—Reginald Anton J. Puno, Partner
—Aidyl Pearl U. Perez, Associate

Due to the outbreak of COVID-19 worldwide, and the imposition of the Enhanced Community Quarantine and Stringent Social Distancing Measures over the entire island of Luzon, there has been a severe disruption of economic activities.  Many establishments have been prevented to physically operate and had to resort to finding means to handle their business activities remotely. Entrepreneurs and businessmen across different industries have reported significant losses and cut backs, which have resulted to a widespread and looming fear of bankruptcy.

In the event that this economic disruption will put juridical entities in a state of insolvency, below is a summary of the remedies available under Philippine laws to address the same.

Under the Philippine laws, an entity is considered insolvent if it is generally unable to pay its liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its assets[1]

For insolvent entities, the law offers two main reliefs: (1) Rehabilitation and (2) Liquidation. Both remedies are made available to ensure or maintain certainty and predictability in commercial affairs, preserve and maximize the value of the assets of debtors, recognize creditor rights and respect priority of claims and ensure equitable treatment of creditors who are similarly situated.[2]

For individual insolvent debtors, the law offers an additional relief of Suspension of Payments.[3]

REHABILITATION

Rehabilitation aims to restore the debtor to a state of solvency or to its former healthy financial condition through the adaptation of a Rehabilitation Plan showing that the continued operations is economically feasible and its creditors can recover more if the debtor continues as a going concern instead of it being immediately liquidated.[4]

There are three main kinds of Rehabilitation Proceedings: (1) Court-Supervised, (2) Pre-Negotiated, and (3) Out-of-Court or Informal Rehabilitation Proceedings. The main difference between these different types is the level of involvement of the courts over the rehabilitation proceedings.

Court-Supervised Rehabilitation

These proceedings are coursed through the regular courts, i.e., the Regional Trial Courts, (“Court/s”) and is initiated by filing of a Petition for Rehabilitation (“Petition”).  The Petition must be accompanied by a Rehabilitation Plan that lays down a plan in order to bring back the entity to a state of solvency or to its former healthy financial condition. If the Court finds the Petition to be meritorious, it shall issue a Commencement Order,[5] which includes the appointment of a Rehabilitation Receiver, among others.

The Petition can be initiated or filed by either the debtor or its creditor/s:

• If filed by Debtor (Voluntary Proceedings)
  • Debtor must acquire a majority vote of the board of directors and further authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock.[6]
  • Creditors can file their verified notices of claims with the Courts at least five (5) days before the initial hearing date, without which they will be barred from participating in the rehabilitation proceedings.[7]
  • Creditors can also file and serve on the debtor a verified comment or opposition to the Petition no later than fifteen (15) days before the initial hearing.[8]

• If filed by Creditor or a Group of Creditors (Involuntary Proceedings)
  • The aggregate amount of their claim must be, whichever is higher of: (1) at least One Million Pesos (Php 1,000,000); or (2) at least 25% of the subscribed capital stock or partners’ contributions.[9]

Benefits for the Debtor:

1. Actions to enforce claims against the debtor may be suspended or prohibited.[10]
2. Waiver of taxes and fees, including penalties, interest and charges, to the government.[11]
3. Measures[12] that allow the debtor to maintain its assets instead of being liquidated.[13]
4. All proceedings against the debtor may be consolidated with the Court[14] making it easier for the debtor to answer all claims.
5. Any compromises of amounts or rescheduling of payments by the debtor shall be binding on creditors regardless of whether the Rehabilitation Plan is implemented.[15]
6. It gives the debtor a chance to re-engage the market, hopefully with more vigor and enlightened services, having learned from a painful experience.[16]

Benefits for the Creditor/s:

1. Measures[17] that preserve the assets of the debtor and directs the same towards efforts to rehabilitate the debtor.
2. Consolidation of all proceedings against the debtor[18] prevents a scenario of several courts issuing various writs over the same assets.[19]
3. Creditors are to be paid equitably.[20]
4. The Court shall not impair the security or lien of secured creditors.[21]
5. Secured creditors are given more defined leverage.[22]
6. Assured creditors’ participation.[23]
7. More protection to the creditors to equitably and fairly address their concerns.[24]
8. Allows for present value recovery for creditors.[25]

Pre-Negotiated Rehabilitation

The proceeding involves the confirmation of the Court of a Rehabilitation Plan that was already pre-negotiated by the debtor and its creditors. A Petition may be filed by the debtor or jointly with its creditors.

The Petition must be supported by an affidavit showing the written approval or endorsement of by creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor.[26]

Benefits for the Debtor:

1. Measures that allow the debtor to maintain its assets instead of being liquidated.[27]
2. All proceedings against the debtor may be consolidated with the Court.[28]
3. A shorter timeline.[29]
4. No need to call creditors for the approval of the Rehabilitation Plan as such is already pre-approved.

