Juridical Insolvent Debtor v. Individual DebtorThere are different remedies for juridical insolvent debtor and natural person debtor. When we say juridical debtor, we mean sole proprietorship, partnership, and corporation. So when we mean individual debtor, it simply means a natural person, who is a debtor to various creditors, without being engage in business. In fact, that was asked last year. I had the proposed answer to the question. So, the other alternative answer that the committee member would like to espouse is regarding suspension of payment. Suspension of payment is available as a remedy only for natural persons not for juridical insolvent debtor. When we s ay juridical insolvent debtor, we include even a sole proprietorship, partnership, and corporation. As opposed to nil, individual debtor. Q: So what are the remedies? A: Simple. There are only 2 basic remedies under FRIA. For juridical insolvent debtor: 1. Rehabilitation 2. Liquidation Now on other rehab, we have various types: 1. Court supervised (voluntary/ involuntary)*Voluntary- It is upon the petition of the debtor. *Involuntary- By petition of creditor/ group of creditors. 2. Pre- negotiated rehabilitationrehabilitation- Before they go to court, they have an agreement already on the terms of the plan. The debtor and the creditor. 3. Out of court or informal structured agreement. Meaning outside the court. The debtor and creditors may agree on a rehab plan for the debtor. Q: Now obviously which one requires court app roval for rehab? Which one does not require court approval? A: Obviously, the last one. When you say out of court, informal work of structured agreement, it does not require court approval. But the first two, court supervised and Pre- negotiated require court approval. And then the second remedy, petition for liquidation, which can be done voluntarily by the debtor himself or by the creditors. Q: Next. What about reliefs or remedies available to individual debtor? A: We have 2 basically. 1. 2.
Suspension of payment and Liquidation
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Now liquidation maybe voluntarily (again) and involuntary. Q: What do you mean by insolvent debtor in the context of FRIA? A: Before FRIA, the concept or the term “insolvent debtor” means technical insolvent. T he assets are more than the liabilities. But the debtor foresees the impossibility of paying his debts as they with . That was the concept before FRIA. So insolvent debtor does not need act for insolvent but only “technically insolvent”. So the assets are more than the liabilities but the debtor foresees the impossibility of paying his debts as they fall due that’s why he can pursue those remedies.
Under FRIA, so the term “insolvent debtor” includes both “technical” and “actual” insolvency. Q: So therefore, can you file a petition for corporate rehab if your assets are less than liabilities? A: Yes. As long as there is a “likelihood” that you can be rehabilitated. So we handled a case New Frontier v. Equitable Bank. The insolvent debtor filed a petition for rehab. But then all of his assets were conveyed to the bank by way of dacion en pago. So he had no more assets right? But he had to file a petition for rehab, ___ to dismiss on the ground that it is “not technically insolvent”, but “actually insolvent”, therefore cannot be rehabilitated. We won. NOW THIS NO LONGER HOLDS DUE under FRIA. Because to repeat, even an “actually insolvent debtor” may file a petition for rehabilitation on an argument that there’s a likelihood that it can be rehabilitated. Q: What is the objective of FRIA? When you say rehabilitation, whether court supervised, prenegotiated, out of court, what is the objective? A: The objective is to restore the debtor to his former state of financial health. Not to put an end to the corporation. So on the premise that the debtor can be rehabilitated through a viable rehabilitation plan. Q: Is the present value of recovery better than the debtor is to undergo liquidation within 120 days from filing of petition. Which is better for the debtor in the various stakeholder? Liquidate? Sell the assets and apply the proceeds in payment of the claim of various creditors or rehabilitate the company? So is the present value of recovery better than if it will go up to liquidation within 120 days from filing of petition. A: If the answer is yes, then it’s better to rehabilitate the company to liquidate the same. Q: What do you mean by ‘present value recovery’? What do you mean by that? Anong ibig sabihin niyan? Yung pera mo ngayon o yung pera mo plus interest once the corporation is rehabilitated? A: Sabi ng SC, the ‘present value recovery’, your money today plus the interest that it would have earned once the rehab is in placed. So it’s not your money today, but money + interest that would have earned if the company would have paid it without benefit of reinstatement order. The case of Viva Shipping v. Keppel Philippine Mining, The SC took note of the characteristics of an economically viable rehab plan. Q: So what are these 3 characteristics? A: 2|FRIA
1.
Cash generation-
Q: Can the assets generate more cash, infuse in operations than to sell it? Basic concept. You have assets for the debtor. So which is better? Sell it or use it for its operations? A: So if the use of the assets can generate more cash rather than to sell, then it stands (?) one on the first test of economic viability. 2.
Liquidity issues
Q: What do you mean by liquidity issues? A: Meaning may pera, ability to pay its debts. So with liquidity issues, it can be addressed with a practicable business plan. 3. Definite source of financing for the proper and full implementation of rehab plan. Meaning may pagagalingan ng pera. There’s one case Viva Shipping. So argument ng debtor, “If I sell the assets, yung mga barko na unserviceable na. If I sell the assets to my sister company, I will have the money, therefore I can be rehabilitated”. That’s the argument.
Ang sabi ng SC, “that’s not definite”. Because the sister company may or may not buy your assets. That’s an indefinite source o f financing, to fully implement the proposed rehab plan for the debtor. Q: So we said the objective of rehab is to restore the debtor to its former state of financial state. How is this objective accomplished? A: 1. While the rehab is pending, all claims against the debtor are suspended. So reinforcement of claims against the debtor is suspended to give time to the debtor to focus on how to rehabilitate the company.
