provide legal advice. Should you have any questions on this or on other areas of law, please do not hesitate to contact any of the authors.

Jirapong Sriwat
Partner

Pruk Chaweekulrath
Associate