Thailand Law Journal 2011 Spring Issue 1 Volume 14

As discussed, Thai offering regime relies on “merits base” approach, while other mature market relies primarily on “disclosure-based” approach. The main disadvantage of Thai merits-base approach is that it enforcement and compliance become very costly in merit-based regulation¹¹⁴; however, the investors’ rights could be firmly protected as the SEC plays significant roles in determining a “qualified” products for investors. Nonetheless, the role of the disclosure-based regulator would focus on the protection of potential investors¹¹⁵, the main challenge is that the disclosure-based approach requires a fair balance between market liquidity and investor protections, taking into account the investors’ knowledge of capital market. Akin to other emerging market in south-east Asia, Thai investors’ knowledge is still low.

For Thailand, a fair balancing between protecting investors’ rights and escalating the liquidity within the market is strongly required. The governing laws should be gradually deregulated, while rights of the investors should be firmly protect by taking into account their financial literacy. It must be noted that Thai government is currently working on this problem in order to minimizing the redundancy of rules and practices, and moving toward the full implementation of disclosure-based approach so that certain deficiencies existing in the market would be removed.

Another crucial impairment is that the secondary market relies on an “agency basis”, rather than by banks or brokers operating as dealers or “market-makers” committing risk capital to the market. This is the result of the limited size of debt product, and lack of supporting tools to make continuous bid-ask quotes with commitment to those quotes.¹¹⁶  The situation is different in most of developed capital market, such as German capital market, where the financial institutions plays significant role. Even in current electronic era, market makers in German continue to be widely used in one form or another as liquidity providers, stabilizers and order managers of the market.¹¹⁷

To be a market maker, the dealer needs to have sufficient funding to purchase and sell debentures all the time; therefore, none of Thai dealers prefers to follow this approach because of an insufficient funding. There is only the exception where some of big commercial banks may collectively make a bid and offer price.¹¹⁸

Moreover, the overall trading is concentrated in the OTC wholesale market; approximately ninety-eight percent of trading. Most of transactions are being conducted over the telephone, outside the control of the authorities, rather than on the FIRST system; only five percent through FIRST.¹¹⁹

In relation to reporting system, every dealer is required to report any debt trading to the TBMA within "half an hour". Thailand, in comparing with other countries, has "high standard" on the timeframe of reporting process. The good example is the case of Canada, where CanPX Inc operates as the information processor for corporate debt. According to the National Instrument 21-101 ("NI 21-101"), exchanges and any alternative trading system displaying orders of exchanges-traded securities must provide accurate and timely pre- and post-trade information about these orders to the information processor.¹²⁰ Any marketplaces trading corporate debt, and interdealer brokers, and brokers that execute trades of corporate debt outside of a market place are required to provide trade information to information processor within “one hour” of trade.

4 The enforcement structure of bondholder's rights

The TBMA's Market Convention spells out the terms and conditions of bond practice, involving the protection of bondholder's rights and the enforcement of their rights.

Thailand, similar to Switzerland, the Netherlands, Germany and Luxembourg have adopted the idea of fiduciary representative for bondholders, but they are not trustee in the common law sense as they do not hold trust property.  They also have no power to take legal action on the behalf of bondholders as titleholders and creditors of the issuer, but the statute or bondholders may mandate them to do so.¹²¹

In case of the Event of Default, the TBMA standard practice provides that the bond can be accelerated. The principle and any accrued interest shall become immediately payable by the written notification of the bondholder representative to the issuer.¹²² In contrast, the U.S. standard provides more choices of remedies: (i) the acceleration of the bond; or (ii) any other remedy to collect the payment of principle and interest or to enforce the performance as a result of acceleration, wherein these remedies will be exercised by the trustee.¹²³

Under Thai law, bondholders can only collectively exercise only upon the fulfilment of strict requirements set forth in TCRD through their bondholder representative.¹²⁴ Nevertheless, the U.S. practice provides more type of enforcement actions by: (i) allowing bondholders to individually exercise their rights regardless as to whether their trustee approves their suit; (ii) collectively accelerating (more than twenty-five percent of holder); or (iii) collectively (more than twenty-five percent of holder) pursuing other remedies, such as through the Non-Action Clause. In this regard, it must be noted that the individual exercise of rights under the U.S. law shall be done only for the payment of principal that has become due as a result of an acceleration pursuance to the court's interpretation.¹²⁵

As illustrated, the enforcement actions for remedies under the Thai practice are considerably weak when compared with the U.S. practice given that it provides more different approaches. Under the Thai practice, the law set forth that bondholders shall exercise their rights only through their bondholder representative. The law is very restrictive for bondholders to act individually, although there is no explicit idea of "Non-Action Clause". It should be noted that the laws governing bondholder representative is not exist, but there is new launch of Thai trust law as an alternative for preventing insolvency risk.

It should be further noted that there is no explicit principle of minority protection under the Thai law and the TBMA's Market Convention, while some civil law countries, such as Japan, requires that the bondholder resolution is subject to judicial review so that the court can step in to ensure that such resolution is not deemed as minority oppression.¹²⁶

Moreover, as reported by the World Bank and International Financial Corporation, contract enforcement delays in Thailand are rather high, similar to other Asian countries – India, Malaysia and China, It takes approximately four-hundred and seventy nine day with thirty-six procedures for dispute parties to get court order with respect to the contractual dispute, while enforcing contract in Australia requires only a year with twenty-eight procedures involved.¹²⁷ Nevertheless, when comparing with other East Asia and Pacific countries, Thailand posits “above” the average standard.¹²⁸ It must be noted that the delays of contract enforcement causing the reliance of banks on short-terms debt, which may result in asset-liability mismatch problems for corporate borrowers. In certain case, borrower will charge a premium to its counterparts as a result of contract enforcement uncertainty.

