The COVID-19 pandemic has severely affected the local economy. For one, the measures imposed to mitigate the spread of the virus has stopped business operations. Except for essential industries, most establishments were ordered closed, school activities were suspended, and overall mobility was restricted.
Filipinos are cautiously optimistic that the easing of quarantine measures will bring economic activities back to life. At any rate, the possibility of a continued slowdown, or even recession, are still in the picture.
The recalibrated approach to trade will present challenges for Filipino entrepreneurs, most especially on the cash flow aspect of their operations. The danger of illiquidity or insolvency is thus expected to persist as we shift to the “new normal.” It is therefore imperative for business owners to come up with a plan should financial difficulties beset their operations.
For distressed businesses, as well as individual debtors, the Financial Rehabilitation and Insolvency Act (“FRIA”) presents the following options in the event of illiquidity or insolvency:
Rehabilitation
Rehabilitation, which means the restoration to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible, and the creditors can better recover if the debtor continues as a going concern than if it is immediately liquidated.
The goal of a Rehabilitation proceeding is to come up with a Rehabilitation Plan, or an arrangement to restore the financial well-being and viability of an insolvent debtor.
Rehabilitation proceedings may either be (a) court-supervised; (b) pre-negotiated, or (c) out-of court informal restructuring arrangements.
Court-supervised Rehabilitation may be instituted either voluntarily (at the instance of the debtor), or involuntarily (at the instance of the creditors).
· In both instances, the petition must establish the insolvency of the debtor and the viability of its rehabilitation.
· If the court finds the petition in order, it shall issue a Commencement Order, which includes the appointment of a Rehabilitation Receiver.
· The Commencement Order shall vest the rehabilitation receiver with the powers and functions as such, including the right to review and obtain all records, including bank accounts of the debtor. The order shall also prohibit the enforcement or collection of any claim against the debtor, save for certain exceptions. The order will also consolidate the resolution of all the legal proceedings by and against the debtor unless the court allows the continuation of the cases in other courts where the debtor initiated the suit.
· If the court deems necessary, the Commencement Order may also include a Stay or Suspension Order which shall:
suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor;
suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor;
prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and
prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein.
Pre-Negotiated Rehabilitation plans, on the other hand, require the distressed debtor to seek the court’s approval of a pre-negotiated rehabilitation plan having been endorsed and approved by the creditors holding at least two-thirds (2/3) of the total liabilities, including secured creditors holding more than fifty percent (50%) of the total secured claims, and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims.
The Petition must include a Schedule of Debts and Liabilities, an Inventory of Assets, a Summary of Disputed Claims, an Affidavit of General Financial Condition, and the Pre-Negotiated Rehabilitation Plan, including the names of at least three (3) qualified nominees for rehabilitation receiver.
Out-of-Court Informal Restructuring/Workout Agreements may be availed provided that: (a) the debtor agrees; (b) it is approved by creditors representing at least sixty-seven percent (67%) of the secured obligations of the debtor; (c) it is approved by the creditors representing at least seventy-five percent (75%) of the unsecured obligations of the debtor; (d) it is approved by creditors holding at least eighty-five percent (85%) of the total liabilities of the debtor, secured or unsecured.
The notice of the Out-of-Court Informal Restructuring/Workout Agreements shall be published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the Philippines. The Rehabilitation Plan or restructuring agreement shall take effect upon the lapse of fifteen (15) days from the date of the last publication of the notice thereof.
The approval of an Out-of-Court Informal Restructuring/Workout Agreements has the same legal effect as a confirmation of a Rehabilitation Plan in a court-supervised rehabilitation.
Liquidation
In the unfortunate event that rehabilitation is no longer possible, and the business has no other option but to close shop, the FRIA lays down the procedure for liquidation for the efficient winding down of the affairs of the establishment.
Under the FRIA, liquidation can either be voluntary or involuntary.
Voluntary liquidation is initiated by the distressed debtor. On the other hand, involuntary liquidation is initiated by three (3) or more creditors whose aggregate claim is at least either One Million Pesos (PhP1,000,000.00), or at least twenty-five percent (25%) of the subscribed capital stock or partner's contributions of the debtor, whichever is higher.
In involuntary liquidation, the creditors must show that: (a) there is no genuine issue of fact or law on their claims, and that payments thereon have not been made for at least one hundred eighty (180) days or that the debtor has failed generally to meet its liabilities as they fall due; and (b) there is no substantial likelihood that the debtor may be rehabilitated.
If the petition for liquidation is sufficient, the court shall issue a Liquidation Order, which has the following effects:
A juridical debtor shall be deemed dissolved and its corporate existence terminated
legal title to and control of the debtor’s assets, except those exempted from execution, shall be vested in the liquidator or, pending his election or appointment, with the court
all contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within ninety (90) days from the date of his assumption of office, declares otherwise and the contracting party agrees
no separate action for the collection of an unsecured claim shall be allowed, and actions already pending will be transferred to the liquidator for him to accept and settle or contest. If the liquidator contests or disputes the claim, the court shall allow, hear, and resolve such contest except when the case is already on appeal. In such a case, the suit may proceed to judgment, and any final and executory judgment therein for a claim against the debtor shall be filed and allowed in court; and
no foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days
Suspension of Payments
A petition for suspension of payments may be filed by the debtor who possesses sufficient property to cover all his debts but foresees the impossibility of meeting them as they fall due. The petition must include, among others, a schedule of debts and liabilities, an inventory of assets, and a proposed agreement with his creditors.
During the pendency of the proceedings, the debtor may request the court to order:
That any execution against the debtor be suspended
That no creditor shall sue or institute proceedings to collect claims from the debtor from the time of the filing of the petition and for as long as proceedings remain pending, except: (i) creditors having claims for personal labor, maintenance, expense of last illness and funeral of the wife or children of the debtor incurred in the sixty (60) days immediately prior to the filing of the petition; and (ii) secured creditors.
We write this short article to provide a broad overview of the legal framework and the options available for distressed debtors under the FRIA. Our article should not be taken as a form of legal advice.Should you need legal assistance on illiquidity and insolvency proceedings in the Philippines, please do not hesitate to shoot us an email at ryan@romanolaw.ph.