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Corporate Rescue and The New Financial Rehabilitation and Insolvency Act of 2010
Corporate Rescue and The New Financial Rehabilitation and Insolvency Act of 2010
2010
2/F MIDWAY
COURT BLDG.,
241
2010
distinction
in
the
Spanish
system
between
insolvency
in
be
to
in
2010
In 1981, then President Marcos issued Presidential Decree (P.D.) No. 1758
which amended P.D. No. 902-A. For the first time, the concept of corporate
rehabilitation was introduced. This is contained in an addendum to the powers
formerly granted to the Securities and Exchange Commission (SEC)3 under
Section 5 of PD No. 902-A, to wit:
Section 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange commission over
corporations, partnerships and other forms of association
registered with it expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
xxx
d) Petitions of corporations, partnerships or
associations to be declared in the state of suspension of
payments in cases where the corporation, partnership or
association possesses sufficient property to cover all its
debts but foresees the impossibility of meeting them when
they respectively fall due or in cases where the corporation,
which he has resided for six months next preceding the
filing of such petition. In his petition he shall set forth
his place of residence, the period of his residence therein
immediately prior to filing said petition, his inability to
pay all his debts in full, his willingness to surrender all
his property, estate, and effects not exempt from execution
for the benefit of his creditors, and an application to be
adjudged an insolvent. He shall annex to his petition a
schedule and inventory in the form hereinafter provided.
the filing of such petition shall be an act of insolvency.
c) Petitions for Involuntary Insolvency:
Section 20. An adjudication of insolvency may be made on
the petition of three or more creditors, residents of the
Philippine islands, whose credits or demands accrued in the
Philippine Islands, and the amount of which credits or
demands are in the aggregate of not less than one thousand
pesos; Provided, that none of said creditors has become a
creditor by assignment, however made, within thirty days
prior to the filing of said petition. Such petition must be
filed in the Court of first Instance of the province or
city in which the debtor resides or has his principal place
of business, and must be verified by at least three of the
petitioner. the following shall be considered acts of
insolvency, and the petition shall set forth one or more of
such acts: xxx
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a marked
improvement over the antiquated Insolvency Law, certain gaps in the law have
prevented it from being a definitive corporate rescue vehicle.
II. THE FRIA
The Lower House approved House Bill (HB) 7090, its version of the
Financial Rehabilitation and Insolvency Act of 2010 (the FRIA), on 02
February 2010 or just before the end of its 14th Session6.
Off the bat, it would be accurate to conclude that the FRIA7 is not a simple
codification of the existing rules on corporate rehabilitation but a veritable
system overhaul.
restructuring along with insolvency law. Furthermore, it moves from the debtor
controlled process of the older system to a framework where the creditors take
the fore in determining the future of the distressed corporation.
What follows below are some of the key features of the new FRIA
pertaining to rehabilitation of corporate debtors.
Meaning of insolvent
The old Insolvency Law of 1909 made a distinction between a debtor who
was insolvent and one which was solvent but illiquid. Given that prior to the
passage of the Securities Regulation Code (Republic Act 8799) the jurisdiction
over Petitions to Declare Suspension of Payments and/or for the appointment of
a Rehabilitation Receiver was given to the Securities and Exchange Commission
6
As of this writing, HB 7090 is to be consolidated with its counterpart
Senate Bill (SB) 61 and thereafter transmitted to the President for
approval.
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(SEC) while Petitions for Insolvency had to be heard by the Regional Trial Court
(RTC), some confusion resulted which eventually required some clarification by
the Supreme Court8.
On the other hand, both the 2000 Interim Rules on Corporate
Rehabilitation as well as the 2008 Rules on Corporate Rehabilitation made
rehabilitation available to any debtor who foresees the impossibility of meeting
its debts when they respectively fall due.
The FRIA avoids the trap entirely by providing for a broad definition of the
term insolvent, as follows:
Section 4. Definition of Terms. As used in this Act,
the term:
xxx
(p) Insolvent shall refer to the financial condition of a
to
rescue
corporation;
Out-of-Court
While the old rehabilitation regime did not expressly provide for
See also: Union Bank v. Concepion, GR No. 160272 where the Supreme
Court declared that the SEC retained jurisdiction over a Petition for
the declaration of suspension of payments and rehabilitation even if
the debtor became insolvent during the course of the proceedings.