So as we see later, when you file a petition for rehab, if it’s in order, the court wi ll issue a commencement order that includes a stay order. Once the court issues a s tay order, claims against the debtor are suspended. You know there’s once case. Remember the case of PAL v. ______. 2 passengers on the plane after a trip from MECCA. After their training, they discovered that their luggage was missing. They filed a claim to recover the missing luggage against PAL. In the meantime, PAL went for rehab and obtained a stay order. Q: What happens to the action to recover the missing luggage? Is the action suspended on the account of stay order obtained by PAL with the rehab court? A: SC said “that is suspended”. Because claims whether money or otherwise are suspended when the court issues a stay order. So you cannot accomplish the objective of rehabilitating the company if the rehab receiver will be busy attending rightful claims against the debtor. So the debtor is given time to recoup itself to rehabilitating the company. That’s why claims as a rule should be suspended whether arising from contracts or labor. So claims for money or otherwise are deemed suspended. 3|FRIA
Q: This was asked in 2014 bar, what about claims of educational plan holders? A: Lumabas yung rehab plan, and files a petition plan for rehab. Pacific plan issued 2 types of educational plans to its members. Yung open- ended tsaka yung fixed value. Open ended, meaning, kung magkano yung kailangan mo, at the time of actual need. So fixed, naka fix lang on that amount na babayaran ng educational company or credit company once i t matures. Ang nagrehab yung pacific plan. Nag-issue ng stay order yung court. What happens now to the educational plans of the policy holders? Are they suspended?
So the argument of the policy holders “These are not your money. Hindi galing sa inyo to. Amin to pinaghirapan namin para sa mga anak namin. That does not form part of your funds. This is trust fund for the benefit of policy holders”. A: But Justice Peralta said “No. Those are claims against the debtor. Therefore they are suspended by virtue of the stay order”. 2. Another way or mode of attaining objective is what we called “cram down clause” or “cram down power of the court”. Q: So what do you mean by “cram down effect” of rehab plan? A: Pag sinabing “cram down”, meaning the court will ram down the throats of debtor and creditors’ rehab plan. The creditors despite their objection, the court may adopt a viable rehab plan and then implement the rehab plan despite the objection of the creditors. If the objection is manifestly unreasonable, the court is not bound by the objection and has the authority, the power, the obligation, the duty to carry out the rehab plan. What is at stake is the interest of the debtor. If you rehabilitate the company/ debtor, all stakeholders are satisfied. The debt or, the creditors, the public, right? That’s why as I said, the creditor may object. No problem. The court will impose its will upon that creditor/ those creditors at the cram down power.
So the creditors cannot say “this violates the principle of equality of contracts”. “This violates the rights under the contract”. Because of the so- called cram down effect of the rehab plan. So it has the right to be imposed upon, the court has the right to impose the rehab plan for as long as for all the good of all stakeholders and the objection of creditors is manifestly unreasonable. 2. National and local taxes are waived until approval of rehab plan. So “are waived”, they cannot collect. Even the national government, local government, they cannot collect un til approval of rehab plan or its termination. Q: What about liquidation? What is the objective of liquidation of the legal debtor? A: So restore the debtor from his former state of financial health. Q: Can you say that the objective of liquidation for juridical debtor is to discharge? A: No, because juridical debtor are not discharged. Only natural person debtors or even debtor proprietorship can be discharged but not legal persons. 4|FRIA
Q: Why are not they discharged? A: Because juridical persons are dissolved. When the court issues a liquidation order, the juridical existence of the juridical person is terminated. So it is not discharge, it simply ends. That juridical life ends or is extinguished. Q: Therefore what is the objective of liquidation of juridical debtors? A: So there are 3. 1. Adjust/ resolve competing claims of propriety rights of debtor and creditorIt means that there are creditors with various claims. Which of those claims shall be paid first? Which of those claims are valid and to what extent? Which of those claims should be prioritized over the other claims of creditors? 2. Maximize asset recovery – Q: If the corporation will go under liquidation, can you still collect the assets of the debtor? A: Yes. Q: Can you still file cases on behalf of the juridical debtor? A: Yes. Because the liquidator or the receiver as the case maybe are still in power to file the cases to reinforce claims or receivables due to the corporation. 3. Distribute equitably the properties of the debtor based on the rules of concurrence and preference of credit. – The most practical objective. So from the assets generated by the liquidator, pay off the claims of the various creditors from his assets based on the rules of concurrence and preference on credit. Q: What about objective of suspension of payment? This was asked in the bar exam. A: The objective is simply deferment in the payment of debts. Not discharge, not liquidation, but simply deferment in the payment of obligations. Q: What about objective of voluntary liquidation of individual debtor? So what is the objective? A: Discharge from the obligation and to start a fresh. Q: What do you mean by this? A: In the states, this is what you called “chapter 11” and this is commonly resorted to by actors and actresses, by basketball players. There are many basketball players who cannot even afford to buy Mcdonalds hamburger. One of them was Allen Iverson. Allen Iverson started earning multi- millions during his prime. He was forced to go bankruptcy. So he was declared bankrupt. So all the claims against him were gone. So they cannot be enforced against him. He starts a fresh. So that’s the objective of voluntary liquidation by individual debtor. Once the court declares him insolvent, then he is discharged from his obligations and claims.
Q: Let’s say he wins in the sweepstakes, he wins in the lotto. Are those claims revive? A: No more, because they are discharged. Except those claims that the general may not discharge that we will see later. Q: How do you distinguish voluntary from involuntary liquidation of individual debtor? A: Voluntary liquidation- Assets are less than liabilities and is filed by the debtor himself.
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Involuntary liquidation- It is filed not by the debtor but by 3 or more creditors whose aggregate claim is at least 500k pesos. Not more than 500k ha, but at least 500k pesos. And the debtor commits an act of insolvency. Q: So what are the 2 requisites for involuntary liquidation? A: 1. 2.
The claims by 3 or more creditors amount to at least 500k and The debtor commits an act of insolvency.
