FINANCIAL REHABILITATION REHABILITATION INSOLVENCY ACT OR 2010 (FRIA) — Hypothetic Example — Case of On the Brink Corporation (OBC) • OBC is registered with the SEC. It is a manufacturing company and well-established and well-known one. • However, as a manufacturing company, it has heavily invested in research and development because for manufacturers, the core of their business is how to develop and sell new innovative products to maintain the profit-motive of the company. • OBC’s newest products is a fuel saving device. When tested, it was shown that it can reduced fuel consumption by 60% when attached to the engine of the car. With this machine, OBC was able to obtain patents over the same. • The announcement of the new product was supported by various certifications attesting to the effectiveness of the new product itself. • Various accrediting private agencies have subjected the product to laboratory test in support of the claim of the OBC. • However, when OBC developed that product, it used most of its cash resources for said research and development. That’s why the company is suffering from cash flow or liquidity problems . • Therefore, it is having difficulty of meeting its debts and obligations. • Since it is no longer able to pay its obligations, it is facing threats of foreclosure and garnishment of its assets. That threat comes primarily from one of its major creditors, BANKABLE CREDIT, that has initiated to foreclose the new machineries or prototype which OBC used as security of its obligations. • The other creditors of the OBC are also threatening to proceed against its assets. • Usually, when facing a short fall in cash, the most likely immediate victims of said liquidity problems would be: (1) (1) work worker erss (2) supp supplie liers rs • There is potential for OBC to make millions of dollars by reason of that new product. However, the moment that any of the creditor proceed against its company assets, the chance of selling the new product in the market becomes difficult if not impossible at all. Options OBC can meet the creditors and: (c) ask for for more more time time to find a white knight investor • White Knight Investor — a natural or juridical person who agrees to bring in new money or capital to the company by way of loans or by way of new money exchange of stocks (d) convince convince the creditors creditors to to restructure restructure existing existing loans loans voluntarily voluntarily (conventional novation) novation) (e) invite invite them them to become become owner ownerss (debt-for-equity swap) swap)
(d) It must be approved approved by by creditors creditors holding at least least eighty-five eighty-five percent (85%) of the total liabilities, liabilities, secured and unsecured, of the debtor. If the OCRA is successful, the parties can also enter a so-called prenegotiated rehabilitation plan.
MODE 2: PRE-NEGOTIATED REHABILITATION PLAN Difference with OCRA
OCRA
PNRP
Creditors unanimity
while there is unanimity of the creditors in discussing or negotiating with the debtor, there are still separate contracts among them; The creditors are treated still as separate and distinct personalities dealing with the same debtor.
the unanimity of the various creditors also implies unanimity in purpose, that all of them will come up with a single plan in order to rehabilitate the debtor.
Outcome
several novated contracts or may lead to a Prenegotiated Rehabilitation Plan
only one rehabilitation plan which is binding upon all of the creditors
Minimum required creditor participation
67% secured 75% unsecured 85% total
50% secured 50% unsecured 2/3 of total
The ultimate objective of these extrajudicial remedies: • to come up with a restructured agreement; or • a unified rehabilitation plan Requirement for Pre-Negotiated Rehabilitation
- Approval or endorsement of creditors holding 2/3 of the total liabilities, which includes: • more than 50% of the total secured claims unsecured claims • more than 50% of the total unsecured
There are three classes of creditors under Preferences and Concurrence of Credits: (1) preferred preferred and secured secured creditors creditors over over specific specific assets - eg. BIR with respect to imported goods for which the custom duties were not paid Extrajudicial Remedies: OCRA and PNRP (2) preferred preferred and secured secured creditors creditors over over the mass of the the assets MODE 1: OCRA - eg. BIR with respect to unpaid income taxes When the company and its various creditors starts discussion, they are (3) ordinary ordinary and unsecured unsecured creditors creditors actually entering into an OCRA under the FRIA — Out of Court Rehabilitation Agreement (OCRA) or Informal Restructuring The reality is that the ordinary and unsecured creditors are likely to Agreement negotiate restructuring than secured because they don’t have preferences and so, they are the last ones to be paid. The ones who OCRA — OCRA — is an extrajudicial remedy whereby the debtor and its various are likely to be unwilling are the secured creditors. creditors agree to negotiate on various means or method by which to provide debt relief to the debtor. That’s why under the law, for the law and the court to recognize a PNRP or even an OCRA, there must be critical mass representing all Under the FRIA, the parties may go into an OCRA for as long as the kinds of creditors. following are met: Minimum Requirement of OCRA Illustration: (a) Th e debtor must agree agree to the out-of-court or informal Balance Sheet of the Debtor as of December 2017 shows: restructuring/workout agreement or Rehabilitation Plan; Total assets 100,000,000 (b) It must be approved approved by creditors creditors representing representing at least sixty-sev sixty-seven en Total liabilities 1,000,000,000 (67%) of the secured obligations obligations of the debtor; Insolvent by 900,000,000 (c) It must be approved approved by creditors creditors representing representing at least seventy-fiv seventy-fivee If the total liabilities is composed of: 500 M secured and 500 M obligations of the debtor; and percent (75%) of the unsecured obligations of unsecured
Secured (500M * 67%) Unsecured (550M * 75%)
335 million 375 million FRIA | Page 1 of 13
Total 710 million The liquidator appointed by the court will step in and take an active Since 710 M is only 71% of the total liabilities, it did not meet the role by gathering and preserving all assets (inventory) which includes minimum requirement of 85% for OCRA. Thus, the court will not assist filing of actions in order to recover property belonging to the debtor. the debtor. - During this period of gathering the assets, the liquidator will also conduct ex parte hearings to determine who among the creditors are Reason for the thresholds: entitled to be notified. - to make the OCRA less controversial and more representative of all stakeholders. Publication of the OCRA For an OCRA to bind not just the creditors who participated but all creditors, the law allows publication of the notice of the OCRA: We OtBC as well as creditors hereby give notice to all interested parties that we have began a out-of-court rehabilitation agreement, etc.
The creditor must show proof of its claim to the liquidator.
The liquidator will prepare the Schedule of Payment. The liquidator has the authority to determine who are the creditors entitled to payment and by how much.
