Philippine Laws: July 2010

In the second month of his presidency, President P-Noy was not able to approve a new law in July as he organized his Cabinet and dealt with early controversies about his executive orders, and as the 15th Congress began its task of legislating. In June 30, 2010, however, a new law was deemed approved, in accordance with Section 27(1), Article VI, of the Philippine Constitution, as it was not acted upon by President GMA within 30 days from the date of her receipt thereof from the 14th Congress. This is Republic Act No. 10142, the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, which was passed by the House of Representatives on February 1, 2010 and the Senate on February 3, 2010.

The FRIA expressly repealed the Insolvency Law (Act No. 1956) as amended, and impliedly repealed, to the extent that they are inconsistent with the provisions of the Act, all other laws, orders, rules and regulations. The FRIA is significant because it covers the rehabilitation of sole proprietorships, partnerships and corporations, provides the legal basis for our procedural rules on corporate rehabilitation (the latest of which is A.M. No. 00-8-10-SC, promulgated by the Supreme Court en banc on December 2, 2009, and took effect on January 16, 2009), and consolidates the laws on insolvency and rehabilitation. The FRIA shall take effect 15 days after its complete publication in the Official Gazette or in at least two national newspapers of general circulation.

I will not venture to summarize the 150-section FRIA, but will just endeavour to discuss provisions which, to my mind, are significant, particularly in connection with rehabilitation proceedings.

The FRIA provides for different types of rehabilitation proceedings for sole proprietorships, partnerships and corporations. The Court-Supervised Rehabilitation (see Chapter II of the FRIA) includes:

(a) Voluntary Proceedings which is a rehabilitation petition initiated by the sole proprietor, by a majority of the partners, or by a majority of the board of directors/trustees and authorized by the corporation’s stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members, and

(b) Involuntary Proceedings which is a rehabilitation petition initiated by creditors with an aggregate claim of at least P1 Million or at least 25% of the subscribed capital stock or partners’ contribution, whichever is higher. The Pre-Negotiated Rehabilitation (see Chapter III of the FRIA) is initiated by the insolvent debtor, by itself or jointly with any of its creditors, and seeks the approval of a pre-negotiated Rehabilitation Plan endorsed or approved by creditors holding at least 2/3 of the debtor’s total liabilities, including secured creditors holding more than 50% of the secured claims, and unsecured creditors holding more than 50% of the unsecured claims.

The Out-of-Court or Informal Restructuring Agreements or Rehabilitation Plans (see Chapter IV of the FRIA) must be agreed upon by the debtor, and approved by creditors holding at least 85% of the debtor’s total liabilities, including secured creditors holding at least 67% of the secured obligations and unsecured creditors holding at least 75% of the unsecured obligations.

A liquidator or rehabilitation receiver may be a juridical entity, provided that it designates as a representative a natural person who possesses all the qualifications and none of the disqualifications. The juridical entity and the representative are solidarily liable for all obligations and responsibilities of a liquidator or rehabilitation receiver.

The Rehabilitation Plan may include various means to restore the financial well-being and viability of an insolvent debtor, including but not limited to debt forgiveness, debt rescheduling, reorganization or quasi-reorganization, dacion en pago, debt-to-equity conversion, sale of business (or parts of it) as a going concern, or setting up of a new business entity, or other similar arrangements as may be approved by the rehabilitation court or creditors. The FRIA however does not specify limitations on the scope of these means, such as the amount or percentage of debt that may be forgiven, or the maximum period of time when debts may be rescheduled.

The FRIA expressly allows for rehabilitation proceedings for a group of debtors, which should be (a) corporations that are financially related to one another as parent corporation, subsidiaries or affiliates, (b) partnerships that are owned more than 50% by the same person, and (c) single proprietorships that are owned by the same person. The group of debtors may jointly file a rehabilitation petition when one or more of its members foresees the impossibility of meeting debts when they respectively fall due, and the financial distress will likely adversely affect the financial condition and/or operations of the other members of the group, and/or the participation of the other members is essential under the terms and conditions of the proposed Rehabilitation Plan. In this connection however, the assets and liabilities of a debtor may not be commingled or aggregated with those of another, unless the latter is a related enterprise that is owned or controlled, directly or indirectly, by the same interest, and only where (i) there was commingling in fact of assets and liabilities prior to the commencement of the rehabilitation proceedings, (ii) they have common creditors and it will be more convenient to treat them together rather than separately, (iii) the related enterprise voluntarily accedes to join the debtor as party petitioner and to commingle its assets and liabilities with the debtor’s, and (iv) the consolidation of assets and liabilities is beneficial to all concerned and promotes the objectives of rehabilitation.

