What remedies are available to insolvent corporations/individuals in your jurisdiction?
Under Republic Act No 10142 (Financial Rehabilitation and Insolvency Act of 2010 (FRIA)), which governs proceedings for the rehabilitation and/or liquidation, insolvent juridical debtors may undergo: (1) rehabilitation; or (2) liquidation proceedings.
FRIA only covers private stock or non-stock corporations, government financial institutions other than banks, and government-owned or-controlled corporations, unless otherwise provided by their charters. FRIA is not applicable to banks, insurance and pre-need companies, which are governed by other laws.
Individual debtors, on the other hand, can only avail of suspension of payments or liquidation, whether voluntary or involuntary.
How is voluntary rehabilitation different from involuntary rehabilitation?
In voluntary (debtor-initiated) rehabilitation, the verified petition for rehabilitation is filed by:
- owner in case of a single proprietorship;
- majority of the partners in case of a partnership; or
- majority vote of the Board of directors or trustees and authorised by at least two-thirds of the outstanding capital stock or members;.
In involuntary (creditor-initiated) rehabilitation, a verified petition is filed by any creditor/s with an aggregate claim of at least PHP1,000,000.00 or at least 25% of the subscribed capital stock or partners’ contributions, whichever is higher, if: (a) there is no genuine issue of fact or law on the claim/s, and that due and demandable payments have not been made for at least 60 days, or that the debtor failed to meet its liabilities due; or (b) a creditor, other than the petitioner/s, initiated foreclosure proceedings that will prevent the debtor from paying its debts as they become due or will render it insolvent.
What is the cram down rule and its effect on rehabilitation proceedings?
The cram down rule states that a rehabilitation plan may be approved even over the opposition of the creditors holding a majority of the liabilities, upon showing that rehabilitation is feasible, and the opposition of the creditors is manifestly unreasonable.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
A stay order, when issued by the court:
- suspends all actions, in court or otherwise, seeking to enforce a claim, including auxiliary remedies, against the debtor;
- prohibits the debtor from: (a) disposing its properties, except in the ordinary course of business; and (b) making payments on its outstanding liabilities, except as may be provided under the FRIA.
The stay order does not apply to cases pending before the Supreme Court, specialised courts or quasi-judicial agencies as of commencement date of the rehabilitation proceedings; enforcement actions against persons solidarily liable with the debtor, including sureties, and third-party or accommodation mortgagers and issuers of letters of credit, unless the property subject thereof is necessary for the rehabilitation of the debtor as determined by the court.
Who is the person in charge of rehabilitation proceedings? What are the corresponding qualifications, functions, and manner of appointment of said person in charge?
The rehabilitation receiver appointed by the rehabilitation court may be a natural or juridical person; must be a Philippine citizen, or resident for six months immediately preceding the nomination; of good moral character and with acknowledged integrity, impartiality and independence, who possesses knowledge about insolvency and other commercial laws; and has no conflict of interest.
The receiver must manage the debtor’s assets; determine the substantial likelihood that the debtor will be rehabilitated; and prepare, recommend, and implement the rehabilitation plan. The receiver also establishes a preliminary registry of claims, and renders a report within the prescribed period from the initial hearing.
In case of danger of dissipation of assets, paralysation of business, or gross mismanagement, a management committee may be appointed to take the place of the debtor’s governing body, and assume its rights and responsibilities.
What is a pre-negotiated rehabilitation proceeding? What are the requirements and procedures for said proceeding?
In pre-negotiated rehabilitation proceedings, a verified petition is filed by an insolvent debtor, by itself or with any of its creditors, with the court for the approval of a pre-negotiated rehabilitation plan. The plan must be endorsed by creditors holding at least two thirds of the total liabilities, including secured creditors holding more than 50% of the secured claims, and unsecured creditors holding more than 50% of the unsecured claims.
What is out of court rehabilitation? What are the requirements and procedures for said proceeding?
Out of Court Rehabilitation (OCRA) occurs when debtors and creditors agree upon and execute a rehabilitation plan, without need for court approval.
The plan must be approved by: (a) debtor/s; (b) creditors representing at least 67% of the secured obligations and 75% of the unsecured obligations; and (c) creditors representing at least 85% of the total liabilities.
The notice of OCRA must also be published as prescribed in the FRIA. Pending the finalisation of the OCRA, parties may agree upon a standstill period, which may include legal effects similar to that of a stay order in a court-supervised rehabilitation proceeding.