Frequency of Publication: at least twice in a newspaper of general circulation in the Philippines Purpose of Notice: To invite all of them to the negotiating table so that any restructuring agreement can also be enforced upon them
Actual Payment
Final Dissolution of the Corporation
This is referred to as collective contracts. One of the principles of Economic Theory behind Liquidation contracts is that it is binding only between the parties. But in OCRA, it • Liquidation proceedings are founded on some broader economic becomes binding upon third persons because it is a collective theory because business exists in a highly competitive economy. contracts. • The hallmark of an uncompeti tive business is always insolvency. • The theory is that since the insolvent company is occupying a Outcome of the Negotiation, for example: precious and valuable space in that limited economy, being competitive, it must be removed in order to make space for a !trade creditors and suppliers continue to supply materials even if they agree to defer demands for payment competitive business. unsecured creditors agreed to convert loan to equity ! ! Bankable Credit, its biggest creditors, the one who has liens over Legal Theory the assets refuses to meet and is now threatening to pursue • Liquidation can only function effectively if it is regarded as a foreclosure proceedings collective process with an objective of ensuring transparent and predictable distribution of the debtor. What to do in that instance? — go to Mode 3 or Mode 4 • The objective of liquidation is to stop the business, pay creditors and MODE 3: COURT-SUPERVISED REHABILITATION ultimately extinguish the civil personality of the corporation. - may either be: CORPORATE REHABILITATION • voluntary petition — initiated by debtor involuntary petition — initiated by creditor However, not all corporation suffering from financial set back should • be liquidated. Therefore, for some companies, their financial set back MODE 4: LIQUIDATION may be temporary and therefore, liquidation may be a harsh remedy. voluntary liquidation (§90) — initiated by debtor That’s why an alternative under the FRIA is corporate rehabilitation. • • involuntary liquidation (§91)— initiated by creditor Similar to liquidation, corporate rehabilitation may be: Liquidation is a historical and traditional method of dealing with • voluntary petition — initiated by debtor • involuntary petition — initiated by creditor insolvency of corporation. Its objective is how to liquidate or convert its assets into cash in order to pay its various creditors and eventually Economic Theory terminate all commercial activities (stop engaging in business). Liquidation tends to be universal in application as well as in • Sometimes there are external factors so strong that the corporation are tied over without assistance and therefore, the corporation that concept. has a reasonable prospect of survival should be given an opportunity Timeline if it can be demonstrated that: - there is greater value and benefits for creditors in the longPetition for Liquidation filed in the special commercial court where term by maintaining the business and by keeping the essential the company has its principal office. of the business with other components one would be more cost-effective and efficient rather than liquidation. The court will issue an Order of Liquidation, which has three parts: 1. appointed liquidator — one who will oversee the conversion of the assets into cash and pay the various creditors 2. close the business of the corporation 3. terminate all corporate powers
Legal Justification (1) facilitate access to remedies that make rehabilitation feasible (2) sufficient protection to all creditors and stakeholders (3) structure proceeding for a court-supervised negotiation for a commercial plan known as rehabilitation plan (4) binds all creditors even if not all of them take part (5) it is a judicial supervision ensuring fair process for all parties
Order of Liquidation is published in a newspaper of general circulation in the Philippines. Who are considered part and parcel of the rehabilitation proceedings? - since it is collective in character, it pertains not just to the interest of the insolvent debtor, its directors and officers, its secured and unsecured creditors like employees, guarantors of debtor, the
FRIA | Page 2 of 13
Republic of the Philippines. All of them are required to participate in furtherance thereof, the State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The court-supervised rehabilitation proceedings. rehabilitation or liquidation shall be made with a view to ensure or Nature of Debt Relief Proceedings maintain certainly and predictability in commercial affairs, preserve - the court deciding who to pay, in what order and how much to pay and maximize the value of the assets of these debtors, recognize them creditor rights and respect priority of claims, and ensure equitable - the goal is always not necessarily equality but equity treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to facilities a speedy and Development of Philippine Laws and Rules on Corporate Insolvency or orderly liquidation of these debtor's assets and the settlement of their Rehabilitation (History) obligations. Act No. 9056 — Insolvency Law (1908) • - for a long time (hundred years), it was the only insolvency law Nature of Proceedings under FRIA (§3) until September 2010 • in rem - under this, failure to pay a debt of 1,000 pesos, creditors can sue - because it affects civil status of corporations - Notice by publication — jurisdiction over all persons affected by the debtor in court and place him under insolvency. - it also has voluntary or involuntary the proceedings shall be considered as acquired upon publication of the notice of the commencement of the • PD 902-A — SEC Charter - authorized the SEC to promulgate rules and regulations as may proceedings in any newspaper of general circulation in the be necessary to enforce its statutory authority Philippines - since it granted SEC with quasi-judicial powers, petitions for - NO summons insolvency or suspension of payments was placed under the • summary proceedings - evidence is allowed to be presented and received ex parte jurisdiction of the SEC • non-adversarial Petition for Insolvency vs. Suspension of Payments GR No. 183050 Insolvency Suspension of Payments - proceedings operate against the whole world and the orders issued by the rehab court are binding not only upon the parties who also known as Classic also known as Technical actively take part but even by those who don’t Insolvency Insolvency
- legal condition of the - legal condition of the debtor who has more liabilities than assets
-
debtor who has sufficient assets to pay for the liabilities except that the debtor cannot pay them as they fall due. it is a cash problem (liquidity problem)
- objective is to distribute - objective is how to defer the assets
payment to the creditors until such time it realizes enough cash, thus, reschedule the debts
Advent Capital - this is a petition for suspension of payments with corporate rehabilitation and then the court which started hearing thereon treated it as an adversarial proceeding, used the ordinary rules on civil procedure, meaning, every motion is heard and litigated which destroys the summary nature of the proceeding Wonder Book - as a remedy, rehabilitation is available only to a corporation who has assets which can generate more cash if used in its daily operations than when sold. - the liquidity issues can be best addressed by practicable business plan that will generate enough cash to sustain the daily operations - reha…goods
- SEC’s innovation was the rules on rehabilitation based on its COURT-SUPERVISED REHABILITATION experience with creditors requesting for restructuring under Debtor suspension of payments Who can be the subject of rehab proceedings? Included: (1) sole proprietorship duly registered with the DTI • Rules of Procedure on Corporate Recovery (2) partnership duly registered with the SEC - SEC tried to consolidate all rules, it came up with this rules of (3) corporation duly organized under Philippine law procedures (4) individual debtors who has become insolvent • Securities and Regulation Code - reorganize the SEC - remove the quasi-judicial powers of the SEC and tranferred it to special commercial courts • Interim Rules on Corporate Rehabilitation - as well as the UNCTRAL Model came into force with the FRIA • FRIA effective February 2010 - it lapsed into law by inaction of the President - it became applicable to all existing proceedings with the SEC unless the SC deems that its transfer will cause prejudice - those proceedings pending with the SEC, will be maintained by the SEC while the new cases will have to be filed with the special commercial court Policy of FRIA (§2) It is the policy of the State to encourage debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve and adjust competing claims and property rights. In
GOCCs and GFIs can be placed under the FRIA unless their charter provides otherwise A debtor under the FRIA may cover a whole group Group of debtors - shall refer to and can cover only: (5) corporations that are financially related to one another as parent corporations, subsidiaries or affiliates; (6) partnerships that are owned more than fifty percent (50%) by the same person; and (7) single proprietorships that are owned by the same person. When the petition covers a group of debtors, all reference under these rules to debtor shall include and apply to the group of debtors
- A group of debtors may jointly file a petition for rehabilitation when one or more of its members foresee the impossibility of meeting debts when they respectively fall due, and the financial distress would likely adversely affect the financial condition and/ FRIA | Page 3 of 13
-
or operations of the other members of the group and/or the participation of the other members of the group is essential. Piercing the veil applies
FRIA does NOT apply to the following entities even if they are suffering insolvency or financial distress Excluded: (1) Banks — because it is the BSP which determines how they should be rehabilitated (2) Insurance Companies — jurisdiction is with the IC (3) Pre-need Companies — jurisdiction is with the IC (4) National and local government agencies or units Creditor - refer to a natural or juridical person which has a claim against the debtor that arose on or before the commencement date.
(k) The specific relief sought pursuant to this Act; (l) The grounds upon which the petition is based; (m) Other information that may be required under this Act depending on the form of relief requested; (n) Schedule of the debtor's debts and liabilities including a list of creditors with their addresses, amounts of claims and collaterals, or securities, if any; (o) An inventory of all its assets including receivables and claims against third parties; (p) A Rehabilitation Plan; (q) The names of at least three (3) nominees to the position of rehabilitation receiver; and (r) Other documents required to be filed with the petition pursuant to this Act and the rules of procedure as may be promulgated by the Supreme Court.
