The PHILJA Judicial Journal
The PHILJA Judicial Journal is published twice a year by the Research, Publications and Linkages Office of the Philippine Judicial Academy (PHILJA). The Journal features articles, lectures, research outputs and other materials of interest to members of the Judiciary, particularly judges, as well as law students and practitioners. The views expressed by the authors do not necessarily reflect the views of either the Academy or its editorial board.
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ISSN 2244-5854 SUPREME COURT OF THE PHILIPPINES
CHIEF JUSTICE Hon. MARIA LOURDES P. A. SERENO
ASSOCIATE JUSTICES Hon. ANTONIO T. CARPIO Hon. PRESBITERO J. VELASCO, Jr. Hon. TERESITA J. LEONARDO-DE CASTRO Hon. ARTURO D. BRION Hon. DIOSDADO M. PERALTA Hon. LUCAS P. BERSAMIN Hon. MARIANO C. DEL CASTILLO Hon. ROBERTO A. ABAD Hon. MARTIN S. VILLARAMA, Jr. Hon. JOSE P. PEREZ Hon. JOSE C. MENDOZA Hon. BIENVENIDO L. REYES Hon. ESTELA M. PERLAS-BERNABE Hon. MARVIC MARIO VICTOR F. LEONEN
COURT ADMINISTRATOR Hon. JOSE MIDAS P. MARQUEZ
DEPUTY COURT ADMINISTRATORS Hon. RAUL B. VILLANUEVA Hon. JENNY LIND ALDECOA-DELORINO Hon. THELMA C. BAHIA
CLERK OF COURT Hon. ENRIQUETA ESGUERRA VIDAL
ASSISTANT COURT ADMINISTRATOR Hon. THEODORE O. TE
ASSISTANT CLERK OF COURT Atty.FELIPA B. ANAMA
DIVISION CLERKS OF COURT Atty.EDGAR O. ARICHETA Atty.MA. LOURDES C. PERFECTO Atty.LUCITA A. SORIANO PHILIPPINE JUDICIAL ACADEMY
Board of Trustees
Hon. MARIA LOURDES P. A. SERENO Chief Justice Chair
Hon. ANTONIO T. CARPIO Senior Associate Justice, Supreme Court Vice Chair
Members
Hon. ADOLFO S. AZCUNA Hon. JOSE MIDAS P. MARQUEZ Chancellor Court Administrator
Hon. ANDRES B. REYES, Jr. Hon. AMPARO CABOTAJE-TANG Presiding Justice, Court of Appeals Presiding Justice, Sandiganbayan
Hon. ROMAN G. DEL ROSARIO Hon. RALPH S. LEE Presiding Justice, Court of Tax Appeals President, Philippine Judges Association
Hon. MARINA G. MEJORADA Dean NILO T. DIVINA Representative, First Level Courts President, Philippine Association of Law Schools
Hon. AMEURFINA A. MELENCIO HERRERA Founding Chancellor Emeritus
Executive Officials Hon. ADOLFO S. AZCUNA Hon. JUSTO P. TORRES, Jr. Chancellor Vice Chancellor Hon. MARINA L. BUZON Executive Secretary
Chiefs of Office Hon. JUSTO P. TORRES, Jr. Finance Office Hon. DELILAH VIDALLON-MAGTOLIS Hon. MARINA L. BUZON Academic Affairs Office Acting Chief, Philippine Mediation Center Office
Dean SEDFREY M. CANDELARIA Hon. ELMER DG. ELERIA Head, Research, Publications and Linkages Office Officer in Charge, Administrative Office
Chairpersons, Curricular Departments
Dean PACIFICO A. AGABIN Prof. RUBEN F. BALANE Constitutional Law Civil Law
Hon. MAGDANGAL M. DE LEON Hon. EDILBERTO G. SANDOVAL Remedial Law Criminal Law
Hon. JOSE MIDAS P. MARQUEZ Hon. HILARION L. AQUINO Court Management Ethics and Judicial Conduct
Hon. JOSE C. VITUG Dean MERLIN M. MAGALLONA Commercial Law International and Human Rights Law
Fr. RANHILIO C. AQUINO Prof. MYRNA S. FELICIANO Jurisprudence and Legal Philosophy Legal Method and Research
Dean SEDFREY M. CANDELARIA Atty.EMMANUEL L. CAPARAS Special Areas of Concern Court Technology
Prof. ALFREDO F. TADIAR Hon. HAKIM S. ABDULWAHID Alternative Dispute Resolution Shari’a and Islamic Jurisprudence Justice Adolfo S. Azcuna Chancellor
Dean Sedfrey M. Candelaria Editor in Chief
Editorial and Research Staff Atty. Ma. Melissa R. Dimson-Bautista Atty. Ronald Paz Caraig Ms. Armida M. Salazar
Ms. Regina Maria Sofia M. Babasa Atty. Rizsa Rose S. Baer Ms. Jocelyn D. Bondoc Atty. Gabriella Louise OJ. Candelaria Mr. Jonel M. Candelaria Mr. Joseph Arvin S. Cruz Ms. Judith B. del Rosario Ms. Christine A. Ferrer Mr. Michael Angelo P. Laude Ms. Joanne Narciso-Medina Ms. Charmaine S. Nicolas Ms. Sarah Jane S. Salazar
Circulation and Support Staff Mr. Lope R. Palermo Ms. Carmela D. Panganiban Mr. Daniel S. Talusig
Printing Services Mr. Ponciano M. Santiago and Staff Contents
Officials of the Supreme Court of the Philippines iv Officials of the Philippine Judicial Academy v
Program 1
Opening Remarks 3 Justice Arturo D. Brion
Message 6 Mr. Aniceto M. Sobrepeña
Lecture 8 Toward a More Forward-Looking Insolvency System Atty. Francis Ed. Lim
Reactions Senator Edgrado J. Angara 36 Atty. Monico M. Jacob 43
Closing Remarks 48 Chief Justice Maria Lourdes P. A. Sereno
References Law Republic Act No. 10142 52 An Act Providing for the Rehabilitation or Liquidation of Financially Distressed Enterprises and Individuals Approved on July 18, 2010 Rules A.M. No. 00-8-10-SC 105 Rule of Procedure on Corporate Rehabilitation Effective January 16, 2009 A.M. No. 12-12-11-SC 131 The Financial Rehabilitation Rules of Procedure (2013) Approved on August 27, 2013 1
Supreme Court of the Philippines Philippine Judicial Academy in cooperation with the Metrobank Foundation, Inc. present the
Ninth Metrobank Foundation Professorial Chair Lecture January 25, 2013, Friday, 2:00 p.m. Court of Appeals Auditorium Centennial Building, Court of Appeals Maria Orosa Street, Manila Program Doxology Philippine National Anthem Supreme Court Hymn Supreme Court Choir Welcome Remarks Honorable Adolfo S. Azcuna Chancellor, Philippine Judicial Academy Opening Remarks Honorable Arturo D. Brion Associate Justice, Supreme Court Message Mr. Aniceto M. Sobrepeña President, Metrobank Foundation, Inc. Musical Number Supreme Court Choir Introduction of Lecturer Justice Jose C. Vitug Retired Associate Justice, Supreme Court Chairperson, PHILJA Department of Commercial Law LECTURE TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM Atty. Francis Ed. Lim Holder, 2012 Metrobank Foundation Professorial Chair in Commercial Law Co-Managing Partner, Angara Abello Concepcion Regala & Cruz Law Offices Vice Chairperson, PHILJA Department of Commercial Law Reactors Honorable Edgardo J. Angara Senator, Senate of the Philippines
Atty. Monico V. Jacob Former Commissioner, Securities and Exchange Commission President and CEO, STI Education Services Group
The Professorial Chair in Commercial Law endowed by The Metrobank Foundation “The Metrobank Foundation Professorial Chair provides assistance to the Philippine Judicial Academy to develop and enhance its programs in Judicial Education in order to encourage its Corps of Professors to author and publish treatises that introduce innovative concepts and approaches in designated areas of law to promote competence, excellence, and efficiency in the Philippine Justice System.”
