Amendment to Thai General Collateral Law to be Effective 11/2/2015

Thai general collateral law, i.e. Title XI and XII of the Civil & Commercial Code of Thailand (CCC), has been amended and will become effective as of 11/2/2015. The amendments are meant to confer to guarantors and mortgagors more right protection and justice, and definitely expose creditors to a higher level of financial risks.

The amendments to the CCC are highlighted below.

1. Suretyship/Guarantee

1.1 In case of a future or conditional obligation, it may be secured for the event in which it would have effect, provided the objectives of the secured obligation, description of the secured obligation, the maximum secured amount, and the period the secured debt can be originated must be specified, except for a guarantee for a series of transactions without limit or time in favor of the creditor. Any contractual provision not complying with this requirement is deemed void.

Further, a guarantee must clearly specify the secured obligations or contract and the guarantor will be held liable only for the specified obligations or contracts.

1.2 It is clearly provided that any deviation from the following provisions, from which exemptions are usually inserted in letters of guarantee in Thailand in an attempt to avoid the effect of these provisions, is deemed void:

(1) An obligation, resulting from a contract which under mistake or incapacity does not bind the debtor, can be validly secured if the guarantor at the time of binding themselves knows such mistake or incapacity.

(2) Besides the defenses the guarantor has against the creditor, the guarantor can also set up defenses they have against the creditor;

(3) The guarantor is discharged as soon as the obligation of the debtor is extinguished by any cause whatsoever;

(4) The guarantee for a series of transactions without limit or time in favor of the creditor can be terminated by the guarantor for the future by giving notice to the creditor to that effect. After the notice has reached the creditor, the guarantor will no longer be held liable for any transaction done by the debtor.

1.3 Any agreement requiring the guarantor to take the same liabilities as a joint debtor or be liable as a joint debtor is deemed void.

1.4 A creditor is required to notify the guarantor within 60 days from the date of the debtor’s default, failing which the guarantor will be discharged from their liabilities in respect of interest, compensation and encumbrances accessory to the debt and accrued after the sixty-day period.

1.5 As any provision requiring the guarantor to take the same liabilities as a joint debtor or be liable as a joint debtor is deemed void, the current exclusion of the rights to which a guarantor will be entitled where they take liabilities as a joint debtor have been removed.

The provision has been replaced with a provision to discharge the guarantor from the guarantee where the creditor takes any action resulting in a reduction of the amount of guaranteed obligation as well as interest, compensation, or encumbrances accessory to the obligation, if the obligation so reduced has been settled in full by both or either of the debtor and the guarantor. Any contractual term imposing any burden on the guarantor greater than the foregoing is deemed void.

1.6 A prior consent to the creditor’s granting extension of time for the debtor’s performance of obligation, which results in the guarantor being discharged from the guarantee, currently prevails in letters of guarantee in Thailand in order to prevent the discharge. The law has been amended to render such prior consent unenforceable. This means the creditor will be required to seek consent from their guarantor prior to granting to their debtor any extension of time.

2. Mortgage

2.1 It is clearly provided that any deviation from the provided pre-lawsuit procedure as specified in Section in Section 728, 729 and 735 of the CCC, including the requirement for the mortgagee to have a written pre-lawsuit notice to the debtor to perform their obligation within a reasonable time, which shall not be less than 60 days, specified in the notice, is void.

2.2 A couple of amendments have been made in order to render more protection to whoever mortgages their property as a security for any other person obligation, but not the mortgagor’s own obligation, i.e.

(1) The amended guarantee provision as mentioned in 1.5 above is also applied to a mortgage of property as security for performance of any other person’s obligation.

(2) Any arrangement—which requires a mortgagor who mortgages their property to secure any obligation to be performed by other persons to (i) be liable for any obligation in excess of the price of the mortgaged property upon the enforcement or foreclosure of the mortgage, or (ii) be held liable as a guarantor—is deemed void. In other words, the mortgagor will no longer be required to take liabilities in excess of the mortgaged property.

(3) The creditor is also required to have a written notice to the mortgagor within 15 days of the creditor having the required pre-lawsuit notice to the debtor as mentioned in 2.1 above, or the mortgagor will be released from their obligations in respect of the interests, compensations, as well as encumbrances accessory to the secured obligation, accrued as of the date following the end of the 15-day period.

2.3 The mortgagor is now entitled to demand the mortgagee to sell the mortgaged property by auction without a lawsuit at any time after the secured obligation became due. If the mortgagee fails to sell the mortgaged property by auction within one year of receiving the written demand notice from the mortgagor, the mortgagor will be released from their obligations in respect of the interests, compensations, as well as encumbrances accessory to the secured obligation, accrued as of the date following the end of the one-year period.

Almost of the amendment will not affect any contracts made prior to the effective date, i.e. 11/2/2015. The retroactively applicable provisions include those mentioned in 1.4 (only if the debtor becomes in default after 11/2/2015), 1.5 (only if the action resulting in a reduction of obligations is taken after 11/2/2015) and 2.2 (1).

We can assist you in revising and drafting letter of guarantee and mortgage contract to be in line with the foregoing amendments and to as much as possible minimize their influences. Cllick here to consult us.

By Phongsak Sirirakwongsa

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