ID:

5901641448

LB333 Case Review (Supreme Court of Thailand):

Judgement of the Supreme Court of Thailand No. 3318/2545 (2002)

Parties to the Case:

Requested Debtor: P. Capital Company Limited

Creditor: Thai Bank Public Company Limited

I. Facts and the Key legal issues of the case 1

The case concerns with a ‘reorganisation of a business’, where a reorganisation plan aims to

resolve financial difficulties of an insolvent debtor by affording an opportunity to restructure

its business instead of being adjudged bankrupt, and helping creditors to be fairly repaid.2

In this case, the P. Capital Company Limited (hereinafter the “Company” or the “debtor”)

had been insolvent and indebted to several creditors, which led to the submission of a petition

to the Central Bankruptcy Court for the reorganisation of its business. Here, the Central

Bankruptcy Court had considered such petition, and appointed P. Capital Planner Company

Limited as the “Plan Preparer”. Subsequently, the Creditor’s meeting was held on the 7

November 2000 to pass a special resolution to approve the reorganisation plan of the debtor’s

business in accordance with section 90/46 of the Bankruptcy Act B.E. 2483 (1940)

(hereinafter the “Bankruptcy Act”). The Creditors were grouped under the reorganisation

plan as follows: secured creditors (or “Group 1 creditors”), unsecured creditors who are

financial institutions (or “Group 2 creditors”), and unsecured creditors who are not financial

1
Judgement of the Supreme Court of Thailand No. 3318/2545,
<http://deka.supremecourt.or.th/search/index/810> accessed 4 February 2019.
2
Chinnavat Chinsangaram, et al., ‘Restructuring and Insolvency in Thailand: overview’ (2014),
Weerawong Chinnavat & Peangpanor Ltd.;
institutions (or “Group 3 creditors”). Following the creditor’s meeting, the Central

Bankruptcy Court approved the business reorganisation plan on 21 November 2000.

Nevertheless, one of the creditor (group 2 creditor) or known as Thai Bank Public Company

Limited (hereinafter the “objecting creditor”) appealed to the Supreme Court, making an

objection that the Court should not approve the reorganisation plan and to adjudge that

Company to be bankrupt instead. First, as the basis of its objection, the creditor contested that

the debt payment to Bangkok Bank Public Company Limited (who is group 1 creditor and

preferential creditor) (hereinafter the “Bangkok Bank”) under the reorganisation plan is not

fair to other creditors. The reason being is that the payment to Bangkok Bank was done via

transfer of pledged shares of Sin Bua Luang Public Company Limited and an additional cash

payment of 2,179,510.55 baht. Indeed, it is objecting creditor’s position that the Bangkok

Bank should not receive an additional cash payment because Bangkok Bank is already

entitled to debt payment through the transfer of shares. Therefore, the Company should repay

the unsecured creditors instead if they have such financial capacity.

Furthermore, the objecting creditor argued that ‘debt-to-equity swap’ is done in bad faith.

Debt repayment can be done in the method of converting debt to equity. In other words, debt

is exchanged for a predetermined amount of stock.3 In the creditor’s meeting on 7 November

2000, the unsecured creditors (both group 2 and 3 creditors) proposed under the

reorganisation plan to make the Company repay for its debt by converting the debt into

equity, i.e. convert debt into company shares. According to the plan preparer, the creditors

agreed that a number of shares would not be increased more than 1,666,666 shares, to allow

3
Michael Bowe and James W. Dean, “Debt-Equity Swaps: Investment Incentive Effects And
Secondary Market Prices” Oxford Economic Papers, Volume 45, Issue 1, 1 January 1993, p. 142.

2

the current existing shareholders to maintain the shareholding ratio of 75% after the debt-to-

equity conversion. It was further agreed that the total debts owed to unsecured creditors (both

group 2 and 3) worth 57,816,317.63 baht would be converted into shares at a price between

35-40 baht per share. However, according to the Company’s balance sheet, while the

registered capital is 50 million baht, the company had a cumulative loss of 177,133,959.62

baht. Therefore, the conversions of debt to ordinary shares are not as beneficial as receiving a

direct debt payment. Consequently, if the creditors accept the plan, the unsecured creditors

will not get the debt repayment and would receive valueless shares.