Presentation of Paper To the Metrobank Foundation, Inc. by the Chairholder
To the Supreme Court of the Philippines by the Metrobank Foundation, Inc.
Presentation of Endowment to the Chairholder by the Metrobank Foundation, Inc.
Presentation of Plaques of Appreciation to the Metrobank Foundation, Inc., to the Chairholder, and the Reactors from the Supreme Court of the Philippines and the Philippine Judicial Academy
Closing Remarks Honorable Maria Lourdes P. A. Sereno Chief Justice, Republic of the Philippines
Philippine Judiciary Hymn
Master of Ceremonies Ma. Kristina Salonga Zamora Associate, Angara Abello Concepcion Regala and Cruz Law Offices 3
Opening Remarks*
Honorable Arturo D. Brion Associate Justice, Supreme Court
Chief Justice Maria Lourdes P. A. Sereno, Senator Edgardo J. Angara, Justice Jose C. Vitug, Chancellor Adolfo S. Azcuna, Mr. Aniceto M. Sobrepeña (President, Metrobank Foundation, Inc.), Former SEC Commissioner, Atty. Monico V. Jacob, Atty. Francis Ed. Lim, our Lecturer and the Ninth Metrobank Foundation Professorial Chair holder, Distinguished guests,
Good afternoon to everyone. Today, under the initiative of the Metrobank Foundation, Inc. and the Philippine Judicial Academy, a very able lecturer—Atty. Francis Ed. Lim of the ACCRA law firm and holder of the 2012 Metrobank Foundation Professorial Chair in Commercial Law—will discuss with us the Financial Rehabilitation and Insolvency Act of 2012 or the FRIA. Let me open the discussion by sharing with you, as an advance glimpse into the law, the insight we gained as we—Atty. Lim among them—drafted the implementing rules of this law for the Court en banc’s consideration. I can best describe the mindset that unavoidably evolved by citing the best-selling book, The Black Swan: The Impact of the Highly Improbable, by Nassem Nicolas Taleb, which discussed the concept of a black swan event. A black swan event is an unexpected or hard to predict event that carries deep and far-reaching consequences. We can hardly see black swans coming; when they do, their consequences can unsettle the existing order, create chaos, cause confusion, and profoundly shape our world. Think in this regard of World War I, 9/11, and the financial crisis currently plaguing the global economy—events that were beyond the realm of normal expectations and which we only saw clearly on hindsight. Because we can hardly predict or prevent these rare occurrences, attempts at prediction or in suppressing randomness and volatility only leave us unsettled and more fragile. In lieu of these efforts, Taleb proposes in his book that “[w]e should try to create institutions that would not fall apart when we encounter black swans—
* Delivered at the Ninth Metrobank Foundation Professorial Chair Lecture held on January 25, 2013, at the Court of Appeals Auditorium, Centennial Building, Court of Appeals, Manila. 4 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
or that might even gain from these unexpected events x x x we should thrive and improve in the face of disorder.”1 In short, we should aim to address fragility or be anti-fragile. In the Philippine corporate law setting, the FRIA provides the nation with an anti-fragile system. Business failures are black swans in the sense that many reasons exist for a business to fail—anything from mismanagement, to intervening criminal acts, to an economic crisis in a nation halfway around the world, and there is no way one can eliminate these risks. As Taleb suggests, the best recourse for us is to manage these risks when and as they come; when a business flounders, our best recourse is not necessarily to immediately close it down but to create conditions that would consider the best interests of the business and all its stakeholders. The FRIA gives us an option for survival and renewal—it provides the opportunity for the “continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency.”2 The FRIA is a milestone; it revised our century-old insolvency law, Act No. 1956, and codified the rules and jurisprudence on corporate rehabilitation. Previously, these remedies were available only to corporations—the FRIA extends them now to individual debtors, sole proprietorships, and partnerships. The FRIA is an innovation; it redefined court-supervised and pre-negotiated rehabilitation, and introduced out-of-court rehabilitation. The FRIA has also incorporated into our legal system the Model Law on Cross-Border Insolvency of the United Nations Center for International Trade and Development. Through the FRIA, we aim to establish an effective and responsive insolvency system. While the FRIA may very well be an important piece of legislation, reading and understanding all its 150 provisions is tedious work. In this era where time and attention are critical resources, we need to absorb crucial information in a fast but effective manner. Through this afternoon’s lecture organized for us by PHILJA and the Metrobank Foundation, we have the privilege of hearing and learning the finer points of FRIA—in less time and effort that it takes the read the whole law—from no less than the 2012 Metrobank Foundation Professorial Chair in Commercial Law, Atty. Francis Ed. Lim. I can think of no one better qualified to discuss the FRIA than Atty. Lim. After sitting with him in the preparation of the FRIA’s implementing rules, I can say that he knows his topic like the back of his hand. For almost a year, we were engaged in this task, along with Supreme Court Justice Estela Perlas-Bernabe, Court of Appeals Justice Japar Dimaampao, Court of Appeals Justice Apolinario Bruselas, Jr., RTC Judge Reynaldo Daway, and Intellectual Property Office Director General Ricardo Blancaflor. I am happy to report that our Subcommittee has already completed the Rules and is now only waiting for the completion of the responses
1 N. Taleb. Learning to Love Volatility. The Wall Street Journal – Asia Edition (Online), November 16, 2012
Message*
Mr. Aniceto M. Sobrepeña President, Metrobank Foundation, Inc.