Q: This was asked in the bar so many times before FRIA. It still holds due but the title now is ‘liquidation and insolvency.’ If the debtor’s assets are more than liabilities, but intends to depart for abroad to avoid the claims of the creditors, can he be subjected to liquidation? A: Yes because the party for abroad, to abscond his obligation is an act of insolvency. So even though his assets are more than his liabilities, if he commits an act of insolvency, he can be subject of involuntary liquidation. Q: Who can file a petition for rehab? A: Sole proprietorship, partnership, and corporation. Q: This was asked in the bar. Filing of rehab by corporation. Does it require board approval only or stockholders approval? A: Well under the law, majority vote of the board and vote of the stockholders owing at least 2/3 of outstanding capital stock. For partnership, approval of at least majority of the partners. Q: Is group filing allowed? Meaning there are various corporations under 1 group of c ompanies. Let’s say only 1 of the company is in need of rehab, the rest are not. But then rehabilitation of the state of this corporation will affect the business of the other corporations under the same group. A: But under this FRIA, group filing is allowed.
I brought it up because there’s a case. The issue is whether or not group filing is allowed under the old rules. SC said not allowed under the old rules but allowed under the FRIA but FRIA takes effect PROSPECTIVELY and not retroactively. Q: Here is the favorite topic in the bar last year: Procedure for debtor’s initiated for rehab. What is the procedure? A: 1.
File a petition in the city or where the place of office is located.
Q: What should be embodied in a petition for rehab? A: Well it has to allege that the corporation is or the debtor is insolvent whether technically or actually insolvent. There is a likelihood of rehabilitation through a viable rehab plan. Therefore, attach to a petition for rehab is a rehab plan, adopted by the debtor. For evaluation and consideration of the court. 6|FRIA
2: Q: Now what else should be included there? A: A nominee for rehabilitation receiver. Because somebody has to adopt or implement the rehab plan right? So the rehab petition must include nominee for rehabilitation receiver. So rehab plan attached to the petition and nominee for rehab receiver. Q: If the court filed petition to be sufficient in form and substance within 5 days from filing, the court will issue a commencement order. Otherwise, if it is not sufficient, it is deficient, the court may require amendment to the petition and once amended, then the court has 5 days from amendment to determine whether it is sufficient in form and substance and issue a commencement order.
Q: This was asked in the bar. What do you understand by a “commencement order”? What do you mean by a “commencement order”? A: Commencement order commences the rehab proceeding. It is the order that commences the rehab proceedings and includes the appointment of the receiver and a stay order. The commencement order is what commences or what starts the rehab proceedings. As you know, rehab proceedings are proceedings in rem, right? You don’t serve summons on the persons involved in the rehab. Q: How is jurisdiction acquired? A: By publication. So the whole proceedings are commenced when the court issues a commencement order within 5 days and the commencement order includes a stay order. Q: What is the importance of a stay order? Let’s enumerate one by one and let’s take a look on bar exam questions. A: It suspends on actions or proceedings to enforce claim against deb tor. The term “claim” has been resolved by the court to mean not just money claim but “money claim or o therwise”. Q: Next, to enforce judgment or attachment of any provisional remedy against the debtor. This was asked in the bar. So nakakuha nang attachment yung creditor after the commencement order. What happens to the attachment? A: It cannot be enforced. A judgment likewise against a debtor cannot be enforced, once the court issues a commencement order. Now prohibits disposition or encumbrance of property. So the debtor cannot sell, alienate or encumber properties. Q: Why? A: Because the properties under the rehab are held in trust for the benefit of various creditors. Also, corollary with non- sale and encumbrance, it cannot make any payment except admin expenses.
Q: Now, there’s a very interesting case, I’ll share this with you, you will not find it in any notes. A retired justice handled a rehab case and the issue is whether or not he is entitled to a payment of rent. So let’s say the debtor went f rom rehab. Yung debtor na nagrehab umuupa sa Secretary of Justice. Ang tanong, pwede bang makakolekta ng renta yung retired justice against the lessee who went for rehab? This was asked in one of the interviews of a person applying for Supreme Court 7|FRIA
Justice. Can you imagine noh? So in a JBC deliberation, Justice Henry Gutierrez, the one who penned the decision asked this question on the applicant, the same question that I posed to you now. So can the rentals be paid without violating the spirit of rehab? A: Ang sagot ng SC, rentals are admin expenses. And admin expenses maybe claimed, right? So what can be paid are obligations owing to creditors but not admin expenses. It is very technical and if you are asked that question your immediate action would be “that should be suspended”. Except that you have a case saying it is not suspended because these are admin expenses that are not subject to stay order. Q: What are not covered by the stay order? Meaning claims that can be enforced despite the stay order. Let ’s take a look one by one. A: 1. Cases pending appeal with the Supreme Court. 2. Cases falling under the specialized court or quasi- judicial agency. Let’s say a violation under SRC. Alright, tender offer not suspended. Because these are cases falling within SRC. 3. Enforcement of claim against surety and other persons liable solidarily with the debtor. The case of Daway. The case likewise of Daway, third party accommodation mortgagor. Q: Can you foreclose the mortgage on the property of the 3rd party mortgagor if the debtor obtains a stay order? A: Yes. Because 3rd party mortgagors are entitled to a stay order. There’s one exception. If the property of 3rd party mortgagor is necessary to rehabilitate the debtor. That’s the only exception. This is the case that we handled. The case of Situs Development. This is the case that we lost. So of the 4 cases of rehab, we won 3 of them except this one. Well this is the story. We were engaged on motion for recon. Meaning talo na siya. Natalo yung Situs. And we thought of an argument. Kasi ang nangyari, yung naforeclose na mortgage belonging to a 3rd party debtor. Sabi namin, under fria, that foreclose should be nullified because it involves the party not the debtor but the 3rd party mortgagor under FRIA. So we cited a provision under FRIA that this proceeding or this rule should be given retroactive effect. Because the commencement order we said retroacted to the filing of petition for rehab. Unfortunately, CJ Sereno held that FRIA takes effect prospectively not retroactively. So ang sabi “Your argument is correct, if you are under FRIA. But in your case, the mortgage was foreclosed under the old rules, 2008 rules of corporate rehab and under the old rules. So etong provision na to under FRIA lang. So kung basehan lang kung yung mortgage mo ay na- foreclose, when the FRIA is already in effect, then you are right. But the mortgage was foreclosed before FRIA, and FRIA takes effect prospectively not retroactively.” That’s why we lost the case.
