Business Rehabilitation—Thai Airways—Banks’ Right to Set Off Questioned

Business Rehabilitation—Thai Airways—Banks’ Right to Set Off Questioned

There is skepticism about banks’ right to set off by deducting from cash deposits in the bank accounts of Thai Airways International Plc.

Thai Airways’ grievances have been aired publicly after its bank accounts, which contain cash reserves for staff salaries or serve as a parking spot for payments from the airline’s trade debtors, were deducted from and set off by banks in order to pay down the debt the carrier owed to these banks.

According to news reports, the deduction was carried out at the objection by the company.

The surprise setoff allegedly took place in the wake of a bankruptcy court order which had been issued on May 27, 2020 to accept the carrier’s application for business rehabilitation.

The court’s acceptance order has given immediate effect to an automatic stay, a crucial part of which is general debt moratorium: the debtor is prohibited from paying debts to creditors until a debt restructuring plan has been hashed out.

That being said, do the banks have the right to set off in this case?

Business Rehabilitation Law Is Silent

Despite a string of amendments to the Bankruptcy Act of 1940 concerning business rehabilitation over the past two decades, the law does not expressly cover setoffs by creditors during an automatic stay and debt moratorium.

It does allow such setoff from the date the court orders to rehabilitate the business of the debtor, after a trial. Such date is expected to be August 17, 2020, if there are no creditors objecting to the rehabilitation and proposed planners.

The law is noticeably silent on the relevance of the automatic stay during the interim period between May 27 to August 17.

Legal Vacuum Filled Up

Banks interpret this silence of the law, an unintended loophole overlooked by legislators, to mean a lack of restriction on them and that they can freely set off any bank account the debtor maintains with them to satisfy a debt owed to them by the debtor.

For a company that is already cash-strapped like Thai Airways, taking away cash from their bank accounts would accentuate its financial woes and cause it disruption during the inactive period.

By their nature, banks don’t just set off arbitrarily. They are financial institutions regulated by the central bank; everything they do supposedly is based on legal principles.

Setoffs as Law Permits

And that legal principle is the business rehabilitation law itself that, on the surface, appears to permit setoffs by creditors.

Banks executed setoffs against Thai Airways’ bank accounts as the debtor, relying on a provision in the business rehabilitation law which holds that eligible creditors, to whom a debt has been owed prior to the date the court orders a business rehabilitation, are entitled to set off from the date the court issues such order onwards.

This date, presumably, is August 17 or a later date.

Banks claim the provision grants it the right to set off prior to the court’s rehabilitation order as well, back to the date of the court order to accept the case for its consideration on May 27.

Not an unreasonable approach!

Except that the law specifically refers to the date of the court’s rehabilitation order, which might be the first trial date on August 17, if no creditors protest against the rehabilitation and the proposed planners by August 14, three days prior to the first hearing as imposed by the rules.

Letter of Setoff, the Underlying Document

The document that underlies the relationship between the bank and the debtor, on which the bank exercises its right to set off citing permission under the business rehabilitation law, is represented by a letter to setoff in the standard form of the bank.

A customer is simply dictated to sign the form as part of the so-called “General Business Conditions” when the bank started to engage with the debtor as a customer on day one.

If you vaguely recollect whether you have signed the letter years ago, you should contact your bank and ask for a copy now. You deserve it!

The setoff letter typically gives rise to the bank’s right to deduct from the credit balance in any and all accounts you open with the bank when there is an event of default under the financing agreement, particularly in the case of insolvency and business rehabilitation as in the Thai Airways case.

Legal Risks of Banks

Setoffs conducted by the bank under the letter of setoff should be safe as far as the rehabilitation law that vaguely permits it is concerned.

There is a possibility, nevertheless, that the Central Bankruptcy Court that took up the rehabilitation application on May 27, 2020 will interpret differently from the bank to rule that the greenlight setoff provision in the law applies from August 17 and thereafter, but not earlier—not from the date the application was accepted on May 27, when a ban on setoffs began.

In a worst-case scenario for the bank, the debt moratorium during the gap period of May 27-August 17 could be regarded by the court to cover a ban on any setoffs dating back to May 27.

Or Thai Airways might launch a fresh lawsuit against the bank to challenge the setoff in another court.

Things that are possible are not necessarily likely scenarios.

Thai Airways would find it tough to reverse the bank setoffs during the interim months. The weight of legal arguments seems to tip the scales in favor of the banks.

In conducting the setoff, banks somewhat carry the risk of the act being nullified, but multiple legal analysts consider the risk as remote.

Pledge Registered under Business Security Law Sensitive to Banks

The real danger that a setoff bank is exposed to relates to a pledge of deposit it has registered with the Department of Business Development under the Business Security Act of 2015. The pledge always incorporates a setoff provision to allow the bank to deduct the pledged cash deposit to meet the debtor’s debt service in an event of default.

The registered account pledge qualifies as loan security under another provision of the business rehabilitation law, elevating a regular setoff document to the level of priority security, similar to mortgages and other pledges, offering preferential rights to the pledgee bank to be paid from the pledged deposit before other creditors.

That prohibitive provision bans a creditor from enforcing from a loan security during the debt moratorium starting from the date the court issued an order to accept the business rehabilitation for consideration, such as Thai Airways’ on May 27.

Most banks are not aware of this conclusion and will be shocked by it: The bank is not allowed to deduct from the pledged bank account registered with the DBD to satisfy the debtor’s debt during the automatic stay as the act would infringe the law that prohibits enforcement of a debt security.

A setoff from a normal letter of setoff should be binding, but the deduction against the registered pledged cash deposit can be nullified.

If the bank accidentally set off from Thai Airway’s registered pledge of deposit, they had better be prepared for fallout.

From Thai Airways’ business standpoint, the company would run more smoothly if it could move its accounts to a non-creditor bank, and the airline should never sign another letter of setoff or pledge of deposit.


Wirot Poonsuwan is Senior Counsel and Head of Special Projects at Bangkok law firm Blumenthal Richter & Sumet and can be contacted at

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