Associate Justice Arturo D. Brion, my former professor at the Ateneo Law School, Justice Teresita Leonardo-de Castro, my former colleague at the Cabinet Assistance System during the term of President Corazon Aquino, whose 80th birthday we fondly celebrate today, Senator Edgardo J. Angara, one of the former colleagues at the Search for Outstanding Teachers of the Metrobank Foundation, Justice Adolfo S. Azcuna, Chancellor of the Philippine Judicial Academy, former colleague at the Cabinet also during the time of President Aquino, Justice Jose C. Vitug, Atty. Monico V. Jacob, former SEC Commissioner, Justices of the Court of Appeals and other appellate courts, Members and faculty of the Philippine Judicial Academy, Our fellow Metrobankers, Judges, distinguished guests, Magandang hapon po sa ating lahat. The Metrobank Foundation Professorial Chair Program is our commitment to support key professions through continuing education. Our partner, PHILJA, shares our vision of strengthening the finest members of the judiciary by providing them opportunities to acquire perspectives and interpretations on issues of law which they may find essential to their respective practices. The judiciary, as mandated by our Constitution, protects our rights and safeguards our prosperity. It is the State’s primary duty to secure the interest of its people. Therefore, it depends on the judiciary to properly explain the law to the citizens and sectors whose lives and affairs are greatly affected by the decision it makes. Aside from the citizens, the State places due importance on the business sector, the prime movers of our economy since it is vulnerable to political and economic changes. Laws are formulated to protect the business sectors’ stakeholders. Today’s lecture is timely because recent figures tell us that economic growth in 2013 is remarkable. In fact, the World Bank has forecasted Philippines’ economic growth to reach 6.2 percent in 2013. World Bank and Standard En Bourse have also upgraded our country’s credit rating. As standards of good governance, the judiciary works hand in hand with other branches of government to introduce reforms that will strengthen the economy. For instance, and as noted by Justice Brion, Republic Act No. 10142 or the Financial
* Delivered at the Ninth Metrobank Foundation Professorial Chair Lectureheld on January 25, 2013, at the Court of Appeals Auditorium, Centennial Building, Court of Appeals, Manila. Transcribed. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 7 OPENING REMARKS Rehabilitation Insolvency Act (FRIA) repealed century-old provisions on insolvency that no longer address the changing global economic trends. We are excited to hear more on FRIA. An effective insolvency system is essential to a strong and globally competitive economy. We thank the Philippine Judicial Academy, led by Justice Azcuna, for adhering to the mandate of creating avenues for the development of judicial competence among our legal practitioners. We also extend our sincerest thanks to Atty. Francis Ed. Lim, our 2012 Professorial Chairholder in Commercial Law, for his dedication to pursue research that gives the business sector and its stakeholders new perspectives to further sustain our economy. It is with fervent hope that our Metrobank Foundation Professorial Chair Lecture holders will continue to introduce new knowledge and insights on law which reflect the culture of excellence and integrity in the judiciary—a vision which Metrobank Foundation also holds dear. Maraming salamat po and have a good afternoon. 8 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Toward a More Forward-Looking Insolvency System* Atty. Francis Ed. Lim Atty. Francis Ed. Lim is the Co-Managing Partner and a Senior Partner of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW). He heads its Corporate and Special Projects Department and is a member of its Litigation and Dispute Resolution Department. Atty. Lim served as President and CEO of the Philippine Stock Exchange from September 15, 2004 to February 15, 2010. During his stint in the PSE, he also served as president and CEO of the Securities Clearing Corporation of the Philippines; chair of the Philippine Stock Exchange Foundation, Inc.; chair of the Capital Market Development Center, Inc.; director of the Philippine Dealing and Exchange Corporation; trustee of the Securities Investors Protection Fund; and member of the Capital Market Development Council. He is credited with several reform initiatives in the Philippine Stock Exchange, and successfully worked for the passage by Congress of several business-related laws: the Financial Rehabilitation and Insolvency Act, Personal Equity Retirement Account Act, Credit Investment System Act, Real Estate Investment Trust Atty. Lim is a law professor at the Ateneo Act, and the Documentary Stamp Duty Exemption for de Manila University School of Law, the San secondary trading of listed stocks. Beda College Graduate School of Law, and a professorial lecturer and the Vice Chairperson of A recipient of various awards and appreciation/ the Commercial Law Department of the Philippine recognition, Atty. Lim has been actively involved Judicial Academy. in the revision of rules for Philippine courts. He is the co-chair of the Subcommittee on the Rules on Atty. Lim has authored papers published E-Commerce and Subcommittee on the Rules on in both local and international publications on Notaries Public of the Philippine Supreme Court; a insolvency. Among his articles are: Informal member of the Subcommittees on Commercial Courts, Workouts, Restructuring and the Future of Asian Rules on Evidence and Rules on DNA Evidence. He Insolvency Reform; Getting the Deal Through; The actively participated in the drafting of the following Philippines Establishes New Rehabilitation Rules, rules: Interim Rules on Intra-Corporate Controversies; Designates Insolvency Law Court; Benchbook Rules on Corporate Rehabilitation, Rules on Electronic for Commercial Law Judges, Procedures for Evidence, Rules on Notarial Practice, Rules on DNA Corporate Rehabilitation; The New Rules on Evidence, proposed Revised Rules on Evidence, and the Corporate Recovery of the Securities and Exchange proposed Rules of Procedure for the FRIA. Commission; and Does Suspension of Payments Cover Foreclosure of Mortgages?. Atty. Lim is also a director of several companies, among which are the Energy Development Corporation, Atty. Lim graduated from the University of Producers Savings Bank Corporation and The Insular Santo Tomas with a magna cum laude degree in Life Assurance Co., Ltd. He is a member of the Financial Bachelor of Philosophy and a cum laude degree in Executives of the Philippines and the Management Bachelor of Arts. He obtained his Bachelor of Laws Association of the Philippines; founding trustee of the degree (Second Honors) from the Ateneo de Manila Shareholders’ Association of the Philippines and Asia University and his Master of Laws degree from the Pacific Real Estate Association–Philippines. University of Pennsylvania, USA. Atty. Lim is a columnist of the Philippine Daily Atty. Lim is married to Atty. Remedios Inquirer. Montecastro-Lim with four children: Jose Paolo (Paolo), Francis Edward (Edward), Juan Lorenzo (Julo) and Stephanie Anne (Stef).
* Lecture delivered at the Ninth Metrobank Foundation Professorial Chair Lectureheld on January 25, 2013, at the Court of Appeals Auditorium, Centennial Building, Court of Appeals, Manila. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 9
I. Introduction
The Philippines is facing a rosy economic outlook. Amidst slowdowns and financial crises abroad, it has recently been dubbed as “an emerging Asian tiger,”1 a “star performer” in Asia,2 and a “truly remarkable hot spot in Asia” [that] can “become one of the world’s top economies by 2050.”3 Indeed, with the increasing investor confidence and the proliferation of small and medium-scale local enterprises, the Philippines is a viable competitor in the race to becoming a lead economy in South East Asia. However, to win this race, it is crucial for the country to lay down its economic fundamentals properly. One of the structural frameworks that need to be put in place is a sound insolvency system. It is said that “the manner in which a country addresses insolvency is tied to other decisions: about support for entrepreneurial behavior as an engine of growth, about the promotion of education as a contributor to the well-educated workforce needed for the future, and about the extent to which safety nets are provided by governments to assist those who are less fortunate, among others.”4 As the continuity of economic activity is vital to our developing country, the country must prepare itself by paving the road to ensure the continuity of economic stability. All businesses, regardless of size, may encounter financial difficulties at some point. The fairly recent experiences of General Motors Corporation and Lehman Brothers—two pillars of the United States economy—attest to this fact. As such, there must be a good set of insolvency laws, rules and systems in place which businesses may turn to in times of financial distress.
The author profoundly thanks Attys. Jacqueline Ann C. Alegre, Catherine Anne L. Diño, Filemon Ray L. Javier, Johanna Aleria P. Lorenzo and Lancaster L. Uy of ACCRALAW for their invaluable assistance in preparing this paper. 1 Michael Lim Ubac, PH is rising Asian Tiger, Phil. Daily Inquirer, November 11, 2012, available at
Indeed, as global integration increases, there is a tendency for risk-taking behavior to rise, inasmuch as it contributes to success in a market-based economy.5 Therefore, the government needs to create mechanisms that would encourage such profitable behavior and at the same time protect businesses and the public from the possible negative repercussions of certain ventures.
