Independent Thai courts???

[jp1]

There is an interesting article in the FEER (edition Sep.04) about the so-called independent judiciary system of Thailand. It looks like Thai courts rule more and more in favor of dubious Thai partners and against foreign investors. Here is an example how the Thai courts (Government influenced) pissed off Japanese investors. This case was published in Japanese papers as well. If this becomes the rule then Thailand can forget to receive important Japanese investments in future. No surprise that more and more Japanese companies prefer to invest in China.

 

 

 

Courts Under the Spotlight

 

A judgment favouring a Thai claimant over rival Japanese creditors strains bilateral relations and raises questions about Thailand's bankruptcy laws

 

 

By Shawn W. Crispin/BANGKOK and Todd Zaun/TOKYO

 

Issue cover-dated September 04, 2003

 

 

A SIMMERING spat over the financial fate of a heavily indebted, Thai-owned steel factory is putting one of Asia's historically closest bilateral-investment relationships under heavy strain.

 

The unlikely antagonists: Japan and Thailand. At issue is the legal handling of the debt restructuring of Siam Strip Mill, or SSM, a troubled steel company that owes mainly Japanese creditors--including Sumitomo Corp, Itochu Corp. and Citibank's Tokyo branch--around $380 million in overdue loans.

 

As SSM was skidding toward bankruptcy in 2000, Japanese lenders holding 90% of the company's debt put together a restructuring plan to save the company. Soon after that, however, one of SSM's affiliates, Siam Power Generation Company, filed a 35-billion-baht ($833 million) claim against SSM for its alleged failure to honour a 20-year energy-services contract.

 

Until then SSM had not included the massive claim in its financial statements; and Siam Power still hasn't built the electricity-generating plant that was contracted to supply the power, say creditors. Siam Power's chief executive, Sombat Leeswadtrakul, is the younger brother of SSM's founder, Somsak Leeswadtrakul.

 

Days after Siam Power filed its lawsuit, the two brothers entered into a memorandum of understanding to "compromise and settle the case", with SSM acknowledging Siam Power's multi-billion-baht claim and agreeing to pay compensation. Significantly, in June Thailand's Central Bankruptcy Court endorsed that agreement, throwing out the creditor-led rehabilitation plan and granting Siam Power full control of SSM's debt restructuring.

 

Representatives of Paper Planner, the new court-appointed debt-plan administrator for SSM, contend the new arrangement represents a better deal for both creditor and debtor. "The bankruptcy laws of Thailand are well-known to all parties in this case," says Peter Reinsford, director of Paper Planner. "Many companies have been successfully rehabilitated under these laws."

 

But Japanese creditors don't agree. Siam Power has since tabled a plan that would potentially force the banks to give up as much as 80% of the money they are owed, creditors claim. Japanese creditors say they now would rather liquidate the company than help rehabilitate it under current family management.

 

Lawyers close to the case say the Central Bankruptcy Court has so far rejected various appeals lodged by Japanese creditors, including one appeal challenging the constitutionality of the decision. As a last resort, Japanese creditors are now appealing the decision to Thailand's Supreme Court.

 

Judges at the Central Bankruptcy Court could not be reached for comment. But behind the scenes, creditor-commissioned lawyers say the case has recently morphed into a full-blown diplomatic incident, as Japanese officials have taken the case up at a government-to-government level.

 

"There isn't any other country with such a funny bankruptcy law," says Mutsuo Hatano, vice-chairman of Nippon Export and Investment Insurance, a government-affiliated agency that guaranteed around half of the loans to SSM. "[Japanese companies] expect if something happens overseas that they will be protected by the judicial system of that country, but that's not happening" in Thailand.

 

Japanese embassy officials and senior members of the Japanese Chamber of Commerce in Thailand have privately expressed their concerns about the case to the Thai government. In response, Thai Prime Minister Thaksin Shinawatra has told Japanese officials that the Thai judiciary is independent of the executive office, and that he can't legally intervene in the case.

 

Yet some foreign analysts and Japanese investors believe the controversial SSM decision is being driven as much by local politics as it is by legal considerations. Since he took office in early 2001, Thaksin's brand of economic nationalism has included various measures that favour local businesses over foreign ones. Recently, analysts contend, the Thai legal system has started to mirror that view.

 

In May, for example, the Central Bankruptcy Court handed down a landmark decision in favour of local debtors over foreign and domestic creditors, when it removed a creditor-appointed debt-plan administrator for Thai Petrochemical Industries, and appointed a government-led team in its stead. Because TPI is Thailand's largest corporate debtor with nearly $3 billion in borrowings, the Thai government asserts it was justified to intervene in the case, citing the potential impact TPI's failure would have on Thailand's broader financial system.

 

But the Siam Strip Mill case suggests that TPI might not be that exceptional, say Bangkok-based Japanese business executives. "Many Japanese CEOs are watching closely how the Siam Strip Mill case develops," says the chief executive officer of a major Japanese electronics company with manufacturing facilities in Thailand. "This will make us all very careful about making future investments in Thailand."

 

Japan is far and away the largest foreign investor in Thailand, with more than 1,100 Japanese companies operating in the country. In the late 1980s and early 1990s, Japanese investment supercharged Thailand's impressive export-driven economic growth, then helping to give the country one of the fastest growing economies in the world.

 

In the wake of the 1997-98 financial collapse, Japanese banks and companies looked for ways to work through the crisis hand-in-hand with their Thai counterparts, often purchasing debts at a market premium while offering generous buyback options for Thai company founders--a notably softer tack than that of most Western creditors.

 

Until recently, that was also the case with Siam Strip Mill. But the political climate in Thailand has since changed. Many Japanese investors are concerned that Thaksin's government is starting to play the nationalism card at their expense, as Thailand enters an election season with polls due by January 2005.

 

Upon winning office in early 2001 under a "Thais love Thais" party slogan, Thaksin often railed against the sort of mass manufacturing-oriented investment Japanese companies have made in Thailand. In his public speeches, Thaksin has said Thailand should move away from the "failed" foreign-direct-investment approach of economic development championed by Japan and the West, and move towards a more self-reliant approach to economic growth.

 

For example, Thaksin raised Japanese hackles in 2001 when he cancelled a contract held by a Japanese-led consortium to build the terminal for the new Bangkok international airport. Thaksin later re-tendered the contract with new provisions requiring the winning company to source 80% of the building materials from Thai companies, a move that led the Japanese Bank of International Cooperation to threaten to withdraw its funding for the project.

 

Since then, the Thailand-based Japanese business community has been on guard against similar moves, with many expressing concerns that the Foreign Business Act's provisions protecting foreign-investor rights could be revised. In particular, investor concerns centre on a possible full-blown amendment of Thailand's bankruptcy and foreclosure laws. Those laws were passed under the financial duress of the 1997 crisis, but are looking vulnerable to alteration now that Thailand has repaid its financial obligations to the International Monetary Fund.