The FRIA punishes an individual debtor, a sole proprietor, partners, or directors and officers of a debtor, having notice of the commencement of the proceedings, or having reason to believe that rehabilitation or liquidation proceedings are about to be commenced, or in contemplation of these proceedings, (a) dispose of or caused 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 (b) conceal, or authorize or approve the concealment of, from the creditors, or embezzles or misappropriates, any property of the debtor. They shall be liable for double the value of the property sold, embezzled, or disposed of, or double the amount of the transaction involved, whichever is higher.

The FRIA authorizes any bank, whether universal or not, to acquire and hold an equity interest in the debtor or its subsidiaries, pursuant to an approved Rehabilitation or Liquidation Plan, subject to the ownership limits applicable to universal banks for equity investments, and provided that such equity investment or interest shall be disposed of by the bank within a period of 5 years or as may be prescribed by the Monetary Board.

Involuntary Proceedings may be initiated by creditors if (a) there is no genuine issue of fact or law on the claims of the petitioners, and the due and demandable payments have not been made for at least 60 days or that the debtor has generally failed to meet its liabilities as they fall due, or (b) a creditor, other than petitioners, has initiated foreclosure proceedings against the debtor that will prevent the debtor from paying its debts as they become due or will render it insolvent.

If the court finds the rehabilitation petition sufficient in form and substance, it shall, within 5 working days from the filing of a petition, issue a Commencement Order, which shall include a Stay or Suspension Order. If the petition is deficient, the rehabilitation court may, in its discretion, grant petitioner a reasonable period to amend or supplement the petition, or to submit such documents as may be necessary or proper to put the petition in order, in which case, the 5 working days shall be counted from the date of such filing or submission.

The rehabilitation proceedings are declared commenced upon the issuance of the Commencement Order. The FRIA clarifies, among others, that the Commencement Order (a) prohibits and renders null and void extrajudicial process or activity to seize property, sell encumbered property, or otherwise attempt to collect on or enforce a claim against the debtor, after the commencement date, unless otherwise allowed under the FRIA, (b) renders null and void any set-off, after the commencement date, of any debt owed to the debtor by any of the debtor’s creditors, and (c) renders null and void the perfection, after the commencement date, of any lien against the debtor’s properties. The FRIA also declares that attempts to seek legal or other recourse against the debtor outside the rehabilitation proceedings shall be sufficient to support a finding of indirect contempt of court.

The FRIA enumerates the exceptions to the Stay or Suspension Order, i.e., where the order shall not apply, including but not limited to (a) cases already pending appeal in the Supreme Court as of commencement date, (b) cases pending or filed in a specialized court or quasi-judicial agency which the court, in its discretion, may determine, is capable of resolving the claim more quickly, fairly, and efficiently than the rehabilitation court, (c) enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the mortgage is necessary for the rehabilitation of the debtor, and (d) any criminal action against the individual debtor, owner, partner, director or officer of the debtor.

The FRIA declares that, upon the issuance of the Commencement Order, up to the approval of the Rehabilitation Plan or the dismissal of the petition, whichever is earlier, the imposition of all taxes and fees, including penalties, interests, and charges, due to the national government and the local government unit, shall be considered waived, in the furtherance of the objectives of rehabilitation.

The FRIA provides shorter periods for the different stages of the rehabilitation proceedings. For example, (a) the Commencement Order shall be published in a newspaper of general circulation once a week for at least 2 consecutive weeks, with the first publication being made within 7 days from its issuance; (b) copies of the petition shall be personally served on creditors holding at least 10% of the total liabilities of the debtor (or on the debtor, in creditor-initiated rehabilitation proceedings) within 5 days from the issuance of the Commencement Order; (c) creditors shall file their claims with the court, and nominate any other person as rehabilitation receiver, at least 5 days before the initial hearing; (d) the initial hearing shall be set not more than 40 days from the filing of the petition; (e) creditors shall file their comment on the petition and the Rehabilitation Plan within a period of not more than 20 days from the initial hearing; (f) the rehabilitation receiver shall submit to the court a report on his preliminary findings and recommendations within 40 days from the initial hearing; (g) the court shall give due course to the petition, dismiss the petition, or convert the petition into a liquidation proceedings, within 10 days from receipt of the rehabilitation receiver’s report; (h) if the petition is given due course, the rehabilitation receiver shall review, revise and/or recommend action on the Rehabilitation Plan, and submit the same or a new one to the court, within 90 days from the due course order; (i) the rehabilitation receiver shall have 20 days from assumption of office within which to establish a preliminary registry of claims, which may be challenged by the debtor, creditors, stakeholders and other interested parties within 30 days from the expiration of the 20-day period; (j) the rehabilitation receiver shall submit the registry of claims (which shall include undisputed claims not subject of any challenge) upon expiration of the 30-day period; (k) within 20 days from notice by the rehabilitation receiver that the Rehabilitation Plan is ready for examination, the rehabilitation receiver shall convene the creditors for purposes of voting on the Rehabilitation Plan; (l) within the same 20-day period, a creditor may file an objection to the Rehabilitation Plan on limited grounds; and (m) the court shall have a maximum period of 1 year from the filing of the petition to confirm the Rehabilitation Plan and, if no Rehabilitation Plan is confirmed within said period, the proceedings may, upon motion or motu proprio, be converted into liquidation proceedings.