Being minimum allegations, lack of one means failure to state a cause of action which warrants a motion to dismiss. This definition under the FRIA departs from the traditional definition of SC. In prior SC decision, a creditor is one who has a claim and that claim is limited to debts and demands pecuniary in Involuntary Petition for Corporate Rehabilitation - may be initiated by any creditor or group of creditors with a claim character or nature (money claim). of, or the aggregate of whose claims is: However, under the FRIA, the term “claim” has been expanded. • at least Php1,000,000.00; or • at least 25% of the subscribed capital stock or partners' Claim contributions, - shall refer to all claims or demands of whatever nature or whichever is HIGHER character against the debtor or its property, whether for money or otherwise, liquidated or unliquidated, fixed or contingent, Grounds: matured or unmatured, disputed or undisputed, including, but 1. there is no genuine issue of fact or law on the claim/s of the not limited to; petitioner/s, and that the due and demandable payments thereon (5) all claims of the government, whether national or local, have not been made for at least sixty (60) days or that the debtor including taxes, tariffs and customs duties; and has failed generally to meet its liabilities as they fall due; or (6) claims against directors and officers of the debtor arising 2. a creditor, other than the petitioner/s, has initiated foreclosure from acts done in the discharge of their functions falling proceedings against the debtor that will prevent the debtor from within the scope of their authority: Provided, That, this paying its debts as they become due or will render it insolvent. inclusion does not prohibit the creditors or third parties from filing cases against the directors and officers acting in Contents: their personal capacities. - petition for rehabilitation shall be verified to establish the substantial likelihood that the debtor may be rehabilitated The meaning of claim is important because it is amount those (f) identification of the debtor, its principal activities and its address; which are suspended. All claims are suspended during the (g) the circumstances sufficient to support a petition to initiate pendency of the rehabilitation proceedings. involuntary rehabilitation proceedings under Section 13 of this Act; Suspension of all claims means that it is neither allowed to be (h) the specific relief sought under this Act; collected nor paid. (i) a Rehabilitation Plan; (j) the names of at least three (3) nominees to the position of Eg. Commencement Order has been issued and has been effective. rehabilitation receiver; Under a promissory note, today is the maturity date. Can the creditor (k) other information that may be required under this Act depending demand payment? — no, because is a claim suspended on the form of relief requested; and (l) other documents required to be filed with the petition pursuant to Voluntary Petition for Corporate Rehabilitation this Act and the rules of procedure as may be promulgated by the - an insolvent debtor may initiate voluntary proceedings under this Supreme Court. Act by filing a petition for rehabilitation when approved (g) by a majority vote of the board of directors or trustees and Court Action on the Petitions (§15) (h) authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock Case title: In the Matter of the Petition for Corporate Rehabilitation of OtBC
Petition for Corporate Rehabilitation
5 days
sufficient in form and substance?
yes
Issuance of Commencement Order
If involuntary: Creditor vs. Debtor Minimum Allegations: 5 days yes no Please read the minimum allegations, although I assure you I will not ask you to enumerate it. Just be familiar with them. sufficient (i) Identification of the debtor, its principal activities and its Issuance of in form and addresses; Corrective Order substance? (j) Statement of the fact of and the cause of the debtor's insolvency or inability to pay its obligations as they become due; NOTE: The FRIA has blurred the lines between these two. It does not matter anymore. Rehabilitation is allowed Commencement Order - most controversial of the proceedings because it stops payment to for either. creditors FRIA | Page 4 of 13
Pryce Corporation v. CBC, GR No. 172302, February 18, 2014 Neither does the Interim Rules require a hearing before the issuance of a stay order. What it requires is an initial hearing before it can give due course to or dismiss a petition. Nevertheless, while the Interim Rules does not require the holding of a hearing before the issuance of a stay order, neither does it prohibit the holding of one. Thus, the trial court has ample discretion to call a hearing when it is not confident that the allegations in the petition are sufficient in form and substance, for so long as this hearing is held within the five (5)day period from the filing of the petition — the period within which a stay order may issue as provided in the Interim Rules.
(14) indicate the location or locations at which documents regarding the debtor and the proceedings under Act may be reviewed and copied; (15) state that any creditor or debtor who is not the petitioner, may submit the name or nominate any other qualified person to the position of rehabilitation receiver at least five (5) days before the initial hearing; (16) include s Stay or Suspension Order
Effects of the Commencement Order (§17) 1. vest the rehabilitation receiver with all the powers and functions provided for this Act, such as the right to review and obtain records Contents of Commencement Order to which the debtor's management and directors have access, (1) identify the debtor, its principal business or activity/ies and its including bank accounts or whatever nature of the debtor subject principal place of business; to the approval by the court of the performance bond filed by the (2) summarize the ground/s for initiating the proceedings; rehabilitation receiver; (3) state the relief sought under this Act and any requirement or NOTE: procedure particular to the relief sought; The rehab receiver is not considered as the trustee of the (4) state the legal effects of the Commencement Order, including assets of the corporation and thus acquire legal title over said those mentioned in Section 17 hereof; property. (5) declare that the debtor is under rehabilitation;\direct the publication of the Commencement Order in a newspaper of 2. prohibit or otherwise serve as the legal basis rendering null and general circulation in the Philippines once a week for at least two void the results of any extrajudicial activity or process to seize (2) consecutive weeks, with the first publication to be made within property, sell encumbered property, or otherwise attempt to seven (7) days from the time of its issuance; collection or enforce a claim against the debtor after (6) If the petitioner is the debtor direct the service by personal commencement date unless otherwise allowed in this Act, subject delivery of a copy of the petition on each creditor holding at least to the provisions of Section 50 hereof; ten percent (10%) of the total liabilities of the debtor as NOTE: determined from the schedule attached to the petition within five It is sufficient basis for nullifying all contracts entered into or (5) days; if the petitioner/s is/are creditor/s, direct the service by activities extrajudicially made that have the effect of personal delivery of a copy of the petition on the debtor within defrauding the creditors. (rescissible contracts) five (5) days; (7) appoint a rehabilitation receiver who may or not be from among 3. serve as the legal basis for rendering null and void any setoff after the nominees of the petitioner/s and who shall exercise such the commencement date of any debt owed to the debtor by any of powers and duties defined in this Act as well as the procedural the debtor's creditors;\serve as the legal basis for rendering null and void the perfection of any lien against the debtor's property rules that the Supreme Court will promulgate; (8) summarize the requirements and deadlines for creditors to after the commencement date; and establish their claims against the debtor and direct all creditors to NOTE: their claims with the court at least five (5) days before the initial Because contracts made after commencement date are hearing; deemed fraudulent transactions. (9) direct Bureau of internal Revenue (BIR) to file and serve on the debtor its comment on or opposition to the petition or its claim/s 4. consolidate the resolution of all legal proceedings by and against against the debtor under such procedures as the Supreme Court the debtor to the court Provided. However, That the court may provide; allow the continuation of cases on other courts where the debtor (10) prohibit the debtor's suppliers of goods or services from had initiated the suit. withholding the supply of goods and services in the ordinary course of business for as long as the debtor makes payments for Illustrations the services or goods supplied after the issuance of the The commencement order took effect after publication on Commencement Order; December 15, 2017. NOTE: On December 18, 2017, a creditor demands payment that matures The effect of the Order is: all claims are suspended . on that day. Should the corporation pay? EXCEPT: suppliers of goods and services because they are not - no, because it is suspended, unless it is an administrative in danger of not getting paid because these are considered administrative expenses expense On December 20, 2017, there is a foreclosure proceeding that has (11) authorize the payment of administrative expenses as they become been already scheduled by the sheriff due; Should the foreclosure proceeding continue? - no, because it is stopped. NOTE: Administrative expenses — those incurred in the ordinary On the same day December 20, the corporation wants to make course of business voluntary payment to its creditor bank. Thus, debtor is allowed to pay its suppliers, its lessor for rent, Is the payment allowed? - no, because it is stopped. etc., but he cannot pay a promissory note The same bank wants to setoff the bank deposit of the debtor (12) set the case for initial hearing , which shall not be more than forty against the outstanding loan. Is the setoff allowed? (40) days from the date of filing of the petition for the purpose of - no, because it is stopped. determining whether there is substantial likelihood for the debtor to be rehabilitated; As of December 20, there were 7 cases pending in different courts (13) make available copies of the petition and rehabilitation plan for in the Philippines against the corporation. What happens to those pending cases? examination and copying by any interested party; - they are suspended
