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DIME & EVIOTA LAW FIRM
2010
Corporate Rescue and the
New Financial
Rehabilitation andInsolvency Act of 2010
[A DLDTE LAW CLIENT PAPER]Ronald B. Dime
2 / F M I D W A Y C O U R T B L D G . , 2 4 1 E D S A M A N D . C I T Y , P H I L S .
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I. INTRODUCTION: A BRIEF HISTORY
For a long time, a distressed corporation in the Philippines had no other
real recourse than to commit legal seppuku, whether or not its financial
condition was due to the fundamental unsoundness of its business or merely atemporary run in with bad luck.
This lack of any real corporate rescue vehicle characterized the legal
environment that prevailed under the regime of Act No. 1956 (otherwise known
as the Insolvency Law) from the time of its enactment on 20 May 1909 until the
early 1980s1.
Act 1956 by itself introduced major changes to corporate law and removed
the distinction in the Spanish system between insolvency
and bankruptcy. Nonetheless, the Insolvency Laws approach to corporate
rescue was simply to provide a solvent but illiquid debtor temporary relief from
payment of its debts while an insolvent corporation was forced to undertake a
gradual and organized liquidation process2.
1 The Insolvency Law of the Philippines is in fact a derivative of even
older laws from other jurisdictions, such as the California Insolvency
Law of 1895 and the American bankruptcy Act of 1867 [See Sun Life
Assurance Co. of Canada v. Frank B Ingersoll, et. al.; GR No. 164758
(November 1921)]
2The three main remedies under Act 1956 are:
a) Petitions for the suspension of payments by an individual, sociedad
or corporation under Section 2 of the Insolvency Law:
Section 2. The debtor who, possessing sufficient property
to cover all his debts, be it an individual person, be it a
sociedad or corporation, foresees the impossibility of
meeting them when they respectively fall due, may petition
that he be declared in the state of suspension of paymentsby the court, or the judge thereof in vacation, of the
province or of the city in which he has resided for six
months next preceding the filing of his petition.
b) Petitions for Voluntary dissolution under Section 14:
Section 14. An insolvent debtor, owing debts exceeding in
amount the sum of one thousand pesos, may apply to be
discharged from his debts and liabilities by petition to
the Court of First Instance of the province or city in
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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 adjudicativefunctions of the Securities and Exchange commission overcorporations, partnerships and other forms of associationregistered with it expressly granted under existing laws anddecrees, it shall have original and exclusive jurisdiction tohear and decide cases involving:
x x x
d) Petitions of corporations, partnerships or
associations to be declared in the state of suspension ofpayments in cases where the corporation, partnership orassociation possesses sufficient property to cover all itsdebts but foresees the impossibility of meeting them whenthey 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 executionfor 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
3 Jurisdiction has since been transferred to the Regional Trial Court.
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partnership or association has no sufficient assets to coverits liabilities, but is under the management of a
Rehabilitation Receiver or Management Committee createdpursuant to this Decree.
[as amended by P.D. 1758]
One of the innovations created by PD 1758 is that while an insolvent
corporation (i.e. one that does not have sufficient assets to cover its debts) was
limited to a Petition for Insolvency resulting in liquidation of assets under Act
1956; a corporation, which is technically insolvent, was given the authority to
prove that it can be rehabilitated with court supervision. As explained by the
Supreme Court:
Section 5, par. (d) should be construed as vestingupon the SEC original and exclusive jurisdiction only overpetitions to be declared in a state of suspension of payments,
which may either be: (a) a simple petition for suspension forpayments based on the provisions of the Insolvency Law, or(b) a similar petition accompanied by a prayer for thecreation/ appointment of a management committee and/ orrehabilitation receiver based on the provision of P.D. No.902-A. Said provision cannot be stretched to includepetitions for insolvency. The reason is that under saidSection 5, par. (d) above-quoted, the jurisdiction of the SECover cases where the corporation, partnership or associationhas no sufficient assets to cover its liabilities, and thereforeinsolvent, is qualified by the conjunctive phrase "but is underthe management of a Rehabilitation Receiver orManagement Committee created pursuant to this Decree."This qualification effectively circumscribes the jurisdiction ofthe SEC over insolvent corporations, partnerships andassociations and consequently, over proceedings or thedeclaration of insolvency. It demonstrates beyond doubt that
jurisdiction over insolvency proceedings pertains neither inthe first instance nor exclusively to the SEC, but only in
continuation of or as incident to the exercise of itsjurisdiction over petitions to be declared in a state ofsuspension of payments wherein the petitioning corporation,partnership or association had previously been placed undera rehabilitation receiver or management committee by theSEC itself.