Q: There’s another case that we handled. We won in this case. The case of DEJ Realty v. Equitable PCI Bank. So this what happened. The debtor obtained a loan from BDO secured by mortgage on the property of the debtor in Cabanatuan. The debtor was not able to pay the loan. BDO foreclosed the mortgage extra- judicially. The sale was annotated at the back of the title. Therefore 1 year period starts to run. At that time wala pa yung Sec. 47 of General Banking Law. After foreclosure of the mortgage and the annotation of the sale at the back of the title, the Court issued a stay order. Can 8|FRIA
we continue the next s tep after annotation of the sale? What’s the next step? Wait before the certificate expires. And once it expires, consolidate title and ask for the issuance of writ of possession. Argument ng DEJ Realty, because the Court issued a stay order, then you cannot continue with the next phase to consolidate the title. Everything should be suspended. Your redemption period, suspended. So kahit tapos na yung 1 year, you cannot consolidate title. And therefore you cannot acquire full ownership, you cannot get a petition for writ o f possession.
Ang argument namin, “No. The stay order was issued after the foreclosure. After the annotation of the sale. So there’s nothing more to injunct”. So we won in that case. A: Now if that case should be asked in the bar, the answer should be different. Because of FRIA. Because the commencement order retroacts to the date of filing of liquidation. Q: What else is not yet included? This was asked in the bar. Issuer of L/C. Remember this case in SPCL? Are the banks that issue a letter of credit liable despite issuance by rehab court of stay order? That’s the case of Daway. A: Sabi ng SC, issuers of L/C are liable to pay the claim of beneficiary under the L/C despite the stay order. Because the stay order does not benefit the issuer of the L/C. Not the same as that of the debtor. So the ruling of Daway is now part of FRIA.
Q: Also asked in the bar. What about violation of PD 115 or violation of BP 22? So let’s say a corporation filed a petition for rehab. Etong officer nag- issue ng cheke, tumalbog. Can you prosecute the officer who signed the bank check? A: Yes because criminal action against the debtor is not suspended by FRIA. So the case of Panlilio v. People is now part of FRIA. So criminal action against debtor not included in the stay order. The criminal liability is pursued despite issuance of the Court of the stay order. Q: You filed a petition for rehab in the court. RTC, we said ‘of the city or principal office located’. And the petition must include a rehab plan and a nominee for rehab receiver. If everything is in order, we say that the Court will issue a commencement order that includes a stay order. Now that commencement order includes the date of hearing. So date of hearing, the appointment of receiver, and a stay order. So during the hearing, creditors will leave their comment to the petition for rehab together with the receiver. The receiver then makes a report. Can the debtor be rehabilitated? A: If the report of the receiver is that ‘debtor can be rehabilitated’ then the Court will now ask the rehab receiver to review the rehab plan proposed by the debtor. Q: What if the receiver recommends that the debtor cannot be rehabilitated? A: If the recommendation of the receiver is agreed by the Court, if the judgment of the receiver or recommendation of the receiver and the Court agrees, then the Court will now direct the rehab receiver to review the rehab plan proposed by the debtor. Q: Now the receiver issued the opinion that it can be rehabilitated; can the Court convert the rehab to liquidation? A: Even though you started as a petition for rehab, if the receiver says or recommends to the Court “it cannot be rehabilitated” and the Court agrees, then the Court motu proprio, may convert the petition for rehab into one obligation. So that’s something new under FRIA. So at the outset, you
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think you can be rehabilitated, go ahead and file. But if the receiver does not agree and so with the Court, then better to liquidate. I remember the case that we handled, the case is Philippine Asset Group v. Caste. So the issue there is whether or not the Court is bound by the report of the receiver. The receiver gave glowing recommendation upon the debtor but it’s all laway. Meaning it’s all beautiful words. The economic feasibility tests were not part of the rehab plan no. So ang sabi namin, the Court should convert this to liquidation. There is nothing more to rehabilitate to this company. So the Court agrees with us. The ponente was Justice Bersamin. So we won that case. The SC said that the Court is not bound by the report of the receiver. The Court must make sole determination whether or not the corporation can be rehabilitated. The Court can make its own assessment to determine if the corporation or the debtor can be rehabilitated. If it can be rehabilitated, as we said, the next step is for the rehab receiver to review, revise, or modify the rehab plan. And with the rehab plan adop ted with the receiver, will be presented now to the Court for approval. So it’s not the rehab plan proposed by the debtor, right? It is a rehab plan adopted by the receiver. That rehab plan would be submitted to the Court for Court approval. The Court will give time for the creditors to comment on the rehab plan. Now once the Court approves for the rehab plan, it would be implemented. Q: Now how many days? How much time does the Court have to approve the rehab? A: 1 year from filing. Q: When is the rehab plans proceedings terminated? A: Either disapproval of the rehab plan or the separate implementation of rehabilitation.
Let’s answer this. Q: Blue star corporation vied with the RTC a petition for rehab on the ground that it forestall the impossibility of paying its obligations as they fall due. So filing the petition, sufficient with form and substance, the Court issued an order appointing a rehab receiver and staying the enforcement of claim against the corporation. What is the rationale of stay order? Remember, as we said, stay order is included in the commencement order, right? A: Stay order enjoins the enforcement of claim against the debtor. Q: This was also asked in the bar. The so- called is ‘equality is equity principle’ in rehab. What do you mean by ‘equality is equity principle’? A: It means that assets of the debtor held under trust for the benefit of all creditors, secured or unsecured. So keep that in mind. Because we will use this principle to answer the next sub questions. So the ‘equality is equity principle’ means that p roperties or assets of the debtor are held under trust for the benefit of all creditors whether secured or unsecured. So it means that even a secured creditor cannot foreclose a mortgage or pledge if the Court issues a stay order. This time equal footing. Usually if you are secured, you have preferred against unsecured right? But not when it comes to FRIA. In stay order, everybody is equal footing. No one is given p reference over the others. PREFERENCE COMES IN IN LIQUIDATION. But not when it comes to rehabilitation. Q: Rationale? A: Remember earlier we said, the rehab receiver is given to focus on rehabilitating the company undistracted by various courts.