A. Keeping Viable Businesses Operating The primary objective of an insolvency system is to reallocate resources and distribute liabilities. Its ultimate goals are to increase the competitiveness of industries, promote investor confidence, and achieve economic growth. It is imperative, therefore, that the law, rules and supporting systems put in place by the government must be able to keep viable businesses operating. This means avoiding premature liquidation of sustainable businesses.6 As aptly described by author Paul L.C. Torremans, the insolvency procedure must be a “measure of last resort.”7 Thus: The insolvency procedure aims at liquidation, i.e., the removal of a financially unhealthy trader from the market to avoid damage to the system to other traders. As such, it is a measure of last resort. It was thought to be desirable to create a tool that could allow proactive intervention to complement the insolvency procedure. Such a tool should make it possible to provide assistance to traders that experience serious difficulties before they find themselves in a situation of insolvency, and before liquidation is the only way out. The aim of the procedure, is, therefore, to give the trader the opportunity and assistance that is needed to solve its problems, which should in turn allow the trader to return to a situation where it can function normally and unassisted in the economy once its financial health has been restored.8 Let us examine some fairly recent experiences. First is the bankruptcy case faced by United States automotive giant General Motors Corporation (now General Motors Company) (“GM”). In 2009, the world watched as GM adamantly maintained its position that “[r]estructuring the business out of court remains the best solution for GM and its constituents.”9 GM had a firm view that in-court restructuring would carry with it
5 Ibid. 6 Simeon Djankov, Bankruptcy Regimes during Financial Distress (Financial and Private Sector Development, The World Bank Group, May 2009), available at
tremendous costs and risks. It insisted that a bankruptcy filing could force liquidation— considering the financing that GM would require as well as consumer reluctance to buy vehicles from a bankrupt automaker. The automaker, which lost nearly $31 billion in 2008, was given a deadline to complete concession talks with the United Auto Workers and bondholders. This was part of a bid to convince the task force assembled by United States President Barack Obama that it could be made viable with a new round of government help. Despite its optimistic outlook, GM had no recourse but to file for bankruptcy in the middle of 2009. The bankruptcy filing was the largest in the United States manufacturing history. The decision to push GM into a fast-track bankruptcy and provide $30 billion of additional taxpayer funds to restructure the automaker was definitely a huge gamble for the Obama administration.10 Now, the re-organized General Motors Company is 60 percent government-owned, i.e., by the United States Treasury, “with a $50 billion equity investment and $10 billion in debt and perpetual preferred shares.”11 Such equity was in exchange for more than $50 billion in federal assistance extended to the old GM and its successor.12 This was a big issue for many American taxpayers. However, the fact of the matter is that the successful rehabilitation of GM saved one of the pillars of the United States economy. Moreover, the United States Government is now slowly recovering its investments by selling some of its shareholdings in GM. In Canada, the successful rehabilitation of its domestic airline carrier, Air Canada, was attributed to the evolving role of the so-called court-appointed “Monitor” in restructurings under the Companies’ Creditors Arrangement Act (CCAA).13 Throughout the process of restructuring, the Monitor enjoyed a wide flexibility under the CCAA, such that he was able to adapt his role to facilitate the needs of a particular restructuring (taking into account the size and complexity of the case).14 In addition, the Superior Court Judge played a crucial
10 Kevin Krolicki and John Crawley, GM Files for Bankruptcy, Chrysler Sale Cleared, Reuters, June 1, 2009, available at
15 Keith McArthur and Brent Jang, How Air Canada got back on a new flight path, The Globe and Mail, August 28, 2004, available at
The approval of the new plan became final after majority of the company’s creditors agreed to swap 77 percent of Daewoo Motor’s debt amounting to 19 trillion won ($15.5 billion) for stock in the GM joint venture.20 About four years after the restructuring, “Daewoo Motor [has become] a bright spot for GM.” GM-Daewoo’s car sales steadily increased and the joint venture rehired most of the 1,600 workers laid off by the old Daewoo Motor.21 It bears noting that the South Korean court played a key role in facilitating the rehabilitation. It paved a way for the creditors to agree on a restructuring plan that made the company attractive for GM to acquire. The cases of GM, Air Canada and Daewoo Motor impress upon us the importance of an insolvency system which gives distressed corporations flexibility and sufficient room to select a rehabilitation proceeding that best addresses their financial problems. In contrast, the Philippine experience has not been encouraging, at least in the 1980s, when there were no detailed rules governing rehabilitation of debtor companies. For example, we have the case of the Philippine Blooming Mills (“PBM”), a large steel company founded in 1952 that filed for suspension of payments in the 1980s with the Securities and Exchange Commission (“SEC”) to save its business. Then, there is the case of the Stanford Microsystems, Inc. (“Stanford”), once the largest and oldest contract semiconductor manufacturer in the Philippines. Like PBM, Stanford filed a petition for suspension of payments in 1985 with the SEC, in an effort to rehabilitate its business.22 Sadly, neither PBM nor Stanford successfully emerged from rehabilitation. Their liquidation ultimately resulted in dire consequences to their creditors, employees and owners that could have been prevented had there been a sound insolvency system in place at the time.
B. Providing a Prompt and Fair Method in Liquidating Corporate Assets An effective insolvency regime should not be in favor of the financially distressed company only. There are numerous stakeholders whose interests must likewise be accommodated. These include: the creditors who may be secured to varying degrees (including tax agencies and other government creditors), employees, guarantors of debt, suppliers of goods and services, and the owners of the insolvent debtor.
20 CNN.com, Daewoo restructuring plan cleared, September 30, 2002, available at
Balancing the interests of all stakeholders is highly important in liquidation proceedings. It cannot be denied that while we may want to preserve all viable companies, liquidation may be inevitable for some distressed entities. In fact, there are instances where it is the stakeholders themselves who want to liquidate the assets of the corporation to provide an orderly closure to their business, as what happened in the PBM case when it became clear that PBM could no longer be rehabilitated.23
C. Sound Insolvency System as a Measure of Global Competitiveness In these modern times, a country’s insolvency system is one of the indicators used by international institutions in benchmarking economies to determine the competitiveness of its investment climate. For example, the World Economic Forum (“WEF”), an independent international organization, comes out with a yearly report measuring the competitiveness of countries around the world. It measures, among others, the degree to which collateral and bankruptcy laws protect lenders’ and borrowers’ rights. The measurement is made under the Legal Rights Index for Pillar 8 on Financial Market Development, one of the 12 pillars for measuring the competitiveness of economies worldwide. While the Philippines improved by 10 notches overall in the 2012–2013 Global Competitiveness Report of the WEF, relative to its rank for 2011–2012, it still fares quite poorly with a score/value of 4 on a 0–10 (best) scale under the Legal Rights Index. The Philippines’ score is the same as those of Lebanon, Iran and Sri Lanka. This score is much lower than the scores of other Asian countries like Singapore, Hong Kong and Malaysia, all of which obtained a perfect score of 10. The International Finance Corporation (“IFC”), an international financial institution that offers investment, advisory, and asset management services to encourage private sector development in developing countries, also prepares an annual report called “Ease of Doing Business Index.” This report ranks economies according to their capacity to foster a suitable investment climate. Relevantly, an economy’s insolvency system is one of the factors24 included in determining the ranking of an economy. The latest report released in June 2012 ranks the Philippines 165 out of the 185 economies included in the index on the topic of insolvency. The Philippines then ranks 138 out of the 185 countries, as an economy recommended for ease in doing business with.25
23 See Chung Ka Bio v. Intermediate Appellate Court, G.R. No. 71837, July 26, 1988, 163 SCRA 534. 24 Other factors include: (1) Starting a business; (2) Employing workers; (3) Registering property; (4) Getting credit; (5) Protecting investors; (6) Paying taxes; (7) Trading across borders; and (8) Enforcing contracts. 25 International Financing Corporation, Doing Business, Economy Rankings as of June 2012 available at
Another measurement worth noting is the so-called “Index of Economic Freedom,” which is monitored by the Heritage Foundation in partnership with the Wall Street Journal. This index considers 10 economic freedoms grouped into four broad categories, to wit: 1. Rule of Law (property rights, freedom from corruption); 2. Limited Government (fiscal freedom, government spending); 3. Regulatory Efficiency (business freedom, labor freedom, monetary freedom); and, 4. Open Markets (trade freedom, investment freedom, financial freedom). The score for business freedom is based on factors such as starting a business, obtaining a license, and closing a business. Efficient and effective insolvency systems and respect for creditors’ rights are, therefore, important to business freedom, to the extent that “[r]igid and onerous bankruptcy procedures [could be] distortionary, providing a disincentive for entrepreneurs to start businesses in the first place.”26 Under the 2013 Index of Economic Freedom Report, the Philippines suffered a decline in business freedom, which is primarily attributed to the fact that business start-up process remains time-consuming. The report does not state whether changes were noted as regards the other factors of business freedom. It must be stressed that the 10-notch increase in the country’s ranking and the increase in the economic freedom score are due to the notable improvements in investment freedom and freedom from corruption.27 Undeniably, an insolvency system plays a vital role in a modern market economy. A strong insolvency system contributes to the efficient use of resources and hence, fosters economic growth. The system also helps underpin investors’ confidence and financial stability. In fact, the Forum on Asian Insolvency Reform (“FAIR”)28 has been set up by the Organisation for Economic Co-operation and Development, the Asia-Pacific Economic Cooperation Forum and the Asian Development Bank, with assistance from the governments of Japan and Australia. FAIR regularly gathers key policy makers, members of the judiciary,