The objecting creditor also raised a concern that the business reorganisation plan also

removes the creditors’ right to enforce against the debtor’s collaterals. This signifies that the

unsecured creditors will receive less debt payment than in case of debtor entering into a

normal course of the bankruptcy proceeding. Moreover, if the Court were to hold that the

Company is bankrupt, the debtor’s assets sold at auction would have more value and would

be paid in a faster time than what is shown in the reorganisation plan. Additionally, the

creditors are entitled to take recourse from debtor’s surety in case of bankruptcy. With such

reasons mentioned above, it would be more beneficial for the majority of the creditors if the

Court were to adjudge that the debtor is bankrupt. To that end, the creditor requests the Court

to disapprove the debtor’s business reorganisation plan and adjudge that the debtor is

bankrupt.

Therefore, the questions presented before the Thai Supreme Court were;

1. Whether Court has the power to examine the contents of the plan?

2. Whether the Creditors are treated fair and equally under the business

reorganisation plan?

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 3. Whether the offer to convert debt to equity under the reorganisation plan is in

good faith?

4. Whether the release of guarantor under the reorganisation plan is in contrary to the

Bankruptcy Act.

5. In executing the reorganisation plan, whether the creditor receives better debt

payment than in case that the debtor is adjudged bankrupt?

II. Decision of the Court 4

Upon the appeal of the objecting creditor, the Supreme Court of Thailand agreed with the

Central Bankruptcy Court to hold that it would approve the business reorganisation plan of

the P. Capital Company Limited and to dismiss the creditor’s objection.

III. Analysis of the Judgement 5

The first issue, in which the Court had to address, is whether the Court has the mandate to

examine the content of the reorganisation plan. The Bankruptcy Act, section 90/58, stipulates

“The Court shall issue an order approving the plan when the Court considers that

(1)…(3)…” Indeed, section 90/58 prescribes set of criteria to determine when the Court can

exercise its discretion in approving the business reorganisation plan.6 According to section

90/58, when the Court considers that the plan contains all the particulars under section 90/42,

plan is not contrary to section 90/42 ter, and that the special resolution is passed in

accordance with section 90/46 (2), then the Court is entitled to issue an order to approve the

4
Judgement of the Supreme Court of Thailand No. 3318/2545,
<http://deka.supremecourt.or.th/search/index/810> accessed 4 February 2019.
5
Ibid.
6
Suntus Kirdsinsap, et al., “The Insolvency Review”, Law Business Research Ltd., edition 5, October
2017, p. 332.

4

reorganisation plan. In this case, the Court sees that the plan fulfils all these criteria. Hence,

the Court has the power to examine the reorganisation plan under the Bankruptcy Act. Here,

the Court noted that the purpose in use of such discretion is for the Court to take an active

role in the Thai economy, and to ensure fairness for all concerned parties.

Secondly, the Court examined the question of whether the debt repayment under the

reorganisation plan provides a fair and equitable treatment of all creditors. Section 90/42 ter

provides that “Rights of the creditors in the same group must receive equal treatment….”

Hence, when considering fairness, the Court must look at the creditors in the same group. In

our case, under the reorganisation plan, the group 1 creditor was offered debt payment by

transferring the shares of Sin Bua Luan Public Company Limited. For group 2 and 3

unsecured creditors, they agreed on the term to convert debt to equity under the plan.

Although both groups are offered to convert debt to equity, it is evident from the

reorganisation plan that the offer to group 1 creditor varied from group 2 creditors in terms of

the offered prices of shares. Nonetheless, the Court considers that as long as the plan treats

the creditors “in the same group” equally, such plan is deemed to be in accordance with

section 90/42 ter and section 90/58 (2) of the Bankruptcy Act. In other words, the plan can

offer debt repayment differently to various creditors i.e. treat creditors differently and still

would be deemed to be a fair treatment provided that the creditors are from different groups.

Therefore, in this case, the Court considered that the reorganisation plan provided a fair and

equitable treatment of all creditors.

