3 The rights of bondholders
In essence, the rights of bondholders are comprehensively protected under the SEA. The new amendment to the SEA enables investors to claim their best benefits, including allowing the investors to supervise the operation of the issuer.
Overall, the new amended law imposes more strict regulations on the discharge of directors’ duties, where the directors shall not have prohibited characteristics, for instance, lack of trustworthiness due to the final judgment of imprisonment. In this regard, Section 89/3 and 89/4 of the SEA allow SEC to issue notification specifying the prohibited types of directors’ characteristics by taking into account the changing circumstances of market.42 If directors fail to perform their duties with responsibility, due care and loyalty, they shall encounter more severe criminal penalty, since it involves public interests.
According to Section 42 of the SEA, the issuers of bond are required to explicitly state the rights and duties of bond holders in their prospectus.43 The "Terms and Conditions of Rights and Duties" ("TCRD") shall be regarded as a “legal binding document” between the issuers and the investors or the bondholder representatives. TCRD is crucial document which is required by law to be explicitly incorporated into the prospectus every times it is launched to the public.44 Any failure to comply with the terms and conditions will constitute the breach of contract, and the investors or bondholder representatives could take legal actions as stated in such terms and conditions, for instance, filing the case or calling for bondholder meeting. Any issuers that fail to comply with Section 42 shall be liable to fine not exceeding THB two hundred thousand.
The TBMA has launched “Market Conventions” as the guidelines of bond practice, including the standard of practice of TCRD. In this regard, it is required that TCRD shall clearly stipulate the conditions on the event of default, and the circumstances where the investors could bring the case to the court.45
Generally, only bondholder representative can bring the case to the court in order to call for performance from the issuer in case of any failure to discharge its duties with respect to TCRD. Nevertheless, each bondholder can take legal action for the performance from issuer on the unpaid amount of bonds, but it is subject to three conditions: (i) bondholder has to submit written notification to the issuer; (ii) there is no repayment received from such issuer more than fourteen days; and (iii) there is no legal action taken by any bondholder representatives.46
Furthermore, the guidelines of TCRD are also endorsed by the Notification of the Capital Market Supervisory Board No. SorJor.359/2545 Re: the Terms and Conditions of Rights and Duties of Debenture Issuers and Holders, and the Notification of the Capital Market Supervisory Board No. SorDor. 40/2552 Re: the Terms and Conditions of Rights and Duties of Debenture Issuers and Holders. Under these regulations, bond issuer need to fulfill the principles spelt out in the guideline, "and the SEC will consider such fulfillment as part of criterion in order to grant an approval for debt offering".
4 Class action under Thai law
In essence, class action proceeding is an alternative way of filing lawsuit collectively on behalf of injured parties. It, rooted in Anglo-Saxon legal tradition, could provide an overwhelmingly powerful law enforcement mechanism that is capable of imposing a threat of liability exposure on business entities for the social consequences of systematic wrongdoing.47
The proposed class action law, with the adoption of principles found in Rule 23 of the United States Federal Rules of Civil Procedure, will be incorporated into the Thai Civil Procedure Code. The rationale of U.S law is to authorize court for playing key role in considering whether the leave should be granted for a class action.48 There are certain special procedures designed to facilitate class action proceedings, for example, the court has discretion whether the leave for withdrawal could be granted to the plaintiff, while there are more complexities in ordinary proceedings.49 In essence, the class action lawsuit is begun by the plaintiff initiating a claim together with a motion requesting leave to commence a class action, wherein the judgment will bind all class members.50
B Legal Measure to Ensure Market Prudence
1 Securities Investor Protection Fund ("SIPF")
In order to provide a protection to bondholders failing to receive the return assets or compensation51, SET and some of its member firms have established SIPF as a fund, which the investors and the clients of SIPF members can receive their asset back, or be compensated from SIPF.
The SIPF is owned by SET, exclusively separated its assets solely for the use of SIPF in performing its function as investor protection mechanism.52 SIPF's funding derives from the initial capital contributed by SET amounted to THB 300 million. The admission fees are paid by its members and any benefit arising from the assets of the SIPF.53
The compensation of lost could be the compensation for asset or compensation for the price of asset, but not exceeding the actual damage incurred. Each investor or bondholder will obtain no more than THB 1 million per one SIPF’s member broker.54
In order to enjoy the SIPF’s privilege, bondholders are required to open trading account through their broker having status as SIPF member. Bondholder need no further application, as well as no fees required.55 The demand for the protection could be made whenever fund members fail to return investor’s assets. The investors could submit the request through Member Service Department of SET.
