Buying a big bike and not paying all cash? You’ll likely face a new law.
Nearly always, guarantors have sustained great disadvantages toward banks, obligees, hire-purchase companies, and other creditors. The turning point was three years ago, when creditors started to be on the defense. A series of new laws, one after another, were enacted to alleviate the heavy burden for guarantors to the point where guarantee agreements themselves might obstruct the creditors’ resorting to the guarantors — the creditor could find suing the guarantor unprecedentedly conditioned upon a lawsuit filed against the primary obligor.
The pinpoint in focus is when the principal debtor defaults in payment, creditors have no right, as enjoyed in the past, to enforce from the guarantor immediately and directly. They must first sue the primary obligor and exhaust their remedy through Thai courts, which could take years, before they have a right of action against the guarantor and inevitably see a deterioration of the guarantee and perhaps the guarantor’s assets diminish in value.
Note that guarantors with advantages over creditors remain limited to guarantors who are individuals. Corporate guarantors maintain their vulnerability under the current law.
The latest in a series of new laws that offer full protection for individual guarantors is the Announcement of the Contracts Committee Regulating Hire-Purchase Contracts for Car and Motorcycle Hire-Purchase Businesses of 2018, which will come into force on July 1.
This new regulation was prescribed under the Consumer Protection Act of 1979 and compels a hire-purchase company, generally the financial arm of multinational car manufacturers and motorcycle makers and their authorized dealers, to sign a “warning” for guarantors, in the form appended to the regulation, and to attach the warning to each of the hire-purchase contracts. This new form of warning totally changes the warning under the old regulation, which had been cancelled earlier. In conjunction with the new warning, the regulation provides for the hire-purchase company to make new guarantee agreements that are clearly in favor of guarantors.
It is fortunate the Contracts Committee applies the new regulation only to future hire-purchase contracts signed on the effective date of the regulation and thereafter, without any retroactive effect. Otherwise, the hire-purchase industry would have been rattled, as there are hundreds of thousands of existing car and motorcycle hire-purchase contracts and related personal guarantees that would need a remake — it would have been a humongous task for the hire-purchase companies.
The gist of a new guarantee agreement, which substantially alters the right of the hire-purchase company, is its inability to require the guarantor to become a joint debtor with the primary obligor, jointly and severally.
In the event that any hire-purchase company violates this stipulation, the clause in violation will become null and void from the outset. The new guarantee agreement under the latest hire-purchase regulation follows the provisions of the Civil and Commercial Code (CCC) concerning guarantees, which have been amended since February 2015, but whose impact has slowly and gradually been felt.
Decades earlier, almost all guarantee agreements called for the guarantors to be liable as a joint debtor with the primary obligor, resulting in the freedom of the creditor to demand payment from the guarantor simultaneously with the principal debtor and bring lawsuits against the guarantors right away, with or without demanding or taking any legal action against the obligor, once the latter defaults in payment. Internationally, this type of guarantee is known as an unconditional demand guarantee—it exists no more in Thailand for individual guarantors.
Under the CCC and the new hire-purchase regulation, when the original debtor fails to pay, the creditor must first demand the payment from the debtor. Only when the debtor neglects to pay within the timeframe set forth in the demand notice, can the creditor demand from the guarantor. That demand notice to the guarantor must be sent by a registered reply mail to reach her no later than 60 days after the debtor’s default date.
Beyond the 60-day period, the creditor will lose its right to claim interest and other expenses, such as collection expenses, from the guarantor that accrue after the period and the guarantor will be responsible only for interest and expenses that have been incurred within the 60 days, not more.
It’s a catch 22 for the creditor, a dilemma either way: the creditor can’t make a demand against the guarantor on the default date. Nor can it demand after two months. Not to prejudice its right, it’s high time the creditor reorganize its debt collection system by fixing the date to demand from the guarantor, such as 2 weeks from the debtor’s default date.
The creditor has to drop its previous practice of demanding directly from the guarantor upon the debtor’s default; or the demand notice will be a waste and the guarantor can instead command the creditor to pursue the debtor first.
Even after the creditor demands from the principal debtor, the guarantor, who usually has a close relation with the debtor and may be aware that the debtor has property that could satisfy or partially pay his debt, can divert the creditor to sue the debtor and enforce from his property before suing the guarantor. The creditor has no cause of action against the guarantor until it has obtained a final court judgment against the debtor and, after execution of the judgment, found that the debtor has insufficient property to pay off the debt.
This major legal issue had never existed in the Thai financial market as under the old CCC the creditor routinely asked the guarantor to waive her right of refusal to pay in the guarantee agreement. The amended CCC has firmly safeguards this right so that the guarantor can no longer waive it—any such waiver in a guarantee agreement again will become void.
In reality, the guarantor’s right of refusal to pay which entitles her to command pursuit against the debtor and his property is rendering personal guarantees valueless in economic terms.
If the debtor is resolved to fights the case, the proceeding might take 10 years or more through the three levels of court, until the creditor can enforce the debt from the debtor’s property. And only if that enforcement is unsuccessful for its full recovery, marking the exhaustion of the creditor’s remedy against the debtor, then the creditor will start to have the right to sue the guarantor.
Another common provision in a guarantee agreement in the past that said the guarantor consents to any future extension of repayment that the creditor—a bank, high-purchase company, obligee, or any other creditor—may grant the principal debtor, which possibly leads to an automatic continuity of the guarantor’s liability for several more years, has also been banned by the amended CCC. The sole solution available to the creditor is to wait until the debtor defaults; if the creditor desires to grant a time extension to the debtor, it must seek prior consent from the guarantor at that particular point in time, for her to continue to be bound. Not many guarantors will agree to renew their liability in this fashion.
Wirot Poonsuwan is a practicing attorney and can be reached at [email protected].