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- the trial judges cannot continue hearing because the purpose (e) to the actions of a licensed broker or dealer to sell pledged of the FRIA is to consolidate all the proceedings in one and securities of a debtor pursuant to a securities pledge or margin the same court — the special commercial court agreement for the settlement of securities transactions in - but that does not mean that the action for quasi-delict, accordance with the provisions of the Securities Regulation Code action for breach of contract, recovery of property will be and its implementing rules and regulations; decided on the merits by the special commercial court; it will just reserve the amount claim just in case the debtor is (f) the clearing and settlement of financial transactions through the adjudged to be liable in those pending cases later on facilities of a clearing agency or similar entities duly authorized, - the only purpose is to include claims in the rehab registered and/or recognized by the appropriate regulatory agency proceedings because the special commercial court does not like the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as have the capacity to decide those action based on the merits. any form of actions of such agencies or entities to reimburse themselves for any transactions settled for the debtor; and Effects of Suspension or Stay Order (a) suspend all actions or proceedings, in court or otherwise, for the (g) any criminal action against individual debtor or owner, partner, enforcement of claims against the debtor; director or officer of a debtor shall not be affected by any (b) suspend all actions to enforce any judgment, attachment or other proceeding commend under this Act. provisional remedies against the debtor; (thus, NO execution sale) NOTE: (c) prohibit the debtor from selling, encumbering, transferring or Criminal cases are not covered by FRIA. disposing in any manner any of its properties except in the ordinary course of business; and Panlilio v. RTC (d) prohibit the debtor from making any payment of its liabilities FACTS: Prior to the filing of the Petition for rehabilitation, outstanding as of the commencement date except as may be Silahis Hotel was already suffering from business losses provided herein. but the businesses were still maintained. However, it does not remit the SSS contribution it has withheld from Exception to the Stay Order its employees for more than 10 years which is a (a) to cases already pending appeal in the Supreme Court as of criminal violation under SSS Law. Thus, criminal cases commencement date were filed against all of the directors. While the criminal Provided, That any final and executory judgment arising from case was pending, the company went to corporate such appeal shall be referred to the court for appropriate rehabilitation. The directors now raised a prejudicial action; question — that the criminal case should be suspended because there is a pending criminal case. NOTE: ISSUE: Would a corporate rehabilitation proceeding constitutea The execution of the final judgment will be referred to or prejudicial question for criminal case for violation of remanded to the court a quo for enforcement. Such the SSS Law enforcement is stopped because it is covered by the rehab SC:No. proceedings. • SSS Law is malum prohibitum and by express provision of the FRIA, criminal cases are excluded. (b) subject to the discretion of the court, to cases pending or filed at • The rehabilitation of SIHI and the settlement of claims against a specialized court or quasi-judicial agency which, upon the corporation is not a legal ground for the extinction of determination by the court is capable of resolving the claim more petitioners’ criminal liabilities. quickly, fairly and efficiently than the court: • The prosecution of the officers of the corporation has no Provided, That any final and executory judgment of such court bearing on the pending rehabilitation of the corporation, or agency shall be referred to the court and shall be treated as especially since they are charged in their individual a non-disputed claim; capacities. • Such being the case, the purpose of the law for the issuance NOTE: of the stay order is not compromised, since the appointed Meaning, if it is filed or is pending with a quasi-judicial body, rehabilitation receiver can still fully discharge his functions as it is automatically STOPPED, UNLESS the special commercial mandated by law. court WAIVES its authority Other Legal Effects(§19, §20) (c) to the enforcement of claims against sureties and other persons • Waiver of taxes and Fees Due to the National Government and to solidarily liable with the debtor, and third party or Local Government Units accommodation mortgagors as well as issuers of letters of credit, - Upon issuance of the Commencement Order by the court, and Unless the property subject of the third party or until the approval of the Rehabilitation Plan or dismissal of the accommodation mortgage is necessary for the rehabilitation of petition, whichever is earlier, the imposition of all taxes and fees the debtor as determined by the court upon recommendation including penalties, interests and charges thereof due to the by the rehabilitation receiver; national government or to LGUs shall be considered waived, in furtherance of the objectives of rehabilitation. Illustration: - it is as if they have a tax holiday A creditor of a loan is secured by a real estate mortgage and • Application of Stay or Suspension Order to Government Financial guaranty. During the effectivity of the commencement order, Institutions. he cannot file for an action for collection for sum of money, he - it is also applicable to government financial institutions, cannot also foreclose the mortgage for nonpayment. notwithstanding provisions in their charters or other laws to the Thus, his remedy is: SUE THE GUARANTOR because it is a contrary. claim against the guarantor and not the corporation. Effectivity and Duration of Commencement Order (§21) (d) to any form of action of customers or clients of a securities market - effective for the duration of the rehabilitation proceedings for as participant to recover or otherwise claim moneys and securities long as there is a substantial likelihood that the debtor will be entrusted to the latter in the ordinary course of the latter's business successfully rehabilitated. as well as any action of such securities market participant or the appropriate regulatory agency or self-regulatory organization to pay or settle such claims or liabilities;
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NOTE: When asked: when a petition for rehab should be filed? Buzz word: FOR AS LONG AS SUBSTANTIAL LIKELIHOOD that the debtor will be rehabilitated. It is NOT certainty but mere LIKELIHOOD that is enough
TIMELINE Filing of Petition
5 days
Substantial Likelihood means: (1) there are sufficient assets with/which to rehabilitate the debtor; (2) there is sufficient cash flow to maintain the operations of the debtor; (3) the debtor's, partners, stockholders, directors and officers have been acting in good faith and which due diligence; (4) the petition is not s sham filing intended only to delay the enforcement of the rights of the creditor's or of any group of creditors; and (5) the debtor would likely be able to pursue a viable Rehabilitation Plan; Report of the Rehabilitation Receiver (§24) - Within forty (40) days from the initial hearing and with or without the comments of the creditors or any of them, the rehabilitation receiver shall submit a report to the court stating his preliminary findings and recommendations on whether : (a) the debtor is insolvent and if so, the causes thereof and any unlawful or irregular act or acts committed by the owner/s of a sole proprietorship partners of a partnership or directors or officers of a corporation in contemplation of the insolvency of the debtor or which may have contributed to the insolvency of the debtor; (b) the underlying assumptions, the financial goals and the procedures to accomplish such goals as stated in the petitioner's Rehabilitation Plan are realistic, feasible and reasonable; (c) there is a substantial likelihood for the debtor to be successfully rehabilitated; (d) the petition should be dismissed ; and (e) the debtor should be dissolved and/or liquidated . Soichi Fishery v. BPI, GR No. 193872, October 19, 2011 - the initial hearing took 11 years - Thus, the case was remanded back to the rehab court stating that each and every incident should not be heard but can be addressed by the rehab receiver. Possible Outcomes on the Petition Give due course 1. the debtor is insolvent; AND 2. there is a (clear showing or prima facia) substantial likelihood for the debtor to be successfully rehabilitated;
Dismiss 1.debtor is NOT insolvent; OR 2.the petition is a sham filing intended only to delay the enforcement of the rights of the creditor/s or of any group of creditors; OR 3.the petition, the Rehabilitation Plan and the attachments thereto contain any materially false or misleading statements; OR 4.the debtor has committed acts of misrepresentation or in fraud of its creditor/s or a group of creditors;
Issuance of Commencement Order and Appointment of Receiver
Publication of the Commencement Order
Filing of Notice of Claims by Creditors
Initial Hearing (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 of the appointment of the rehabilitation receiver and, if necessary appoint a new one in accordance with this Act; (c) direct the creditors 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 of not more than twenty (20) days; and (d) direct the rehabilitation receiver to evaluate the financial condition of the debtor and to prepare and submit to the court within forty (40) days from initial hearing the report
40 days
Receiver’s Report
Dismiss
Give Due Course
Liquidation
Convert to Liquidation 1. the debtor is insolvent; AND 2. there is NO substantial likelihood for the debtor to be successfully rehabilitated;
90 days " if there is dispute ADR
Submission of Revised Rehabilitation Plan
Implementation
Rehabilitation Receiver and Management Committee Displacement of Existing Management by the Rehabilitation Receiver or Management Committee - Even if the petition is pending, the business is still open. So, the Board of Directors continues discharging their functions. Unless the rehab court changes them or replaces them with a management committee. If there is a management committee, that means the board of directors are suspended. Thus, it may either be: • Board of Directors and Rehab Receiver; or • Management Committee and Rehab Receiver FRIA | Page 7 of 13
• Grounds: 1. Actual or imminent danger of dissipation, loss, wastage or destruction of the debtor’s assets or other properties; 2. Paralyzation of the business operations of the debtor; or 3. Gross mismanagement of the debtor or fraud or other wrongful conduct on the part of, or gross or willful violation of FRIA by existing management of the debtor or the owner, partner, director, officer or representative/s in management of the debtor. Management Committee - When appointed, it shall take the place of the management and the governing body of the debtor and assume their rights and responsibilities.
