An economic analysis of bankruptcy law with particular reference to Thailand
thesisposted on 15.12.2014, 10:36 authored by Supruet Thavornyutikarn
The thesis presents a theoretical and empirical analysis of the Thai Bankruptcy Law, which was substantially amended in 1998. The amendment introduced a legal procedure called 'reorganisation.' The underlying economic rationale of bankruptcy law is extensively examined. Bankruptcy is needed when a solution to insolvency cannot be reached among creditors because of prohibitive transaction costs arising from divergent expectations on and insufficient information about the debtor. Transaction costs are directly proportional to the number of creditors. The real purpose of bankruptcy procedure is to align such divergences, then select the best deployment of the debtor's assets to maximise their value, and redistribute the proceedings from the selected realisation to all creditors. Efficient bankruptcy law would achieve all these tasks and not affect the behaviour of creditors at the time of lending. The design of optimal bankruptcy legislation requires the thorough understanding of economic reality where the law will be enforced. There is no single bankruptcy law that can be optimal for every economy. The law must be tailor-made to achieve the desirable balance between ex ante and ex post efficiency. The structure of the Thai bankruptcy law is analysed along with a review of Thai economic and legal development. Due to the unique characteristics of connections, insolvency is mainly solved by non-bankruptcy approaches. Since the Thai Bankruptcy Act borrows its framework from other legislations, the fundamentals of the Thai economy, especially lending-borrowing relationship, have been overlooked. Subsequently, deficiencies prevail. The Act inherently inclines toward reorganisation, provides wrong incentives for creditors, releases the debtor to its status quo without initiating liquidation, and imposes no threat of managerial displacement. It also grants discretionary power for the court to exercise judgement inappropriately. Hence, there is a room for efficiency improvement. It is argued that creditors can play a greater role in bankruptcy, particularly financial institution creditors because of their higher ability to absorb bankruptcy risk than other types of creditors and close connections between themselves can reduce transaction costs considerably. The thesis proposes an additional procedure, using the exchange of debt or compulsory debt offsetting to be implemented when there is an impasse in the process. Using a binary response model with panel data and the multinomial logit model, the empirical analysis confirms that the conjectured drawbacks in the procedure are apparent. Results also reveal financial institutions are relatively more effective in dealing with insolvency than other creditors. Thus, there is a strong argument to amend the Law to utilise these advantages for the benefit of all other creditors. The evidence reveals that the Thai Bankruptcy Act discourages non-bankruptcy workouts and allows the debtor and/or some creditors to exploit the legal protection for private benefits. It is also confirmed that the number of creditors is directly proportional to the level of transaction costs and make settlement less attainable.