Viewed differently, where the petition filed is one for
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declaration of a state of suspension of payments due to arecognition of the inability to pay one's debts and liabilities,and where the petitioning corporation either : (a) hassufficient property to cover all its debts but foresees theimpossibility of meeting them as they fall due (solvent but
illiquid) or (b) has no sufficient property (insolvent) but isunder the management of a rehabilitation receiver or amanagement committee, the applicable law is P.D. No. 902-
A pursuant to Sec. 5, par. (d) thereof. However, if thepetitioning corporation has no sufficient assets to cover itsliabilities and is not under a rehabilitation receiver or amanagement committee created under P.D. 902-A, and doesnot seek merely to have the payments of its debts suspended,
but seeks a declaration of insolvency, as in this case, theapplicable law is Act 1956 on voluntary insolvency,specifically section 14 therefor, which states:
x x x[Land Bank of the Philippines vs. Capistrano, et al.
G.R. No 73123, 2 September 1991]
It may be convenient to mention at this juncture that by the Law on
corporate rehabilitation, is meant that body of rules that govern: (i) formal and
substantive requirements of rehabilitation, (ii) effects of rehabilitation, (iii)
procedural rules as well as (iv) liquidation and disposition of assets. For the most
part, this body of rules was developed over time by the courts4. Thus, aside from
jurisprudence, the chief tomes of rehabilitation practice are Administrative
Matter (A.M.) No. 00-8-10-SC, otherwise known as the Rules of Procedure on
Corporate Rehabilitation5 of 2008 (hereinafter, the 2008 Rules) which took
the place of the 2000 Interim Rules on Corporate Rehabilitation (hereinafter,
the Interim Rules) as well as some related provisions of A.M. No. 01-2-04 SC or
the Interim Rules of Procedure for Intra-Corporate Controversies (circa
2001).
4 Thus, in a sense, mimicking Common Law.
5 Which amended the 2000 Interim Rules on Corporate Rehabilitation.
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While the current corporate rehabilitation rules are 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. Broadly speaking, the FRIA integrates rehabilitation and
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.
7 The author uses FRIA and HB 2070 interchangeably as a practical
convention.
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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)Insolventshall refer to the financial condition of adebtor that is generally unable to pay its or his liabilities asthey fall due in the ordinary course of business or hasliabilities that are greater than its or his assets.
xxx
Three ways to rescue a corporation; Out-of-CourtRehabilitation
While the old rehabilitation regime did not expressly provide for
8 For instance, see Rubberworld v. NLRC, GR No. 126773.
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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rehabilitation without court intervention, it did not specifically disallow it either.
Thus, a rehabilitation plan entered into by the debtor and its creditors partakes of
the nature of a contract and should not be invalidated simply on the ground that
it was done without court approval. Following the general rule however, non-
parties cannot be bound by the terms of the negotiated rehabilitation plan.
The FRIA takes it a step further by expressly providing rules to govern
extrajudicial rehabilitation. More specifically, there are three (3) processes to
resuscitate a financially distressed corporation under the FRIA, namely: (i) court
supervised rehabilitation, (ii) pre-negotiated rehabilitation and/or (iii) out-of-
court restructuring agreements. The choice largely depends on whether or not
the initiating party can accumulate the necessary number of votes, to wit:
VoluntaryRehabilitation
(Debtor InitiatedCourt
Supervised)
Involuntary.Rehabilitation
(CreditorInitiated Court
Supervised)
Pre-NegotiatedRehabilitation
InformalRehabilitation
Provision Section 12 Section 13 Section 76 Section 83
Petitioner Debtor Creditors Debtor who may bejoined by any of its
creditors
None
GeneralConditions
- in case of acorporation, by a
majority vote of theboard of directors or
trustees andauthorized by a voteof the stockholders
representing at leasttwo-thirds (2/3) ofthe outstanding
capital stock, or incase of a non-stockcorporation, by the
vote of at least two-thirds (2/3) of the
members- in case of a
- creditors musthave an
aggregate claimof
PhP1,000,000.00 or at least25 % of the
subscribedcapital stock orpartner's
contributions,whichever is
higherprovided that:
(a) there is nogenuine issue of fact
- Pre-negotiatedRehabilitation Plan
which has beenendorsed orapproved by
creditors holding atleast two-thirds
(2/3) of the totalliabilities of thedebtor, includingsecured creditors
holding more thanfifty percent (50%)of the total securedclaims of the debtor
and unsecuredcreditors holding
- debtor must agreeto the out-of-court
or informalrestructuring/
workout agreementor Rehabilitation
Plan
- it must beapproved bycreditors
representing at leastsixty-seven percent
(67%) of the securedobligations of the
debtor- it must beapproved by
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partnership, theapproval of a
majority of thepartners
or law on theclaim/s and due and
demandablepayments have notbeen made for at
least 60 days or
debtor has generallydefaulted onobligations as they
fall due; or
(b) a creditor, otherthan petitioner/s,
has initiatedforeclosure
proceedings againstthe debtor that willprevent the debtor
from paying itsdebts as they fall
due.
more than fiftypercent (50%) of the
total unsecuredclaims of the debtor
creditorsrepresenting at leastseventy-five percent
(75%) of theunsecured
obligations of the
debtor- it must beapproved by
creditors holding atleast eighty-five
percent (85%) of thetotal liabilities,
secured andunsecured, of the
debtor.