Regarding the third issue, the Court considered whether the offer to convert debt to equity

under the restructuring plan is done in good faith. Although, the set-off of debt against the

shares of the company is prohibited by section 1119 paragraph 2 of the Civil and Commercial

5

Code as “A Shareholder cannot avail himself of a set-off against the company as to payments

on shares.” Indeed, it is a legal principle firmly established in our law that the shareholders

are liable for its debts to the par value of the stock subscribed by them respectively.7

Nevertheless, section 90/42 stipulates, “section 1119… shall not apply to the reorganisation

plans”. To that end, the Court held that the plan preparer could, therefore, make a capital

increase under the plan by converting debt into equity, and change the status of creditors to

Company’s shareholders. However, it is the Court’s view that such debt-to-equity conversion

is done in bad faith. This is because the debt to equity conversion under the plan necessitated

the debt worth 40 baht to be paid-off by Company’s registered shares worth 10 baht par

value. Therefore, the price of the debtor’s shares is not worth the value to repay the debt.

Hence, allowing such conversion to the Company’s ordinary shares under the plan is

considered to be done in bad faith.

The fourth issue is whether the agreement to release the surety under the reorganisation plan

is against section 90/60 paragraph 2 of the Bankruptcy Act. Here, the issue arose from the

conversion from debt to equity by issuing new ordinary shares of the Company valued at 35-

40 baht per share. To be more precise, the issue was that the actual market price of the shares

was less than the price of shares agreed (35-40 baht) for the purpose of converting debt into

equity. Thereby, the Court ruled that the converted shares would only be used to repay the

amount of debt equal to the market price of the shares. In other words, the shares converted

would only extinguish the debt equal to the value of shares at its current market price. This

signifies that the debtor did not make full repayment of its debt by issuing these shares under

the plan. Therefore, in such case of partial payment of the debts, the liability of the surety is

only partially extinguished. Indeed, this is in accordance with section 698 of the Civil and

7
Alessandro Stasi, “Principles of Thai Business Law”, Cengage Learning, July 2015.

6

Commercial Code, which states, “The surety is discharged as soon as the obligation of the

debtor is extinguished by any cause whatsoever.” On the contrary, it was agreed under the

reorganisation plan that the surety would be entirely released from its liabilities. According to

section 90/60 paragraph two, it provides that “The Court’s order approving the plan does not

have any effect of varying liabilities of persons who are the debtor’s partners or bear joint

liability together with the debtor or stand surety for or are in the same position as the surety

for the debtor…” Therefore, the plan that releases surety from its liability completely is

contrary to section 90/60, which is a section related to public order. Accordingly, the terms

under the plan to release surety’s entire liability would be void under section 150 of the Thai

Civil and Commercial Code. Having said that, the Court also expressed its opinion that such

nullity of the term under the reorganisation plan does not affect the integrity of the business

reorganisation plan as a whole. This is because such term is not an important particular that

is required by the law to be incorporated in the plan, and therefore, it is deemed that the plan

has a complete list under section 90/42 and section 90/58 paragraph 2 of the Bankruptcy Act.

The fifth issue, which the Court had to consider, was whether the creditor would receive

higher debt repayment in case it implements the reorganization plan or when the debtor is

being adjudged bankrupt. The Court sees that if the debtor is ruled its status to be bankrupt,

the unsecured creditors would not receive sufficient payment from the debtor. Whereas the

restructuring plan allows the unsecured creditor to receive payment through ordinary shares

of the company. Certainly, the unsecured creditors would become the shareholders of the

company, and would have the opportunity to receive dividends in case when the Company

makes profit.8 Hence, the Court sees that the implementation of the reorganisation plan would

be successful, as the creditors would receive payment in the amount of not less than that

8
Thai Civil and Commercial Code, section 1201.

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received in the case where the Court adjudges the debtor bankrupt under 90/58 (3) of the

Bankruptcy Act.

Finally, the Court had addressed the creditor’s objection that the Company bears a loss with

no prospect in recovery by a mere business restructuring. Therefore, it is objecting creditor’s

contention that there are no good reasons for the Court to approve the reorganisation of the

debtor’s business. However, it is Court’s position that the creditor should have raised this

objection before the Central Bankruptcy Court ordered the reorganisation process and prior to

the plan was approved in the creditor’s meeting. Therefore the Court dismissed such

objection of the creditor.

On such petition, the Supreme Court was faced with several conundrums. Ultimately, the

Court saw that the reorganisation plan has complete particulars as required by the law, and

treats all creditors equally. Here, the Supreme Court agrees with the Central Bankruptcy

Court to approve the reorganisation plan, and thereby, to dismiss the creditor’s objections.