26 Ambassador Terry Miller and Anthony B. Kim, Defining Economic Freedom, in Terry Miller, Kim R. Holmes, and Edwin J. Feulner (eds.), Index of Economic Freedom: Promoting Economic Opportunity and Prosperity (2013), available at
academics, insolvency practitioners and other private sector participants to discuss insolvency-related matters, in recognition of the vital role that an insolvency system plays in an economy. Thus, an insolvency system is relevant, not only to cater to the needs of the stakeholders of a company, but also to make an economy financially viable and globally competitive. It is, thus, my humble submission that the time is ripe to pave the road to ensure that our insolvency system is effective and responsive. While there is no perfect model or framework that a country can simply adopt, there are guidelines and principles that have emerged, primarily motivated by the recent economic and financial crisis. Among these guidelines are: (1) the United Nations Commission on International Trade Law (“UNCITRAL”) Legislative Guide on Insolvency Law (“UNCITRAL Guide”);29 (2) the Principles for Effective Creditor Rights and Insolvency Systems formulated by the World Bank (“World Bank Principles”);30 and the principles and guidelines submitted under a technical project of the Asian Development Bank under RETA No. 5975: Promoting Regional Cooperation in the Development of Insolvency Law Reforms (“ADB Insolvency Reform Guide”). These standards and/or practices are aimed at improving both the efficiency and outcome of insolvency proceedings. a. UNCITRAL Guide The UNCITRAL Guide explains how designing an effective and efficient insolvency law involves a consideration of a common set of issues relating to the substantive and procedural legal framework and the institutional framework required for its implementation. Thus, UNCITRAL recommends that an insolvency system must have the following key objectives: (i) provide certainty in the market to promote economic stability and growth; (ii) maximize value of assets; (iii) strike a balance between liquidation and reorganization; (iv) ensure equitable treatment of similarly situated creditors; (v) provide for timely, efficient and impartial resolution of insolvency; (vi) preserve the insolvency estate to allow equitable distribution to creditors;
29 United Nations Commission on International Trade Law, Legislative Guide on Insolvency Law (2005) [UNCITRAL Guide], available at
(vii) ensure a transparent and predictable insolvency law that contains incentives for gathering and dispensing information; and, (viii) recognize existing creditors rights and establish clear rules for ranking of priority claims.31 b. World Bank Principles The World Bank Principles, in turn, recommend the following objectives: (i) integrate with a country’s broader legal and commercial systems; (ii) maximize the value of a firm’s assets and recoveries by creditors; (iii) provide for both efficient liquidation of nonviable businesses and those where liquidation is likely to produce a greater return to creditors, and reorganization of viable businesses; (iv) strike a careful balance between liquidation and reorganization, allowing for easy conversion of proceedings from one to another; (v) provide for equitable treatment of similarly situated creditors, including similarly situated foreign and domestic creditors; (vi) provide for timely, efficient and impartial resolution of insolvencies; (vii) prevent the improper use of the insolvency system; (viii) prevent the premature dismemberment of a debtor’s assets by individual creditors seeking quick judgments; (ix) provide a transparent procedure that contains, and consistently applies, clear risk allocation rules and incentives for gathering and dispensing information; (x) recognize existing creditor rights and respect the priority of claims with a predictable and established process; and (xi) establish a framework for cross-border insolvencies, with recognition of foreign proceedings.32 The foregoing guides, principles and assessments, however, do not provide concrete rules or actions to be set in place. In order to determine other laws, rules or systems to implement, we must look into, study and consider the experiences and trends implemented by other countries, and determine if such laws, rules or systems, would work for our country. c. ADB Insolvency Reform Guide Since the Asian financial crisis in 1997, the Asian Development Bank (“ADB”) was extensively involved in helping ASEAN countries reform their insolvency systems.
31 UNCITRAL Guide, supra. 32 World Bank Principles, supra. 18 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
In 2002, it undertook a regional technical project (RETA No. 5975: Promoting Regional Cooperation in the Development of Insolvency Law Reforms), which involved four ASEAN countries (i.e., Indonesia, Korea, Philippines and Thailand) with the following as its main focus areas: (1) the development of sound insolvency frameworks for handling cross-border insolvencies; (2) regional cooperation, especially in formal and informal workouts and restructurings; and, (3) the intersection of laws relating to secured transactions and insolvency.33 In its Final Report (“ADB Insolvency Reform Guide”),34 the ADB suggests several principles that should be taken into account in improving insolvency systems. On cross-border insolvency, for example, the ADB Insolvency Reform Guide suggests the following factors to be considered: (i) formalities for commencement in cases of recognition of foreign insolvency proceedings; (ii) procedures covering both inbound and outbound proceedings; (iii) accommodation of different types of insolvency processes; (iv) nomination of different courts; (v) access to relevant courts; (vi) necessary evidence; and, (vii) effect of recognition of a foreign insolvency proceeding.35 Insofar as informal workouts are concerned, the recommendations contained in the ADB Insolvency Reform Guide include the following: (i) All finance creditors (other than those whose exposure is negligible) should be eligible to participate in an informal workout process; (ii) A restructure should be based on a business plan that addresses operational as well as financial issues. A business plan should contain forecasts, prepared on documented and reasonable assumptions as to future events, which evince that the business of the debtor corporation can generate sufficient cash flow and profit to meet its obligations existing after the restructure; (iii) Where a debtor is found to be in financial difficulties, all relevant creditors should be prepared to cooperate with each other and to allow a sufficient (though
33 See Asian Development Bank Website (About RETA 5975) at
limited) time (“Standstill Period”) for information about the debtor to be obtained and evaluated and for proposals for resolving the debtor’s financial difficulties to be formulated and assessed, unless such a course of action is inappropriate in a particular case. The length of a Standstill Period should be limited to the time that is reasonably required to fulfill the above objectives; (iv) During the Standstill Period, all relevant creditors should agree to refrain from taking any steps to enforce their claims or (otherwise than by disposal of their debt to a third party) to reduce their exposure to the debtor provided that during the Standstill Period their position relative to other creditors and each other will not be prejudiced; (v) During the Standstill Period, the debtor should not take any action that might adversely affect the prospective return to relevant creditors (either collectively or individually) as compared with the position at the commencement of the Standstill Period; (vi) The interests of relevant creditors are best served by coordinating their response to a debtor in financial difficulty. Such coordination will be facilitated by the selection of one or more representative coordination committees and by the appointment of professional advisers to assist such committees, where appropriate, and the relevant creditors participating in the process as a whole; (vii) Creditors participating in an informal workout should ensure that they take an active role by appointing an experienced and competent representative. The representative should ensure that appropriate levels of management within the creditor organization are informed of the progress of the workout at all important stages, and that the prospective and likely outcome of the workout is expected to be acceptable to the decision-makers within the creditor organization; (viii) The debtor should meet all reasonable costs of creditors while it is considering restructuring proposals. This would include the costs of professional advisers, and any costs necessarily incurred by the coordinating committee; and, (ix) If additional funding is provided during the Standstill Period or under any rescue or restructuring proposals, the repayment of such additional funding should, as far as practicable, be accorded priority status as compared to other indebtedness or claims of relevant creditors.36 On the intersection of secured transactions and insolvency, the ADB Insolvency Reform Guide includes the following proposals: (i) Clear rules regarding the creation of a secured property interest would benefit an insolvency representative because it would assist in determining whether a secured property interest had been validly created;
36 ADB Final Report, supra. 20 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(ii) An insolvency law should provide for the participation of a secured creditor in an insolvency case, particularly in a case of reorganization, enabling a secured creditor to participate in any decision-making process and, for that purpose, establishing a class of secured creditors, regulating their participation and the circumstances under which a secured creditor may be bound to a reorganization plan; (iii) If an insolvency law provides that a secured creditor may be bound by a plan of reorganization, the law should provide conditions to ensure that the economic value of the secured creditor’s rights are not impaired and permit a secured creditor to object to being bound, unless such conditions are met; and (iv) An insolvency law should limit any claims of privilege or priority as they may affect secured creditors. Any such claims to which the proceeds of secured property are subject should be stated in a transparent and predictable way.