Under the FRIA, all valid and subsisting contracts of the debtor with creditors and other third parties as at the commencement date shall continue in force, unless cancelled by virtue of a final judgment of a competent court prior to the issuance of the Commencement Order or at any time thereafter by the rehabilitation court. The debtor, with the consent of the rehabilitation receiver, shall, within 90 days following the commencement date, inform its contractual counter-party whether or not it is confirming the particular contract. Contractual obligations of the debtor arising or performed during this period, and afterwards for confirmed contracts, shall be considered administrative expenses. Contracts not confirmed within the deadline shall be considered terminated. Any contract of the debtor may be cancelled or terminated for any ground provided by law.

For Pre-Negotiated Rehabilitation, (a) any creditor or other interested party may submit to the court a verified objection to the petition or the Rehabilitation Plan on specified grounds within 8 days from the date of the second publication of the Commencement Order; (b) if there is no such objection, the court shall approve the Rehabilitation Plan within 10 days from the date of said second publication; (c) hearings on any objection shall be held not earlier than 20 days, and not later than 30 days, from the date of said second publication; and (d) the court shall have a maximum period of 1 year from the filing of the petition to approve the Rehabilitation Plan although, if the court fails to act within said period, the Rehabilitation Plan shall be deemed approved.

For Out-of-Court or Informal Restructuring Agreements or Rehabilitation Plans, a standstill period agreed upon the parties pending negotiation and finalization of the Restructuring Agreement or Rehabilitation Plan shall be effective and enforceable also against other creditors if (a) such agreement is approved by creditors representing more than 50% of the total liabilities of the debtor, (b) notice of the agreement is published in a newspaper of general circulation once a week for at least 2 consecutive weeks, and (c) the standstill period does not exceed 120 days from the date of effectivity. The approved Restructuring Agreement or Rehabilitation Plan is granted a cram-down effect such that it shall have the same legal effect as a court-confirmed Rehabilitation Plan. The notice thereof shall be published in a newspaper of general circulation once a week for at least 3 consecutive weeks, and the Restructuring Agreement or Rehabilitation Plan shall be effective 15 days from the date of the last publication of the notice.

To end, let me just say that the FRIA also provides for the liquidation of insolvent juridical debtors (see Chapter V of the FRIA). The Voluntary Liquidation is initiated by the debtor via a verified petition, or a verified motion in court-supervised or pre-negotiated rehabilitation proceedings. In this connection, rehabilitation proceedings may also be converted into liquidation proceedings, when the rehabilitation court finds that the debtor is insolvent and there is no substantial likelihood for the debtor to be successfully rehabilitated, or when the Rehabilitation Plan is not confirmed by the rehabilitation court within 1 year from filing of the petition, or when the rehabilitation proceedings is terminated due to failure of rehabilitation or dismissal of the rehabilitation petition for reasons other than technical grounds, or at any time upon the recommendation of the rehabilitation receiver that the rehabilitation of the debtor is not feasible. The Involuntary Liquidation is initiated by 3 or more creditors whose aggregate claims amount to at least P1 Million or at least 25% of the subscribed capital stock or partners’ contribution, whichever is higher, also via a verified petition or a verified motion in a court-supervised or pre-negotiated rehabilitation proceedings.

On the other hand, for insolvent individual debtors (see Chapter VI of the FRIA), the FRIA provides for (a) the suspension of payments, when the debtor possesses sufficient properties to cover all his debts but foresees the impossibility of meeting them when they respectively fall due, (b) voluntary liquidation, initiated by the debtor who does not have sufficient properties to cover his liabilities and owes debts exceeding P500 thousand, and (c) involuntary liquidation, initiated by creditors with claims aggregating at least P500 thousand.

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