Benefits for the Creditor/s:

1. Consolidation of all proceedings against the debtor prevents a scenario of several courts issuing various writs over the same assets.
2. Commencement Order is lifted earlier.[30]
3. Objecting creditors’ rights are protected.[31]
4. The proceeding is significantly shorter compared to a Court-Supervised Rehabilitation.[32] 

Out-of-Court or Informal Rehabilitation Agreements (“OCRA”)

This remedy does not involve the use of court processes.  The requirements for OCRAs are as follows:[33]

1. The debtor must agree to the OCRA;
2. Approval by creditors representing at least sixty-seven (67%) of the secured obligations of the debtor;
3. Approval by the creditors representing at least seventy-five (75%) of the unsecured obligations of the debtor; and
4. Approval by creditors holding at least eighty-five (85%) of the total liabilities, secured and unsecured, of the debtor.

Benefits for the Debtor:

1. The Rehabilitation Plan does not need the appointment of a Rehabilitation Receiver –negotiations will be conducted by the parties independently.
2. A standstill period may be agreed upon,[34] which protects debtor from actions of its creditors.

Benefits for the Creditor/s:

1. Confirmation from the Court  is not needed, only requires the publication of the notice.[35]
2. The requirements of creditor approval for the Rehabilitation Plan can be made more stringent.

All Rehabilitation Plans approved under the three kinds of Rehabilitation Proceedings shall legally bind the debtor and all persons who may be affected thereby, including the creditors, whether or not such persons have participated in the proceedings.

Since the first two kinds of Rehabilitation Proceedings generally involve the Courts, it may normally take longer, maybe several months or even years, most especially if contested, to complete compared to the third kind. These timelines should be taken into consideration given the immediate or otherwise need for relief.

Under certain scenarios provided under the law,[36] Rehabilitation Proceedings may be converted into Liquidation Proceedings.

LIQUIDATION

The goal of a Liquidation Proceeding is to wind up the affairs of the entity and distribute its assets among its creditors. It involves either the filing of a Petition for Liquidation or the failure or conversion of a Rehabilitation Proceeding into a Liquidation Proceeding.

• If filed by the Debtor (Voluntary Liquidation)
  • Debtor must show certificates attesting that resolutions for the filing of the Petition for Liquidation was approved by at least a majority of the members of the board of directors present and stockholders holding at least two-thirds (2/3) of the outstanding capital stock of the stock corporation.[37]

• If filed by the creditors (Involuntary Liquidation)
  • Applicants must be made up of three (3) or more creditors whose aggregate claims are: (1) at least One Million Pesos (Php 1,000,000.00); or (2) At least twenty-five percent (25%) of the subscribed capital stock.[38] 

In both cases, if the Court finds the Petition for Liquidation meritorious, the Court will issue a Liquidation Order which determines the point when the debtor is deemed dissolved and its corporate or juridical existence is terminated.[39]

Since Liquidation Proceedings also involve the regular courts, it may take a months or years to obtain a Liquidation Order from the Court, most especially if contested.

Benefits for the Debtor:

1. May allow termination of debtor’s contracts.[40]
2. Prohibits separate actions for the collection of an unsecured claims.[41]
3. Disallows foreclosure proceedings[42] to protect the debtor’s assets prior to distribution.  

Benefits for the Creditor/s:

1. May attribute direct liability to directors or officers of the debtor.[43]
2. The right of secured creditors to enforce its liens are not affected by the Liquidation Order.[44]
3. More protection to the creditors as the State steps in to equitably distribute the debtor’s limited resources[45] while its losses are re-allocated.[46]
4. It prevents further devaluation of the business assets.

INSOLVENCY COSTS/LIABILITIES:

Preference of Credits and Payments

The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law, unless he waives his right.[47] Thus, there is preference accorded to secured creditors, but they must file a manifestation that reflect their desire to maintain their rights under the security or lien.[48]

In the settlement of the assets of an insolvent debtor, the priority of claims depend on the type of property used to satisfy the debt, as follows:

• If personal or movable property is involved – the preference shall follow Article 2241 of the Civil Code.
• If real or immovable property is involved – the preference shall follow Article 2242 of the Civil Code.
• If none of the foregoing claims apply to personal or real properties – the preference shall follow Article 2244 of the Civil Code as amended by Article 100 of the Labor Code[49].

If there is still an excess after satisfying the claims or liens under Article 2244 – all other common credits shall be satisfied pro rata.[50]

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[1] Financial Rehabilitation and Insolvency Act of 2010 (“FRIA”), Republic Act No. 10142, July 18, 2010, Section 4 (p).

[2] Viva Shipping Lines v. Keppel Philippines Mining, Inc., et. al., G.R. No. 177382, February 17, 2016.

[3] To be discussed in a separate VAL LAW Newsletter as necessary.

[4] FRIA, Section 4 (gg).

[5] Financial Rehabilitation Rules of Procedure of 2013 (“FR Rules”), A.M. No. 12-12-11-SC, Rule 2, Section 7.

[6] FRIA, Section 12.

[7] FR Rules, Rule 2, Section 8 (M).

[8] FR Rules, Rule 2, Section 8 (N).