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 ofout-of-
court 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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Section 15. Action on the Petition. If the Courtfinds the petition for rehabilitation to be sufficient in formand substance, it shall, within five (5) working days from thefiling of the petition, issue a Commencement Order. If within
the same period, the court finds the petition deficient in formand substance, the court may, in its discretion, give thepetitioner/s a reasonable time within which to amend orsupplement the petition, or to submit such documents asmay be necessary or proper to put the petition in properorder. In such case, the five (5) working days provided abovefor the issuance of the Commencement Order shall bereckoned from the date of the filing of the amended orsupplemental petition or the submission of such documents.
Section 16. Commencement of Proceedings andIssuance of a Commencement Order. The rehabilitationproceedings shall commence upon the issuance of theCommencement Order, which shall:
xxx
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 Subparagraphs (f) and (g)
11 Subparagraph (h)
12 Subparagraph (m)
13 Subparagraph (i)
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In addition, the Commencement Order shall include a Suspension or Stay
Order prohibiting the sale or disposition of assets of the debtor and ordering the
suspension of all actions against the debtor and/or the debtors estate. 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 SuspensionOrder. The Stay or Suspension Order shall not apply:
(a) to cases already pending appeal in the SupremeCourt as of commencement date: Provided, That any final
and executory judgment arising from such appeal shall bereferred to the court for appropriate action;
(b) subject to the discretion of the court, to casespending or filed at a specialized court or quasi-judicialagency which, upon determination by the court, is capable ofresolving the claim more quickly, fairly and efficiently thanthe court: Provided, That any final and executory judgmentof such court or agency shall be referred to the court andshall be treated as a non-disputed claim;
(c) to the enforcement of claims against sureties andother persons solidarily liable with the debtor, and thirdparty or accommodation mortgagors as well as issuers ofletters of credit, unless the property subject of the third partyor accommodation mortgage is necessary for therehabilitation of the debtor as determined by the court uponrecommendation by the rehabilitation receiver;
(d) to any form of action of customers or clients of asecurities market participant to recover or otherwise claimmoneys or securities entrusted to the latter in the ordinarycourse of the latters business as well as any action of suchsecurities market participant or the appropriate regulatory
agency or self-regulating organization to pay of settle suchclaims or liabilities;
(e) to the actions of a licensed broker or dealer to sellpledged securities of a debtor pursuant to a securities pledge
14 In Philippine Airlines v. Court of Appeals [GR No. 150592, 20 January
2009], it was held that the stay order suspends the proceedings and not
just the enforcement of the claim. However, the 2008 Rules allow the
commencement of actions to prevent prescription of actions.
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or margin agreement for the settlement of securitiestransactions in accordance with the provisions of theSecurities Regulation Code and its implementing rules andregulations;
(f) the clearing and settlement of financial
transactions through the facilities of a clearing agency orsimilar entities duly authorized, registered and/orrecognized by the appropriate regulatory agency like theBangko Sentral ng Pilipinas (BSP) and the SEC as well as anyform of actions of such agencies or entities to reimbursethemselves for any transactions settled for the debtor; and
(g) Any criminal action against the individual debtoror owner, partner, director or officer of a debtor shall not beaffected by any proceeding commenced under this Act.
Note that pursuant to sub-paragraph (c) above, the suspension order does
not cover the enforcement of claims against persons solidarily liable with the
debtor including issuers of letters of credit. This follows the rule in MWSS vs.
Daway [GR No. 160732, 21 June 2004] which held that a letter of credit is
excluded from the jurisdiction of the rehabilitation court, thus:
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules
does not enjoin the enforcement of all claims againstguarantors and sureties, but only those claims againstguarantors and sureties who are not solidarily liable
with the debtor. Respondent Maynilads claim that thebanks are not solidarily liable with the debtor does not findsupport in jurisprudence.
We held inFeati Bank & Trust Company v. Court ofAppeals that the concept of guarantee vis--vis the conceptof an irrevocable letter of credit are inconsistent with eachother. The guarantee theory destroys the independence of
the banks responsibility from the contract upon which it wasopened and the nature of both contracts is mutually inconflict with each other. In contracts of guarantee, theguarantors obligation is merely collateral and it arises onlyupon the default of the person primarily liable. On the otherhand, in an irrevocable letter of credit, the bank undertakes aprimary obligation. We have also defined a letter of credit asan engagement by a bank or other person made at the
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request of a customer that the issuer shall honor drafts orother demands of payment upon compliance with theconditions specified in the credit.