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So the rehab plan must include a material financial commitment on the debtor to make it work. Remember I told you na hindi pwedeng “good works lang” right? The debt or must be committed to make the rehab work. Q: What is your remedy if you are not happy with the Court decision on the rehab? Notice of appeal or petition for review under rule 43? What is your remedy? A: The case of Viva Shipping v. Keppel, the SC that the remedy is not notice of appeal but petition for review under rule 43. So remember the decisions of the SEC is appealable to the CA under rule 43. So RTC exercising jurisdiction over rehab and intra- corporate cases is ‘akin’ to SEC. So therefore, decisions of RTC on intra- corporate cases as well as rehab are appealable not by notice of appeal but petition for review to the CA under rule 43. Which means that decisions of rehab court are executor and can be stayed only if the CA issues an injunctive relief in favor of the petitioner. Q: Debtor- corporation and its principal stockholders filed with a S EC a petition for rehab and declaration of a stayed special claim under PD 902- A. This was asked before FRIA. But let us answer this under FRIA. So the objective was for the SEC to take control of the corporation on its assets and liabilities, earnings and operation, and rehabilitating the company for the benefit of the investors and creditors. So the creditor manifested its willingness to cooperate with debtorcorporation, basic proprietor expressed objection. So first bank initiated judicial foreclosure proceedings on the mortgage on the factory of the debtor- corporation. Second bank initiated a foreclosure proceeding on 3rd party mortgage construed on the assets of the principal’s stockholders. Third bank filed a suit against the principal stockholders who admitted themselves liable as surety for loan of the debt of corporation of the second bank. After hearing, the SEC then and now the Court, direct appointment on rehab receiver and court suspension of all action or claim against the debtor- corporation against principal’s actualities. Let’s answer one by one. a.)
Discuss whether or not the SEC order of suspension is valid.
A: It is valid because technical insolvency is a ground for petition for rehab. Q: What is not valid? A: The stockholders, right? The SEC then, and the Court now has no jurisdiction over the stockholders of the debtor. Jurisdiction is only over sole proprietorship, partnership, and corporation but not on the individual stockholders. b.) What are the effects of the SEC now the RTC order on suspension of judicial foreclosure? Take note that the judicial foreclosure is on the property of the debtor. What is the effect of the stay order? A: That should be suspended. Because as we said earlier, stay order covers both secured and unsecured creditors. c.) What about the foreclosure proceedings by the 2nd bank? Remember that the 2nd bank foreclosed on the property of the 3rd party mortgagor, right? What happens to those proceedings? Are they suspended by the stay order? What do we say a while ago? A: The stay order does not extend to 3rd party mortgagor unless the property of such mortgagor is needed to rehabilitate the company.
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d.) What about suspension filed with the 3rd bank? You know the 3rd bank naman filed a claim for case against stockholders who acted as sureties. So is this suit filed by the 3rd bank against the stockholders act as sureties, suspended? A: No, because sureties are not covered by the stay order. e.) Now regarding the authority of receiver, as we said, he can take charge on the asset of the corporation as incident to rehab and preserve the assets. Does he have the right to access bank accounts? A: By expressed provision of law, YES. The receiver takes the place of ____ (53:21) If ____ can take a look at bank accounts of the debtor, with more the reason that the rehab receiver can also take on the accounts of the debtor. The debtor of course under rehabilitation. Q: When may creditors commence involuntary proceedings? Involuntary, remember, it is not by the will of the debtor, right? But the will of the creditor. So filed by the creditor. Can one creditor filed petition for rehab? Involuntary rehab? A: Yes unlike involuntary liquidation involving natural person debtor. Kapag corporation ang involved, kahit one creditor, it is okay as long as the claim is at least P1 million pesos. So for rehab, it is not the question of number of creditors. It is a question of ‘how much is the claim’ owing to that creditor or group of creditors. As you know, this amount is no longer realistic, you know? One million is so small now. It should have been adjusted (But the threshold amount is still one million pesos/ or at least 25% of subscribed capital stock of the corporation or partners’ contribution whichever is higher) plus there is no genuine issue of fact or law on the claim of petitioners. So no contest. And due demandable payments unpaid for at least 60 days. All payments, meaning due payments on obligation, not paid at least 60 days. Pag rehab, 60 days unpaid. Pag liquidation, 180 days. So pag involuntary rehab, yung payments not made at least 60 days. Or creditor, other than petitioner initiated foreclosure proceeding on the property of the debtor that prevents that debtor from claiming its assets as they fall due to the other creditors. So to recap, involuntary rehab. 1 creditor or more creditors, with a claim of at least 1 million pesos or at least 25% of subscribed capital stock of the corporation or partners’ contribution whichever is higher plus no genuine issue of fact or law of the claim of the petitioners and due payments have not been made for at least 60 days or the creditor other than the petitioner has initiated foreclosure proceeding on the property of the debtor that prevents the debtor from paying his claim to other creditors or make him insolvent. Q: What do you mean by pre- negotiated rehab plan? A: Remember we said, pag court supervised, the court will wait for the report of the receiver whether or not the debtor can be rehabilitated in the receiver’s shares. If the receiver says yes and the Court agrees, then the Court will have direct the receiver to review, modify, revise the rehab plan prepared by the debtor, the rehab plan submitted to the creditors for approval, right? T heir objections will be made known to the Court and the Court will consider the comment of the creditors. If the creditors’ comments are not reasonable, then the Court will impose the rehab plan even to the creditors. So there’s a potential disagreement between and among debtor and creditors if it is court supervised. That’s why the rule we introduced is the co ncept of pre- negotiated plan. Meaning, before you go to Court, nag kasundo na yung debtor at yung creditor. Okay ano yung threshold number pag pre- negotiated? So it has to be approved by debtor and creditors, 2/3 in 12 | F R I A
their total liability. And then more than 50% of the claim of secured creditors and more than 50% of the unsecured claim of the receiver creditors. So 2/3, total liability. Of the 2/3, more than 50% of the secured claims and more than 50% of the unsecured claims. So halimbawa, nagrelay yung 2/3 creditors of the present total liability. Merong 1/3 na natitira diba? What happens with this 1/3? So the debtor and the creditors agreed on the rehab plan. And if there is approval of 2/3 of total liability, depending on the Court, and the Court may approve it, what happens with the 1/3? Wala silang saysay. Wala silang sinabi. Because the Court may impose the rehab plan under the “cram down effect of rehab” even on those creditors not belong to the 2/3. That’s the beauty of pre- negotiated rehab plan. You need to deal with 2/3 creditors, once you get their consent, you go to the Court and the Court will approve the rehab plan and the receiver nominee (if any) will be the one to implement it. Q: Now can you have a pre- negotiated plan without a rehab receiver? A: You can. It’s the option of the debtor and the creditors. Q: What is the period for the Court to adopt a pre- negotiated rehab plan? A: 120 days from filing. If not approve, if not acted upon by the Court, deemed approved.
