| ผู้เขียน | Wirot Poonsuwan |
|---|
The 2014 amendment of the Civil and Commercial Code (CCC) revolutionized the Thai mortgage law by allowing for the first time foreclosure or enforcement of a land mortgage by the creditor in a public auction without having to file a lawsuit with a Thai court. As an alternative to a long, drawn-out court battle, the choice of a quick out-of-court public auction is vested in the mortgagor though, not the mortgagee, triggered by the mortgagor notifying the mortgagee/lender in writing after the maturity date of the debt when the debtor is already in default that he wishes the mortgagee to conduct a public auction to satisfy the debt.
The mortgagee has one year to comply with the request. Non-compliance by the mortgagee will result in him losing his right in regular interest, default interest and fees that accrue after the 1-year period counting from the date he receives the mortgagor’s written request.
Regular foreclosure through court
In the absence of the mortgagor’s request, the mortgagee is still required by law to file a foreclosure lawsuit with the court either for a public auction, or for an ownership transfer to the mortgagee. The former is very common, while the latter is rare.
Foreclosure by way of the bank mortgagee taking ownership of the mortgaged land is scarce, as the mortgagee would have to wait for the loan interest to fall in arrears and unpaid for at least five years, plus the mortgagee would also have the burden to prove that the mortgaged land value is less than the debt. Such a proof will not be difficult as Thai banks typically accept a land for mortgage as loan security at value 30% or more lower than the amount of the credit. But waiting for interest to be unpaid for five years, consecutive or not, is impractical. No mortgagees would be patient that long.
Nearly all the cases of mortgage enforcement in Thailand are therefore lawsuits for public auction rather than for taking the ownership of the mortgaged land.
Foreclosure is enforcement
Just on terminology. The term, “foreclosure” alone can confuse Thai lawyers and bankers as under Thai law it specifically means mortgage enforcement by way of the mortgagee “taking ownership of the mortgaged property” only. This method of enforcement is called, “strict foreclosure” under the U.S. law and laws of other countries.
In the world of a layman, foreclosure used in the U.S. and internationally by and large means an enforcement of mortgage in general, either by way of a public auction or taking ownership of the mortgaged property–mostly, by public auction.
The term under Thai law is different; it does not cover an enforcement of a mortgage by a public auction.
“Foreclosure” in this article loosely means an “enforcement” of a mortgage either by way of auction or by way of taking ownership, generally the public auction enforcement, similar to what is understood across the globe.
Shortfall not to be taken up by mortgagor
The new CCC pays particular attention to a third-party mortgagor, the mortgagor who dedicates his own land or machinery in a mortgage to secure the debt owed by another person as the debtor. For example, a mother mortgages her ancestral land to the bank to secure the payment by her son who is the debtor.
It is impossible for a mortgage agreement under the new law to require a third-party mortgagor to be responsible to pay a shortfall, when the bank mortgagee executes a court order to sell the mortgaged land at a public auction and gets the sale proceeds lower than the amount of the mortgage debt.
Routinely before the law change, the mortgage agreement always required the mortgagor to meet the shortfall.
The new law now shuts out that possibility. You cannot even have the third-party mortgagor sign a side letter, separately from the mortgage agreement agreeing to be liable for the shortfall. A personal guarantee or a corporate guarantee, in addition to the mortgage agreement, commanding the total liability of the debt, including the shortfall, from the third-party mortgagor will not work either, for the new law particularly bans such an extra agreement outside the mortgage agreement. No form of written consent will do. This is a public policy law that the parties cannot vary or differentiate from.
One crucial exception: If the third-party mortgagor is a controlling shareholder with the power to manage and the debtor is a legal entity, the mortgagor can sign a valid and binding guarantee to have a full responsibility for the shortfall and the total amount of the debt.
Extension of time releases the mortgage
Another significant feature of the new mortgage law is an automatic release of the mortgage if the bank mortgagee grants the debtor an extension of time to pay the loan, without the prior consent of the third-party mortgagor. After the release by operation of law, knowingly or unknowingly by the mortgagee, he must register the release of mortgage with the land office and return the original land title deed mortgage free to the mortgagor, or risk a lawsuit by the mortgagor.
This strict legal requirement cannot be forgotten by the debt-restructuring team of a bank, when they negotiate a deal with the debtor—they must include the third-party mortgagor in the process and can no longer ignore him. They must obtain his prior consent!
The consent that will defeat the ban on the extension of time can come in in whatever form. The third-party mortgagor can sign as a party to the debt restructuring agreement; his signature as a witness to the agreement can also imply his consent. A single letter of consent will serve the purpose as well.
Haircut needs no consent
Generous as the new CCC may seem towards the third-party mortgagor, it protects the debtor more than the mortgagor. An extension of time requires the prior consent of the mortgagor, all right! But if an extension of time comes with the so-called “haircut,” a reduction in the amount of debt granted by the creditor/mortgagee to the enjoyment of the debtor, such consent is no longer needed. The reduction in debt will bind the third-party mortgagor, whether he likes it or not, and whether or not it accompanies a time extension.
If you run into a combative mortgagor that will not agree to a time extension, include some haircut into the debt restructuring agreement as leverage to win him over.
Complications may arise when the debt restructuring agreement calls for a new survival loan from the creditor to assist in the business rehabilitation the debtor. The current law is quite strict in shielding the third-party mortgagor from additional liability. An extension of time in exchange for a cut debt is fine. But not more burden of a new loan! Such additional liability of the third-party mortgagor in the debt restructuring agreement would be null and void on the grounds of public policy. An express consent of the mortgagor to accept the addition of the loan liability would run head to head against the law.
Maneuvering through the legal twists and turns, again if the third-party mortgagor is the controlling and managing shareholder and the debtor is a legal entity, a personal guarantee or a corporate guarantee from the third-party mortgagor undertaking to be fully responsible for the new recovery loan will be perfectly legal, valid and enforceable.
Wirot Poonsuwan is Senior Counsel at Blumenthal Richter & Sumet in Bangkok and can be reached at [email protected]