- NO hearing is required for the creation of the managment committee Rehabilitation Receiver Who May Serve as a Rehabilitation Receiver - Any qualified natural or juridical person Qualifications 1. A citizen of the Philippines or a resident of the Philippines in the six (6) months immediately preceding his nomination; 2. Of good moral character and with acknowledged integrity, impartiality and independence; 3. Has the requisite knowledge of insolvency and other relevant commercial laws, rules and procedures, as well as the relevant training and/or experience that may be necessary to enable him to properly discharge the duties and obligations of a rehabilitation receiver; and 4. Has no conflict of interest : Provided, That such conflict of interest may be waived, expressly or impliedly, by a party who may be prejudiced thereby.
Note: Anyone may petition the rehab court of said disqualification. If any of these grounds are found to be present by the court, then the rehab receiver will be required to recuse himself.
- An individual shall be deemed to have a conflict of interest if he is -
so situated as to be materially influenced in the exercise of his judgment for or against any party to the proceedings An individual shall be deemed to have a conflict of interest if: 1. he is a creditor, owner, partner or stockholder of the debtor; 2. he is engaged in a line of business which competes with that of the debtor; 3. he is, or was, within five (5) years from the filing of the petition, a director, officer, owner, partner or employee of the debtor or any of the creditors, or the auditor or accountant of the debtor; 4. he is, or was, within two (2) years from the filing of the petition, an underwriter of the outstanding securities of the debtor; 5. he is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owners of a sole proprietorship-debtor, partners of a partnership- debtor or to any stockholder, director, officer, employee or underwrite r of a corporation-debtor; or 6. he has any other direct or indirect material interest in the debtor or any of the creditors.
Creditor’s Committee (§42, §43) During rehab proceedings, in order to facilitate the negotiation to be paid by the rehab receiver with the various stakeholders, the court through the rehab receiver may require that the Creditor’s Committee be created. For example, if the debtor is obligated currently to about 10,000 creditors, it would be difficult to the rehab receiver to talk to each of them individually. What can be done to facilitate negotiation and discussion would be to create creditor’s committees.
Creditor’s committees might form themselves together by reason of kind or class: Other qualifications and disqualification’s of the rehabilitation (a) Secured creditors; receiver shall be set forth in procedural rules, taking into (b) Unsecured creditors; consideration the nature of the business of the debtor and the (c) Trade creditors and suppliers; and need to protect the interest of all stakeholders concerned. (d) Employees of the debtor.
Compensation Service Note: Even if the corporation is insolvent, the appointed rehabilitation receiver is still entitled to compensation which is considered an administrative expense.
The rehab receiver is required to conduct discussions or meetings with these committees or groups in order to obtain their sentiments or their inputs in the drafting of the rehabilitation.
Determination of Claims (§§ 44-46) In the determination of claims (debts owed by the company), the law The rehabilitation receiver and his direct employees or required to establish a Preliminary Registry of Claims — a list of independent contractors shall be entitled to compensation for creditors, the amount of debts, and their due dates. reasonable fees and expenses from the debtor according to the terms approved by the court after notice and hearing. Prior to such Note: Even if a creditor does not directly participate in the hearing, the rehabilitation receiver and his direct employees shall proceedings, for as long as there’s proof of the obligation in be entitled to reasonable compensation based on quantum favor of that creditor, that claim should be included in the meruit. Such costs shall be considered administrative expenses. registry. Determination of claims must be done within 30 days from the time
- he must be capable of the exercise independent judgment and must that a report is submitted to rehab court.
not represent any particular interest —that is always a balancing act This is a provision (Stay Order) in the FRIA that was exploited in on the part of any of receiver who may be appointed to that position. the case of Express Investment v. BayanTel, one of the famous rehab proceedings which reached the SC. Conflict of Interest (§40) - ground for disqualification Treatment of Secured Creditors (§§60-61) - overriding consideration: able to exercise independent judgment No Diminution of Secured Creditor Rights. - The issuance of the Commencement Order and the Suspension or Stay Order, and any other provision of this Act, shall not be deemed Covered: Rehab receiver in any way to diminish or impair the security or lien of a secured • any member of the management committee creditor, or the value of his lien or sec urity , • " except that his right to enforce said security or lien may be persons employed by the rehab receiver or management • committee suspended during the term of the Stay Order.
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- The court, upon motion or recommendation of the rehabilitation just in case, basahin nyo na lang. I will not ask any for your quiz of receiver, may allow a secured creditor to enforce his security or lien, or foreclose upon property of the debtor securing his/its claim, if the said property is not necessary for the rehabilitation of the debtor. The secured creditor and/or the other lien holders shall be admitted to the rehabilitation proceedings only for the balance of his claim, if any. Discussion: - secured creditors are the most difficult to negotiate with. - that’s why, in order to remove the possible fears of the unsecured creditors, the law requires that as much as practicable, the securities that they currently have must be maintained. If there is any impairment to those securities, then a replenishment must be done at the instance of the rehab receiver. - eg. you are a creditor who lent 1 billion pesos worth of debts, so your securities are in the form of Real Estate Mortgages, and those Real Estate Mortgages consist land, buildings on land. But because of the length of time between the principal obligation was created up to the time the rehab proceedings was instituted, these properties depreciate in value, thus, depreciating as well the securities of the secured creditor. The 1 billion security will no longer the same value after 10 or 15 years. Under the law as written, eg, the value decreased to 600 million, the rehab receiver is required to find ways and means by which to replenish the depreciation. Thus, he must find other assets to fulfill the difference of 400 million.
- The operative word or phrase in this provision is “as much
as practicable” meaning they can maintain their means and securities as much as practicable. Lack of Adequate Protection. - The court, on motion or motu proprio, may terminate, modify or set conditions for the continuance of suspension of payment, or relieve a claim from the coverage thereof, upon showing that: (b) a creditor does not have adequate protection over property securing its claim; or (c) the value of a claim secured by a lien on property which is not necessary for rehabilitation of the debtor exceeds the fair market value of the said property .
- A creditor shall be deemed to lack adequate protection if it can be shown that: (d) the debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured; (e) the debtor fails or refuses to take commercially reasonable steps to maintain the property; or (f) the property has depreciated to an extent that the creditor is under secured.
- Upon showing of a lack of protection, the court shall order the debtor or the rehabilitation receiver: • to make arrangements to provide for the insurance or maintenance of the property; or • to make payments or otherwise provide additional or replacement security such that the obligation is fully secured.