Finally, see Philippine National Bank v. CA [GR No. 165571, 20 January
2009] where one of the issues raised was whether or not a technically
insolvent corporation (i.e. one which foresees its inability to pay
its obligations for more than one year) can file a Petition for
Rehabilitation with the SEC despite not having filed a prior petition
for Suspension of Payments. The Supreme Court ruled that the SEC Rules
on Corporate Recovery allowed rehabilitation without [r]equiring a
previous filing of a petition for suspension of payments.
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the initiating party can accumulate the necessary number of votes, to wit:
Voluntary
Rehabilitation
(Debtor Initiated
Court
Supervised)
Involuntary.
Rehabilitation
(Creditor
Initiated Court
Supervised)
Pre-Negotiated
Rehabilitation
Informal
Rehabilitation
Provision
Section 12
Section 13
Section 76
Section 83
Petitioner
Debtor
Creditors
None
- Pre-negotiated
Rehabilitation Plan
which has been
endorsed or
approved 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
General
Conditions
- in case of a
- creditors must
corporation, by a
have an
majority vote of the
aggregate claim
board of directors or
of
trustees and
PhP1,000,000.
authorized by a vote
00 or at least
of the stockholders
25 % of the
representing at least
subscribed
two-thirds (2/3) of
capital stock or
the outstanding
partner's
capital stock, or in
contributions,
case of a non-stock
whichever is
corporation, by the
higher
vote of at least twoprovided that:
thirds (2/3) of the
members
(a) there is no
- in case of a
genuine issue of fact
2010
or law on the
more than fifty
creditors
claim/s and due and percent (50%) of the representing at least
demandable
total unsecured
seventy-five percent
payments have not claims of the debtor
(75%) of the
been made for at
unsecured
least 60 days or
obligations of the
debtor has generally
debtor
defaulted on
- it must be
obligations as they
approved by
fall due; or
creditors holding at
least eighty-five
(b) a creditor, other
percent (85%) of the
than petitioner/s,
total liabilities,
has initiated
secured and
foreclosure
unsecured, of the
proceedings against
debtor.
the debtor that will
prevent the debtor
from paying its
debts as they fall
due.
Other than some salient points that will be touched on later, the rules on
voluntary and involuntary court supervised rehabilitation proceedings, as well as
pre-negotiated rehabilitation, remain essentially the same. Nonetheless, one of
the most significant developments under the new law is the recognition of out-ofcourt restructuring agreements and the establishment of the legal vehicle to
encourage informal rehabilitation of the debtor.
Procedure for Court Supervised Rehabilitation
A. Filing of Petition and Issuance of Commencement Order
In court supervised rehabilitation proceedings, the rehabilitation of the
debtor officially commences after the court makes the finding that the Petition
(whether voluntary or involuntary) is sufficient in form or substance. More
specifically, the rehabilitation proceedings are deemed to commence on the date
of the issuance of the Commencement Order, pursuant to Sections 15 and 16 of
the law, to wit:
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Under the same Section 16, the Commencement Order shall, among
others: (i) declare that the debtor is under rehabilitation9, (ii) direct publication
of the Order and notice to creditors10, (iii) appoint a rehabilitation receiver11, (iv)
set the date of the initial hearing for the determination of whether or not the
debtor can be rehabilitated12, (v) direct all creditors to file their claims at least
five (5) days from initial hearing13 and (vi) direct the government, through the
Bureau of Internal Revenue (BIR) to either file its Comment to the Petition for
Rehabilitation or present its claims against the debtor.
Suspension or Stay Order
9
Subparagraph (e)
10
11
Subparagraph (h)
12
Subparagraph (m)
13
Subparagraph (i)
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The
scope and/or coverage of the stay order under the FRIA remain as broad as
before. However, certain cases are allowed to proceed until the execution stage14.
