Insolvency Laws

2. Financial Rehabilitation and Insolvency Act of

2010

a. definition of insolvency

b. suspension of payment

c. Rehabilitation

i.types

ii. commencement order

iii. stay or suspension order

iv. Rehabilitation receiver

v. management committee

vi. rehabilitation plan

vii. cramdown effect

Facts: On October 15, 2004, Jose Marcel

Panlilio, Erlinda Panlilio, Nicole Morris and Mario
Cristobal (petitioners), as corporate officers of
Silahis International Hotel, Inc. (SIHI), filed
with the Regional Trial Court (RTC) of Manila,
Branch 24, a petition for Suspension of
Payments and Rehabilitation in SEC Corp. Case
No. 04-111180. On October 18, 2004, the RTC
of Manila, Branch 24, issued an Order staying
all claims against SIHI upon finding the petition
sufficient in form and substance.

At the time, however, of the filing of the

petition for rehabilitation, there were a number
of criminal charges pending against petitioners in
Branch 51 of the RTC of Manila. These criminal
charges were initiated by respondent Social
Security System (SSS) and involved charges of
violations of Section 28 (h) of Republic Act
8282, or the Social Security Act of 1997 (SSS
law), in relation to Article 315 (1) (b) of the
Revised Penal Code, or Estafa. Consequently,
petitioners filed with the RTC of Manila, Branch
51, a Manifestation and Motion to Suspend
Proceedings. Petitioners argued that the stay
order issued by Branch 24 should also apply to
the criminal charges pending in Branch 51.
Petitioners, thus, prayed that Branch 51
suspend its proceedings until the petition for
rehabilitation was finally resolved.

Issue: Whether or not suspension of claims

during corporate rehabilitation include suspension
of the criminal action against it.

Held: No. To begin with, corporate

rehabilitation connotes the restoration of the
debtor to a position of successful operation and
solvency, if it is shown that its continued
operation is economically feasible and its
creditors can recover more, by way of the
present value of payments projected in the
rehabilitation plan, if the corporation continues
as a going concern than if it is immediately
liquidated. It contemplates a continuance of
corporate life and activities in an effort to
restore and reinstate the corporation to its
former position of successful operation and
solvency, the purpose being to enable the
company to gain a new lease on life and allow
its creditors to be paid their claims out of its
earnings.

A principal feature of corporate rehabilitation is

the suspension of claims against the distressed
corporation. Section 6 (c) of Presidential Decree
No. 902-A, as amended, provides for suspension
of claims against corporations undergoing
rehabilitation, to wit:
Section 6 (c). . . . . . .

Provided, finally, that upon appointment of a

management committee, rehabilitation receiver,
board or body, pursuant to this Decree, all
actions for claims against corporations,
partnerships or associations under management
or receivership pending before any court,
tribunal, board or body, shall be suspended
accordingly.

The rehabilitation of SIHI and the settlement of

claims against the corporation is not a legal
ground for the extinction of petitioners’ criminal
liabilities. There is no reason why criminal
proceedings should be suspended during corporate
rehabilitation, more so, since the prime purpose
of the criminal action is to punish the offender
in order to deter him and others from
committing the same or similar offense, to
isolate him from society, reform and rehabilitate
him or, in general, to maintain social order. As
correctly observed in Rosario, it would be absurd
for one who has engaged in criminal conduct
could escape punishment by the mere filing of a
petition for rehabilitation by the corporation of
which he is an officer.

The prosecution of the officers of the

corporation has no bearing on the pending
rehabilitation of the corporation, especially since
they are charged in their individual capacities.
Such being the case, the purpose of the law for
the issuance of the stay order is not
compromised, since the appointed rehabilitation
receiver can still fully discharge his functions as
mandated by law. It bears to stress that the
rehabilitation receiver is not charged to defend
the officers of the corporation. If there is
anything that the rehabilitation receiver might
be remotely interested in is whether the court
also rules that petitioners are civilly liable. Such
a scenario, however, is not a reason to suspend
the criminal proceedings, because as aptly
discussed in Rosario, should the court
prosecuting the officers of the corporation find
that an award or indemnification is warranted,
such award would fall under the category of
claims, the execution of which would be subject
to the stay order issued by the rehabilitation
court. The penal sanctions as a consequence of
violation of the SSS law, in relation to the
revised penal code can therefore be implemented
if petitioners are found guilty after trial.
However, any civil indemnity awarded as a result
of their conviction would be subject to the stay
order issued by the rehabilitation court. Only to
this extent can the order of suspension be
considered obligatory upon any court, tribunal,
branch or body where there are pending actions
for claims against the distressed corporation.