Furthermore, bondholder protection relates to a number of legal aspects, and, inevitably, the issue of corporate governance. High level of corporate governance involves the robustness among the works of the board of directors, its shareholders, and other stakeholders (bondholder), in controlling company’s direction and monitoring the company’s operation and administration.¹²⁹ Corporate governance could ensure the strong leadership skill, good planning skill, and ability to control power of the directors. Nevertheless, the legislation on civil penalties and class action law are not existed under Thai laws. This result in the enforcement of SEA is not robust. Although Thailand ranks high in Asia on its corporate governance practice, there is still the lack of effectiveness of independent directors and internal control, causing the ineffectiveness of check and balance system, and impairing the effective role of investor to promote good governance among issuers (listed companies).¹³⁰

Moreover, an incentive to promote corporate governance seems to concentrate on large-sized corporations. This problem is also fueled by the fact that there is no mechanism in promoting medium-sized companies in enhancing their corporate governance regime; therefore, investors are reluctant to invest in medium-sized firms, resulting in the overall volume of bond trading is limited and illiquid. 

Comparing with other mature markets, EU Member States can exhibit a rich diversity in corporate governance practices, structures and participants, where some countries achieved co-operative relationships and consensus, and the others achieved competition and market processes in their corporate governance frameworks.¹³¹ The code law provides the requirement for a supervisory body that is distinct from management in its decisional capacity for objectivity to ensure accountability. These codes invariably urge companies to appoint outside (or nonexecutive) directors, and some truly “independent” directors.¹³²

5 The trust law of Thailand and other Asia countries

According to academic commentaries, the nature of common law trust could be considered into four categories, as follows:
(a)  the vesting of legal ownership of the trust property with the trustee, wherein the settler is required to transfer legal title of the trust property to the trustee. This embracement of dual ownership is extremely widely adopted in common law system, where there is a separation of management and beneficial enjoyment over the trust assets;
(b)  the segregation of trust assets from trustee assets, where the trust assets are free from the claims of the trustee's spouse, successors, or creditors;
(c)  the imposition of fiduciary duty; and
(d)  the availability of tracing and imposition of proprietary remedies.

In essence, only the core concept and substantial requirements of the trust are adopted into civil law jurisdiction including Thailand, due to the attempt to limit the adverse impact on the indigenous legal regimes; especially the law of property. In Asia, trust law is generally incorporated into the legal system of some jurisdictions, such as Japan, South Korea, Taiwan and China with the main objective to enhance the financial infrastructure. In contrast, the concept of trust law is applied in Thailand only in financial arena through the enactment of Trust Act, as discussed.

Akin to Japan, Taiwan, and South Korea, Section 11 of the TTCMA states that the transfer or disposition of asset is required by the settlor to the trustee. The implication of this provision involves two elements: the transfer or disposition of property to the trustee which it will be the title holder of the trust property; and the management of such property wherein the trustee will hold the administrative powers over the property. Nevertheless, the characteristic of trust is uncertain in China, in which Article 2 of the Trust Law of the People's Republic of China ("TLC") adopted the different approach that "[t]he settlor ... entrusts (weituo) the rights in his property to the trustee....".¹³³The absence of the term "transfer" (zhuanyang) by substituting with the term "entrust" induces in problematic interpretation, since "entrustment" is commonly used for the creation an agency relationship¹³⁴ (or a mandate), regardless the transfer of property to the agent. Therefore, "entrustment", as spelt out in TLC seems not to be the unique legal term for establishing trust, and is deemed with no reference to the transfer of assets.

Section 19 and 34 of the TTCMA provide that the trustee shall segregate trust assets from those his own, and such asset shall not be affected in case of insolvency. These provisions are similar to the law of China, Taiwan, South Korea and Japan.¹³⁵ Thai law and the other five jurisdictions also stipulated that the asset of trust shall include the initial settlement, and any benefits arisen from the assets as the result of management, use disposal or other circumstances.¹³⁶

The trust law in Thailand, akin to Japan, Taiwan and South Korea, does not expressly refer to the fiduciary duty; however, the rudimentary of fiduciary duty was incorporated through other form, for instance, the prohibition that the trustee could not enjoy the benefits of the trust. There are adequate mechanisms to ensure the necessary tension between the trustee and beneficiary, which is the core to the common law trust.¹³⁷  In addition, the activities of trust will be under the supervision of SEC, where it could launch regulations, conduct a fact-finding investigation, or impose sanction with respect to the TTCMA. Similar to the TCL, Section 30 of the TTCMA set forth that trustee shall handle trust affair for the highest benefit of the beneficiary. The TTCMA, likewise the TCL, is deemed to be the most elaborate in relation to the duties of the trustee.¹³⁸

One observation (unlike other jurisdictions), Thai trust law goes beyond the concept of remedy nullification that it is likely to provide the imposition of constructive trust on traceable assets in hand of the third parties, according to Section 44 of the TTCMA. This means that it could provide fuller protection to the trust fund than the remedy of nullification by treating the nullification remedy as having been executed, and so the property as having already reverted back to the trust fund; however, it is subject to certain conditions stipulated under the TTCMA.¹³⁹