II. Philippine Insolvency Law under the FRIA
A. Historical Background Our first insolvency law, Act No. 1956 (“Insolvency Law”), was enacted on May 20, 1909. As with most legislation of that time, the Insolvency Law traces origin to American laws. Specifically, it was derived from the Insolvency Act of California (1895), with a few provisions taken from the American Bankruptcy Law of 1898.37 Under the Insolvency Law, jurisdiction over suspension of payments and insolvency was vested in the Courts of First Instance (now the Regional Trial Courts). This changed in 1981, when Presidential Decree No. 1799 amended Section 6 of Presidential Decree No. 902-A (“PD No. 902-A”), otherwise known as the SEC Reorganization Act which was promulgated by then President Ferdinand Marcos on March 11, 1976. Presidential Decree No. 902-A, as amended, gave the SEC jurisdiction over suspension of payments cases filed by corporations, partnerships or associations. For the first time in our legal history, PD No. 902-A, as amended, introduced the remedy of rehabilitation. The SEC was vested with the power to create and appoint a management committee or rehabilitation receiver “when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties or paralization of business operations of such corporations or entities which may be prejudicial to the interest of minority stockholders, parties-litigants or the general public.”38
37 See Sun Life Assurance Co. of Canada v. Ingersoll, G.R. No. 16475, November 8, 1921, 42 Phil. 331 and Mitsui Bussan Kaisha (Ltd.) v. Hong Kong & Shanghai Banking Corporation, G.R. No. 11079, January 12, 1917, 36 Phil. 27. 38 Presidential Decree No. 902-A, as amended by Presidential Decree No. 1799, Sec. 6. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 21
On August 8, 2000, Republic Act No. 8799, otherwise known as the Securities Regulation Code, came into effect. It reverted jurisdiction over rehabilitation cases from the SEC to the courts of general jurisdiction or the appropriate Regional Trial Courts.39 On December 15 of the same year, the Supreme Court’s Interim Rules of Procedure on Corporate Rehabilitation (“Interim Rules”)40 became effective. The Interim Rules laid down the guidelines for filing a petition for rehabilitation, either by the debtor or the creditor(s), and outlined the powers and functions of the rehabilitation receiver, among others. On January 16, 2009, or more than eight years after its promulgation, the Supreme Court amended the Interim Rules.41 The Insolvency Law, however, continued to remain in force and effect. It was only on July 18, 2010 that this century-old law was replaced by Republic Act No. 10142, otherwise known as the Financial Rehabilitation and Insolvency Act (“FRIA”) of 2010. The FRIA adopts best practices for an effective insolvency law culled from the UNCITRAL Guidelines and World Bank Principles, and the ADB Insolvency Reform Guide, among others. It has the following basic principle: Sec. 2. Declaration of Policy. – 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 furtherance thereof, the State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The rehabilitation or liquidation shall be made with a view to ensure or maintain certainty and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to facilitate a speedy and orderly liquidation of these debtor’s assets and the settlement of their obligations.42 Prior to the enactment of the FRIA, rules and procedures on suspension of payments, corporate rehabilitation, insolvency and liquidation were scattered and embodied in different laws and Supreme Court issuances. The FRIA effectively repealed the provisions found in the Insolvency Law, PD No. 902-A, as amended, the Interim Rules, and the Rules of Procedure on Corporate Rehabilitation. In addition, the FRIA codified the procedures and requirements for court-supervised, pre-negotiated and out-of-court rehabilitation and liquidation proceedings to enable businesses to continue operating and creditors to recover their investments faster and more efficiently.
39 Republic Act No. 8799 (2000), Sec. 5.2. 40 A.M. No. 00-8-10-SC, November 21, 2000. 41 A.M. No. 00-8-10-SC, December 2, 2008. 42 Republic Act No. 10142 (2010) [FRIA], Sec. 2. 22 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
B. Salient Features The FRIA is not merely a collaboration and codification of existing laws and issuances on insolvency. It introduced several innovations and has a forward-looking structure to put our country’s insolvency law at par with international standards. The following are some of its salient features: 1. Broadened Definition of Insolvency– Under the FRIA, insolvency does not only refer to a situation where the debtor’s liabilities are greater than its assets (a concept under the Insolvency Law). Consistent with modern day trend, insolvency now includes a state of inability to pay liabilities as they fall due in the ordinary course of business.43 2. Broadened Definition of Debtor– Consistent with the pro-business stance of the FRIA, individuals who conduct business under a single proprietorship, which is duly registered with the Department of Trade and Industry, may now petition for rehabilitation.44 3. Global Filing – Recognizing the emergence of business conglomerates, the FRIA allows the filing of a petition by a group of debtors45 w h i c h i s d e fi n e d a s : “(1) corporations that are financially related to one another as parent corporations, subsidiaries or affiliates; (2) partnerships that are owned more than fifty percent (50%) by the same person; and (3) single proprietorships that are owned by the same person.”46 4. Commencement Date – The FRIA introduces the concept of a Commencement Date and specifies in detail its consequences. It occurs upon the issuance of a Commencement Order by the court and retroacts to the filing of the petition. The Commencement Order serves as legal basis for: (a) exception or waiver of all taxes and fees including penalties, interests and charges;47 (b) rendering null and void the results of any extrajudicial activity or process to seize property, sell encumbered property, or otherwise attempt to collection or enforce a claim against the debtor after the Commencement Date;48 (c) rendering null and void any set-off after the Commencement Date of any debt owed to the debtor by any of the debtor’s creditors;49 (d) rendering null and void the perfection of any lien
43 FRIA, Sec. 4(p). 44 FRIA, Sec. 4(k). 45 FRIA, Sec. 12. 46 FRIA, Sec. 4(n). 47 FRIA, Secs. 19, 71. 48 FRIA, Sec. 17(b). 49 FRIA, Sec. 17(c). NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 23
against the debtor’s property after the Commencement Date;50 (e) rendering null and void any sale, payment, transfer or conveyance of the debtor’s unencumbered property or any encumbering thereof by the debtor or its agents or representatives which are not in the ordinary course of the business of the debtor;51 (f) declaring claims of separation pay for months worked prior to the Commencement Date as pre-commencement claim;52 (g) reckoning the 90-day period to confirm existing contracts;53 and (h) declaring null and void transactions, occurring prior to Commencement Date, entered into by the debtor or involving its funds or assets, which were executed with intent to defraud the creditor/s or which constitute undue preference of creditors.54 5. Exchange Debt for Equity – The FRIA recognizes that banks are usually the big creditors of businesses. To enable them to help rehabilitate their debtors, the FRIA allows banks to acquire and hold an equity interest or investment in a debtor or its subsidiaries when conveyed to such bank in satisfaction of debts pursuant to a rehabilitation or liquidation plan, notwithstanding any provision of law to the contrary.55 6. Pre-Negotiated Rehabilitation – Consistent with its objective to provide a quick resolution of an insolvency situation, the FRIA expressly allows pre-negotiated rehabilitation plan. The plan must be endorsed or approved by creditors holding at least two-thirds of the total liabilities of the debtors, including secured creditors holding more than 50 percent of the total secured claims and unsecured creditors holding more than 50 percent of the total unsecured claims of the debtor.56 The approval of a pre-negotiated rehabilitation plan will have the same legal effect as the confirmation of a court-supervised rehabilitation plan.57 7. Out-of-Court Rehabilitation– To accommodate preference for informal workouts and protect the debtor and its creditors from the tyranny of the minority, the FRIA introduces a key innovation by formally adopting out-of-court rehabilitation as part of our legal system.
