Thailand´s Corporate Restructuring Experience through Formal Bankruptcy Procedures: Economic and Legal Perspectives

Abstract

I. Introduction and Objectives It has been almost seven years since Thailand faced a major and severe economic crisis in mid-1997. Thailand sparked off a currency and banking crisis resulting from over-investment and carelessly unhedged foreign over-borrowing of the corporate sector, which spread to other countries in Southeast Asia. The massive exchange rate collapse had a direct impact on corporate insolvency. Financial and negative 10.5 per cent output collapse in 1998 jointly interacted to produce financial distress for most large and small businesses. The cumulative net loss of the firms listed on the Stock Exchange of Thailand (SET) amounted to 1,438 billion baht or one-third of the country's gross domestic product (GDP). While accounting practices may not reveal negative net worth for many non-financial firms on the stock exchange, evidence from court-based reorganized firms showed a high degree of insolvency even in 1999, two years after the onslaught of the crisis. The total output and financial loss has been estimated to be more than 100 per cent of GDP or around 5,337 billion baht (Table 1). The highest ratio of non-performing loans (NPLs) to total loan was recorded at almost 50 per cent in mid-1999. Despite the bleak situation, Thailand has recorded current account surplus for six consecutive years (Table 2), and consequently has reduced its outstanding foreign debt. Thailand has also repaid its debt to the International Monetary Fund (IMF) ahead of schedule. The turnaround in large segments of the corporate sectors, as well as the gradual good economic growth, warrants a study to analyse the methods, outcomes, and effectiveness of its policy menu. Thailand's changing of institutional and legal frameworks, innovations, and the capabilities of the private sector in both debt and business restructuring are also worthy of analysis. While out-of-court or informal methods of corporate workout or restructuring as well as financial restructuring have been studied before by other scholars (Ammar 2001 ; Claessens, Djankov, and Wu 2000; Claessens, Djankov, and Klapper 1999; Haksar and Kongsamut 2003; Tumnong 2001; Veerathai 2003), systematic analysis and empirical evidence of court-supervised corporate restructuring in Thailand has not been attempted until the authors' study for the Thai Central Bankruptcy Court (Pairoj, Manit, and Nuttanan 2002). The objectives of this paper are: (1) to present some empirical facts of court-based corporate rehabilitation or reorganization in comparison with other modes of corporate rescues; (2) to provide some analytical underpinning and explain its outcome from the perspectives of economics and law; and (3) to draw some useful lessons for other developing countries. II. Overview of Alternative Mechanisms for Solving Distressed Firms In most market economies, whenever a conflict regarding debt settlement cannot be resolved through out-of-court or informal process, the creditors can exercise their rights through the civil court on grounds of breach of contract. This applies to both secured and unsecured creditors. While the enforcement of pledge may be simpler, the Thai legal process involves the enforcement of mortgage either through public auction of asset or foreclosure. Foreclosure is relatively less used since unpaid interest has to be accrued for five years. Such legal procedure, however, can be lengthy (between two to six years) and costly. In addition, Thai law still does not recognize floating charge. Before the 1997-98 crisis, financial institutions in Thailand relied heavily on the use of real estate as collateral for loans to minimize risks of nonpayment and to signal a creditable threat to debtors. This is supplemented by personal guarantee, usually extended by the owner if the company is a family-run business. These arrangements worked well for Thailand when it was experiencing sustained growth of 7 per cent per annum for several decades, as the value of land appreciated with the economic growth trend (Ammar 2001). …