To improve the competitiveness of the financial sector, the Thai government and another 12 Asian nations, have tried to promote Asian bonds by organizing Asian Bond Markets Initiative which provides online access to financial and regulatory information about the region’s bond markets.  Further development of bond markets might help motivate banks to increase their operational efficiency and to become more active in monitoring corporate governance of their debtors.

Because the pre-crisis bankruptcy law did not provide sufficient protection for creditors, the Thai government, in compliance with the IMF’s call for legal reform, rapidly enacted a new Bankruptcy Act in March 1998, amending the Bankruptcy Act of 1940.  The new law incorporates elements of the U.S. Bankruptcy Codes Chapter 11, British Insolvency Law and the Singapore Companies Act Regarding Judicial Management.  The new law has the following five major changes which enhance the creditor rights that were not part of the old law (Urapeepatanapong et al 1998).  First, for the first time in Thai history, the law allows for reorganization as an alternative to liquidation of a debtor’s assets.  Second, at least 50% of creditors must approve the reorganization plan before the court can approve the plan.  This important right of creditors to vote for or against the plan increases the creditors’ chance to gain control over the debtors and possibly receive repayment of debts greater than that which would be received if the debtors were declared bankrupt.   Third, creditors can also vote for or against the planner’s appointment.  Fourth, the reorganization plan can be submitted by creditors, debtors or relevant state agencies.  Fifth, if the debtor meets the requirement per the Act and the court has approved the reorganization, creditors may provide further financial assistance to insolvent debtors without losing the right to make claim to payments in a future bankruptcy case.  In sum, this new law should protect insolvent debtors while improving the creditor rights, thereby, providing incentives to foreign creditors to inject funds to reorganize businesses.

However, the new law also has the following shortcomings (Baker & McKenzie, 2003; and Urapeepatanapong et al, 1998).  First, similar to the old law, the debtor’s insolvency must be established by proving that the liabilities have exceeded the assets (the balance sheet test).  A more accurate indicator of insolvency would be the debtor’s inability to pay debt when due (the cash flow test).  Second, the official receiver has the sole discretion to determine which creditors can vote on a reorganization plan.  The official receiver’s order is final, leaving the creditors with no recourse to appeal.  Third, the Act limits the rights of secured creditors to enforce their security once the debtor receives approval for reorganization.  This limit may lead to secured creditors voting against the plan to subject the debtor to bankruptcy (liquidation).  Fourth, Section 94(2) of the old law remains part of the new law, i.e., creditors that extended credit to a debtor knowing the debtor was insolvent would be prevented from sharing the proceeds of a distribution of the debtor’s assets in a subsequent bankruptcy case.   Such creditors cannot claim loans extended to the debtor before the court’s approval of the debtor’s reorganization.  Fifth, the Act gives the court wide discretion in supervising reorganization.  Because the Act is relatively new with little or no precedent to guide the court, there is a concern that the court’s discretion may be used in a manner inconsistent with the creditor rights.  In deed, Japanese investors have started to question the credibility of the law after the central Bankruptcy Court’s recent resolution on the Siam Strip Mill case in favor of the company’s owner (Wiriyapong 2003).  In addition, the Act is not designed to deal with a major problem of Thailand which is liquidation and foreclosure (Vatikiotis, 1998).  The process of liquidating a company’s assets and foreclosing on property remains hostage to a cumbersome legal process that can take as long as five years.  A bankruptcy will still be administered by an official receiver’s office which does not aggressively collect money owed to the creditors.  This means foreign creditors would still have very difficult time obtaining insolvent companies’ assets and the collateral behind bad loans.

Institutional Investors

The only institutional investor which has significantly affected Thai corporate governance is California Public Employees’ Retirement System (CalPERS).  In February 2002, CalPERS announced that it would divest investments in Thailand and three other ASEAN countries following its review of corporate governance, transparency and market factors for emerging markets (Polkuamdee, 2002).  In response to CalPERS’s announcement, the Thai government set up a national level committee on corporate governance headed by the Prime Minister, and declared 2002, the “Year of Good Corporate Governance”.  This national-level committee has six sub-committees.  The first subcommittee is responsible for proposing: (1) amendments to the Public Company Law, and (2) a method to enhance corporate governance of listed companies.  The second subcommittee is to review accounting, external auditing and internal auditing standards, and code of ethics for accountants, and to draft an Accounting Profession Act.  The third subcommittee is to review the code of best practices for listed companies and to propose additional guidelines to raise the standard of corporate governance.  The fourth subcommittee is to set principles for raising corporate governance standards of commercial banks, finance companies and insurance companies.  The fifth subcommittee is to set principles for raising corporate governance standards of securities and investment management companies.  The sixth subcommittee is to conduct a promotion plan to educate the public on corporate governance.  

Although Thai institutional investors have been inactive in terms of corporate governance, this could be changed as a result of an establishment of Institutional Investors Club in July 2002.  The club members which are mutual funds, provident (retirement) funds, social security funds and insurance companies are encouraged to use corporate governance as one of their investment criteria and to exercise their monitoring judgment more vigilantly in their voting at a company’s Annual Meeting.  Consistent with the club’s objective, the SEC may soon require managers of Thai mutual funds to use corporate governance as one of their investment criteria and to disclose to fund-holders how they incorporate corporate governance in  their voting.