50 FRIA, Sec. 17(d). 51 FRIA, Sec. 52. 52 FRIA, Sec. 56. 53 FRIA, Sec. 57. 54 FRIA, Sec. 58. 55 FRIA, Sec. 11. 56 FRIA, Sec. 76. 57 FRIA, Sec. 82. 24 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
This remedy may be availed of where the debtor/s, and creditors representing at least 85 percent of the debtor’s total liabilities (composed of at least 67 percent of the debtor’s secured obligations and 75 percent of the debtor’s unsecured obligations), agree on a restructuring or rehabilitation plan.58 This is essentially an out-of-court proceeding, but the FRIA expressly allows the insolvent debtor and/ or creditor to seek court assistance for the execution or implementation of their rehabilitation plan.59 8. Exemption from Taxes – In furtherance of its policy objectives, the FRIA grants certain relief from the imposition of all taxes and fees including penalties, interests and charges due to the national government or local government units upon issuance of the Commencement Order.60 In addition, the FRIA provides that the amount of any indebtedness or obligation, reduced or forgiven in connection with a rehabilitation plan’s approval, shall not be subject to any tax.61 9. Additional Exceptions to Stay or Suspension Order – To help put an end to never-ending disputes on the coverage of the stay or suspension order, the FRIA enumerates the exceptions to its suspensive effect. For example, the order does not apply to cases pending in the Supreme Court and specialized bodies62 and some financial market-related transactions (i.e., clearing of checks, settlement of securities in the stock market, etc.).63 10. Post-commencement Loans and Obligations– To encourage third parties to extend financial and other forms of assistance to the distressed debtor, the FRIA allows the debtor, with the approval of the court and upon the recommendation of the rehabilitation receiver, to enter into credit arrangements or incur other obligations as may be essential for its rehabilitation.64 The payment of these post-commencement loans and obligations is considered an administrative expense,65 which means that they can be paid by the debtor notwithstanding the stay or suspension order.
58 FRIA, Secs. 83–84. 59 FRIA, Sec. 89. 60 FRIA, Sec. 19. 61 FRIA, Sec. 71. 62 FRIA, Sec. 18(a) and (b). 63 FRIA, Sec. 18(f). 64 FRIA, Sec. 55. 65 See FRIA, Sec. 4(a)(4). NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 25
11. Personal Liability of Directors and Officers– In line with trends on good corporate governance, the FRIA imposes personal liability on directors and officers if they are found to have willfully disposed or caused the disposal of any property in fraud of creditors or in a manner grossly disadvantageous to the debtor, or have concealed or approved the concealment from the creditors of, or embezzles or misappropriates, any property of the debtor.66 12. Juridical Person as Rehabilitation Receiver– A juridical person may now serve as a rehabilitation receiver. It must, however, designate a natural person who possesses all the qualifications and none of the disqualifications of a rehabilitation receiver as its representative.67 13. Creditors’ Committee – To facilitate the rehabilitation of the debtor, the FRIA expressly authorizes the creditors belonging to a class to formally organize themselves into a committee. The creditors may, as a group, form one committee composed of: (a) secured creditors; (b) unsecured creditors; (c) trade creditors and suppliers; and, (d) employees of the debtor.68 14. Confirmation of Contracts – The FRIA requires the debtor, with the consent of the rehabilitation receiver, to notify each contractual counter-party whether it is confirming a particular contract. Contractual obligations of the debtor arising or performed during this period, and afterwards (for confirmed contracts), shall be considered as administrative expenses. Contracts not confirmed within the required deadline shall be considered terminated.69 15. Protection of Secured Creditors’ Interest – Consistent with international best practices, the issuance of a commencement order or a suspension or stay order does not diminish or impair the security or lien of a secured creditor, or the value of his/its lien or security, except that his right to enforce it is suspended during the term of a Stay Order. If the property secured is not necessary for the rehabilitation of the debtor, however, the secured creditor is allowed to enforce his security or lien, or foreclose upon the property of the debtor securing his/its claim under certain conditions.70 16. Conversion into Liquidation– In a court-supervised rehabilitation, a rehabilitation plan must be approved by the court not later than one year from the filing of a petition. If no rehabilitation plan is approved within such period, the court may,
66 FRIA, Sec. 10. 67 FRIA, Sec. 28. 68 FRIA, Secs. 42–43. 69 FRIA, Sec. 57. 70 FRIA, Sec. 60. 26 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
on its own or upon motion of a party, order the conversion of the rehabilitation proceeding into liquidation.71 17. Faster Voluntary Liquidation– In cases of voluntary liquidation, the FRIA mandates the issuance of a Liquidation Order within five working days if the court finds the petition sufficient in form and substance.72 In addition, the FRIA, in contrast to the old Insolvency Law, no longer requires the posting of a bond with at least two sureties.
C. UNCITRAL Cross-Border Insolvency Model Law In order to better prepare for globalization of businesses, the FRIA formally adopted the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (“Model Law”). The Model Law is aimed at improving cooperation of courts and administrators in international insolvency proceedings, with the “goal of maximizing the value of the debtor’s worldwide assets, protecting the rights of the debtors and creditors and furthering the just administration of the proceedings.”73 Notably, in the Association of Southeast Asian Nations (ASEAN), the Philippines is first to recognize and adopt the Model Law in its insolvency system. The Model Law reflects cross-border insolvency practices which are characteristic of modern and efficient insolvency systems. The Model Law, however, respects different national procedural laws and does not impose a substantive unification of insolvency laws. Instead, the Model Law offers solutions which help in modest, but significant, ways.74 These include: 1. Providing foreign representatives the right to access courts of the enacting State. This, in turn, provides relief or a temporary “breathing space” to foreign representatives and allows the court to determine coordination among various jurisdictions or grant such other relief warranted for optimal disposition of the insolvency proceeding; 2. Determining when a foreign insolvency proceeding should be accorded recognition and the consequences of the same;
71 FRIA, Sec. 72. 72 FRIA, Sec. 104. 73 The World Bank, Principles and Guidelines for Effective Insolvency and Creditor Rights Systems (April 2001), available at
3. Providing a transparent regime in furtherance of the right of foreign creditors to commence or participate in an insolvency proceeding in the enacting State; 4. Permitting courts in the enacting State to cooperate effectively with other courts and representatives, in a foreign insolvency proceeding; 5. Authorizing courts in the enacting State and other persons administering insolvency proceedings therein to seek assistance abroad; 6. Establishing rules for coordination in cases where an insolvency proceeding in the enacting State proceeds concurrently with an insolvency proceeding in another State; and, 7. Establishing rules for coordination of the relief granted in the enacting State, in cases where two or more insolvency proceedings involving the same debtor take place in multiple States. The Model Law may be applied to a number of cross-border insolvency situations, including the following: (a) inward-bound requests for recognition of a foreign proceeding; (b) outward-bound requests from a court or administrator in the enacting State for recognition of an insolvency proceeding commenced under the laws of the enacting State; (c) coordination of concurrent proceedings in two or more States; and, (d) participation of foreign creditors in insolvency proceedings taking place in the enacting State.75 The salient features of the Model Law are the following: 1. Cross-border Cooperation– There is a widespread limitation on cooperation and coordination among judges from different jurisdictions in cases of cross-border insolvency. This limitation is derived from uncertainty in, or lack of a legislative framework regarding, the scope of legislative authority to pursue cooperation with foreign courts. The Model Law expressly empowers courts to extend cooperation in the areas covered by the Model Law.76 This includes authorizing cooperation between a court in the enacting State and a foreign representative, and between a person administering the insolvency proceeding in the enacting State and a foreign court or representative.77 2. Coordination of Concurrent Proceedings– The Model Law deals with coordination between a local proceeding and a foreign proceeding concerning the same debtor78
75 UNCITRAL Model Law, Art. 1. 76 See UNCITRAL Model Law, Arts. 25–27. 77 UNCITRAL Model Law, Art. 26. 78 UNCITRAL Model Law, Art. 29. 28 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
and facilitates coordination between two or more foreign proceedings involving the same debtor.79 The objective is to foster coordinated decisions that would best achieve the objectives of both proceedings (e.g., maximizing the value of the debtor’s assets and determining the most advantageous restructuring of the enterprise). In order to achieve satisfactory coordination and adapt relief to changing circumstances, the Model Law directs the court, in all situations covered by the Model Law (including those that limit the effects of foreign proceedings in the face of local proceedings), to cooperate with foreign courts and representatives to the maximum extent possible.80 3. Foreign Assistance for Insolvency Proceeding Taking Place in the Enacting State– The Model Law authorizes courts of the enacting State to seek assistance from other jurisdictions on behalf of an insolvency proceeding taking place therein.81 Without such legislative authorization, courts are deterred from seeking such assistance abroad. This, in turn, creates potential obstacles to a coordinated international response in case of cross-border insolvency. 4. Foreign Representative’s Access to Courts of the Enacting State – An important objective of the Model Law is to provide foreign representatives expeditious and direct access to courts of the enacting State. The Model Law avoids the need to rely on cumbersome and time-consuming letters rogatory or other diplomatic or consular communications. Thus, it facilitates a coordinated approach to cross-border insolvency and makes fast action possible. 5. Recognition of Foreign Proceedings – The Model Law establishes the criteria in determining whether a foreign proceeding should be recognized.82 It provides that, in appropriate cases, the court may grant interim relief pending a decision on recognition.83
D. The Proposed FRIA Rules In accordance with its constitutionally-vested rule-making power, the Supreme Court is in the process of formulating the implementing rules and regulations of procedure (“IRR”) of the FRIA. The IRR for rehabilitation proceedings under the FRIA has been drafted by the Subcommittee on Commercial Courts. The draft rules have been circulated to various stakeholders for their comments.
