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Thailand: New Business Security Act

The draft Business Security Act (BSA) passed its third reading by the National Legislative Assembly on August 7 2015

The draft Business Security Act (BSA) passed its third reading by the National Legislative Assembly on August 7 2015. After royal consent and publication in the Government Gazette, it will become effective after 240 days (section 2).

Unlike the laws of many developed countries, Thai law does not provide a way for a borrower to give lenders legal security in most types of movable property. This is a restraint on lending and borrowing, especially for borrowers with substantial inventories of raw materials, work in progress and products, accounts receivable, bank accounts, unregistered machinery and other movable property, and contract rights.

Under the Bankruptcy Act, in the insolvency context, there are only the following types of security: mortgages; pledges; rights of retention; and, preferential rights in nature of a pledge. There are no floating charges or other security over movable property (with few exceptions), and no mortgages of leaseholds or reclaimed land. There is no pledge substitution concept.

In practice, lenders and borrowers enter into additional security documents which provide the appearance of security in assets in insolvency, but may be unenforceable or otherwise of little practical value. Such security documents include, among others: assignments of rights, and conditional novations, of project documents; assignments of rights under performance security under project documents; conditional assignments of accounts; pledges of accounts; pledges of permitted investments; general pledges over movable property; assignments of insurances and reinsurances.

The BSA introduces business security contracts under which a borrower (security provider) provides agreed assets to a lender (security receiver) as security for repayment of debt, without the need to deliver the assets to the lender. The lender must be a financial institution or other person as prescribed in ministerial regulations. The parties agree on grounds for enforcement in the business security contract. The business security contract must be in writing and be registered with the business security registration office to be established in the Department of Business Registration (DBR), Ministry of Commerce.

The following types of assets may be subject to business security contracts, including assets acquired by the borrower in the future (sections 8 and 9): business; claims; movable property used in borrowers' business operation such as machinery, inventories, raw materials used for production of goods; immovable property where the borrower directly operates real estate business; intellectual property; and, other assets as prescribed in ministerial regulations.

The business security registration office has the duty to register, amend registration particulars, and cancel the registration. Its records will be open to the public.

In general, the lender may enforce security by foreclosure or by a sale by open bid. However, the BSA contains a number of provisions concerning enforcement of security in different forms of assets, including mortgaged assets under other laws.

The BSA sets out qualifications of a security enforcer, and rules governing licensing of security enforcers. In cases where a business is used as security, a security enforcer must be appointed, and must follow the prescribed enforcement procedures.

The BSA has one annex (rate of fees). The fee for registration of a business security contract is: (i) in the case of land, the fee will be equal to the fee for registration of a land mortgage (one percent of the mortgaged amount) but no more than Bt200,000 ($5,500); or (ii) in the case of assets other than land or business, the fee will be no more than two percent of the amount secured, but no more than Bt200,000.

The BSA has 94 sections, some of which prescribe enforcement processes for different types of assets, and some in light of third party rights under mortgages or other security interests. It provides for supervision of certain findings by the civil court.

The Minister of Finance and Minister of Commerce are in charge of enforcement of the BSA, and have the power to issue ministerial regulations and notifications for implementation of the BSA.

It will be necessary to wait for the regulations and notifications to be published, to have a better understanding of: (i) the administration of the BSA; (ii) acceptable forms of business security contracts, and meaning of 'such agreement must not be contrary to the public order or good morals' (section 11); (iii) risks posed by conflicts with security interests under other Thai laws; (iv) the importance and value of the continued use of the informal security documents used in practice (as listed above); and, (v) the number of business security registration offices in Thailand.

CCC section 305 is being amended to include business security to pass with a transfer of a claim, in addition to rights of mortgage or pledge.

Supattra Sathapornnanon, Nopamon Thevit Intralib and Sarunporn Chaianant

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