In Thailand, the intersection of corporate insolvency and director liability raises critical questions for company leaders. While the law does not impose a duty on directors to commence formal insolvency proceedings, it does create potential liabilities for failing to address a company’s deteriorating financial health. Moreover, directors who continue to operate a business while insolvent may face exposure if their actions are found to be fraudulent. This article examines the key legal risks, defences, and procedural changes that directors should be aware of when a company faces financial distress.
1. Failure to Commence Insolvency Proceedings
Under Thai law, there is no statutory obligation for directors or officers to initiate bankruptcy or reorganisation proceedings when a company becomes insolvent. Consequently, a director does not incur liability solely for the failure to commence such proceedings.
However, a significant risk arises under the Act on Offences Concerning Registered Partnerships, Limited Partnerships, Limited Companies, Associations and Foundations BE 2499 (1956). Section 21 of that Act requires a company’s board of directors to call an extraordinary general meeting of shareholders when the company has lost half of its capital. Failure to do so renders each director criminally liable and carries a penalty of up to 20,000 Baht.
Media reports have occasionally highlighted this provision in the context of dormant or financially distressed companies where directors neglected to call shareholder meetings, leading to criminal complaints filed with the Department of Special Investigation. In one case reported by the Bangkok Post, a director of a construction company was prosecuted under this section after the company’s capital erosion went unremedied for over a year, underscoring the importance of timely shareholder engagement even before formal insolvency is considered.
2. Trading While Insolvent
Thai law does not explicitly prohibit a company from continuing its operations while insolvent.
The Bankruptcy Act BE 2483 (1940), as amended, focuses on the procedural mechanisms by which creditors may initiate bankruptcy proceedings, rather than on imposing a duty on directors to cease trading.
As a result, directors who manage a company’s business without dishonest intent generally do not incur personal liability to creditors. In practice, however, the line between permissible continued operation and fraudulent conduct can be narrow. Courts will scrutinise whether directors acted in good faith to preserve the business or engaged in transactions that unfairly prejudice creditors.
The Supreme Court of Thailand has held in several judgments (e.g., Supreme Court Judgment No. 423/2548) that directors who continue to incur new debts while knowing that the company cannot repay them may be subject to liability for fraudulent conduct, even in the absence of a statutory prohibition on trading while insolvent.
3. Fraudulent Conduct and Personal Liability
Directors and officers are not personally liable for the ordinary debts of a company, as established under sections 820 and 1167 of the Civil and Commercial Code (CCC).
However, liability may attach when fraudulent conduct is proven. Chapter 6 of the Bankruptcy Act addresses fraudulent acts that harm creditors. Directors who conceal material details of debts, misrepresent the company’s financial position, or issue fraudulent instructions causing the company to act in bad faith may be held personally liable. Criminal penalties can also arise under the Criminal Code if the director’s actions constitute fraud, embezzlement, or other offences.
A prominent example is the 2019 case involving a Thai electronics manufacturer, widely covered in Krungthep Turakij, in which the company’s directors were charged with fraud for transferring assets to related parties while the company was insolvent, leaving creditors with unpaid debts. The court found the directors personally liable for damages and imposed criminal sanctions, emphasising that while the corporate veil generally protects directors, fraudulent conduct pierces that protection.
4. Criminal Liability and Defences
Directors may face criminal liability when their actions or omissions result in the company committing a criminal offence. This can include failing to file required financial statements, violating tax laws, or participating in fraudulent schemes.
Under the Act on Offences Concerning Registered Partnerships, Limited Partnerships, Limited Companies, Associations and Foundations, directors are personally liable for such offences unless they can prove they had no knowledge and exercised due diligence. In practice, directors often raise defences that they relied on professional advice or that they acted in good faith, but the absence of a specific statutory defence in the bankruptcy context means that successful exoneration typically depends on proving the absence of dishonest intent.
5. Shift in Directors’ Duties
Unlike some jurisdictions, Thai law does not provide that directors’ duties shift from the company to its creditors when insolvency becomes likely.
The duties of directors remain owed to the company, even in times of financial difficulty. This principle was affirmed in Supreme Court Judgment No. 2783/2542, where the court rejected creditors’ claim that directors owed them a fiduciary duty during the period of insolvency. Consequently, directors are not automatically required to prioritise creditor interests over those of shareholders, though they must avoid conduct that constitutes fraud or breach of their statutory duties.
6. Directors’ Powers After Proceedings Commence
The commencement of bankruptcy or reorganisation proceedings alters directors’ authority in distinct ways.
Under the Bankruptcy Act, after a bankruptcy petition is filed, directors retain their powers to manage the company’s business and assets until the court issues a receivership order (sections 22 and 24). This period, sometimes referred to as the “interim period,” allows directors to continue operations, but any actions taken must be for the benefit of the company and not to defraud creditors.
In practice, media reports have highlighted cases in which directors used this window to improperly dissipate assets, prompting swift court intervention and, in some instances, the issuance of arrest warrants for the directors involved.
In reorganisation proceedings under Section 90 of the Bankruptcy Act (the “business reorganisation” provisions), the framework is more restrictive. Upon the court’s acceptance of a petition for reorganisation, an automatic stay takes effect, and directors may only manage the business as necessary for normal operations (section 90/12(9)).
Once the court issues an order for business reorganisation, the powers and duties of the debtor’s executives cease and are transferred to the interim executive, the receiver, or the planner (section 90/21).
After the reorganisation plan is approved, the debtor’s directors no longer have control; instead, a plan administrator appointed by the court manages the business (sections 90/25 and 90/59). This shift is a critical consideration for directors who may otherwise attempt to negotiate with creditors or influence the reorganisation process.
The 2021 reorganisation of a well-known Thai retail chain, extensively reported by the Bangkok Post, illustrated how incumbent directors were sidelined after the court’s approval of the reorganisation plan, highlighting the importance of early strategic planning before formal proceedings begin.
7. Director Exposure and Practical Considerations
Directors of Thai companies facing insolvency must navigate a legal landscape that does not mandate the commencement of proceedings but does impose strict liabilities for fraudulent conduct and for failing to address capital impairment.
While the duties of directors do not shift to creditors, the practical consequences of continuing to trade while insolvent can be severe when accompanied by bad faith. Moreover, once bankruptcy or reorganisation proceedings are initiated, directors’ powers are significantly curtailed.
Understanding these legal parameters is essential for directors seeking to manage their personal exposure while fulfilling their corporate responsibilities.