Q: Let’s repeat. Court supervised rehab, how many days before the Court will have to act on it? A: 1 year from filing of the rehab plan, otherwise deemed approved. Q: What about pre- negotiated rehab plan? A: 120 days from filing, otherwise deemed approved. Q: The 3rd one, so this is the example: So what will be the liability of the 5 creditors? A, B, C, D, and E? The obligation due to A, B, and C, amount to 120 million. But all of them are secured. The obligation due to D and E amount to 60 million (unsecured). So the plan received by them for approval by the creditors holding at least 120 million in terms of liability. Now on the s ecured creditors who gave their approval, they should know that at least 60 million plus 1 peso. And the unsecured creditors at least 30 million plus 1 p eso. Otherwise it does not merit the approval of the Court based on these numbers.
What about this one. Out-of-court on informal structured agreement. 85-75-67 ang formula. 85 total liability. Of the 85, 75 unsecured. 67, secured obligations. So it’s not a question of number of creditors approving the out-of-court on i nformal structured agreement. It’s a question of amount of liability. Approval of creditors holding at least 85% of total liability, of the 85% kailangan 75% pag unsecured claim, and 67% pag secured claim. 85-75-67. S o once you have those creditors representing those liabilities, then the agreement will be implemented even over the objection of the creditors holding 50% of the total liability. So assuming, na mayroong 50%. Hindi naman lahat mag-aagree. Kung lahat mag-aagree, walang problema. Kung 85% lang ang mag-aagree, it doesn’t matter. The 50% bound by the agreement of the debtor and creditors. Q: What about the so- called ‘stand- still agreement’? A: So no claim can be enforced against the debtor. Q: What is the requirement for the ‘stand - still agreement’? A: Approval of just majority. More than 50% of total liability. So the debtor can convince a creditor holding more than 50% of liability for a ‘stand - still agreement’. 13 | F R I A
Q: When may a juridical debtor file a petition for voluntary liquidation? A: If the assets are less than liabilities. If the assets are less than the liabilities, then the Court will issue an order to rehabilitate the debtor as insolvent and issue a liquidation order. Q: Does the Court have the discretion to reject the petition for voluntary obligation by a juridical debtor? If the petition is sufficient in form and substance, and it will be shown that assets are less than liabilities, does the Court has the discretion to reject the petition? A: No. It is a remedy available to the debtor. To file a petition for voluntary liquidation if the assets are less than liabilities. If it is so, then the Court will issue a liquidation order. So that’s asked in 1991. Is it mandatory for the Court to issue a liquidation order and declare the debtor as insolvent if the petition shows that the assets are less than its liabilities. Q: What about a petition for involuntary liquidation? So 3 or more creditors claim at least P1 million pesos, or 25% of subscribed capital stock or partner’s con tribution whichever is higher. Plus there is no genuine issue of fact or law on the claim of petitioners and payment is not acted upon immediately within 60 days. So remember pag rehab, payments not being made for 60 days. Pag liquidation, payments not being made for 180 days. Or debtor failed to pay its obligation as they fall due, then in all likelihood, the debtor maybe rehabilitated. So what do you see in a petition for involuntary obligation? So claim of creditors. 3 or more creditors, at least P1 million pesos or 25% of subscribed capital stock or partner’s contribution whichever is higher and coupled with that: no genuine issue of fact or law on the claim of petitioners (meaning beyond dispute) and then obligations that are due and demandable not being made for at least 180 days or debtor failed to pay its obligation as they fall due or no likelihood that the debtor can be rehabilitated. Q: Can a distressed corporation file a petition for corporate rehab after dismissal of the earlier petition for insolvency? So na-dismiss yung insolvency dahil hindi siya insolvent. Can you file a petition for corporate rehab? A: Yes. It only means that the debtor can still be rehabilitated. Q: Can a corporation file a petition for rehab first and after it is dismissed, file a petition for insolvency? A: Yes. Remember our discussion earlier, the Court may convert the petition for rehab to liquidation either motu proprio or motion of the creditor. So you don’t have to wait for the rehab to be dismissed and then file a petition for liquidation in the same proceedings as the rehab, you can ask the Court and the creditors to convert the liquidation or the Court motu proprio may convert the proceedings to one obligation. Q: When may an individual debtor file a petition for suspension of payment? In the last bar exam, the debtor was a sole proprietorship. The question was, what are the remedies available to him if his assets are more than liabilities, but simply not liquid. Is it suspension o f payment or rehabilitation?
