Amendments to Thai Law on Limited Companies in 2008: An important step forward or a missed opportunity?

1. Introduction

 Thai company law is undergoing significant changes. The Act Amending the Civil and Commercial Code (No. 18) B.E. 2551 (2008), which will enter into force on 1 July 2008 (“Effective Date”), is arguably the most important revision of Thai company law in 80 years.   The amendments are in line with the reforms of company laws that are taking place in other parts of the world. For instance, the UK, China and Japan have recently introduced new company legislation to make it more in tune with the needs of businesses. Companies, especially small and medium-sized companies, are a major driving force of every economy. If the law makes it difficult and expensive to set up a company and the procedures for running it too burdensome and costly, it would ineluctably hamper the growth of trade and business, impede innovations and stifle the economy. Therefore, it is important to modernise company law to facilitate the incorporation and running of companies. Such is the main objective of the recent amendments to Thai law on limited companies and, as will be seen below, the changes are on the whole desirable, although one may ask whether the legislators could have gone further.

2. Amendments to the CCC: a major step forward

As stated at the end of the Act Amending the CCC, the reasons behind the changes are that the provisions on partnerships and companies in the CCC have been in force for a long period of time and certain provisions have imposed undue burdens on the public, leading to unnecessary complexity, duplication of procedures and delay in the discharge of the government authorities’ functions. In addition, the Act states that certain provisions were an obstacle to the country’s competitiveness. Therefore, to deal with such problems and to enable partnerships and companies to operate with more flexibility, it was deemed necessary to enact this Act.

Details of some of the important changes introduced by the Act are discussed below.

Number of promoters and shareholders

The number of promoters (i.e. persons who initiate or direct the organisation of a company) required for setting up a private limited company is reduced from at least 7 promoters to at least 3 promoters. As a result, the number of shareholders required for maintaining the status of a company is also reduced from at least 7 shareholders to at least 3 shareholders.

Setting up a company in one day

Currently, it takes at least 10 - 14 days to register the incorporation of a company. The amendment will offer an alternative so that the incorporation of a company can be effected within one day.

Notice to convene the shareholders' meeting

In contrast to other amended provisions, the modification concerning the notice to convene the shareholders’ meeting creates an extra obligation on companies. Currently, there are two alternatives of giving notice to shareholders regarding the shareholders’ meeting, either to be published at least twice in a local newspaper at least 7 days prior to the meeting date or to be sent to each shareholder whose name appears on the share register at least 7 days prior to the meeting date. Under the amendment, however, both types of notice must be given.

Passing special resolutions

A special resolution can now be passed at a single shareholders’ meeting by an affirmative vote of 75% of shareholders present and eligible to vote. Before the Effective Date, a company had to convene two consecutive shareholders’ meetings and the resolution had to be passed by a vote of 75% or more of the total number of shareholders in the first meeting and a vote of two-thirds or more of the total number of shareholders in the second meeting with a gap of not less than 14 days between meetings.

Notice requirements

Distribution of dividends: Now, a company must send a written notice of dividend distribution to all shareholders. If the shares are in bearer form, the company must publish the notice in a local newspaper at least once. Prior to the Effective Date, a company may choose whether to inform its shareholders by advertising twice in a local newspaper or sending a written notice to all eligible shareholders and, if the company chooses to only publish the notice in a newspaper, certain shareholders might not be informed of the dividend distribution.

Reduction of capital: Currently, the company shall publish a notice of the capital reduction at least 7 times in a local newspaper and send a notice of the proposed reduction to all creditors known to the company. This notice requires creditors to submit any objections they may have to such reduction within 3 months from the date of the notice. However, the amendment reduces the administrative burden and only requires that the company publish a notice of the capital reduction in a local newspaper at least once. In addition, the period of time within which creditors can submit their objections is reduced from three months to 30 days.

Amalgamation of companies: Before the Effective Date, a company is required to publish a notice of amalgamation at least 7 times in a local newspaper and send the notice of amalgamation by registered mail to all creditors. This notice requires creditors to submit any objections they may have to such amalgamation within 6 months from the date of the notice. The amendment reduces the administrative burden and only requires that the company publish a notice of the amalgamation in a local newspaper at least once. In addition, the period of time within which creditors can submit their objections is reduced from six months to 60 days.