Letters of credit were developed for the purpose of
insuring to a seller payment of a definite amount upon thepresentation of documents and is thus a commitment by theissuer that the party in whose favor it is issued and who cancollect upon it will have his credit against the applicant of theletter, duly paid in the amount specified in the letter. Theyare in effect absolute undertakings to pay the moneyadvanced or the amount for which credit is given on the faithof the instrument. They are primary obligations and notaccessory contracts and while they are securityarrangements, they are not converted thereby into contractsof guaranty. What distinguishes letters of credit from otheraccessory contracts, is the engagement of the issuing bank topay the seller once the draft and other required shippingdocuments are presented to it. They are definiteundertakings to pay at sight once the documents stipulatedtherein are presented.
Letters of Credits have long been and are stillgoverned by the provisions of the Uniform Customs andPractice for Documentary Credits of the InternationalChamber of Commerce. In the 1993 Revision it provides in
Art. 2 that the expressions Documentary Credit(s) andStandby Letter(s) of Credit mean any arrangement, however
made or described, whereby a bank acting at the request andon instructions of a customer or on its own behalf is to makepayment against stipulated document(s) and Art. 9 thereofdefines the liability of the issuing banks on an irrevocableletter of credit as a definite undertaking of the issuing bank,provided that the stipulated documents are presented to thenominated bank or the issuing bank and the terms andconditions of the Credit are complied with, to pay at sight ifthe Credit provides for sight payment.
We have accepted, in Feati Bank and Trust
Company v. Court of Appeals and Bank of America NT & SAv. Court of Appeals, to the extent that they are pertinent, theapplication in our jurisdiction of the international creditregulatory set of rules known as the Uniform Customs andPractice for Documentary Credits (U.C.P) issued by theInternational Chamber of Commerce, which we said inBankof the Philippine Islands v. Nery was justified under Art. 2 ofthe Code of Commerce, which states:
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`Acts of commerce, whether those who execute thembe merchants or not, and whether specified in thisCode or not should be governed by the provisionscontained in it; in their absence, by the usages ofcommerce generally observed in each place; and in
the absence of both rules, by those of the civil law.
The prohibition under Sec 6 (b) of Rule 4 of theInterim Rules does not apply to herein petitioner as theprohibition is on the enforcement of claims againstguarantors or sureties of the debtors whose obligations arenot solidary with the debtor. The participating banksobligation are solidary with respondent Maynilad in that it isa primary, direct, definite and an absolute undertaking topay and is not conditioned on the prior exhaustion of thedebtors assets. These are the same characteristics of a suretyor solidary obligor.
Being solidary, the claims against them can bepursued separately from and independently of therehabilitation case, as held in Traders Royal Bank v. Courtof Appeals and reiterated inPhilippine Blooming Mills, Inc.v. Court of Appeals, where we said that property of thesurety cannot be taken into custody by the rehabilitationreceiver (SEC) and said surety can be sued separately toenforce his liability as surety for the debts or obligations ofthe debtor. The debts or obligations for which a surety may
be liable include future debts, an amount which may not be
known at the time the surety is given.
The terms of the Irrevocable Standby Letter of Creditdo not show that the obligations of the banks are not solidary
with those of respondent Maynilad. On the contrary, it isissued at the request of and for the account of Maynilad
Water Services, Inc., in favor of the MetropolitanWaterworks and Sewerage System, as a bond for the full andprompt performance of the obligations by the concessionaireunder the Concession Agreement and herein petitioner isauthorized by the banks to draw on it by the simple act of
delivering to the agent a written certification substantially inthe form Annex B of the Letter of Credit. It providesfurther in Sec. 6, that for as long as the Standby Letter ofCredit is valid and subsisting, the Banks shall honor any
written Certification made by MWSS in accordance with Sec.2, of the Standby Letter of Credit regardless of the date on
which the event giving rise to such Written Certificationarose.
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Taking into consideration our own rulings on thenature of letters of credit and the customs and usagedeveloped over the years in the banking and commercialpractice of letters of credit, we hold that except when a letterof credit specifically stipulates otherwise, the obligation of
the banks issuing letters of credit are solidary with that of theperson or entity requesting for its issuance, the same being adirect, primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of documentsrequired therein.
The public respondent, therefore, exceeded hisjurisdiction, in holding that he was competent to act on theobligation of the banks under the Letter of Credit under theargument that this was not a solidary obligation with that ofthe debtor. Being a solidary obligation, the letter of credit isexcluded from the jurisdiction of the rehabilitation court andtherefore in enjoining petitioner from proceeding against theStandby Letters of Credit to which it had a clear right underthe law and the terms of said Standby Letter of Credit, publicrespondent acted in excess of his jurisdiction.