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A: Rehabilitation. Because juridical debtor’s remedy is rehabilitation. Because the commencement order includes a stay order. Now if that it will be issued in a business, you are a natural person debtor, your remedy is suspension of payment. By expressed provision of law, an individual debtor, not a sole proprietorship obviously, who possesses sufficient property to cover his debt but foresees the impossibility to pay as they fall due may file a petition for suspension of payment.
Q: Let’s answer this. One day, Jerry Hao doing business under the name of Starlight Enterprises, a sole proprietorship, finds himself short in cash, unable to pay his debt as they fall due although sufficient property to cover such debts. He asked you as counsel the following queries, should he file a petition with SEC now RTC to be declared as special payment in view of said financial business? A: Under FRIA, it cannot, right? Because he was a sole proprietorship. He should file a petition instead for rehabilitation. Q: What is the effect when you file a petition for rehab and you obtained a commencement order? A: The effect is the same. IT STAYS the claim of creditors. But the correct remedy is not suspension of payment because it is only available to individual debtor. The correct remedy is rehabilitation. Q: Should we sell profit participation certificate? A: It is no longer FRIA, right? It is already SRC. Profit certificate participation as securities and securities cannot be limited also without complying with the restriction requirement under the SRC. Q: Distinguish insolvency now liquidation from suspension of payment. You know this has been the favorite topic in the bar before FRIA. About 6x asked. A: 1. Objective- The objectives of liquidation are: a.) To adjust and resolve competing claims of the debtor and creditor. b.) Maximize asset with the company c.) Equitably distribute the property to various creditors based on concurrence and preference of credit. d.) Discharge of obligation Objective of suspension of the payment is deferment in the payment of obligation. 2. Next, in liquidation, assets are less than liabilities whether it is voluntary liquidation assets. Suspension of payment, assets are more than liabilities and debtor foresees the impossibility of payment of debts as they fall due. Q: Juan opened a coffee shop using money borrowed from financial institutions. After 3 months, Juan left for the USA with intent to defrauding his creditors. While his liabilities are 1.2 million, his assets are worth 1.5. May Juan be declared insolvent? A: Yes, because this one of involuntary liquidation. Remember, we said, if it is voluntary liquidation, it is not by reason of having less assets than liabilities. Your assets can be more than your liabilities, but you commit an act of insolvency and the threshold amount is available, more than 500k.
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Q: A debtor was being adjudged insolvent, is being discharged by the Court after his properties have been applied to his debts. A year later, with those d ebts still not fully paid, he waits as they fall due. Creditors were looking for the balance. Will the suit prosper? A: Not anymore. Because the objective of liquidation is to discharge from obligation and liabilities. So improvement in fortune will not bring the revival of the claim against the discharged debtor.
Q: Regarding foreclosure, let’s take a look on the various remedies that we have seen. Recap. Suspension of payment and then liquidation, right? Of all these remedies, in what situation can a mortgagee or pledgee foreclose? Can the mortgagee or pledgee foreclose a mortgage levied if the debtor/ pledger opted for Rehab and he was unable to get a commencement order? A: No. The commencement order includes a stay order and the so- called ‘equality is equity principle’, all creditors whether secured or unsecured, stand equal footing. Therefore, even secured creditor cannot enforce the lien against the debtor. In fact, there’s one case. China Bank v. CA. Does it not amount to impairment of obligation of contract ? Does it not violate the principle of presumptive of contract? The SC said ‘NO’, because well, police power. Police power is superior compared to non- impairment contract clause under the Constitution. And the cram- down effect of rehab is part of the police power. Q: Now, does it mean that the lien is forgone? A: It only means that it is suspended. You cannot foreclose the mortgage during the pendency of the rehab proceeding. But the lien is not lost, it is still there, just deferred in the foreclosure of mortgage/ pledge. Q: What about suspension of payment? What is the effect of suspension of payment? A: The effect is just like stay order. Claims are suspended. So a mere filing of the petition of suspension of payment, suspends the claims against the debtor. In rehab, you have to wait right? The Court has 5 days to determine if the petition is sufficient in form and substance. Pag suspension of payment by debtor, mere filing suspends claim against the debtor. Q: Except for what? A: Laborers, illnesses and medical expense within 60 days from death of relatives, and mortgage and debts. Q: What about liquidation? What is the essence of liquidation? Can the mortgagor/ pledgee foreclose if the debtor will not file a petition for rehab but liquidation? A: Yes, to wait for 180 days from issuance of liquidation order before he can foreclose. Q: Regarding discharge, what debts are not discharged despite liquidation by individual debtor? A: Taxes and assessments owed to the government. Baka makalimutan natin, pag rehab, taxes, national and local taxes are waived while the rehab plan is being implemented. Pag discharge, taxes and assessments are not discharged despite the order of insolvency involving a natural debtor. But there’s an obligation arising f rom embezzlement,
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alimony, claim for support. In general, debts not proved against estate, meaning debts not listed in the petition for liquidation. They are not discharged. Q: Who are not covered by the court order and proceedings of suspension of payment? A: Creditors having claimed on question of labor, maintenance, last illness, funeral of wife and children of debtor incurred within 60 days from filing the petition, secured creditors and those not listed in the petition. Q: Now, this is very tricky. What are the requisites for the Court to approve a petition for suspension of payment? A: The so-called double majority rule under the insolvency law, which is retained under FRIA. So the presence of creditors holding claim amounting to at least 3/5 of total liability and 2/3 in terms of number. 2/3 of creditors and claim represented by the mortgagor amounting to at least 3/5 in terms of total liability. Otherwise the Court will not approve the suspension of p ayment petition.
