Rarely does good news come so poorly packaged. Thailand’s biggest corporate debtor, Thai Petrochemical Industry, was declared insolvent last week by a Thai bankruptcy court. Oddly enough, that is a welcome development. The decision allows creditors to take over the company, restructure it and get back to business. The ruling was hailed by foreign investors, since it clears the way for a real recovery in the Thai economy.

TPI is Southeast Asia’s largest petrochemical complex. Unfortunately, its size is rivaled by the size of its debt, a towering $3.5 billion, which it had not been able to service since the baht crisis hit in 1997. Yet TPI’s owners, the Leophariatana family, denied the company was bankrupt, arguing that assets exceeded liabilities, which is the traditional Thai standard for solvency. Management agreed to a restructuring plan a year ago, but failed to implement it for fear of losing control of the business. Other companies have adopted similar stalling tactics as economic prospects brightened. As a result, foreign investors have become increasingly wary of investing in the country.

The Thai bankruptcy court rejected TPI’s claim. Instead, it adopted a different benchmark — whether debt could be serviced from cash flow, a measure more in line with international standards. Investors were also heartened by the court’s rejection of evidence from the company’s auditor and its reliance on neutral, court-appointed accountants.

The case was a test for the bankruptcy court, which had been set up after the 1997 crisis. With bad debt among Thai banks totaling 38 percent of total loans, the backlog had to be cleared before banks could clean up balance sheets and resume lending and the country’s economy could return to normal. Unless creditors have a stick with which to force debtors to restructure, the debt mess will never be eliminated. Both the World Bank and the Asian Development Bank had been encouraging reform along precisely these lines. Last week’s ruling is proof the judiciary is listening. Bad news for the Leophariatana family, good news for Thailand.

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