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 amanagement committee, rehabilitation receiver, board or
body, all actions for claims against corporations,partnerships or associations under management orreceivership pending before any court, tribunal, board or
body shall be suspended. PD 902-A does not make anydistinction as to what claims are covered by the suspensionof actions for claims against corporations under
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rehabilitation. No exception is made therein in favor ofmaritime claims. Thus, since the law does not make anyexemptions or distinctions, neither should we. Ubi lex nondistinguit nec nos distinguere debemos.
The justification for the suspension of actions orclaims, without distinction, pending rehabilitationproceedings is to enable the management committee orrehabilitation receiver to effectively exercise its/his powersfree from any judicial or extra-judicial interference thatmight unduly hinder or prevent the "rescue" of the debtorcompany. To allow such other actions to continue would onlyadd to the burden of the management committee orrehabilitation receiver, whose time, effort and resources
would be wasted in defending claims against the corporationinstead of being directed toward its restructuring andrehabilitation.
It is undisputed that THI holds a preferred maritimelien over NNCs assets by virtue of THIs unpaid services.The issuance of the stay order by the rehabilitation courtdoes not impair or in any way diminish THIs preferredstatus as a creditor of NNC. The enforcement of its claimthrough court action was merely suspended to give way tothe speedy and effective rehabilitation of the distressedshipping company. Upon termination of the rehabilitationproceedings or in the event of the bankruptcy andconsequent dissolution of the company, THI can still enforce
its preferred claim upon NNC.
PD 902-A was designed not only to salvage an ailingcorporation but also to protect the interest of investors,creditors and the general public. Section 6 (d) of PD 902-Aprovides: "the management committee or rehabilitationreceiver, board or body shall have the power to take custodyof, and control over, all the existing assets and property ofsuch entities under management; to evaluate the existingassets and liabilities, earnings and operations of suchcorporations, partnerships or other associations; to
determine the best way to salvage and protect the interest ofthe investors and creditors; to study, review and evaluate thefeasibility of continuing operations and restructure andrehabilitate such entities if determined to be feasible by the[court]. It shall report and be responsible to the [court] untildissolved by order of the [court]: Provided, however, Thatthe [court] may, on the basis of the findings andrecommendation of the management committee, or
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rehabilitation receiver, board or body, or on its own findings,determine that the continuance in business of suchcorporation or entity would not be feasible or profitable nor
work to the best interest of the stockholders, parties-litigants, creditors, or the general public, order the
dissolution of such corporation entity and its remainingassets liquidated accordingly. The management committeeor rehabilitation receiver, board or body may overrule orrevoke the actions of the previous management and board ofdirectors of the entity or entities under managementnotwithstanding any provision of law, articles ofincorporation or by-laws to the contrary."
When a distressed company is placed underrehabilitation, the appointment of a management committeefollows to avoid collusion between the previous managementand creditors it might favor, to the prejudice of the othercreditors. The stay order is effective on all creditors of thecorporation without distinction, whether secured orunsecured. All assets of a corporation under rehabilitationreceivership are held in trust for the equal benefit of allcreditors to preclude one from obtaining an advantage orpreference over another by the expediency of attachment,execution or otherwise. As between the creditors, the keyphrase is equality in equity. Once the corporation threatened
by bankruptcy is taken over by a receiver, all the creditorsought to stand on equal footing. Not any one of them should
be paid ahead of the others. This is precisely the reason for
suspending all pending claims against the corporation underreceivership.
Rizal Commercial Banking Corporation v.Intermediate Appellate Court [GR No. 74851, 9 December1999], promulgated by the Court en banc before theeffectivity of the Interim Rules on Corporate Rehabilitation,is still valid case law up to the present. It enumerates theguidelines in the treatment of claims involving corporationsundergoing rehabilitation, viz.:
1. All claims against corporations, partnerships, orassociations that are pending before any court,tribunal, or board, without distinction as to whetheror not a creditor is secured or unsecured, shall besuspended effective upon the appointment of amanagement committee, rehabilitation receiver,board, or body in accordance with the provisions ofPresidential Decree No. 902-A.
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2. Secured creditors retain their preference overunsecured creditors, but enforcement of suchpreference is equally suspended upon theappointment of a management committee,
rehabilitation receiver, board, or body.
In the event that the assets of the corporation,partnership, or association are finally liquidated, however,secured and preferred credits under the applicableprovisions of the Civil Code will definitely have preferenceover unsecured ones.
