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Summary of the Official Explanatory Notes on Regulation on Credit Terms

NO&T Thailand Legal Update

*Please note that this newsletter is for informational purposes only and does not constitute legal advice. In addition, it is based on information as of its date of publication and does not reflect information after such date. In particular, please also note that preliminary reports in this newsletter may differ from current interpretations and practice depending on the nature of the report.

1.Background

Following the Trade Competition Commission Notification on Guidelines for the Assessment of Unfair Trade Practices, made with respect to the Credit Terms for SMEs regarding goods and services dated 24 May 2021 (“Regulation on Credit Terms”) which we have explained in our previous article (click the link here), the Office of Trade Competition Commission (“OTCC”) has published explanatory notes (“Credit Terms Explanatory Notes”) in late November 2021 to provide better understanding and a guideline for entrepreneurs who are considering to engage in trading with Small and Medium Enterprises (“SMEs”) under Credit Terms.

The key takeaways from the Credit Terms Explanatory Notes are as follows:

(1) Confirmation on the determinative factor of SMEs

The Regulation on Credit Terms defines an “SME” as:

  • a) a manufacturer of goods (i) having no more than 200 employees; or (ii) having an annual turnover not exceeding THB 500,000,000; or
  • b) a seller of goods or a service provider (i) having no more than 100 employees; or (ii) having an annual turnover not exceeding THB 300,000,000※1.

As we mentioned in our previous newsletter, the OTCC previously explained that this definition of SMEs was adopted based on the Ministerial Regulation Prescribing the Criteria for Small and Medium Sized Enterprises of 2019 dated 20 December 2019 (“Ministerial Regulation under SME Act”). Under the Ministerial Regulation under SME Act, a business operator with high annual turnover and a small workforce may not be deemed an SME, so it would not be entitled to the protections under the Regulation on Credit Terms※2. However, the Credit Terms Explanatory Notes clearly mentions that the definition of SMEs in the Ministerial Regulation under SME Act will be applied to serve the intent of the Credit Terms Explanatory Notes, i.e., to broaden the protection thereunder to cover as many SMEs as possible.

As a result, the determinative factor of SMEs is either the annual turnover or the number of employees. In this regard, considering (aa) a manufacturer of goods having 210 employees with an annual turnover of THB 490,000,000, and (bb) a service provider having 90 employees with an annual turnover of THB 400,000,000 – both (aa) and (bb) would be SMEs according to the Credit Terms Explanatory Notes.

Annual turnover > THB 500,000,000 (or THB 300,000,000) Annual turnover ≤ THB 500,000,000 (or THB 300,000,000)
Number of employees > 200 (or 100) Non-SME SME
Number of employees ≤ 200 (or 100) SME SME

This interpretation is in line with the wording of the regulation and makes sense as the law aims to protect genuine small and medium enterprises, and high annual turnover business operators should not be treated in the same way as low annual turnover business operators.

(2) No clarification on the ‘business, marketing, or economic justifications’ exception

The Regulation on Credit Terms states that parties may set a longer Credit Term if there are ‘business, marketing, or economic justifications stipulated under the contractual obligations’※3 related to the payment or the Credit Terms. The Credit Terms Explanatory Notes does not have any specific explanation or example on this provision, however, it provides that while contractual parties may freely enter into a mutual agreement to waive such Credit Terms on the basis that no complaint is raised to the OTCC thereof, the OTCC still has jurisdiction to determine whether such an agreement is an abuse of power, unfair or otherwise, as the OTCC may conduct motu proprio review. Therefore, the parties should bear in mind when they enter into the agreement the extent to which a party can exercise its dominant bargaining power without violation of the rules on unfair trade practice.

(3) Further clarification on how to count credit terms

The Credit Terms Explanatory Notes provides further clarifications based on two types of transactions:

3.1 For general trading or service businesses, including the non-complex production of agricultural-related products with primary agricultural processing, the credit term will begin from the day on which※4:

  • (i) goods or services are delivered in accordance with the quantity, type, and quality standard as agreed; and
  • (ii) the delivery of documentation is completed.