- If such arrangements are not feasible, the court may modify the Stay Order to allow the secured creditor lacking adequate protection to enforce its security claim against the debtor: Provided, however, That the court may deny the creditor the remedies in this paragraph if the property subject of the enforcement is required for the rehabilitation of the debtor. When there’s showing that they lack adequate protection, then the court may intervene by providing them with additional. The above are the remedies. You don’t have to read this because this is really technical and I doubt if this would be ask in the bar exam. But
final exams.
Rehabilitation Plan The heart of every court-supervised rehabilitation proceedings is the Rehabilitation Plan because it provides the ways and means by which the debtor may be released or relieved from the current obligations and claims of the creditors. Remember while a rehabilitation proceedings is going-on in court, the business of the debtor is still open. That’s why, while that business is being maintained, there are mechanisms by which the various creditors are ordered for purposes of payment. That’s why a viable or feasible rehabilitation plan must contain: Contents of a Rehabilitation Plan (a) specify the underlying assumptions, the financial goals and the procedures proposed to accomplish such goals; - eg. If new money is brought it to enable it to manufacture and produce that fuel-saving device then it stands to be able to revive itself through sales and subsequent profit. (b) compare the amounts expected to be received by the creditors under the Rehabilitation Plan with those that they will receive if liquidation ensues within the next one hundred twenty (120) days; - Is it better to just close the business and distribute the assets or would it be better for the creditors to maintain the business as a going concern and then when cash enters the company, creditors will be paid gradually (c) contain information sufficient to give the various classes of creditors a reasonable basis for determining whether supporting the Plan is in their financial interest when compared to the immediate liquidation of the debtor, including any reduction of principal interest and penalties payable to the creditors; (d) establish classes of voting creditor s; (e) establish subclasses of voting creditors if prior approval has been granted by the court; (f) indicate how the insolvent debtor will be rehabilitated including, but not limited to, debt forgiveness, debt rescheduling, reorganization or quasi-reorganization. dacion en pago, debt-equity conversion and sale of the business (or parts of it) as a going concern, or setting-up of a new business entity or other similar arrangements as may be necessary to restore the financial well-being and visibility of the insolvent debtor; (g) specify the treatment of each class or subclass described in subsections (d) and (e); (h) provide for equal treatment of all claims within the same class or subclass (PARI PASSU), unless a particular creditor voluntarily agrees to less favorable treatment; (i) ensure that the payments made under the plan follow the priority established under the provisions of the Civil Code on concurrence and preference of credits and other applicable laws; (j) maintain the security interest of secured creditors and preserve the liquidation value of the security unless such has been waived or modified voluntarily; (k) disclose all payments to creditors for pre-commencement debts made during the proceedings and the justifications thereof; (l) describe the disputed claims and the provisioning of funds to account for appropriate payments should the claim be ruled valid or its amount adjusted;
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(m) identify the debtor's role in the implementation of the Plan;
When presented for approval by the creditors. > If they approve it — implementation of the rehab plan (n) state any rehabilitation covenants of the debtor, the breach of > If they approve but there are objections — the court will conduct which shall be considered a material breach of the Plan; hearing on the objection (hearings which are not required since it is a summary proceedings) > implementation (o) identify those responsible for the future management of the > if they reject > the court will conduct hearing on the objection> debtor and the supervision and implementation of the Plan, > if objections are valid > liquidation their affiliation with the debtor and their remuneration; > If objections are not valid > cramdown authority > implementation (p) address the treatment of claims arising after the confirmation of the Rehabilitation Plan; The Implementation is still court supervised. (q) require the debtor and its counter-parties to adhere to the terms If upon presentation to the creditors, they reject it and the objections of all contracts that the debtor has chosen to confirm; are found to be valid, then the court can motu proprio convert the rehab proceedings to liquidation proceedings. (r) arrange for the payment of all outstanding administrative expenses as a condition to the Plan's approval unless such On the other hand, even if a creditor or a group of creditors reject the condition has been waived in writing by the creditors rehab plan that was written or crafted by the rehab receiver, the court concerned; may use its CRAMDOWN authority and order that the rehab plan be implemented despite objection. (s) arrange for the payment" of all outstanding taxes and assessments, or an adjusted amount pursuant to a compromise Examples of invalid objections: - dilatory settlement with the BlR Or other applicable tax authorities; - without basis (t) include a certified copy of a certificate of tax clearance or - purely speculative in character evidence of a compromise settlement with the BIR; When can the court its CRAMDOWN authority? (u) include a valid and binding, solution of a meeting of the - despite objections, the debtor complies with all the requirements of debtor's stockholders to increase the shares by the required the FRIA amount in cases where the Plan contemplates an additional - when the rehab receiver acting in good faith recommends issuance of shares by the debtor; confirmation by the court - the shareholders or partners of the debtor lose at least their (v) state the compensation and status, if any, of the rehabilitation controlling interest (eg. BayanTel Case where the Lopez family yield receiver after the approval of the Plan; and their controlling interest to creditors) (w) contain provisions for conciliation and/or mediation as a When to deny the remedy of Rehabilitation? prerequisite to court assistance or intervention in the event of - The remedy of rehabiliation should be denied to corporations whose any disagreement in the interpretation or implementation of the insolvency appears to be irreversible and whose sole purpose is to Rehabilitation Plan. delay the enforcement of any of the rights of the creditors, which is rendered obvious by the following: Consultation with Debtor and Creditors (§63) (g) the absence of a sound and workable business plan; If the court gives due course to the petition, the rehabilitation (h) baseless and unexplained assumptions, targets and goals; receiver shall confer with the debtor and all the classes of creditors, (i) speculative capital infusion or complete lack thereof for the and may consider their views and proposals and shall the review, execution of the business plan; revision or preparation of a new Rehabilitation Plan. (j) cash flow cannot sustain daily operations; and (k) negative net worth and the assets are near full depreciation or Note: If the Rehabilitation Plan is to be enforced, it has to have the fully depreciated. (Wonder Book v. PBCom, GR No. 187316, cooperation of all stakeholders, not just debtor but also all July 16, 2012) creditors. Meaning, they must treat the rehabilitation plan as a - If despite all attempts of rehabilitation, insolvency appears to be the common agreement among all of them. logical outcome and therefore, the business should be closed, then Creditor’s Approval of Rehabilitation Plan (§64) rehabilitation should be denied The correct term is that the rehabilitation plan is: - APPROVED by CREDITORS and eg. Uniwide, a retailer engaged in property develpment, is the - CONFIRMED by the COURT company won the bid 30 or 40 years ago for the rehabilitation of the Baguio City Market. But after the trading stock market fall during the The rehabilitation receiver shall notify the creditors and stakeholders Asian Financial Crisis, Uniwide went to severe debt. It filed a petition • that the Plan is ready for their