Does Thailand Bar Enforcement of Ipso Facto Clauses?
What is an Ipso Facto Clause?
Although the term “Ipso Facto Clause” reeks of legalese, it is acceptable short hand for describing a particular type of contract clause that is often relevant to (but not limited to) bankruptcy cases. An Ipso Facto Clause is a provision in an agreement which permits the termination of that agreement because of the bankruptcy, insolvency, or financial condition of a party. They are common clauses found in virtually all contracts.
The U.S. Bankruptcy Code generally (there are exceptions) prohibits action to enforce these provisions in executory contracts and unexpired leases of the debtor when a debtor is in bankruptcy. On 20 June 2019, the European Parliament published Directive 2019/1023 on preventive restructuring frameworks (the “Restructuring Directive”). The Restructuring Directive allows a debtor company in insolvency proceedings to preserve certain business-critical contracts while that company is conducting business negotiations. There is a visible international trend towards restricting the enforcement of Ipso Facto Clauses in insolvency and restructuring proceedings.
What about Thailand?
Thai law on bankruptcy reorganization proceedings does not contain an express bar on the enforcement of Ipso Facto Clauses. Instead, clause 90/12 of the Bankruptcy Act, sets out prohibitions on the action a creditor can take against a debtor in Thai bankruptcy reorganization proceedings, andthose prohibitions include many of the actions a creditor would likely take after terminating a contract based on an Ipso Facto Clause.
For example, a provider of public utilities is not permitted to suspend services supplied to a debtor in bankruptcy reorganization proceedings unless (a) permission is obtained from the court or(b) the debtor fails to make two successive payments following the business restructuring order. A similar provision applies to leases, which is particularly relevant to the bankruptcy reorganization of Thai Airways since it leases most of the aircraft it uses. Thai Airways’ financial annual financial statement states that: as at December 31, 2019, its fleet had 103 aircraft, and Thai Airways owned 32 of those aircraft. The other 71 aircraft are leased.
Recovery of the Leased Aircraft?
Section 90/12 (8) contains the provision restricting recovery of leased property. An English translation of this provision reads:
An owner of proper which is essential for the operation of the debtor’s business under an owner of the property which is essential for the operation of the debtor’s business under a contract of hire-purchase, a contract of sale or any other contract carrying a condition or a time clause for a transfer of ownership or a contract of hire the agreed term of which has not yet expired shall not exercise the right to follow and recover the property in the possession of the debtor or any other person relying on the debtor’s rights or institute an action for enforcement in connection with property and liabilities arising from such contract. If an action has previously been instituted, the Court shall stay its trial unless the Court receiving the petition orders otherwise or, after the date of the Court’s business reorganization order, the debtor, the Receiver, the interim executive, the plan preparer, the plan administrator or the interim plan administrator, as the case may be, commits, on two successive occasions, a default on the payment of hire-purchase remuneration, a price, remuneration for the use of the property or rent under the contract or commits a breach of any material part of the contract.
In other words, action to recover the leased aircraft in Thailand is barred unless certain conditions are satisfied. But this provision does not expressly prohibit enforcement of an Ipso Facto Clause. It only addresses proceedings to recover property that is essential to the business of a party in Thai bankruptcy proceedings.
What about Termination of the Lease?
Section 90/12 (8) does not bar termination of lease agreements. It bars recovery of property subject to lease agreements. In other words, the lease agreement could be terminated (based on the choice of law provisions in the lease agreements), but the ability to recover the leased aircraft in Thailand is subject to conditions set out in the Thai Bankruptcy Act.
What About Seizing Thai Aircraft Outside of Thailand?
Would the Thai bankruptcy proceedings bar seizure of Thai airways aircraft outside of Thailand? This issue would be decided by a foreign (non-Thai) court applying the law of that foreign jurisdiction. This makes it difficult, if not impossible, to predict how the issue would be decided, but, in general terms, it would likely turn on two issues.
First, would the foreign court recognize and enforce Thailand’s automatic stay? A foreign court could, for example, extend comity to the Thai bankruptcy reorganization proceedings and recognize and enforce Thai law’s automatic stay. Under the doctrine of comity, courts may recognize and enforce each other’s’ executive, legislative and judicial acts within their own territory having due regard to both international law and convenience and the rights of its own citizens.
In addition, there could be a law governing the recognition of foreign bankruptcy proceedings. In the U.S., there is a separate chapter of Bankruptcy Code that addresses foreign bankruptcy proceedings, Chapter 15. Chapter 15 even has provisions allowing a U.S. Bankruptcy Court to “ring-fence” the assets in the U.S. of a bankrupt foreign debtor for the benefit to the foreign bankruptcy estate. But as far as we can tell Thai Airways has not filed Chapter 15 proceedings in the U.S. Nor has it filed Chapter 11 proceedings in the U.S., as had been earlier reported in the press.
Second, if the foreign court decides not to recognize and enforce the automatic stay of Thai law, it would likely look at the choice of law provisions in the lease contracts. When addressing a dispute over termination of a supply and license agreement, this is what a U.S. Bankruptcy Court did in SMP v SunEdison, Inc. After determining that the automatic stay under Korean law did not apply, the Court looked at the choice of law provision in the supply and license agreement. The supply and license agreement provided that New York state law applied. And under New York state law, Ipso Facto Clauses are enforceable absent fraud, collusion or overreaching.
It’s hard to say if courts in the scores of international jurisdictions where Thai Airways previously operated would extend comity to or otherwise recognize and enforce the automatic provided for in Thai bankruptcy reorganization proceedings. It’s hard to say if jurisdictions where Thai Airways operated restrict or bar the enforcement of Ipso Facto clauses against parties in foreign bankruptcy reorganization proceedings. But it would be risky for Thai Airways to blithely assume they do or would. And it’s hard to see how Thai Airways can survive, in the long-run, as a solely domestic carrier without a robust list of international destinations.
Written by Douglas Mancill, Of Counsel at Pisut & Partners