B. Other effects of Commencement
Continuous Supply of Goods and Services
To ensure continuous delivery of goods and services necessary for the
debtors business, the FRIA adopts the provision under the 2008 Rules granting
the rehabilitation court authority to include in the Commencement Order a
prohibition enjoining the debtors suppliers from withholding supply of essential
goods and services15, to wit:
Section 16. Commencement of Proceedings andIssuance of a Commencement Order. The rehabilitationproceedings shall commence upon the issuance of theCommencement Order, which shall:
xxx
(k) prohibit the debtors suppliers of goods orservices from withholding the supply of goods and services
15 Presumably, the authority of the court under this section appliesonly to valid and subsisting contracts for continuous supply of goods
or services, as opposed to supply contracts on a per order basis. In
other words, it would be one thing to require the supplier to fulfill
the terms of an existing supply contract by continuing to supply the
debtor. It would be a different matter to compel the supplier to
continue supplying the debtor where each order is covered by a separate
contract as this would be tantamount to requiring the supplier to
contract with the debtor.
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in the ordinary course of business for as long as the debtormakes payments for the services or goods supplied after theissuance of the commencement order;
xxx
[Italics ours]
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 dismissalof the Petition, which is earlier, the imposition of all taxesand fees, including penalties interests and charges thereof,due to the national government or to LGUs shall beconsidered waived, in furtherance of the objectives ofrehabilitation.
C. Duration of the Commencement Order and Modification of theSuspension Order
The Commencement Order shall be effective for the entire duration of the
rehabilitation proceedings and for as long as there is a substantial likelihood
that the debtor will be successfully rehabilitated16. The determination of this
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 setconditions for the continuance of suspension of payment, orrelieve a claim from the coverage thereof, upon showing that:(a) a creditor does not have adequate protection overproperty securing its claim; or (b) the value of a claimsecured by a lien on property which is not necessary for therehabilitation of the debtor exceeds the fair market value ofthe 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 commerciallyreasonable steps to maintain the property;
(c) the property has depreciated to an extent that thecreditor is under secured.
Upon showing of lack of protection, the court shallorder the debtor or rehabilitation receiver to makearrangements to provide for the insurance or maintenance ofthe property; or to make payments or otherwise provideadditional or replacement security such that the obligation isfully secured. If such arrangements are not feasible, the courtmay modify the Stay Order to allow the secured creditorlacking adequate protection to enforce its security claimagainst the debtor: Provided, however, That the court maydeny the creditor the remedies in this paragraph if theproperty subject of the enforcement is required for therehabilitation 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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expenses during the rehabilitation proceedings17. These include court-approved
pre-commencement loans, as discussed above18 and compensation of employees
necessary to carry on the debtors business19.
Nonetheless, the court may, upon application by the rehabilitation
receiver, allow the disposition of the debtors encumbered property subject to the
general requirement that the disposition is necessary for the continued operation
of the business. However, the debtor must make an arrangement with the
secured creditor for a substitute lien20. This applies to the sale of property
covered by a trust receipt or consignment agreement, in which case the law
provides that the disposition shall not give rise to any criminal liability under
applicable laws.
E. Treatment of Contracts
Confirmation of Cancellation of Existing Contracts
Likewise, the issuance of the Commencement Order marks the start of a
cleanup period which requires the debtor and the rehabilitation receiver to chop
out those contractual commitments which are not necessary for the continued
existence of the business and/or the rehabilitation of the debtor.
Section 57 of the law grants the debtor the power to confirm or cancel
pre-existing contracts within ninety (90) days from the issuance of the
Commencement Order in order to weed out extremely onerous contracts that
may have been the cause of the debtors predicament. Those not confirmed
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. Unlesscancelled by virtue of a final judgment of a court ofcompetent jurisdiction issued prior to the issuance of theCommencement Order, or at anytime thereafter by the court
before which the rehabilitation proceedings are pending, allvalid and subsisting contracts of the debtor with creditorsand other third parties as at the commencement date shallcontinue in force: Provided, That within ninety (90) daysfollowing the commencement of proceedings, the debtor,
with the consent of the rehabilitation receiver, shall notifyeach contractual counterparty of whether it is confirming theparticular contract. Contractual obligations arising orperformed during this period, and afterwards for confirmedcontracts, 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 thedebtor. Nothing contained herein shall prevent thecancellation 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 post-
commencement 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. Debt payments falling under this provision will be considered as
administrative expenses during the pendency of the proceedings.
F. The Rehabilitation Receiver
21 Section 55
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The initial appointment of the Rehabilitation Receiver (as one of the
elements of the Commencement Order under Section 16) is subject to the
discretion of the court, which may retain the original appointee or choose another
from the petitioners nominees. However, this discretion is limited in the
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 than50% 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 ofany interested party, thus:
Section 36. Displacement of Existing Managementby the Rehabilitation Receiver or Management Committee. -- Upon motion of any interested party, the court may appointand direct the rehabilitation receiver to assume the powers ofmanagement of the debtor, or appoint a managementcommittee that will undertake the management of thedebtor, upon clear and convincing evidence of any of thefollowing circumstances:
(a) Actual or imminent danger of dissipation, loss,wastage or destruction of the debtors assets or otherproperties;
(b) Paralyzation of the business operations of thedebtor; or
22 Section 30
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(c) Gross mismanagement of the debtor, or fraud orother wrongful conduct on the part of, or gross or willful
violation of this Act by, existing management of the debtor orthe owner, partner, director, officer or representative/s inmanagement of the debtor.