[9] FR Rules, Rule 2, Section 4.

[10] FR Rules, Rule 2, Sections 8 (V).

[11] FRIA, Section 19.

[12] FR Rules, Rule 2, Sections 9 (B), (C), (D) and (F).

[13] Viva Shipping Lines v. Keppel Philippines Mining, supra note 2.

[14] FR Rules, Rule 2, Section 9 (E).

[15] FR Rules, Rule 2, Section 67.

[16] Viva Shipping Lines v. Keppel Philippines Mining, supra note 2.

[17] FR Rules, Rule 2, Section 8 (V).

[18] FR Rules, Rule 2, Section 9 (E).

[19] Viva Shipping Lines v. Keppel Philippines Mining, supra note 2.

[20] FR Rules, Rule 2, Sections 61 (H) and (I).

[21] “xxx except that his right to enforce the security or lien may be suspended during the term of the Stay Order” [FR Rules, Rule 2, Section 59].

[22] Before FRIA “secured and unsecured creditors [were placed] in equal footing or in pari passu with each other during rehabilitation.” [Express Investments III Private LTD, et. al., v. Dayan Telecommunications Inc., et. al., G.R. Nos. 174457-59, December 5, 2012.]

[23] The Rehabilitation Plan needs the vote of the members of a class of creditors holding more than fifty percent (50%) of the total claims vote in favor of the Rehabilitation Plan. [FRIA, Section 64.]

[24] Viva Shipping Lines v. Keppel Philippines Mining, supra note 2.

[25] Id.

[26] FRIA, Section 76.

[27] FR Rules, Rule 3, Section 3.

[28] FR Rules, Rule 3, Section 3.

[29] Eight [8] days from the date of the second publication of the Order for the approval of the Rehabilitation Plan if there are no objections as compared with the Court-Supervised proceedings (i.e. Court will confirm if no objections are filed within the twenty (20)-day period from receipt of notice that a Rehabilitation Plan had been submitted to the court [FR Rules, Rule 2, Section 66].

[30] The Commencement Order shall be effective only for one hundred twenty (120) days from the filing of the Petition. “Unless earlier lifted by the court on account of (a) the approval of the Pre-Negotiated Rehabilitation Plan, or (b) termination of the rehabilitation proceedings. “ (FR Rules, Rule 3, Section 3).

[31] The Court only has one hundred twenty (120) days from the filing of the Petition to approve or disapprove the Rehabilitation Plan. Creditors can still object to the Petition or Rehabilitation Plan. [FR Rules, Rule 3, Section 5.]

[32] FR Rules, Rule 3, Section 9.

[33] FRIA, Section 85.

[34] Standstill period hall not exceed one hundred twenty (120) days from the date of effectivity. [FR Rules Rule 4, Section 2.]

[35] Notice of the OCRA shall be published once a week for at least three consecutive weeks in a newspaper of general circulation in the Philippines. [FR Rules, Rule 4, Section 4.]

[36] FRIA,Sections 25 (c), 72, 75 and 90, or at any time the Rehabilitation Receiver recommends that the rehabilitation of the debtor is not feasible.

[37] Financial Liquidation and Suspension of Payments Rules of Procedure for Insolvent Debtors (“FLSP Rules”), Rule 2, Section 1.

[38] FLSP Rules, Rule 2, Section 4.

[39] FLSP Rules, Rule 4, Section 3.

[40] “ xxx  unless the liquidator declares otherwise and the contracting party agrees” [FLSP Rules, Rule 4, Section 3 (c).]

[41] FLSP Rules, Rule 4, Section 3 (d).

[42] For one hundred eighty (180) days from the date of the Liquidation Order. [FLSP Rules, Rule 4, Section 3 (e).]

[43] If they are proven to have committed acts mentioned in Section 8 of Rule 1 of the FLSP Rules.

“xxx if they, having notice of the commencement of the proceedings, or having reason to believe that the proceedings are about to be commenced, or in contemplation thereof, willfully commit the following acts:

• Dispose or cause to be disposed any property of the debtor other than in the ordinary course of business or authorize or approve any transaction in fraud of creditors or in a manner grossly disadvantageous to the debtor and/or creditors; or
• Conceal, authorize, or approve the concealment from the creditors, or embezzle or misappropriate, any property of the debtor. xxx”  (FLSP Rules, Rule 1, Section 8).

[44] Unless he waives his right (FLSP Rules, Rule 4, Section 4)

[45] Viva Shipping Lines v. Keppel Philippines Mining, supra note 2.

[46] Id.

[47] FLSP Rules, Rule 4, Section 4.

[48] FLSP Rules, Rule 4, Section 9.

[49] “In the event of bankruptcy or liquidation of an employer’s business, his workers shall enjoy first preference as regards their unpaid wages and other monetary claims, any provision of law to the contrary notwithstanding. Such unpaid wages and monetary claims shall be paid in full before the claims of the Government and other creditors may be paid”.

[50] Civil Code of the Philippines, Art. 2251