Business Collateral Act in Thailand: Security Without Possession

Business collateral rights pass with a transferred claim under Section 305 of the Civil Code; see our guide to assignment of claims in Thailand.

The Civil Code also provides for possessory security. See our guide to a pledge in Thailand.

Where the security is land or registered property rather than business assets, read our guide to mortgage in Thailand under the Civil and Commercial Code.

What does the Business Collateral Act in Thailand cover?

The Business Collateral Act covers a contract in which a grantor pledges property to a secured creditor to secure a debt, without handing the property over (section 5). Furthermore, the grantor may be an individual or a juristic person (section 6). Likewise, the secured creditor must be a financial institution or another person named in a ministerial regulation (section 7).

Who may hold security under the Business Collateral Act?

Section 7 allows only a financial institution, or another person prescribed by ministerial regulation, to take business collateral. Section 3 defines a financial institution by reference to the banking and insurance laws and to institutions set up under specific laws. As a result, a lender outside those groups can hold the security only if a ministerial regulation names it.

The Department of Business Development publishes a summary that lists several groups, including commercial banks, foreign bank branches in Thailand, finance companies, insurers, asset management companies, factoring businesses, hire-purchase and leasing juristic persons, and lending juristic persons. The same summary also lists foreign commercial banks that lend jointly with a financial institution. However, the summary does not name the regulation or its year. A foreign lender should therefore confirm its own category with the Department.

What property can a grantor pledge?

Section 8 lists six categories: a business undertaking, claims, movable business assets, immovable property in one case, intellectual property, and other property that a ministerial regulation prescribes. A grantor may pledge present or future property, although security over future property arises only when the grantor acquires it (section 9).

How does registration work under the Business Collateral Act?

A business collateral contract must be in writing and registered with the registrar at the Business Collateral Registry Office inside the Department of Business Development (sections 13 to 15). First, the secured creditor files the application with the grantor’s written consent (section 17). After registration, the creditor ranks as a secured creditor under bankruptcy law.

In particular, the registration must state the debt secured, the collateral, the maximum amount secured and the enforcement events (section 18). Where the collateral is a business undertaking, the contract must also name the licensed enforcer (section 13). Moreover, ranking among several creditors follows the date and time of registration (section 33).

What may the grantor do with the pledged property?

Under section 22, the grantor keeps the property and may use, exchange, dispose of, transfer and mortgage it, and may use it in production, unless the parties agree otherwise. Also, the grantor must preserve it with the care of a prudent person (section 23). In addition, the grantor must allow inspection (section 25) and may redeem the collateral at any time before disposal or vesting (section 27).

A buyer of inventory-type collateral in the ordinary course of trade, or with the creditor’s consent, takes it free of the security. Similarly, a buyer of other collateral takes it free if the buyer acts in good faith and gives value, or has the creditor’s consent (section 32).

How does a secured creditor enforce the Business Collateral Act?

Section 36 gives the secured creditor two methods: take ownership of the collateral, or sell it to repay the debt. However, forfeiture is open only on the conditions in section 37. Otherwise the creditor follows the notice and auction steps in sections 38 to 44, or applies to the court.

1. Enforcement event. The contract defines the events (section 11). After an event and written notice, the grantor may not transfer or damage the collateral, and the creditor may take possession (section 38).
2. Possession. If the grantor or holder refuses to hand over, the creditor petitions the court (section 46). The court hears the case on consecutive days, and an appeal goes to the Court of Appeal within 15 days; its decision is final (sections 47 and 48).
3. Notice. Next, within 15 days of taking possession, the creditor sends a notice requiring payment within 15 days of receipt (section 39).
4. Sale or forfeiture. Then, if the grantor does not pay, the creditor sells by public auction on at least 7 days’ notice (section 40). Forfeiture follows only if the grantor sends no written objection and section 37 is met (section 44).
5. Proceeds. Lastly, costs come first, then the secured creditor and registered priority creditors, then judgment creditors who claimed a share, and any surplus returns to the grantor (section 52).

Section 37 permits forfeiture only if the unpaid principal equals or exceeds the collateral’s value, the debtor has paid no interest for five years, and no other secured or priority claim is registered over the collateral. Additionally, forfeiture extinguishes the principal debt (section 53). For the statutory limits on interest itself, see our guide to the interest rate cap in Thailand.

How is a business undertaking enforced?

For a business undertaking, the parties appoint a licensed enforcer in the contract (section 12). Meanwhile, the registrar licenses enforcers for three years (sections 54 and 57). Then the enforcer decides within 15 days of the first hearing day (section 68). A party may object to the court within 15 days, although the objection does not stop enforcement, and the court’s ruling is final (section 70). Finally, on enforcement, the grantor’s management powers end, and the grantor hands over the business within 7 days (sections 71 and 72).

How do sections 5, 7 and 52 of the Business Collateral Act fit together?

Three sections, read together, set the exposure of a third-party grantor. First, section 5 lets a grantor pledge property for a debt owed by someone else, so a parent or affiliate can secure a borrower’s loan with its own assets. Second, section 7 limits the holder of that security to a financial institution or a person named in a regulation. Third, section 52 caps the downside: if the proceeds fall short, the creditor recovers the shortfall from the debtor but not from a grantor that is not the debtor, and a contrary term is void.

Consequently, an Act-based pledge differs from a personal guarantee. A guarantor answers for the whole debt, whereas a non-debtor grantor answers with the pledged property. Our guide to the guarantee contract in Thailand covers the guarantor’s position under the Civil and Commercial Code.

Which points remain open?

Frequently asked questions

Conclusion

The Business Collateral Act replaces possession with registration. Section 7 decides who may lend on this basis, section 8 decides what the grantor may pledge, and sections 36 to 52 set out how the creditor enforces. For related debt matters, see our debt recovery lawyer in Thailand page. In addition, the Thai text is available through the Royal Gazette and the Office of the Council of State.