These and other exceptions are enumerated in Section 18 of the law, to wit:
Section 18. Exceptions to the Stay or Suspension
Order. The Stay or Suspension Order shall not apply:
(a) to cases already pending appeal in the Supreme
Court as of commencement date: Provided, That any final
and executory judgment arising from such appeal shall be
referred to the court for appropriate action;
(b) subject to the discretion of the court, to cases
pending or filed at a specialized court or quasi-judicial
agency which, upon determination by the court, is capable of
resolving the claim more quickly, fairly and efficiently than
the court: Provided, That any final and executory judgment
of such court or agency shall be referred to the court and
shall be treated as a non-disputed claim;
(c) to the 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 third party
or accommodation mortgage is necessary for the
rehabilitation of the debtor as determined by the court upon
recommendation by the rehabilitation receiver;
(d) to any form of action of customers or clients of a
securities market participant to recover or otherwise claim
moneys or securities entrusted to the latter in the ordinary
course of the latters business as well as any action of such
securities market participant or the appropriate regulatory
agency or self-regulating organization to pay of settle such
claims or liabilities;
(e) to the actions of a licensed broker or dealer to sell
pledged securities of a debtor pursuant to a securities pledge
14
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On the other hand, the Stay or Suspension Order applies with equal force
to the enforcement of both secured and unsecured claims except that under
Section 60 of the FRIA, the issuance of the Stay or Suspension Order shall not
be deemed in any way to diminish or impair the security or lien of a secured
creditor, or the value of his lien or security, except that his right to enforce said
security or lien may be suspended during the term of the Stay Order. Again,
this paraphrases the equality in equity principle the effects of which were
explained in the case of Tsuneishi Heavy Industries (Cebu), Inc. v. Negros
Navigation Co., Inc. et. al. [GR 166845, 10 December 2008], thus:
PD 902-A mandates that upon appointment of a
management committee, rehabilitation receiver, board or
body, all actions for claims against corporations,
partnerships or associations under management or
receivership pending before any court, tribunal, board or
body shall be suspended. PD 902-A does not make any
distinction as to what claims are covered by the suspension
of actions for claims against corporations under
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Waiver of Taxes
Section 19 of the law provides that from the time of the issuance of the
Commencement Order until the approval of the Rehabilitation Plan or dismissal
of the petition, the imposition of all taxes shall be waived, thus:
Section 19. Waiver of Taxes and Fees Due to the
National Government and to Local Government Units.
Upon issuance of the Commencement Order by the court,
and until the approval of the Rehabilitation Plan or dismissal
of the Petition, which is earlier, the imposition of all taxes
and fees, including penalties interests and charges thereof,
due to the national government or to LGUs shall be
considered waived, in furtherance of the objectives of
rehabilitation.
fact will be based primarily on a report (by the Rehabilitation Receiver] either
that the Rehabilitation Plan is realistic, feasible and reasonable or even if the
Rehabilitation Plan is not feasible, there still exists a substantial likelihood for
the debtor to be rehabilitated.
16
Section 21
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As in the old Rules, the FRIA allows the court to modify the terms of the
suspension order or relieve a claim from its coverage if a creditor does not have
adequate protection over the security, thus:
Section 61. Lack of Adequate Protection. The court,
on motion or motu proprio, may terminate, modify or set
conditions for the continuance of suspension of payment, or
relieve a claim from the coverage thereof, upon showing that:
(a) a creditor does not have adequate protection over
property securing its claim; or (b) the value of a claim
secured by a lien on property which is not necessary for the
rehabilitation of the debtor exceeds the fair market value of
the said property.
For purposes of this section, a creditor shall be
deemed to lack adequate protection if it can be shown that:
(a) the debtor fails or refuses to honor a pre-existing
agreement with the creditor to keep the property insured;
(b) the debtor fails or refuses to take commercially
reasonable steps to maintain the property;
(c) the property has depreciated to an extent that the
creditor is under secured.