What is liquidation proceeding? What are the requirements and procedures for said proceeding?
Liquidation may be voluntary or involuntary. In voluntary liquidation, the insolvent debtor files a verified petition with the court, upon at least the majority vote of the board of directors or trustees and the vote of stockholders representing at least two thirds of the outstanding capital stock or members in corporations, or two thirds vote of the partners in partnerships.
In involuntary liquidation, three or more creditors with aggregate claims of at least PHP1,000,000.00, or 25% of the subscribed capital stock or partner’s contributions, whichever is higher, may file a verified petition with the court, seeking the liquidation of the insolvent debtor. If the petition is sufficient in form and substance, the court shall order the publication of the petition, and for the debtor and all other creditors to file their comment on the petition.
What is a liquidation order and its corresponding effects?
The liquidation order declares the insolvency, and orders the liquidation of the debtor. Upon issuance, the debtor is deemed dissolved and its corporate existence terminated. It prohibits payments and transfers of any property by the debtor, and requires the sheriff to take possession and control of all properties of the debtor, with the legal title and control over the same vested upon the court-appointed liquidator, except those exempt from execution. All contracts of the debtor shall be deemed terminated, unless the liquidator declares otherwise and the contracting parties agree.
No separate action for the collection of unsecured claims is allowed, and actions already pending shall be transferred to the liquidator to accept and settle, or contest. No foreclosure proceeding is allowed for 180 days from date of issuance of the liquidation order.
What practical issues do secured creditors face in enforcing their security (eg timing issues, requirement for court involvement)? What are the rights of a secured creditor upon the issuance of a liquidation order by the rehabilitation court?
A secured creditor’s right to enforce a lien is not affected by the liquidation order. However, a secured creditor may waive such rights under the security, and prove the claim in the liquidation proceedings.
In case the secured creditor opts to maintain the security, the value of the property may be agreed upon by the creditor and liquidator. If the value of the property is less than the claim, the liquidator may convey the property to the creditor, with the balance being admitted into the liquidation proceedings. If the value of the property exceeds the claim, the liquidator may convey the property to the creditor and waive the debtor’s right of redemption upon receiving the excess from the creditor. The creditor may also opt to enforce the lien by foreclosing on the property pursuant to applicable laws.
The liquidator may also sell the property and satisfy the creditor’s entire claim from the proceeds of the sale.
Who is the person in charge of liquidation proceedings? What are the corresponding qualifications, functions, and manner of appointment of said person in charge?
The court-appointed liquidator is a natural or juridical entity; must be a Philippine citizen, or resident in the six months immediately preceding the nomination; possesses knowledge about insolvency and relevant commercial laws; of good moral character and with acknowledged integrity, impartiality and independence; and has no conflict of interest.
The liquidator is mandated to preserve and maximise the value of the debtor’s assets, with the end of liquidating the assets to discharge, to the extent possible, all the claims against the debtor.
What are available legal mechanisms for foreign creditors and cross-border cases in relation to restructuring and insolvency in the Philippines?
When there is a rehabilitation or insolvency in a foreign jurisdiction involving a foreign entity, the Philippine court shall, upon petition filed by the foreign entity representative, set a hearing to either: (1) suspend any action to enforce claims against the foreign entity or otherwise seize or foreclose on its property located in the Philippines; (2) require the surrender of the foreign entity’s property to the foreign representative, or (3) provide any other necessary relief.
Did your country make any changes to its restructuring or insolvency laws in response to the Covid-19 pandemic? If so, what changes were made, what was/is their effect and were/are they temporary or permanent?
Covid-19 prompted the implementation of various debt relief and restructuring measures.
Banks and other non-bank financial institutions (NBFIs) that agree to loan extensions and restructuring beyond 2020 are granted tax exemptions and regulatory reliefs (Republic Act No 11494).
Republic Act No 11523 was enacted, authorising the incorporation of Financial Institutions Strategic Transfer Corporations (FISTC). FISTC has the power to acquire non-performing loans (NPL) and non-performing assets (NPA) of banks and NBFIs. To encourage the transfer of NPAs and NPLs from banks and NBFIs, the law grants several incentives, such as tax exemptions and reduced property registration fees.
Republic Act No 11534 was enacted, amending the National Internal Revenue Code. This allows activities registered with an investment promotion agency to carry over losses as deductions from gross income and to claim additional deductions on gross income for labour, research and development, training, and power expenses, among others.