20 May 2021
Thailand

New Default Interest Rate in Thailand

Thailand has made significant changes to its default interest rate framework to reflect the current economic development. Previously, the default interest rate for any monetary debt unspecified by the agreement or the laws under Thai law had been set at a fixed rate of 7.5% per annum by virtue of section 7 of the Thai Civil and Commercial Code (“CCC”).

On 10 April 2021, an emergency decree was gazetted to amend the Civil and Commercial Code B.E. 2564 (2021) which came into force from 11 April 2021. The amendment was much needed as it was critical to protect debtors from unreasonably high interest rate.

The key points of the amendment are as follows:

Section 7Section 224Section 224/1
The interest rate is amended from 7% per annum to 3% per annum, which may be subject to change by the issuance of a Royal Decree once every three years.

 

The default interest rate (in default of monetary debt) is amended from 7% per annum to 5% per annum.

The rate is based on the rate specified by section 7 of the CCC (i.e., 3% per annum) plus additional 2% per annum.

However, the creditor can demand a higher interest if there is a legitimate ground for it.

 

Section 224/1 is a new section that was introduced to provide that when the debts are due in instalments and the debtor defaults in any of the instalment, default interest rate is only applied to the defaulted principle amount.

Previously, the practice was to charge the default interest on the unpaid principle and the defaulted instalment payment.

Any agreement made in contrary to the section is void.

Effective DateThe amended provision applies to the interest which fall due from 11 April 2021, but shall not affect the interest due prior to the effective date.The amended provision shall apply the default interest rate from 11 April 2021. It does not affect the interest due prior to the effective date.The amended provision of Section 224/1 shall apply the default interest on the instalment which fall due from the effective date of this emergency decree (i.e., 11 April 2021).

 

Following the enactment of the amendments, the Office of the Court of Justice issued a consideration remarks on the amendments, circulated to all judiciary personnel, on the interpretation and enforcement of the amendments. The key points are as follows:

Section 7

The principle that has been set out by past precedents in terms of the application of interest, when the agreement does not expressly specify the interest rate, can still be referenced and applied when the loan agreement provides that there will be interest on the loan, but if no interest rate is specified, the 3% per annum rate will be applied.

The interest rate set out in section 7 is an inflated rate which can be revised by the Ministry of Commerce once every three years. If there is any subsequent adjustment of the interest rate, the Court can apply the new rate by itself which means that the parties are not required to adduce the applicable interest rate to the Court in trial as part of the burden of proof for the claim made.

The inflated interest rate can be reflected in the judgement, though the applicable rate will be determined during the execution of the judgment process to apply the up-to-date interest rate.

The application of the interest rate

  • The transitory provision means that if the agreement is made before 11 April 2021 with unspecified interest rate, the interest of 7.5% per annum is applicable until 10 April 2021. The new inflated rate of 3% per annum will be applied from 11 April 2021 onwards.
  • For the cases filed and judgments had been rendered prior to the effective date, the new amendment does not affect their validity. The execution of judgments can follow the interest rate set out by the said judgments.
  • For interest rate that changes after the judgment is made while the case is not final, the debtor may appeal or deka appeal[1] on the newly amended interest rate, or may raise an argument in the execution of judgment process.
  • For cases pending trial, the new amended interest rate will be applicable to the parties and the Court may adjudicate on the interest rate on its own.
  • For the filing of any complaint after 11 April 2021, the plaintiff must separate the interest rates in the calculation of the claim amounts.

Section 224

The default interest rate set out in this provision is calculated based on the inflated rate in section 7, which is also an inflated rate. If the creditor demands a higher interest rate on a legitimate ground, this will continue to apply but the agreed default interest rate must not be higher than the rate prohibited by laws. Other examples of scenarios for legitimate grounds, includes the default interest rate under the Labour Protection Act which stipulates the default interest of 15% per annum, or the default interest of the financial institutions as allowed by the sector specific laws.

Where the debt arises from a wrongful act, the rate in section 224 will apply (i.e., 5% per annum).

The application of the interest rate

  • The transitory provision means that if the default takes place before 11 April 2021, the interest rate of 7.5% per annum applies until 10 April 2021. The new inflated rate of 5% per annum (or as may be adjusted by the Royal Decree later) shall be applicable from 11 April 2021 onwards.
  • For the debt arising from wrongful act committed before 11 April 2021, the creditor can apply the default interest of 7.5% per annum in accordance with the previous provision until 10 April 2021. The new rate of 5% per annum (or as may be adjusted by the Royal Decree later) will apply from 11 April 2021.
  • In hire purchase or leasing cases, where the vehicle is demanded to be returned or repayment in lieu of the vehicle has to be made, if the court stipulates the compensation of the vehicle, which may be based on the judgment date, as the basis for the estimated value, then after 11 April 2021 the Court may stipulate the amended interest rate as the basis to grant the interest to the lesser for the default interest or the loss of opportunity under the hire purchase or leasing agreement.

Section 224/1

This amendment will allow the creditor to apply the interest to the principal in the actual defaulting instalment only rather than to apply to the whole principal amount as may be agreed in some facility agreements which would include future instalments for the basis of calculation. Any agreement made in contrary to this provision, which refer to the agreement on the calculation of default interest based on the principal amount of the defaulting instalment only, shall be void.

Nonetheless, this provision does not prevent the creditor to enforce the total debt amount to the Court pursuant to the provisions of sections 204 and 213 of the CCC. This means that where there is an agreement for the creditor to demand for all the unpaid debt if the debtor fails to pay any of the instalment will still be enforceable. The agreement will still be enforceable if it was made after 11 April 2021.

The application of the interest rate in defaulting instalment

  • The transitory provision means that in the agreement with instalments repayment, the creditor can apply the agreed calculation of interest to the instalments which fall due prior to 11 April 2021. The interest applicable to the defaulting instalment which fall due from 11 April 2021 onwards, shall be limited to the principal amount of the defaulting instalment only. The validity of the agreement made before the effective date will remain unaffected, but the calculation will have to follow the law from 11 April 2021 onwards.
  • This principle only applies to the debtor who has the obligation to repay by instalments as per section 224/1. If the debtor can no longer exercise the timing of repayment by instalments, such as when the default renders all outstanding debts to be in default, the creditor can then demand for the total outstanding amount with the default interest rate applicable to the total outstanding amount.

The changes to the default interest rate will be impactful to the financial institutions, especially for the calculation of the defaulting instalment which on the other hand will be more beneficial and fairer to the debtors/consumers in this economic downturn. If your business is considering making any claims arising in April 2021, the effective date of these amendments may affect such claims.

If you have any questions or require any additional information, please contact Threenuch Bunruangthaworn, Archaree Suppakrucha or Panwadi Maniwat of ZICO Law Thailand or the partner you usually deal with.

 

This alert is for general information only and is not a substitute for legal advice.

 

[1] Appeal to the Supreme Court.