examination. for corporate rehabilitation with the SEC. About 4 or 5 years ago, the SEC realized that it cannot be anymore be rehabilitated. So for all Within 20 days from the said notification, the rehabilitation receiver those years, the creditors of Uniwide cannot collect because it is going • shall convene the creditors, either as a whole or per class, for under rehabiliation. That’s why it was favorable that FRIA was passed purposes of voting on the approval of the Plan. because under the old law, there is no period to observe a rehabiliation proceedings. In the case of FRIA, the rehabilitation Timeline: proceedings shall only be for a maximum of 1 year. Remember, in the Filing of Petition > Commencement Order > Submission of Initial Draft case of Uniwide, the creditors cannot collect for 30 plus years and in of Rehab Plan > Meetings will be conducted with creditors (w/in 90 the same period, the interests do not run. It is only when the SEC days) > converted the proceedings to liquidation that the creditors will be able > if there are disputes, the court, thru the rehab receiver is to collect. allowed to resort to various ADRs — to minimize, if not totally eliminate objections Sole Grounds for Objection of the Rehabilitation Plan (§66) > If there are no disputes, present the rehabilitation plan to the - there are the only tenable grounds: creditors for approval 5. The creditors' support was induced by fraud ;
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6. The documents or data relied upon in the Rehabilitation Plan are materially false or misleading ; or Effects of Confirmation of the Rehab Plan 7. The Rehabilitation Plan is in fact not supported by the voting (a) The Rehabilitation Plan and its provisions shall be binding upon the debtor and all persons who may be affected by . it, including the creditors. creditors, whether or not such persons have participated in the proceedings or opposed the Rehabilitation Plan or whether or not Hearing on those Objections (§67) their claims have been scheduled; - As much as possible, hear those objections. (b) The debtor shall comply with the provisions of the Rehabilitation Plan and shall take all actions necessary to carry out the Plan; Confirmation of the Rehabilitation Plan (§68) - The ultimate outcome is confirmation of the rehab plan if the court (c) Payments shall be made to the creditors in accordance with the provisions of the Rehabilitation Plan; is convince if the company may still be rehabilitated and that its (d) Contracts and other arrangements between the debtor and its business may still result to solvency and wealth. creditors shall be interpreted as continuing to apply to the extent that they do not conflict with the provisions of the Rehabilitation • If no objections are filed within the relevant period or, if objections are filed, the court finds them lacking in merit, or determines that the Plan; - if duly confirmed, the rehab is considered a continuing basis for the objection has been cured, or determines that the debtor has complied with an order to cure the objection, the court shall contract among all them until fully executed. issue an order confirming the Rehabilitation Plan. (e) Any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on creditors regardless of whether or not the Plan is successfully implement; and • The court may confirm the Rehabilitation Plan notwithstanding unresolved disputes over claims if the Rehabilitation Plan has made (f) Claims arising after approval of the Plan that are otherwise not adequate provisions for paying such claims. treated by the Plan are not subject to any Suspension Order. • For the avoidance of doubt, the provisions of other laws to the Rehabilitation Plan, defined (§4ii) contrary notwithstanding, the court shall have the power to approve - refer to a plan by which the financial well-being and viability of an or implement the Rehabilitation Plan despite the lack of approval, insolvent debtor can be restored using various means including, but or objection from the owners, partners or stockholders of the not limited to: insolvent debtor: Provided, That the terms thereof are necessary to • debt forgiveness (condonation or remission of debt), restore the financial well-being and viability of the insolvent debtor. • debt rescheduling (novation), • reorganization or quasi-reorganization, Termination of Rehabilitation Proceedings • dacion en pago, How will the court-supervised rehabilitation proceedings e nd? • debt-equity conversion and - either: • sale of the business (or parts of it) as a going concern, or • by successful implementation of the rehabilitation plan; or • setting-up of new business entity as prescribed in Section 62 hereof, or • by failure of rehabiliation • other similar arrangements as may be approved by the court or A. Failure of Rehabilitation creditors. - there is failure of the rehabilitation when there is a rehabilitation plan but despite best effort to comply with it, the business does not eg. There is one company that when rehabilitation and part of the thrive, does not prosper or continues to bleed money, etc., rehabilitation plan included reorganization because it had 48 vicetherefore, proceed to liquidation. presidents, all of them earning about 300-500 thousand a month. - the court must dismiss the petition The 48 vice presidents were managing 6,000 employees. So, in the - instances: rehabilitation plan, this was cut into 3 vice-presidents only. (a) Dismissal of the petition by the court; (b) The debtor fails to submit a Rehabilitation Plan; Cramdown, defined (c) Under the Rehabilitation Plan submitted by the debtor, there - a restructuring of debt that creditors are required to accept as party is no substantial likelihood that the debtor can be to the bankruptcy rehabilitated within a reasonable period; (d) The Rehabilitation Plan or its amendment is approved by CONTROVERSIAL CASES the court but in the implementation thereof, the debtor fails Pacific Wide Realty and Development Corporation (PWRDC) v. to perform its obligations thereunder or there is a failure to Puerto Azul Land, Inc. (PALI) GR No. 178768, November 25, realize the objectives, targets or goals set forth therein, 2009 including the timelines and conditions for the settlement of • The rehabilitation plan was offered for approval by the rehabilitation the obligations due to the creditors and other claimants; receiver to the creditors. Various creditors committees or groups met (e) The commission of fraud in securing the approval of the together and found that the provisions of the rehabilitation plan were Rehabilitation Plan or its amendment; and to onerous for them to accept. Puerto Azul is the company (f) Other analogous circumstances as may be defined by the undergoing. Pacific Wide is one of its biggest creditors. Puerto Azul rules of procedure. is a domestic company that is engaged in luxury resort business. It belongs to the same family with Sulo Hotel or Silahis Hotel. North Bulacan is one of the creditors of a cement company that was a • The rehabilitation plan is contested on the ground that the same is subject of a rehabilitation proceeding. The rehab court probably unreasonable and results in the impairment of the obligations of applied the usual rules on civil actions. Rehab proceedings are always contract. considered in rem, adversarial but summary. The judge in this case of • PWRDC contests the following stipulations in PALI’s rehabilitation North Bulacan v. PBCom, sets each motion filed by the creditors for plan: - fifty percent (50%) haircut or debt reduction of the principal hearing and litigation. So, from the time the petition for rehabilitation was filed up to the time that it reached the SC only to be remanded obligation; - condonation of the accrued and substantial interests and penalty back was already 10 years. So, there was no outcome, no rehabilitation plan. Eventually the court terminated the rehabilitation. charges; (Condonation is an act of donation which is ordinarily voluntary; however, this is not the case in rehabilitation) - repayment over a period of ten years, with minimal interest of B. Successful - no purpose for the rehabilitation plan anymore and everything will two percent (2%) for the first five years and five percent (5%) for be back to normal operation for the company the next five years until fully paid, and only upon availability of - no more court supervision FRIA | Page 11 of 13
cash flow for debt service. (At that time the prevailing rate was 18-24% and the legal rate was 12%) Note: this are debts that have matured and pending in various courts for 10-20 years and yet in the rehabilitation plan a 10 year period is yet to be imposed.
