Thailand’s long awaited and much anticipated Business Collateral Act B.E. 2558 (2015) (Act), was published in the Royal Thai Government Gazette on 5 November 2015 and will come into force on 1 July 2016.
The objective of this Act is to help boost Thailand’s economic growth and will provide business operators, especially SMEs, greater access to sources of investment for their businesses.
Under the Thai Civil and Commercial Code (CCC), the only security capable of being given by a borrower was by way of a pledge or mortgage. Even then, only land and buildings could be mortgaged. Until now, it has been illegal to mortgage, or pledge, certain types of moveable assets such as raw materials, work in progress, or unregistered machinery.
Additionally, it has been necessary for a borrower, or a pledgor, to deliver the pledged property to the lender to create a valid and binding pledge.
A floating charge was an alien concept. Such constraints have long been recognised as limiting lending abilities and impacting negatively on the potential for growth of business in Thailand.
Until Now Under the Act, the limitation on the type of assets that can be given as collateral is eliminated. It is now possible to have a business, a right of claim, moveable property of the security provider used in operating businesses such as machinery, inventories or raw materials, real property, intellectual property or any other assets as specified in the ministerial regulation as collateral.
The Act creates a new form of contract known as a business collateral contract between a borrower, or security provider, who agrees to provide pre-agreed assets, and a lender, or a security receiver, who in turn lends money against those assets.
A Major Shift?
While the BCA represents a major shift in the legal framework of secured transactions in Thailand, there are still a number of issues which need to be clarified in practice. Ultimately, whether the BCA proves to be helpful to Thai borrowers will depend on the extent to which it is relied upon by parties seeking to extend and obtain credit.
Below is a summary of the key provisions under the Act:
A security provider can either be an individual or a legal entity. However, under the Act, security receivers must be a financial institution (or any person specified in the ministerial regulation).
A security provider retains the right to possess, use, exchange, dispose, transfer or mortgage the collateral, including using it in manufacturing process, provided the security provider cannot pledge the collateral under the Act further, otherwise the pledge will be voidable.
A business collateral contact must be made in writing and registered centrally.A new office known as the Business Collateral Registration Office is to be established in the Department of Business Development of the Ministry of Commerce which will be responsible for the registration of security, including the amendment and cancellation of the registration records as well as making those records public.
A security receiver has a preferential right to debt payments from the collateral before other creditors regardless of whether the collateral is transferred/assigned to a third party or not.In cases of enforcement of a business which is registered as collateral, enforcement action must be undertaken by a security enforcer, who is required to be licensed.
The Act also sets out the methods of enforcement for assets and business given as collateral, which differ from the CCC. In the event the collateral under the Act is also mortgaged, the mortgagee is permitted to enforce the mortgage under the procedure under the Act.
In case a security provider is a third party and not the debtor and if the proceeds realised from the enforcement are insufficient, the creditor can bring a claim for the shortfall from the debtor, but cannot claim for a shortfall from the security provider and any agreement to the contrary shall be void.