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Insolvency And Corporate Rehabilitation In The Philippines

Insolvency refers to the inability to pay one’s debts as they fall due. Rehabilitation, on the other hand, pertains to the process of recovery and reorganization, and is especially applicable to a juridical entity, such as a corporation. In the Philippine setting, these are the two main possible scenarios of financial distress that may befall a corporation.

APPLICABLE PHILIPPINE LAWS

The Insolvency Law (Act No. 1956), which was passed in 1909, remains to this date the principal special legislation on the matter. Act 1956 deals with three situations: (1)suspension of payments, for a debtor who possesses sufficient property to cover all his debts but foresees the impossibility of meeting them when they respectively fall due; (2)voluntary insolvency, for a debtor applying to be discharged from his debts and liabilities (amounting to the then sizeable amount of 1000 pesos); and (3)involuntary insolvency, or an adjudication of insolvency made on petition of three or more creditors of an insolvent debtor. Under this Act, the judicial courts had jurisdiction over such proceedings.

Largely patterned after the Insolvency Act of California of 1895, Act No. 1956 was created by the Philippine Legislature with the Spanish Civil Code of 1889, then still in force. The suspension of payments aspect was taken from the Spanish Code of Commerce, while the part relating to insolvency is essentially akin to the bankruptcy laws of American origin because it discharges the honest debtor1.

Despite debate in interpreting and applying the provisions of Act No. 1956, it remained largely untouched for nearly sixty years. In 1976, Presidential Decree 902-A, was issued by President Ferdinand E. Marcos using his dictatorial powers. With the intention of creating a more inviting climate for investment, both domestic and foreign, the Decree introduced several changes to the rules governing insolvency.

Foremost, Presidential Decree 902-A expressly established the concept of rehabilitation, which applies only to corporations, and is wholly different from insolvency, because it allows the corporation to recover and be able to continue its business as a going concern. Presidential Decree 902-A, however, lacked rules that would provide for an effective corporate recovery system.

Few financially distressed corporations in the Philippines availed of proceedings under the laws then in force. For one, the filing of proceedings under the Insolvency Act went against the Oriental value of maintaining ‘social face’2. On the other hand, the “automatic stay” was effective only against unsecured creditors, leaving the important assets of the debtor, often covered by mortgages, susceptible to foreclosure anyway. As such, corporate reorganization practice evolved slowly in the Philippine commercial landscape. The Philippine Supreme Court, acting on cases elevated to it on appeal or certiorari from the SEC, took the task of interpreting and applying the provisions of the Decree and formulating a body of policy, principles, and rules on corporate rehabilitation3.

In November 1999, the SEC finally promulgated its Rules on Corporate Recovery. Shortly thereafter, in July 2000, the Philippine Congress promulgated the Securities Regulation Code (Republic Act No. 8799) which transferred SEC’s jurisdiction over corporate rehabilitation proceedings, among other cases, back to the regular courts.

Having been granted “rulemaking power” in the 1987 Constitution, the Supreme Court did not waste time nor opportunity and pushed forward the development of the whole body of corporate rehabilitation. Seen as an act of “judicial activism”4, the Court promulgated the Interim Rules of Procedure on Corporate Recovery of 2000, which contained not only procedural rules but key provisions that bordered on substantive laws. In January 2009, the SC Rules of Procedure on Corporate Rehabilitation (SC A.M. No. 00-8-10-SC) took effect.

Finally, it is to be noted that these special laws and rules of procedure are applied by the Court together with provisions of New Civil Code of the Philippines and the Labor Code of the Philippines. Moreover, certain concepts borrowed from foreign jurisprudence are applied as well.

HOW CORPORATE REHABILITATION WORKS

Generally

Under the New Rules, there are three types of rehabilitation proceedings: (1)debtor-initiated, (2)creditor-initiated, and (3)pre-negotiated rehabilitation. The Regional Trial Court which has jurisdiction over the principal office of the debtor, as specified in the articles of incorporation, is where rehabilitation proceedings are to be had. If a group of companies is concerned, venue lies in the RTC which has jurisdiction over the parent company. At present, there are 65 trial courts specially designated by the Supreme Court as ‘commercial courts’ and hear such petitions. Proceedings are to be summary and non-adversarial, thus certain pleadings are prohibited.

The Rehabilitation Receiver and the Management Committee

Aside from the debtor, its creditor/s, and the rehabilitation Court, there are other parties involved in the proceeding.

The Rehabilitation Receiver is a person appointed by the Court to closely oversee and monitor the operations of the debtor, ensure that the value of the debtor’s property is reasonably maintained during the pendency of the proceedings, and to implement the rehabilitation plan once approved.

The receiver, however, shall not take over the management and control of the debtor. Instead, he may recommend the appointment of a Management Committee when there is (1) imminent danger of waste or dissipation, loss, wastage, or destruction of assets or (2) paralyzation of business operations (of the debtor) which may be prejudicial to the interest of minority stockholders, parties-litigants, or the general public.

The Stay Order

If the Court finds the petition to be sufficient in form and substance, it shall, not later than five (5) working days from its filing, issue a “Stay Order”, whose effects include:

  1. staying enforcement of all claims,
    • whether for money or otherwise
    • whether such enforcement is by court action or otherwise, against the debtor, its guarantors and persons not solidarily liable with the debtor,
  2. prohibiting the debtor from selling or disposing its properties except in the ordinary course of business
  3. prohibiting the debtor from making any payment of its liabilities except
    • For supply of goods and services in the ordinary course of business
    • For administrative expenses incurred after the issuance of the stay order
    • For payment of new loans or other forms of credit accommodations obtained for the rehabilitation with prior court approval

Recognition of Foreign Proceedings

Where assistance is sought by a foreign court or a foreign representative in connection with a foreign proceeding; where assistance is sought in a foreign State in connection with a domestic proceeding governed by (Philippine law); or where a foreign proceeding and a domestic proceeding are concurrently taking place, a petition may be filed in the rehabilitation court for this purpose.

The Rehabilitation Plan

A rehabilitation plan shall be drawn up and shall include the desired business targets or goals and the duration and coverage of the rehabilitation, the terms and conditions of such rehabilitation, and the means for the execution of the rehabilitation plan, i.e., debt to equity conversion, restructuring of the debts, dacion en pago, or sale exchange or any disposition of assets or of the interest of the shareholders.

Once approved, the rehabilitation plan shall be binding upon the debtor and all persons who may be affected thereby, including the creditors, whether or not such persons have participated in the proceedings or opposed the plan or whether or not their claims have been scheduled. However, the plan may be revoked, upon motion, on the ground that it was secured through fraud.

Termination of Proceedings

The court shall, upon motion or upon recommendation of the rehabilitation receiver, terminate the proceeding when, among other instances, the petition is dismissed, the debtor fails to submit a rehabilitation plan or the same is disapproved, or after the successful implementation of an approved rehabilitation plan.

CURRENT EFFORTS

Presently, there is continuing effort–this time, on the part of the Legislature–to create a more systematic framework for insolvency proceedings. It is well-recognized in the Philippines that the solutions to be afforded by laws should be adequate to meet complex modern issues and over-all, provide a good investment climate.