Q: Let’s take a look at h ere. Total amount of liabilities owing to 6 creditor A,B,C,D,E, and F is 250 million. The amount due to A,B,C is 150 million. In a creditors’ meeting, the 3 agreed to the petition but not the remaining creditors. Will the petition be granted by the Court? A: So 150 million is 3/5 of 250 million right? But 150 million is only owing to A, B, and C. You have 6 creditors. So 2/3 in numbers should mean 4. But only 3 approved, it covers 3/5 of the total liability, and therefore, under the double majority rule, this petition for suspension of payment will not be approved by the Court. So it is only in this remedy that the number of creditors is important. Remember in Pre- Negotiated Rehab, 2/3 total liability. Of the 2/3 more than majority of the secured claim. It does not pertain to number of amount of liability. Out-of-court agreement, structured agreement, remember? 85 total liability. 75% secured, 67% unsecured, right? Now, when it comes to suspension of payment, you need number of creditors concurrently with total amount of liabilities. So the so- called d ouble majority rule. Q: When will the Creditor file a petition for involuntary liquidation against an individual debtor? A: Any creditor with a claim of at least 500k pesos. Q: As we said earlier, the premise of involuntary liquidation against an individual debtor, amounted claim coupled with an act of insolvency. Can you resort to this remedy against juridical debtor? A: You cannot. It is only a remedy available against an individual debtor and not to juridical debtor. Diba pag juridical debtor, ang test is assets are less than liabilities. Q: May the following be declared insolvent? May the following be subject to liquidation? Married woman, partnership in same person. A: Yes, with respect to his own debts. Q: What about partnership? May a partnership file a petition for rehab or be subject to liquidation? A: Yes, because partnership is one of a debtor, juridical debtor. Q: What about the same person? Can he be subject to liquidation? A: It depends. Voluntary liquidation, NO WAY! Q: What about involuntary liquidation? A: As long as the interest is protected, then the answer is YES.
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Q: What are considered acts of insolvency und er FRIA? A: Remember we said, individual debtor, at least 500k plus act of insolvency. Q: What are these acts of insolvency maintained under FRIA? A: DCRA- Chief Justice a.) Depart in the Philippines with intent to defraud the creditors/ Being absent from the Philippines with intent to defraud. b.) Concealing himself. c.) Removing property to avoid being attached. d.) Attachment for 3 days e.) Confession to judgment f.) Judgment to be taken against him So when you smell fraud, act of insolvency, right? Except for the following (If the debtor commits any of the following, he can be placed under involuntary liquidation). 1. So being a merchant/ placeman defaulted the payment of current obligation for at least 30 days. 2. Money under trust or fiduciary fails to return upon demand by the person who gave it to him. 3. Execution return unsatisfied. Creditor, naghanap ng property ng debtor. Walang nakita. Magaling masyado yung debtor nito. Hindi na- satisfy. What is your remedy? Petition for involuntary liquidation. Let him suffer the consequences, because it is very embarrassing for your assets to be dissolved and then proceeds upon payment of obligation. In HongKong, if you are declared insolvent, you cannot get a credit card. You cannot get a car financing slip. You have to travel, you have to commute. So that’s the very con sequences that go with being insolvent. Now in the Philippines, despite the FRIA, no debtor has gone to Court and asked the Court to be declared insolvent. Why? We have so much pride. Have you ever heard about a Filipino who has went to the Court and said, “ Court please declare me insolvent. I would like to be discharged of all my obligations.” There’s none right? Because we have so much pride. Kahit wala ka ng pera, panguutang mo yan, para maghanda ka, to pass the bar right??? Q: What does the liquidation order contain? A: Remember we said, what is the bottomline in case of voluntary/ involuntary liquidation? Issuance of the Court of a liquidation order. So that order amounts to a declaration that that debtor is insolvent, right? In case of juridical person, juridical existence is terminated, what happened to assets? So assets are transferred to liquidator, right? So no payment should be made except to the liquidator. No assets should be conveyed or encumbered. Because all assets should be collated and distributed to answer the claims of various creditors. Here is something new. All contracts of debtor are deemed terminated and/ or breached. So once the Court issues a liquidation order, all contracts entered into by debtor are deemed terminated/
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breached unless liquidated within 90 days from date of assumption of office, or declares otherwise and the contractive party agrees. So this is something new. Q: What about a mortgagee or a pledgee? What are the rights or remedies available to a mortgagor or pledgee in a liquidation scenario? A: He may foreclose the mortgage or the pledge but he has to wait 180 days from issuance of liquidation order. Q: Can he participate in the liquidation proceeding? A: If he wants to participate, he has to waive his lien arising from the mortgage/ pledge. But he cannot foreclose yet, he has to wait for 180 days. Q: Whom does the assignee insolvency liquidator represent? A: Debtor, the creditors, and the Court. Q: This one was asked under the old law. Under the old law, any action commence within 30 days prior to the commencement of insolvency liquidation deemed vacated. Now under FRIA, wala na yung 30-day period. Anytime, you attempt your property to be attached. Diba ang rule, if it is obtained within 30 days from filing the petition, it is deemed vacated. Ngayon, any attempt to place your property under attachment is an act of insolvency. Q: Is there a difference between mortgage and preference of credit? A: Mortgage is lien. Lien is superior over preference of credit. The mortgage is not bound by these rules on preference and concurrence of credit. Q: What would guide the liquidator in carrying the liquidation of an insolvent debtor? So liquidator submitted to the Court a liquidation plan. Now that plan contains the rules on concurrent and preference of credit. Once approved, the plan should be carried out to resolve the claims against the individual debtor. So that’s the end result. Remember our discussion in corpo on liquidation? Same concept. First place, identify the claims against the debtor. Second, ascertain these claims against the debtor. Third, determine which are valuable and which ones are not. Which one are enforceable and not enforceable. And then collate the assets of the debtor, convert the cash submitted and then from these cash or proceeds, pay on these claims based on rules of concurrence and preference of credit. Same rules applies.
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