In case the court appoints the rehabilitation receiverto assume the powers of management of the debtor, thecourt may:
(1) require the rehabilitation receiver to post anadditional bond;
(2) authorize him to engage the services or employpersons or entities to assist him in the discharge of hismanagerial functions; and
(3) authorize a commensurate increase in hiscompensation.
F. Actions by the Rehabilitation Receiver
As part of its functions, the Rehabilitation Receiver retains the authority to
file an action to annul certain pre-commencement transactions intended to
defraud the creditors. Indeed, this power can be traced back to the basic
authority of the receiver to undertake measures to preserve property underreceivership under the Rules of Court23.
Should the receiver refuse to institute proceedings, any creditor may take
up the cudgels of the corporation with leave of court. If successful, Section 59 of
the law provides that the fruits of the case will redound to the pro-active creditor
to the extent of the value of its credit plus costs, thus:
Section 59. Actions for Rescission or Nullity. (a)The rehabilitation receiver or, with his conformity, anycreditor may initiate and prosecute any action to rescind, ordeclare null and void any transaction described in Section 58hereof. If the rehabilitation receiver does not consent to the
23 Salientes v. IAC [GR 66211, 4 July 1995]
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filing or the prosecution of such action, any creditor mayseek leave of the court to commence said action.
(b) If leave of court is granted under subsection (a),the rehabilitation receiver shall assign and transfer to thecreditor all rights, title and interest in the chose in action or
subject matter of the proceeding, including any document insupport thereof;
(c) Any benefit derived from a proceeding takenpursuant to subsection (a), to the extent of his claim and thecosts, belongs exclusively to the creditor instituting theproceeding, and the surplus, if any, belongs to the estate.
(d) Where before an order is made under subsection(a), the rehabilitation receiver (or liquidator) signifies to thecourt his readiness to institute the proceeding for the benefitof the creditors, the order shall fix the time within which he
shall do so and, in that case, the benefit derived from theproceeding, if instituted within the time limits so fixed,belongs to the estate.
H. Administration of Proceedings
Within forty (40) days from the issuance of the Commencement Order, the
court shall set the case for Initial Hearing to determine whether or not there is
substantial likelihood that the debtor can be rehabilitated and undertake the
following:
(a) determine the creditors who have made timely and proper filing
of their notice of claims;
(b) hear and determine any objection to the qualifications or the
appointment of the rehabilitation receiver and if necessary, appoint a new
one;
(c) direct the creditor to comment on the petition and the
Rehabilitation Plan, and to submit the same to the court and to the
rehabilitation receiver within a period not exceeding twenty (20) days;
(d) direct the rehabilitation receiver to evaluate the financial
condition of the debtor and to prepare and submit his report to the court24.
24 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 theconsultation is a necessary procedure, the Receiver is not bound by the objections
of the parties27.
Among others, Section 62 of the FRIA provides that Rehabilitation Plan
must include provisions establishing classes and subclasses of voting creditors28.
After identifying the appropriate creditor classes and sub-classes, the Plan must
specify the treatment of each class or subclass29 and provide for equal
treatment for all claims within the same class30. Similar to the 2008 Rules,
Section 62 grants additional protection to secured creditors by requiring the Plan
to maintain the security interest of secured creditors and preserve the
liquidation value of the security.
25 Section 24
26 Section 25
27 Section 63
28 Sub-paragraph (d) and (e)
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 RehabilitationPlan. The rehabilitation receiver shall notify the creditorsand stakeholders that the Plan is ready for their examination.
Within twenty (20) days from the said notification, therehabilitation receiver shall convene the creditors, either as a
whole or per class, for purposes of voting on the approval ofthe Plan. The Plan shall be deemed rejected unless approved
by all classes of creditors whose rights are adversely modifiedor affected by the Plan. For purposes of this section, the Planis deemed to have been approved by a class of creditors ifmembers of the said class holding more than fifty per cent(50%) of the total claims of the said class vote in favor of thePlan. The votes of the creditors shall be based solely on theamount of their respective claims based on the registry ofclaims submitted by the rehabilitation receiver pursuant toSection 44 hereof.
Notwithstanding the rejection of the RehabilitationPlan, 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 theconfirmation of the Rehabilitation Plan;
(c) The shareholders, owners or partners of thejuridical debtor lose at least their controlling interest as aresult of the Rehabilitation Plan; and
(d) The Rehabilitation Plan would likely provide theobjecting class of creditors with compensation which has a
net present value greater than that which they would havereceived if the debtor were under liquidation.
