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Thailand: Mortgagors and sureties’ protection

Thai law governing surety and mortgages is found in the Civil and Commercial Code (CCC) and has been relatively stable over the years. However, the amendments described in our November 2014 briefing are already out of date.

On November 13 2014, the Act on Amendment to the CCC 20 (BE 2557) was published in the Government Gazette and came into effect on February 11 2015 (Amendment 20). The amendments were made to provide better protection and fairness to sureties and mortgagors who are not a principal debtor. However, such changes impact on how lenders assess the credit value of Thai-law governed suretyships and mortgages.

Another proposed Act on Amendment to the CCC (February CCC Amendment) passed first reading by National Legislative Assembly on February 12 2015. If the proposed amendment is enacted, it will be retroactively effective as of February 11 2015. Under the proposed Act, there are certain exceptions to Amendment 20.

While most of the amendments are not retroactive, several do apply to existing contracts. It may be necessary to review existing contracts in light of the new amendments. This briefing includes all proposed amendments in the February CCC Amendment.

Suretyship

An obligation secured by a surety must be expressly prescribed by the suretyship contract, including objectives, nature of obligation, maximum liability and timeframe, with some exceptions.

Any agreement providing that the surety take liability similar to or as a joint debtor should be void. The February CCC Amendment provides an exception to this provision for when the surety is a juristic person who agrees to take liability similar to or as a joint debtor.

When a debtor is in default, the creditor must notify the surety in writing within 60 days of the date the debtor is in default. Otherwise, the surety will not be liable for interest and other charges arising after the lapse of the said 60 days. Any agreement which is contrary to this section is void.

In cases where the creditor does any act to reduce the secured obligation, the surety may be discharged upon performance of the reduced obligation. Any agreement which increases the liability of a surety is void.

If a creditor grants an extension of time for performance, the surety will be discharged unless it agrees to such extension of time, after it has been granted. Any agreement to the contrary is void. The February CCC Amendment provides an exception for when the surety is a financial institution or a surety for remuneration in the ordinary course of business.

Mortgages

In the case of a mortgage of property to secure indebtedness by a third party, the mortgagor's liability is limited to the value of the mortgaged property. Any agreement which provides for a mortgagor being liable for more than the value of the property is void. The February CCC Amendment provides an exception for when a juristic person becomes a debtor and a person with the authority to manage such juristic person mortgages its property as security for such debt of the juristic person, and the mortgagor enters into a separate suretyship agreement. In such case, a juristic person may be liable for more than the value of the mortgaged property.

When a debtor is in default, the mortgagee must notify the debtor in writing to perform its obligation within a reasonable time (not less than 60 days).

In the event of a mortgagor mortgaging its property as security by a third party, the mortgagee must deliver written notice to the mortgagor within 15 days of the date the debtor is notified. Otherwise, the mortgagor will not be liable for interest and other charges arising after the lapse of 15 days.

A mortgagee may request the court to allow foreclosure of the mortgage (instead of a public auction) if the debtor has failed to pay interest for five years, and the value of the property is less than the unpaid amount.

With the consent of the mortgagor, a mortgagee may proceed with the sale of the mortgaged property by public auction (without filing an action in court), if there is no other mortgage on the same property.

Effectiveness of a mortgage agreement requires registration with the relevant registration officer. Due to the enactment of Amendment 20, the Land Department issued a letter to provincial governors, which has been circulated to almost all of the provincial land registration offices to act as a guideline for the registration of a mortgage under Amendment 20, with the summary of the amendment and the proceeding of the competent official. The officer has discretion to review the content of the agreement to avoid the registration of any provisions that become void as a result of the enactment of Amendment 20. Therefore, any registration of the mortgage agreement and the annexed agreement after February 11 2015 should be under special scrutiny to be in accordance with the Amendment 20, especially a mortgage of properties granted by a third party who is not a debtor. The parties may seek a prior opinion or consult with the relevant registration officer on case by case basis prior to the registration.

The Secured Lending Bill, which would allow the registration of security interests over moveable property and charges over bank accounts, for example, passed the first reading of the National Legislative Assembly on February 26 2015.

Supattra Sathapornnanon, Nopamon Thevit Intralib and Sarunporn Chaianant

Supattra SathapornnanonNopamon Thevit Intralib Sarunporn Chaianant


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