corporation to its former position of successful operation and liquidity. • The purpose of rehabilitation proceedings is precisely to enable the company to gain a new lease on life and thereby allow creditors to be paid their claims from its earnings. • The Rehabilitation Court held that "the creditors of Bayantel, whether secured or unsecured, should be treated equally and on the same footing or pari passu until the rehabilitation proceedings is terminated in accordance with the Interim Rules.” - this is the controversial part — the PARI PASSU Order in the Rehabilitation Plan
SC: • We find nothing onerous in the terms of PALI’s rehabilitation plan. The Interim Rules on Corporate Rehabilitation provides for means of execution of the rehabilitation plan, which may include , among others, the conversion of the debts or any portion thereof to equity, Pari Passu restructuring of the debts , dacion en pago, or sale of assets or of the - principle of equality in equity - it means that all creditors shall be treated alike controlling interest. • The restructuring of the debts of PALI is part and parcel of its - all the creditors should stand on equal footing rehabilitation. Moreover, per findings of fact of the RTC and as - Not anyone of them should be given any preference by paying one affirmed by the CA, the restructuring of the debts of PALI would not or some of them ahead of the others be prejudicial to the interest of PWRDC as a secured creditor Comment: What the court did not clarify in pari passu order is whether it is: - equal per class? - equal regardless of class? We also find no merit in PWRDC’s contention that there is a • - pro-rata per class? violation of the impairment clause. Section 10, Article III of the - pro-rata for all? Constitution mandates that no law impairing the obligations of contract shall be passed. Pacific Wide raised a constitutional issue because it was being forced to accept a rehabilitation plan without Pari passu can take many forms in different jurisdictions. its consent and that the basis used for such imposition is the FRIA. • Equal per class - In some countries, pari passu is equality over members of the According to Pacific Wide, the rehabilitation plan in accordance with the FRIA impairs its constitutional right. same class. So if secured creditors, they are equal to one another but they are still considered superior to the ordinary creditors. Meaning, they maintain their liens over the property of the • This case does not involve a law or an executive issuance declaring the modification of the contract among debtor PALI, its creditors debtor. and its accommodation mortgagors. Thus, the non-impairment • Equal regardless of class - If equal regardless of class, as in the case of US, the secured and clause may not be invoked . (inapplicable) unsecured creditors will be treated the same way. All of them are Furthermore, as held in Oposa v. Factoran, Jr. even assuming that the considered as ordinary unsecured. The secured creditors lose • their preferences. same may be invoked, the non-impairment clause must yield to the police power of the State. Property rights and contractual rights are • If equal per class is imposed, it should be pro-rata per class not absolute. The constitutional guaranty of non-impairment of • If equal regardless of class, all cash available for payment of debts should be divided among all creditors alike without regard for any obligations is limited by the exercise of the police power of the State for the common good of the general public. (overriding limitation to distribution. the non-impairment clause) Reading from the decision of the SC in Express Investment, it appears • Successful rehabilitation of a distressed corporation will benefit its to be EQUALITY REGARDLESS OF CLASS — all creditors are debtors, creditors, employees, and the economy in general. considered ordinary and unsecured. (stakeholders of Puerto Azul) • Since then, the principle of equality in equity has been cited as the basis for placing secured and unsecured creditors in equal footing or • CRAMDOWN AUTHORITY: The court may approve a rehabilitation plan even over the in pari passu with each other during rehabilitation. In legal opposition of creditors holding a majority of the total liabilities of parlance, pari passu is used especially of creditors who, in the debtor if, in its judgment, the rehabilitation of the debtor is marshaling assets, are entitled to receive out of the same fund feasible and the opposition of the creditors is manifestly without any precedence over each other. unreasonable. The rehabilitation plan, once approved, is binding upon the Is the Assignment Agreement between Bayantel and and the group of debtor and all persons who may be affected by it, including the foreign banks because the group of foreign banks, under the creditors, whether or not such persons have participated in the assignment agreement NOT incorporated in the rehabilitation plan, proceedings or have opposed the plan or whether or not their will about 80% of total assets. That leaves barely 20% for all other claims have been scheduled. creditors. That’s why the court disallowed the Assignment Agreement because substantial portion of the assets of Bayantel is taken without Comment: leaving sufficient value for the other creditors. Unfortunately, despite the success of Puerto Azul in the SC case, until now, it is still doing rehabilitation and none of the creditors have been Effect of Approval and Confirmation of Rehabilitation Plan paid because the operations of Puerto Azul breaks even, meaning, its Based on those decisions of the SC and by the law itself, once a cash flow only sustains its administrative and operating expenses and rehabilitation plan is approved and confirmed, it operates as a novation of all existing contracts and obligation to which the company there is no extra cash to pay the creditors. is a party. All of these contracts are deemed extinguished and Express Investments v. Bayantel, GR Nos. 1774457-59, December 5, superseded by the rehabilitation plan. 2012 • Rehabilitation is an attempt to conserve and administer the assets of However the rehabilitation plan was approved by some creditors and an insolvent corporation in the hope of its eventual return from later confirmed through cramdown by the special commercial court, financial stress to solvency. It contemplates the continuance of there was a provision there that the SC found to be repugnant to the corporate life and activities in an effort to restore and reinstate the Constitution. Under the proposed restructure, there is a debt-for-equity .
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swap or conversion. The Lopez’s lost control in Bayantel by giving their economy will continue because the State will assist the banking common shares to the foreign banks. Under the structure, 77.7% of all sector in proceedings against debtors. common shares of Bayantel will be given to foreigner-creditor banks - Pro-creditor regime allows creditors to avail themselves of despite the constitutional limitation of 40% foreign equity in public protection through security interest and set-offs, third-party owners utility companies such as telecommunication companies. Meaning, to claim property held by bankrupt entities. the foreign banks will own 77.7% of the common shares of BayanTel. The SC struck down this provision in the rehabilitation plan because it Pro-debtor Regime - Under pro-debtor regime, the objective is to increase the size of the is unconstitutional. patrimony or estate of the debtor usually by destroying creditor’s Remedies rights. The assets of the corporate debtor are maximized. What if you are a creditor who has valid ground to believe that you - A pro-debtor regime redeems the debtor while a pro-creditor regime, creditors are ought to be able to avoid losses, maintaining had been prejudiced by an approved rehabilitation plan? - a Motion to Dismi ss is INAPPROPRIATE the banking system as a viable channel for flow of capital. - once the rehab court has confirmed the rehab plan and it is already being implemented, motion to dismiss would be too late in the day. Danger: Operating at an extreme would be problematic. There are less lenders in a pro-debtor regime but less borrowers in a proBPI v. Shemberg Biotech Corporation and Benson Dakay, GR No. creditor regime. 162291, August 11, 2010 We cannot grant BPI’s prayer that the petition for rehabilitation Trivias: be ordered dismissed and terminated. To dismiss the petition for • Hong Kong and Singapore which follows a pro-creditor regime are rehabilitation would be to reverse improperly the final course of the most stable economies at least in southeast Asia.They have the that petition: the petition was granted by the RTC; the RTC most stable banking system even during the Asian Financial Crises. decision was affirmed with finality; and the rehabilitation plan is • Most pro-debtor would be France because it is socialist. now being implemented . • Philippines is a pro-debtor regime (9) because the old insolvency law And while the Interim Rules and the new Rules of Procedure protects the debtor in order to allow the debtor to start afresh in the on Corporate Rehabilitation contain provisions on termination of business and the old insolvency law was carried into the FRIA. the corporate rehabilitation proceedings, neither the RTC nor the Unfortunately, by the letter of the law FRIA intends to balance the CA ruled on this point. In fact, BPI did not ask the CA to terminate interest of the debtor and creditor, the decision of the SC appears the rehabilitation proceedings. Aside from being another new otherwise. issue, its resolution involves factual matters such as: (1) whether — End of FRIA — there was failure to achieve the desired targets or goals as set forth in the rehabilitation plan; (2) whether there was failure of the debtor (SBC) to perform its obligations under the plan; (3) whether the rehabilitation plan may no longer be implemented in accordance with its terms, conditions, restrictions or assumptions; or (4) whether there was successful implementation of the rehabilitation plan. We are not at liberty to consider these factual matters for the first time. This Court is not a trier of facts and our role in a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure is limited to reviewing or reversing errors of law. The Rule 45 petition itself must raise only questions of law. Proper Mode of Appeal - once rehab plan is confirmed by the court it becomes FINAL and EXECUTORY. - the only way to have it reviewed is by way Rule 65 Petition (CBC v. Cebu Printing and Packaging Corporation, GR NO. 172880, 11 August 2010) Liquidation vs. Corporate Rehabilitation - the challenge is always for the court to decide with the help of the receiver, who to pay and in what order to pay and how much - efficiency and equity may sometimes be competing - The way countries pursues those goals through an insolvency law says about its attitude in its legal system - Some countries are pro-debtor; some countries are pro-creditor - Different countries implement the doctrines differently - how pro-debtor or pro-creditor is the country determines its economic status because if a country through its legal framework is considered or perceive to be as pro-debtor, then there are more business persons taking entrepreneurial risk. It is easier to put up businesses and these businesses create jobs if the they know that the law will protect them as a debtor. That emboldens them to borrow more. That provides for greater innovation. Eg. If one invented a product and wants to sell it but nobody wants to finance it under a pro-creditor regime but if it is pro-debtor, there are banks willing to lend even for such innovative enterprises. Pro-creditor Regime - Under pro-creditor regime, this encourages the provision of liquidity in the business. It means that banks are tightened. To protect the banking system, it is more or less assured that monetization of the
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