Upon showing of lack of protection, the court shall
order the debtor or rehabilitation receiver to make
arrangements to provide for the insurance or maintenance of
the property; or to make payments or otherwise provide
additional or replacement security such that the obligation is
fully secured. If such arrangements are not feasible, the court
may modify the Stay Order to allow the secured creditor
lacking adequate protection to enforce its security claim
against the debtor: Provided, however, That the court may
deny the creditor the remedies in this paragraph if the
property subject of the enforcement is required for the
rehabilitation of the debtor.
D. Use, Treatment and Disposition of Assets
As a general rule, funds or property of the debtor cannot be used except in
the ordinary course of business or unless necessary to pay off the administrative
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17
Section 48
18
Section 55
19
Section 56
20
Section 50.
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expressly by the debtor shall be deemed terminated but the party whose contract
is not confirmed will be allowed to pursue a claim for damages on account of the
debtors election, which claim shall be considered a demand existing prior to the
filing of the Petition for Rehabilitation, to wit:
Section 57. Treatment of Contracts. Unless
cancelled by virtue of a final judgment of a court of
competent jurisdiction issued prior to the issuance of the
Commencement Order, or at anytime thereafter by the court
before which the rehabilitation proceedings are pending, all
valid and subsisting contracts of the debtor with creditors
and other third parties as at the commencement date shall
continue in force: Provided, That within ninety (90) days
following the commencement of proceedings, the debtor,
with the consent of the rehabilitation receiver, shall notify
each contractual counterparty of whether it is confirming the
particular contract. Contractual obligations arising or
performed during this period, and afterwards for confirmed
contracts, shall be considered administrative expenses.
Contracts not confirmed within the required deadline shall
be considered terminated. Claims for actual damages, if any,
arising as a result of the election to terminate a contract shall
be considered a pre-commencement claim against the
debtor. Nothing contained herein shall prevent the
cancellation or termination of any contract of the debtor for
any ground provided by law.
New Money
Stay Order notwithstanding, the FRIA allows the debtor to incur postcommencement loans and/or other obligations subject to the approval of the
court21. This has a similar import as the New Money clause under the 2008
Rules.
Section 55
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following circumstances:
(a) In case the debtor is a securities market participant, in which case the
court shall give priority to the nominee of the appropriate securities or
investor protection fund; or
(b) If the qualified natural or juridical person is nominated by more than
50% of secured creditors and general unsecured creditors, in which case
the court shall appoint the creditors nominee22.
As a rule, the Rehabilitation Receiver will not supplant the existing
management of the debtor corporation unless otherwise ordered by the court on
motion of any interested party, thus:
Section 36. Displacement of Existing Management
by the Rehabilitation Receiver or Management Committee. - Upon motion of any interested party, the court may appoint
and direct the rehabilitation receiver to assume the powers of
management of the debtor, or appoint a management
committee that will undertake the management of the
debtor, upon clear and convincing evidence of any of the
following circumstances:
(a) Actual or imminent danger of dissipation, loss,
wastage or destruction of the debtors assets or other
properties;
(b) Paralyzation of the business operations of the
debtor; or
22
Section 30
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24
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Section 22
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Within forty (40) days from the Initial Hearing, the Rehabilitation
Receiver is required to submit his written Report to the court, which will include
a determination of (a) whether or not there is substantial likelihood for the
debtor to be successfully rehabilitated or in the alternative (b) whether the
debtor should be dissolved or liquidated25. After submission of report, the Court
shall act on the petition by: (i) giving due course to the petition, (ii) dismissing
the petition or (iii) converting the proceedings into one for liquidation26.
In the event the court gives due course to the petition, the court will
require the Rehabilitation Receiver to review the Rehabilitation Plan, taking into
consideration the views of the debtor and all creditor classes.
While the
25
Section 24
26
Section 25
27
Section 63
28
29
Sub-paragraph (g)
30
Sub-paragraph (h)
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Once satisfied with the version of the Rehabilitation Plan, the receiver
must convene the creditors and present the plan to them for approval. Unlike the
old procedure however31, the vote of the debtor is not required for the approval of
the plan, thus:
Section 64. Creditor Approval of the Rehabilitation
Plan. The rehabilitation receiver shall notify the creditors
and stakeholders that the Plan is ready for their examination.