2 The concept of trust law under Thai law
The concept of trust law has rooted and been applied into Thai law long time ago, but through the implementation of the “bondholder representative”.56 The law requires that every bond issuance through public offering and private placement shall have bondholder representative in order to protect investor’s benefits, for instance, running bondholder meeting, and processing securities registration. According to the Notification of the Capital Market Supervisory Board No. KorJor. 33/2544 Re: Rules regarding the Qualification of Bondholder Representative, and the Authorization of Bondholder Represenatative, the bondholder representative shall be bank or financial institution, securities company or public company that SEC approves for operation. The bondholder representative must fulfill certain legal requirements, especially in terms of its directors’ qualification, and must file application with the SEC for consideration.57 The functions of bondholder representative are to protect any actions of the bond issuer impairing the value of securities, run bondholder meeting, take legal action for any compensation in case of events of default occurred by the bond issuer, and represent the investors in filing lawsuit calling for indemnification and the enforcement of securities, as well as allocate such indemnification received to the entitled investors.58 The removal of bondholder representative could be take place in case it could not fulfill the legal requirements or violate the relevant laws59 or TCRD. However, the permission for such removal from the SEC is required.60
In order to mitigate default and insolvency risk, the Trust for Transactions in Capital Market Act ("TTCMA") was firstly enacted in 2008 with the initiative to facilitate transaction in the capital market. Nonetheless, the concept of bondholder representative is still being used together with the reinforcement by the concept of TTCMA.
The key rationales of TTCMA are to promote bankruptcy remoteness, while ensuring full implementation of fiduciary duties, and beneficiary protection. As legally owned by trustee, trust property will not be deemed as debt repayment to creditors of trustee although the trust becomes insolvent.61 Investors could be more secured because there are specific provisions emphasizing on the duties of trustee given that it has to manage trust with skill, loyalty and reasonable care for the best interest of beneficiary Therefore, the rights of beneficiary will be fully protected. The beneficiary could trace trust property from third parties having bad-faith, and could be recovered by alternatively the claiming trustee as it fails to manage trust property properly with respect to the TTCMA and trust contract.62
Nevertheless, the concept of trust law is implemented only for the purposes of capital market transactions.63 Trust is not a legal person; instead, it is a legal binding created only by written contract.64 There are three parties involved: the settlor, the trustee, and the beneficiary, where the trustee is legally authorized to manage the properties for the beneficiary’s benefit. Under TTCMA, the settlor shall have no more rights or duties, unless explicitly stated in the trust establishment contract.65 The beneficiary is entitled to claim any interest arising from the trust, and is protected by the law in case of the insolvency of trustee so that the trust shall not be affected. In this regard, the creation of trust is required to be registered with the SEC under the criterion to be prescribed and announced by the SEC.66
, s89/3, 89/4.
44. See the Notification of the Capital Market Supervisory Board No. SorJor. 35/2535 Re: Rules, Terms and Conditions of Rights and Duties, clause 1.
45. Thai Bond Market Association, Market Convention (2010) Thai Bond Market Association, 4-5. < http://www.thaibma.or.th/main.html> at 4 February 2011.
47. See Guy Halfteck, ‘The Class Action as a Financial Call Option’(2004) Harvard Law School, 3.
48. Explanatory Memorandum, the Amendment to the Civil Procedure Code 2010, 2.
51. See the Regulations of the Securities Investor Protection Fund Re: Protection for Securities Investors, clause 6.
52. See the Regulations of the Securities Investor Protection Fund Re: Protection for Securities Investors, clause 3.
53. See the Regulations of the Securities Investor Protection Fund Re: Protection for Securities Investors, clause 3.
54. See the Regulations of the Securities Investor Protection Fund Re: Protection for Securities Investors, clause 14.
55. See the Regulations of the Securities Investor Protection Fund Re: Protection for Securities Investors, clause 5.
56. Jaruporn Intrararung, Let’s Trust Together (2006) the Securities Commission of Thailand < http://www.sec.or.th/investor_edu/info_media/article/2550/Content_0000000828.jsp?categoryID=CAT0000316> 21 January 2011
57. See the Notification of the Capital Market Supervisory Board No. KorJor. 33/2544 Re: Rules regarding the Qualification of Bondholder Representative, clause 4,5.
58. See the Notification of the Capital Market Supervisory Board No. KorJor. 33/2544 Re: Rules regarding the Qualification of Bondholder Representative, clause 15-20.
60. See the Notification of the Capital Market Supervisory Board No. KorJor. 33/2544 Re: Rules regarding the Qualification of Bondholder Representative, clause 6-8.
61. The Securities Commission of Thailand, Trust for Transactions in Capital Market Act (2011) <www.sec.or.th/sec/trust_business.pdf> at 1 Febuary 2011
63. See the Trust for Transactions in Capital Market Act (“TTCM”)B..E. 2550 (2007), s4 <http://www.thailawforum.com/database1/trust-for-transaction-act.html> at 1 February 2011
66. Carolin A. Rost, Iain G. O. Melville, New Trust Law - Paving The Way For Smooth Transactions In The Capital Market (2006) Mayor Brown JSM (Thailand) <http://www.mayerbrown.com/publications/article.asp?id=7324&nid=6> at 1 February 2011