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Guideline for Credit term under Trade Competition law for Small and Medium Enterprises has been Announced

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Guideline for Credit term under Trade Competition law for Small and Medium Enterprises has been Announced

The credit term plays an important role in the liquidity of a small and medium enterprise (“SME”) in every country. In general, business operators always use a credit term for any sale and purchase or service, which leads to the liquidity of business and bargaining power of each business operator. If a business operator has a bargaining power, it always uses such power to extend the credit term as long as it could maintain its cash with its company. However, this would affect the cash flow of the counterparty, especially if it is an SME. This is because an SME does not have a lot of cash flow; therefore, it will be forced to accept a long credit term in order to do business with a big company.

In the past, Thailand did not have any specific laws or regulations regarding the limit of credit terms. Nevertheless, Section 57 of the Trade Competition Act B.E. 2560 (2017) (“TCA”) regulates any conduct resulting in damage to other business operators, such as unfairly obstructing the business operation of another business operator; unfairly utilising superior market power or superior bargaining power; unfairly setting trading conditions that restrict or prevent the business operation of others; and other conduct/actions in other ways prescribed in the Trade Competition Commission (the “Commission”)’s notification. However, Section 57 of the TCA does not specify as to what length of credit term would result in damage to another business.

On 18 June 2021,  the Government Gazette published the Announcement of the Trade Competition Commission regarding the Guidelines for the Assessment of Fair Trade Practice in the Provision of the Credit Term for a Small and Medium Enterprise who is a Seller or Service Provider dated 24 May B.E. 2564 (2021) (the “Announcement”) under the TCA. The Announcement was proposed by the Office of the National Economic and Social Development Council and the Bank of Thailand for the purpose of preventing damage caused to an SME, who may have less bargaining power, from unfair trade practices under Section 57 of the TCA. In addition, the Thai Government has a policy to reduce social inequalities and create a fair environment for the sustainable operation of an SME business, by setting a benchmark of the suitable credit term to be 30 - 45 days. Thus, the Announcement has an objective to increase the liquidity of an SME. The Announcement will come into force 180 days later, on 16 December 2021; the details of which are as follows”

Who is considered an SME under the Announcement?

To be eligible under the Announcement, the SME shall be as follows:  

  • A business operator who manufactures, with no more than 200 employees or with the annual turnover of not over Baht 500 million; or
  • A business operator who provides a service, wholesale or retail business, with no more than 100 employees or with the annual turnover of not over Baht 300 million.

In light of the above, the SME has to notify its business partner of its SME status by providing evidence of the number of employees or its annual turnover. Such notification may be submitted to the business only on one occasion unless the SME’s status changes.

Please note that the definition of SME under the Announcement is rather vague; if a company has the requisite number of employees or annual turnover, such company will be considered as an SME under this Announcement. Any big company that has an annual turnover of more than Baht 300 - 500 million for a manufacturing business, service business, wholesale business or retail business may fall under this definition if such company has less than 200 employees for its manufacturing business or less than 100 employees for its service business, wholesale business or retail business.

Criteria of the Announcement

The Announcement specifies the criteria for fair trade practice in the credit term if one of the business partners is an SME; wherein such trade practice between parties must not exhibit any superior bargaining power, discrimination or business obstruction. In addition, clear standards should be set forth in writing on reasonable business operations.

Guidelines for the credit term, for fair trade practice, if one of the business partners is an SME

  • Credit term
    • 45 days for trading, manufacturing and service providing business unless otherwise prior agreed to be less than 45 days; or
    • 30 days for trading, manufacturing and service providing business relating to agricultural goods or primary processed agricultural products which does not involve a complicated production process, unless otherwise prior agreed to be less than 30 days.

    Nevertheless, any credit term under a condition of an agreement may differ from the above if there are reasonable business, marketing or economic grounds.

  • Commencement of credit term

    Commencement of a credit term under the Announcement shall begin from the date of the handover of goods or service according to the amount, type and quality standard of the agreed product or service, and the submission of all corrected documents. In the case of consignment, commencement shall begin from the date of selling an agreed amount of goods at an agreed rate according to normal trade practice.

  • Payment of trade credit

    A payment of trade credit shall clearly show the steps according to normal trade practice. As stated above, an SME has to notify their business partner of its SME status by providing evidence of the number of employees or its annual turnover in order to receive the payment of trade credit under the Announcement.

Guidelines for the credit term, for unfair trade practice, if one of the business partners is an SME

  • Delay payment of goods or service over the specified credit term in Item 5.1 without any reasonable grounds;
  • Change of credit term or other condition under an agreement without any reasonable grounds, or the provision of an advance notice of such change of less than 60 days; and
  • Other behaviour of a business partner to an SME in the manner of an unfair compulsory condition, such as setting a special condition relating to the credit term which may create an unnecessary burden on the other party.

Definition of unfair trade practice

This Announcement does not define the meaning of unfair trade practice. However, the guideline of unfair trade practice may be considered as specified under Clause 11 of the Announcement of the Trade Competition Commission regarding Guidelines for Consideration of Actions that are Damaging to Other Business Operators B.E. 2561 (2018), as follows:

  • Where it is an action that has never been performed before and which is not a normal business operation;
  • Where it is a condition that is not specified in writing and the trade partner is not notified in advance within a reasonable time in accordance with the normal trade practice of the parties;
  • Where it is an act that cannot be heard for legitimate business, marketing or economic reasons; and
  • Other relevant factors.

Penalty

If any person fails to perform according to the Announcement, such person shall be subject to an administrative fine of not more than 10 percent of the turnover in the year during which the offence is committed. If it is an offence committed in the first year of the business operation, the person committing the offence shall be subject to an administrative fine of not more than Baht 1,000,000.

In addition, if a juristic person is an offender, if the offence is the result of an order or an action of any person, or failure to order or act in accordance with the duties of a director, manager and/or any other person responsible for the operation of such juristic person; such offender shall also be liable to the penalties specified for such offences.

Filing of Lawsuits for Damages

Since the Announcement is issued under Section 57 of the TCA, a person receiving damage due to a violation of the Announcement shall have the right to file a lawsuit for damages against  such violator of the law.

 

In summary, any business operator who is a business partner with an eligible SME who is a seller or service provider should pay attention to the Announcement. This is because if an SME shows its SME status under the Announcement to the business operator to exercise a right of the credit term under the Announcement after 16 December 2021, such business operator has to limit the credit term to be not over 30 - 45 days depending on the type of business. If it does not, such business operator may be subject to an administrative fine of not more than 10 percent of the turnover in the year during which the offence is committed, including a director, manager and/or any other person responsible for the operation of such juristic person. In addition, a person receiving damage due to a violation of the Announcement shall have the right to file a lawsuit for damages from a violator of the law.

 

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 contact:

Chavalit Uttasart
Partner

Siriwan Nopareporn
Attorney-at-Law

Authors

チャワリット・ウッタサート

With more than forty years of experience, Chavalit is highly regarded as a leading figure in Thailand. His areas of specialization include dispute resolution, intellectual property, TMT and e-commerce, as well as M&A, foreign investment and corporate law. His extensive experience also includes advising on trade competition, corporate recovery and business reorganization. In particular, Chavalit is renowned in the areas of dispute resolution and intellectual property. He was selected as a Litigation Star by Benchmark Litigation Thailand 2021 and is ranked as a leading individual for intellectual property in Thailand by Chambers Asia-Pacific 2021.