Within twenty (20) days from the said notification, the
rehabilitation receiver shall convene the creditors, either as a
whole or per class, for purposes of voting on the approval of
the Plan. The Plan shall be deemed rejected unless approved
by all classes of creditors whose rights are adversely modified
or affected by the Plan. For purposes of this section, the Plan
is deemed to have been approved by a class of creditors if
members of the said class holding more than fifty per cent
(50%) of the total claims of the said class vote in favor of the
Plan. The votes of the creditors shall be based solely on the
amount of their respective claims based on the registry of
claims submitted by the rehabilitation receiver pursuant to
Section 44 hereof.
Notwithstanding the rejection of the Rehabilitation
Plan, the court may confirm the Rehabilitation Plan if all of
the following circumstances are present:
(a) the Rehabilitation Plan complies with all the
requirements specified in this Act;
(b) the rehabilitation receiver recommends the
confirmation of the Rehabilitation Plan;
(c) The shareholders, owners or partners of the
juridical debtor lose at least their controlling interest as a
result of the Rehabilitation Plan; and
(d) The Rehabilitation Plan would likely provide the
objecting class of creditors with compensation which has a
net present value greater than that which they would have
received if the debtor were under liquidation.
31
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Requiring
33
28
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(b) The documents or data relied upon in the Rehabilitation Plan are
materially false or misleading; or
(c) The Rehabilitation Plan is in fact not supported by the voting
creditors34
If, upon due hearing, the court finds merit in the objection, it may order
the receiver or the debtor to cure the defect whenever possible. On the other
hand, it shall order the proceedings to be turned into liquidation if the debtor
acted in bad faith or if the defect is incurable35.
However, in case (a) there are no objections to the Rehabilitation Plan, (b)
the objections are found to be without merit or (c) any defect in the
Rehabilitation Plan has been cured; the court shall issue an order confirming the
plan even over and above the objections of the owners, partners or stockholders
of the insolvent debtor36
To prevent the debtor (or any interested party) from dragging out the
proceedings in the hopes of obtaining a settlement on the basis of attrition, the
law fixes a maximum period of one year (from the time of the filing of the
petition) within which the plan must be confirmed. Otherwise, the proceedings
will turn into one of liquidation. This should force the parties to negotiate in
earnest.
Pre-Negotiated Rehabilitation
The concept of a pre-negotiated rehabilitation was introduced and is
currently available under the 2008 Rules, which the FRIA adopts without
substantial modification. Thus, the debtor, by itself or jointly with the creditors,
34
Section 66
35
Section 67
36
Section 68
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the
are
37
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induced by fraud.
Copies of the objection to the petition or the
Rehabilitation Plan shall be served on the debtor, the
rehabilitation receiver (if applicable), the secured creditor
with the largest claim and who supports the Rehabilitation
Plan, and the unsecured creditor with the largest claim and
who supports the Rehabilitation Plan.
If, after due hearing, the courts finds merit to the objection, it will order
the debtor to cure the defect. On the other hand, if it finds that the petitioners
acted in bad faith or that the defect is incurable, it may order the conversion of
proceedings into one for liquidation38. As in the 2008 Rules, the Rehabilitation
Plan will be deemed approved if the court fails to act within a period of 120
days39.
Informal Rehabilitation
As mentioned previously, one of the most important and potentially far
reaching innovations under the FRIA is the recognition of out-of-court
restructuring/workout agreements. Pursuant to Section 89 of the Act, [t]he
insolvent debtor and creditor may seek court assistance for the execution or
implementation of the Rehabilitation Plan, provided that it meets the minimum
requirements of the law. Ultimately, this type of cooperative endeavor may offer
the best chances of rehabilitation as it theoretically provides the least amount of
disruption to the operations of an already beleaguered company.
Furthermore, to allow the parties to negotiate a feasible workout plan, the
debtor and creditors holding more than 50% of the debt may agree on a standstill
period pending the completion of the plan for up to 120 days40, provided in
38
Section 80.
39
Section 81.
40
Section 85
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41
Ibid.
42
Section 84
32