In the event that either party challenges the other on grounds of non-completion of the delivery of goods or services, the general principle governing the rights and duties of buyer and seller under Section 465 of the Civil and Commercial Code※5 shall govern. This is because the rights and duties of buyer and seller are still subject to normal practice – and not the Trade Competition Act of 2017 or the Regulation on Credit Terms.

Similarly, in relation to the completion of the delivery of documents, document means the document including the details or descriptions therein in accordance with the ordinary course of business, e.g., an invoice.

3.2 For consignment※6, the credit term will begin from the day of the goods being sold in accordance with the quantity or the proportions agreed in the ordinary course of business. This is because the terms of agreement are varied depending on the parties’ intentions.

However, competition law implications may arise in the event of an abuse of the acceptance of delivery, delay in the inspection of goods without the fault of the seller, or any other reasonable grounds, and there could be a legal violation on such bases.

(4) How to properly structure the payment system under the Regulation on Credit Terms

The Credit Terms Explanatory Notes provides the following advice:

4.1 On the buyer’s side, whether or not it is an SME, the details and payment procedures must be clear. Modifications to the payment procedures and relevant accounting systems may be necessary and therefore accepted in accordance with the Regulation on Credit Terms (e.g., billing system).

In the event that the buyer extends the credit terms by abusing its bargaining power, stipulates other conditions, or fails to elaborate on the details and payment procedures to sellers who are SMEs, the buyer may be subject to the rules on unfair trade practice and the penalties thereto.

4.2 On the seller’s side, evidence confirming its status as an SME, e.g., documents showing (i) the number of employees at the time of entering into the contract, or (ii) the latest annual turnover, must only be presented to another party once the status of the SME is changed. Samples of these evidence include the contribution of the Social Security Funds document and an official receipt thereof, a personal or corporate income tax filing form and an official receipt thereof, or audited financial statements, etc.

If the seller fails to provide evidence confirming the status of the seller as an SME, it can be deemed that the seller has waived the protections and privileges accorded under the Regulation on Credit Terms.

2.Our remarks

A prudent business operator should, with the support of a professional legal advisor, ensure that transactions with SMEs that involve the Credit Terms are in line with the Regulation on Credit Terms and the Credit Terms Explanatory Notes.

*1

Clause 2 of the Regulation on Credit Terms

*2

This is because Section 5 of the Ministerial Regulation under SME Act provides that in the event that the enterprise has a number of employees matching one type of enterprise when its turnover matches that of another type of enterprise, the turnover shall be used for the determination of the type of such enterprise.

*3

Clause 4 (1), Paragraph 2 of the Regulation on Credit Terms

*4

According to Clause 4 (1) of the Regulation on Credit Terms, the credit term periods are not to exceed 45 days or 30 days as the case may be.

*5
Section 465 of the Civil and Commercial Code states that in a sale of movable property:

  • (1) where the seller delivers the property with an amount less than contracted for, the buyer may reject it; but if the buyer accepts it, the buyer must pay the proportionate price.
  • (2) where the seller delivers the property with an amount more than contracted for, the buyer may accept the property according to the contract and, or the buyer may reject the property. If the buyer accepts the property so delivered, the buyer must pay the proportionate price.
  • (3) where the seller delivers the property he contracted for a property of a different description not included in the contract, the buyer may accept the property according to the contract and choose not to make payment of the excess amount, or the buyer may reject the property.

*6
In this article, “consignment” generally means a transaction where an SME delivers goods to a merchant for the purpose of sale to the merchant’s customers and the merchant receives a commission from the sale.

This newsletter is given as general information for reference purposes only and therefore does not constitute our firm’s legal advice. Any opinion stated in this newsletter is a personal view of the author(s) and not our firm’s official view. For any specific matter or legal issue, please do not rely on this newsletter but make sure to consult a legal adviser. We would be delighted to answer your questions, if any.

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