27 August, 2015
Guarantors are subject to a number of important obligations under Thai law. Guarantors can be held jointly liable with a debtor, or worse, solely and entirely liable as a primary debtor. In addition, creditors often use their higher bargaining power to force guarantors to waive their rights as secondary debtors, meaning that certain fundamental rights, such as the requirement for creditors to first call upon debtors, are no longer enforceable.
The main forms of security available under the Thai Civil and Commercial Code are:
- pledge; and
- guarantee (suretyship), corporate or personal.
Thailand, however, does not provide for many of the security rights that are available in common law countries, such as liens and charges. Therefore, creditors often elect to use guarantees—both corporate and personal—instead of security interests. Consequently, guarantors are tremen- dously important to creditors and they are frequently called upon to provide guarantees.
Despite their popularity, guarantors are not afforded an adequate level of protection. The Supreme Court has ruled that an agreement which is contrary to a guarantee provi- sion, such as an agreement that requires a guarantor to be liable as a joint debtor, is enforceable because an act is not void if it differs from a provision of any law if such law does not relate to public order or good morals under Section 151 of the Civil and Commercial Code.
Therefore, as guarantee laws do not relate to public order or good morals, exemptions to the laws are permitted. The result is that guarantors are forced to sign agreements which are contrary to the general provisions of guarantee laws—provisions which are intended to protect guarantors’ rights as secondary debtors.
Corporate guarantors can still be liable as joint debtors or primary debtors. If you are a corporate guarantor and your company is regarded as foreign under the Foreign Business Act, the provision of a corporate guarantee to secure a parent company’s or affiliated company’s debts would be deemed as a service business, which is restricted.
In a sign that things could change for guarantors, new amendments to the Civil and Commercial Code’s guarantee and mortgage provisions will soon come into effect. This includes the Civil and Commercial Code Amendment Act (No. 20) B.E. 2557 (Amendment No. 20), which became effective on February 11, 2015, and another recent draft amendment of the Act (New Amendment), which was approved by the National Legislative Assembly on May 14 and is currently pending publication in the Government Gazette.
Amendment No. 20 aims to provide greater protection of rights and fair treatment to guarantors who are not primary debtors. However, local lenders have expressed discontent with Amendment No. 20 because it offers the same level of protection to individual guarantors and corporate guaran- tors. In response to the outcry, the New Amendment will introduce changes to amend the provisions that relate to guarantors and mortgagors who are juristic persons, finan- cial institutions, or in the business of providing guarantees for remuneration.
Some of the most significant changes introduced by Amendment No. 20 and the New Amendment relate to corporate guarantors. Under Amendment No. 20, Section 681/1 has been added to the Civil and Commercial Code, which provides that:
Any Agreement which specifies that a guarantor must be liable in the same manner as that of a joint debtor or in the capacity of a joint debtor shall be void.
The New Amendment added a second paragraph to Section 681/1, as follows:
The above provision is not apploicable to a gurarantor who is a juriistic person and hwo has concented to be bound in the same manner as that of a joint debtor, or inthe capacity of a jount debtor. In such cae, a guarantor who is a juristic person shall have no rights as provided in Section 688, 689, and 690.
Under these provisions, guarantors who are juristic persons and who have consented to be bound as a joint debtor can still be held jointly liable with debtors. In such a case, they have no rights as secondary debtors to request and require lenders to demand and call upon debts from debtors first. These are rights provided under Sections 688, 689, and 690 of the Civil and Commercial Code.
In conclusion, corporate guarantors can still be liable as joint debtors or primary debtors. Furthermore, if you are a corporate guarantor and your company is regarded as foreign under the Foreign Business Act, the provision of a corporate guarantee to secure a parent company’s or affiliated company’s debts would be deemed as a service business, which is restricted under List 3 (21) of the Act.
Therefore, a Foreign Business License would need to be obtained before entering into a guarantee agreement. If lending and guarantee arrange- ments involve foreign lenders, then an approval in principle from the Bank of Thailand regard- ing Foreign Exchange Control regulations is also likely to be required.
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