Why Businesses Should Choose Rehabilitation

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Why Businesses Should Choose Rehabilitation

Since the outbreak of Covid-19, the Thai economy has experienced a prolonged shutdown, leading to the need for bankruptcy and rehabilitation processes to address the financial challenges faced by businesses. However, there is a common misconception among the public that rehabilitation is synonymous with bankruptcy. This misunderstanding arises from the fact that rehabilitation provisions are enshrined in the same legislation as the Bankruptcy Act B.E.2483 (1940), leading to the belief that rehabilitation is equivalent to bankruptcy. In reality, the objectives of bankruptcy and rehabilitation are different. Bankruptcy aims to identify and gather the debtor’s assets for equitable distribution among creditors, while rehabilitation aims to maintain the value of the organization, provide an opportunity for the debtor to continue business operations, and preserve employment.

Although both rehabilitation and bankruptcy share the objective of resolving creditor issues through equitable debt distribution, they involve different processes. In the case of bankruptcy, the debtor must have a debt exceeding 2 million baht and be ordered by the court to receivership. The court will then schedule a witness hearing to render a judgment on the debtor’s bankruptcy. Once the debtor is declared bankrupt, the court will order receivership, prohibiting the debtor from engaging in any actions related to their properties or businesses without the court’s approval.

On the other hand, the rehabilitation process requires the debtor to have a debt exceeding 10 million baht and demonstrate a reasonable cause and prospect for the rehabilitation of their business. After the court receives the petition for rehabilitation, an urgent witness hearing is scheduled, and the court can make orders regarding the rehabilitation. Once the court accepts the rehabilitation petition, an automatic stay is initiated, providing legal protection to the debtor against certain actions from creditors until the expiration of the implementation period for the rehabilitation plan or the successful completion of the plan.

The purpose of bankruptcy and rehabilitation laws is for building and improving investor trust. Each approach has its own strengths and weaknesses, which are outlined below:

Strengths and weaknesses of Bankruptcy:

Bankruptcy primarily focuses on identifying and collecting the debtor’s assets for equitable distribution among creditors. This process involves a receivership order issued by the bankruptcy court, granting the official receiver control and management authority over the debtor’s assets. However, this also means that the debtor loses the right to manage their business.

Strengths and weaknesses of rehabilitation:

Rehabilitation primarily focuses on maintaining the overall value of the organization and providing the debtor with an opportunity to continue business operations. The debtor can request a court’s business organization order, and upon approval, an automatic stay is initiated, allowing the debtor to operate continuously during the debt restructuring process.

The automatic stay in the rehabilitation process serves several purposes, including halting legal actions against the debtor, preserving assets by preventing their seizure or sale, and promoting negotiation and restructuring between the debtor and its creditors.

It is important to note that the automatic stay is not an indefinite protection. It remains in effect until the court decides whether to accept or reject the rehabilitation petition and plan. If the court accepts the plan, the automatic stay may continue until the plan is fully implemented. However, if the court rejects the plan, the automatic stay is lifted, and creditors can resume their legal actions against the debtor.

Rehabilitation case example:

A prominent company in Thailand, JKN GLOBAL GROUP PUBLIC COMPANY LIMITED (“JKN”), announced its intention to file a petition for business rehabilitation on November 8, 2023. This action demonstrates the consequences and benefits of the rehabilitation plan, including:

  • Adjusting the company’s business and financial structures to align with current financial and economic conditions.
  • Resolving liquidity problems through organizational restructuring, ensuring the company can continue operating.
  • Attracting financial backing from new investors or financial institutions to infuse capital into the company’s operations.
  • Providing guidance on the sale of non-beneficial or non-income-generating assets and utilizing the proceeds to settle debts owed to all creditors.

In conclusion, when businesses consider the choice between bankruptcy and rehabilitation, they must carefully evaluate the specific processes and operational authority involved. Engaging in the company’s business rehabilitation process allows for effective resolution of liquidity issues with legal backing and ensures fair protection for all stakeholders. Moreover, the company can sustain its business operations during rehabilitation, addressing challenges and generating profits through ongoing activities.

Author: Panisa Suwanmatajarn, Managing Partner.