Conversion of a registered ordinary partnership and registered limited partnership into a limited company

A new chapter has been incorporated into the CCC. This chapter sets out the procedures for converting a registered ordinary partnership and a registered limited partnership into a limited company. A registered ordinary partnership or a registered limited partnership may be converted into a limited company, provided that the partnership has at least three partners and all partners consent to the conversion. Individual partners remain liable for debts incurred prior to conversion into a limited company.

3.1. From seven to three – what’s wrong with one?

From the Effective Date onwards, a minimum of 3 persons, instead of 7, will be required to set up a private limited company. However, should and could a single-person company have been introduced in Thailand? My answer would be ‘yes’ to both questions. As will be seen below, there is a strong argument in favour of permitting the establishment of single-person companies and there are no reasons why one could suggest that Thailand is not ready for such a change.

3.2. The attractiveness of a single-person company

As Copperthwaite stated, the most significant reason for shareholders to incorporate the ‘single-person company’ is certainly the desire for the limited liability. If one person is able to solely establish a company with limited liability, corporatisation of business and entrepreneurship would be encouraged. As one author has stated, single-person companies are imperative because they provide entrepreneurs with an outlet for participation in economic activity and such economic activity may take place through the creation of an economic person in the form of a company.

3.3. A single-person company – a theoretical impossibility?

By virtue of Section 1012 of CCC, Thai law considers a company as a contract whereby there must be “two or more persons” who “agree to unite for a common undertaking.” Therefore, although the minimum number of persons required to form a limited company has been reduced under the new law, the legislators have stuck to the traditional idea that a company is a contract. As a result, it is not possible even to contemplate the idea of a single-person company under Thai law.

The question is this: Does the term ‘company’ necessarily require an association of at least two persons? The answer is certainly ‘no’. The fundamental characteristic of a company is not the plurality of its founders but the separate legal personality it possesses. Therefore, it is submitted that the idea of a company as a contract is no longer tenable and should be obliterated from the thinking of Thai legislators.

3.4. The existence of de facto single-person companies

In Thailand, like anywhere else, single-person companies are commonplace. Although the 7-person rule is complied with on paper, in practice not all of the seven persons have any real interest in the company. In fact, a vast number of small companies are actually owned and managed by a single individual, but currently are required to bring in six other shareholders. This increases compliance requirements and is unnecessary in light of what happens in practice. The prevalent existence of de facto single-person companies has led a number of countries, including the PRC and Qatar, to introduce the one-person company into their legal system.

3.5. Risks to creditors

The most significant concern about single-person companies is the risks to creditors. Because of the company’s limited liability, the sole owner is not as such liable for its debts and obligations. Thus, when obligations and debts are incurred on behalf of the company, the company is liable and not the owner. For this reason, there is a concern in many jurisdictions that corporate forms could be dishonestly employed to shield single individuals from liability and to harm creditors of the companies.

However, such risks may be addressed through the provision of adequate precautions. For instance, the law pertaining to the formation of companies could address some specific issues such as whether only an individual or even a legal person can form a one-person company and whether a single member can form a company without any limit on the paid-up capital or some ceiling.

4. Conclusion: Incrementalism or a half-hearted compromise?

So, why do we still have the multi-individual companies? A possible answer one would receive as the reason for the current kind of half-way house approach to the Thai company law amendment is perhaps one of incrementalism. However, in view of the existence of de facto single-person companies in Thailand, it makes no legal sense to continue prohibiting their incorporation. If the reason for the continued prohibition was really to take a step-by-step approach to the issue, then it should mean that much thought was given to the question of whether a radical change is appropriate for the country at present. However, that is unlikely to be the case because, given the circumstances of political instability during the time the amendment was passed, it is not unreasonable to assume that the amendment might have been a product of an unhappy compromise. Evidence of a compromise is the fact that there were attempts to change the rule regarding the minimum number of promoters required to form a limited company about 20 years ago and the committee set up for that purpose at the time proposed a reduction to a minimum of two promoters. However, nothing came out of that and now the 3-person rule is about to become law. Whatever the real reason, it is probably not incorrect to state that another opportunity for modernisation of Thailand’s company law and vitalisation of the Thai economy has been missed. Nonetheless, one should not forget the big picture. It is that Thai company law has made another step forward, however disappointingly small it may seem to a number of observers.

By Wipanan Prasompluem/2008