Don’t Throw the Keys and Run: New Hope for Small Business in Financial Distress

Home » Don’t Throw the Keys and Run: New Hope for Small Business in Financial Distress

This year is expected to be challenging for small businesses due to the possible recession in key markets, disruptions of global supply chains caused by issues such as the Ukrainian war, and the continuing fallout from last year’s crypto winter.

In Thailand, many small businesses will struggle to manage their finances and make debt payments. However, despite these continuing challenges, it is widely considered that the Thai Bankruptcy Act B.E. 2483 (“Bankruptcy Act”), which is the main legislation for the rehabilitation framework in Thailand, has not fully served its key purposes, especially for expediency and meeting the specific needs of Small and Medium-sized Enterprises (SMEs). Only a few SME business rehabilitation cases have ever been filed with the court, which has limited rehabilitation options for struggling SMEs. Faced with a struggling SME sector, Thai lawmakers are attempting to reform the Thai rehabilitation law and procedures to address these issues.

Back in 2021, the Cabinet gave the go-ahead to make changes to the Bankruptcy Act. In August of 2022, the House of Representatives decided to push ahead with a proposed draft amendment and put the Legal Committee in charge of exploring the possibility of such changes. Recently, the Legal Committee completed their study and finalized the draft amendment to the Bankruptcy Act (known as the “Draft Amendment”), which has now been submitted to the House of Representatives for their review and approval. The final approval may await the coming elections, but the basic changes are known.

To break down the changes to SME Business Rehabilitation:

  1. The debt limit for SME business rehabilitation will be increased from less than THB 10 million to less than THB 50 million. This means that any SME who owes less than THB 50 million to creditors can file for SME business rehabilitation, while those who owe more than THB 50 million will need to go through ordinary business rehabilitation. This is a significant expansion of the ceiling for expedited SME processes.
  2. The SME will be designated as the Planner and the Plan Administrator under the new scheme, and the Draft Amendment will establish the classification system for creditors in SME business rehabilitation as follows:
  1. Secured creditors; or
  2. unsecured creditors for debts that occurred as a result of business operation (which can be classified into several sub-categories); or
  3. unsecured creditors for debts that did not occur as a result of business operation.
  1. Under the current system, SME debtors must submit a pre-packaged rehabilitation plan that has already been approved by all creditors. However, this requirement will be removed under the Draft Amendment. The pre-packaged plan scheme will still be available as an option for both ordinary and SME business rehabilitation.

Since pre-packaged plan submission will no longer be mandatory for SME rehabilitation plans, there will only be a need for a creditors’ meeting and then court approval of the plan. The SME can hold a creditors’ meeting, where there will be a vote by all creditors either at one meeting or separate meetings (for separate classes of creditors) to vote and agree on the proposed rehabilitation plan.

  1. Finally, the SME will have three months from the date of approval of the rehabilitation submission to prepare the plan and obtain approval from the majority of creditors.

A Simpler and Quicker Process

The Draft Amendment proposes a new pre-packaged scheme for SME business rehabilitation, which will be included in the new Chapter 3/3 (Expedited Rehabilitation Procedure).

This part of the Draft Amendment is influenced by the Pre-packaged Bankruptcy provisions found in Chapter 11 of Title 11 of the U.S. Code (commonly referred to as Chapter 11).

This pre-packaged scheme has the potential to reduce risks and uncertainties arising in creditor negotiations in conventional restructuring. It will also allow distressed businesses to emerge from bankruptcy more quickly and efficiently. Additionally, it could facilitate out-of-court negotiations between the SME and its creditors, resulting in significant cost and time savings for all parties involved.

Under the Draft Amendment, the SME can file a petition for a pre-packaged rehabilitation scheme by presenting the pre-packaged plan and evidence of creditor approval at the time of initial filing. The plan will be subject to the same legal criteria as all rehabilitation schemes and will be subject to court scrutiny.

If the Court finds the petition valid, it will issue a business rehabilitation order and approve the rehabilitation plan concurrently. The pre-packaged proceedings and the approved rehabilitation plan will be binding on the creditors who approve the plan or did not vote but received notification of the creditors’ meeting to vote on the approval of the plan. This would save significant time since several stages, such as a creditors’ meeting and plan consideration, would be eliminated,

Overall, these changes present a viable and cost-effective option to deal with creditors for financially stressed SMEs. This simple process will all SMEs to negotiate and agree on a debt repayment plan and have it ratified by the courts. This gives certainty to the SME trading as an ongoing business as well as ensures Directors are not unexpectedly held liable for continuing to operate the business.

Silk Legal specializes in matters related to bankruptcy, insolvency, and restructuring. We have guided several businesses, from SMEs to multinationals, through the process of rehabilitation and recovery. If you are a small business looking for assistance, please contact us through [email protected].

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