31 See Section 8 of the Rules of Procedure on Corporate Rehabilitation
(2008)
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Note that under the foregoing provision, separate arrangements can be
made with different classes of creditors subject to approval of 50% of the affected
creditors or 80% of all creditors. This grants flexibility in dealing with varying
needs of each class32.
Even if the Rehabilitation Plan is not approved by the creditors, the court
may still confirm the Plan if it can be shown that objecting class of creditors shall
receive a net present value greater than that they would have received if the
debtor were under liquidation. Under the Interim Rules, the debtor can force
court approval of a Rehabilitation Plan over the objection of creditors by merely
showing that [t]he plan would likely provide the objecting class of creditors with
compensation greater than that which they would have received if the assets ofthe debtor were sold by a liquidator within a three-month period. The 2008
Rules33 changed the basis to present value projected in the plan. Requiring
that the computation be based on net present value is intended to prevent
debtors from railroading a rehabilitation plan disadvantageous to the creditors by
the simple expedient of stretching the repayment schedule without regard to the
costs of borrowing.
Finally, creditors who take a haircut under the plan will not be taxed for
any amount of debt which is reduced or forgiven under Section 71 of the law.
H. Termination
After creditor approval of the Rehabilitation Plan as provided above, it
must be submitted to the court for confirmation. Creditors shall have the right to
make an Objection but on limited grounds, to wit:
(a)The creditors support was induced by fraud;
32 See also Section 42 on the formation of Creditors Committee.
33 Specifically, Rule IV, Section 11
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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 theRehabilitation 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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may file a petition for the approval of a pre-negotiated rehabilitation plan
provided that it has been endorsed by creditors holding at least 2/3 of the total
liabilities of the debtor, including secured creditors holding more than 50 percent
of the total secured claims and unsecured creditors holding more than 50 percent
of the total unsecured claims. However, while the 2008 Rules mandated the
appointment of a Rehabilitation Receiver either by election of the parties or by
order of the court, the FRIA gives the parties the freedom to undertake the
proceedings without a receiver.
The Order under Section 77 of the law which directs interested parties to
file their objections to the Pre-Negotiated Rehabilitation Plan also requires
publication and personal delivery of a copy of the Petition to each creditor who is
not a petitioner but who holds at least 10%37 of the total liabilities of the debtor.
The FRIA enumerates grounds to object to the Rehabilitation Plan in
addition to those originally provided under the 2008 Rules. Thus, under Section
79:
Section 79. Objection to the Petition or
Rehabilitation Plan. Any creditor or other interested partymay submit to the court a verified objection to the petition orthe Rehabilitation Plan not later than eight (8) days from thedate of the second publication of the Order mentioned inSection 77 hereof. The objection shall be limited to thefollowing:
(a) The allegations in the petition or theRehabilitation Plan, or the attachments thereto arematerially false or misleading;
(b) The majority of any class of the creditors do notin fact support the Rehabilitation Plan;
(c) The Rehabilitation Plan fails to accurately accountfor a claim against the debtor and the claim is notcategorically declared as a contested claim; or
(d) The support of the creditors, or any of them, was
37 5% under the 2008 Rules.
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induced by fraud.
Copies of the objection to the petition or theRehabilitation Plan shall be served on the debtor, therehabilitation receiver (if applicable), the secured creditor
with the largest claim and who supports the Rehabilitation
Plan, and the unsecured creditor with the largest claim andwho 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 orimplementation 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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addition that notice to all creditors is published in a newspaper of general
circulation once a week for two consecutive weeks. The said notice must invite
the creditors to participate in the negotiation of the plan and inform them that
the plan will be binding on all creditors if the required votes are obtained41.
An out-of-court Rehabilitation Plan approved by at least 67% of secured
creditors, 75% of unsecured creditors, and 85% of all creditors42 will be
crammed down all creditors pursuant to Section 86 of the law, to wit:
Section 86. Cram Down Effect. Arestructuring/workout agreement or Rehabilitation Plan thatis approved pursuant to an informal workout framework
referred to in this chapter shall have the same legal effect asconfirmation of a Plan under Section 69 hereof. The notice ofthe Rehabilitation Plan or restructuring agreement orPlan shall be published once a week for at least three (3)consecutive weeks in a newspaper of general circulation inthe Philippines. The Rehabilitation Plan or restructuringagreement shall take effect upon the lapse of fifteen (15) daysfrom the date of the last publication of the notice thereof.
Quick Notes on Insolvency and Liquidation: Cross Border
Insolvency
By virtue of Section 139 of the FRIA, the Philippines is now deemed to
adopt the provisions of the UNCITRAL Model Law on Cross Border Insolvency
(1997) subject to procedural rules to be promulgated by the Supreme Court.
Essentially, the law provides a framework for the recognition of foreign
insolvency proceedings and grants certain parties in such proceedings access to
Philippine courts for purposes of obtaining some form of affirmative or other
relief.
41 Ibid.
42 Section 84