79 UNCITRAL Model Law, Art. 30. 80 See UNCITRAL Model Law, Arts. 25–30. 81 UNCITRAL Model Law, Art. 25. 82 See UNCITRAL Model Law, Arts. 15–17. 83 UNCITRAL Model Law, Art. 19. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 29
Some of the key issues to be clarified under the IRR (for rehabilitation proceedings) are the following: 1. The majority vote requirement for court-supervised rehabilitation under Section 12 of the FRIA. The issue is whether the majority vote requirement should be liberally construed and simply defined as more than 50 percent of the stockholders representing the outstanding capital stock, notwithstanding any higher majority vote requirement imposed in the debtor’s articles of incorporation and/or by-laws. 2. The consolidation of all legal proceedings upon the issuance of a Commencement Order as provided under Section 17(e) of the FRIA. The question is whether a decision or order rendered by a judicial body, despite the issuance of a Commencement Order, should at least be voidable in nature or may be a subject of an annulment proceeding. 3. The time period for deciding a court-supervised rehabilitation case. The FRIA gives a maximum period of one year. The issue is whether the Supreme Court may be authorized under the IRR to give an extension for compelling reasons. 4. Treatment of Employee’s Claims. Under Section 56 of the FRIA, compensation of employees required to carry on the business shall be considered administrative expense. In cases where the employer does not want to reinstate the employee pending appeal and opts for payroll reinstatement, the issue is whether such payroll reinstatement can be considered as administrative expense. 5. Out-of-Court Rehabilitation Agreements. The issue is whether there can be an authorized splitting of cause of action, i.e., a case in the Regional Trial Court to annul the out-of-court rehabilitation agreement under its general jurisdiction and a case for prohibitory injunction under Section 88 of the FRIA, to enjoin the implementation of the agreement. Once the IRR for rehabilitation proceedings are approved, the IRR for liquidation proceedings will be drafted and thereafter, promulgated in due course.
III. Additional Key Components for an Effective Insolvency System Found in Developing Countries
The passage of the FRIA is considered a major reform to our economy’s financial system. Nevertheless, we still need to provide a complementary set of rules and support systems to ensure its effectivity and efficiency. As previously mentioned, the Supreme Court is in the process of drafting the IRR of the FRIA. Aside from well-established rules, however, developed and/or developing countries have put in place the following in their insolvency frameworks: 30 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
A. Capacity Building for Insolvency Courts i. Special Commercial Courts An efficient judicial system is founded on rules that confer jurisdiction upon courts and vest them with authority to act on insolvency proceedings. Jurisdiction is the authority to hear and determine a cause or the right to act in a case.84 Considering that rehabilitation proceedings, insolvency issues and the task of implementing its governing law, such as the FRIA, involve highly crucial and technical matters, most jurisdictions have assigned and created “specialized” courts. In Belgium, its legislature created a body called the “judicial composition” under the Federal Act of July 17, 1997. The objective was to spot traders in difficulty at an early stage and before their problems became so serious that the procedure would not be able to save them from insolvency. Inside the commercial courts, there were special chambers that were assigned to collect data on traders in difficulty. These chambers were composed of three judges who determine whether a trader meets the criteria for a judicial composition. The main source of information consisted of data that traders were obliged to file with the registry of the commercial court on a regular basis. The special chambers were also required to conduct its examinations in a discreet way so as not to disturb normal commercial life. In fact, only the debtor and the public prosecutor were given the right to consult the file.85 This “specialized” court in Belgium, however, was considered too evasive and created a negative stigma in the names of the distressed traders. Thus, Belgium later (i.e., on January 31, 2009) passed the Law on the Continuity of Enterprises, which fundamentally changed the rules on judicial composition. At present, the two main objectives which govern Belgium’s new Restructuring Law are: (i) promoting out-of-court or confidential restructurings, so that the debtor can avoid the negative stigma attached to any public insolvency proceeding; and, (ii) providing flexible solutions to allow companies in distress to reorganize their activities.86 In the United States, Congress passed the Bankruptcy Code which, among others: (1) created a bankruptcy court, the constituent members of which are bankruptcy judges appointed by the judges of various courts of appeals for a term of 14 years; (2) granted jurisdiction over bankruptcy cases and litigation, which arises in those cases to the district courts in the first instance; and, (3) reallocated the insolvency responsibility by enabling a district court handling bankruptcy litigation to refer them to the bankruptcy court.87
84 Feria and Noche, I Civil Procedure Annotated 130 (2001). 85 Collier International Business Insolvency Guide 2, Insolvency Laws of Selected Nations 15.05[1] (2005 ed.). 86 See Thierry Bosly and Muriel Alhadeff, The New Belgian Insolvency Law, White and Case, January 31, 2009, available at
However, in the Philippines, while Congress initially considered the creation of specialized courts, budgetary constraints prevented this idea to materialize. Moreover, considering that there are only few insolvency cases filed every year, Congress found it best to leave the designation of specialized commercial courts from the ranks of our Regional Trial Courts to the Supreme Court. At present, there are special commercial courts which handle intra-corporate, rehabilitation and intellectual property cases under A.M. No. 03-03-03-SC. ii. Training Programs Sufficient training programs and a medium must be in place to ensure the competency, efficiency and independence of these specialized courts. In the United States, bankruptcy judges as well as all federal judges and magistrates, receive formal judicial training from the Federal Judicial Center in Washington D.C. The Center provides research, training and continuing education programs necessary to increase the skills of the judges. The Center runs orientation training for all new federal judges, providing an in-depth introduction to the federal court system and to substantive and procedural areas pertinent to the areas of law in which the judges deal. The Center also provides continuing legal education programs, offering each judge an update in relevant areas of statutory and case law, as well as case management. There is also specialized training in specific subject areas, such as financial accounting, which is very important to the development of bankruptcy judges skills.88 In the Philippines, the Philippine Judicial Academy (PHILJA), which was created by the Supreme Court pursuant to Administrative Order No. 35-96 on March 12, 1996, was institutionalized as the “training school for justices, judges, court personnel, lawyers and aspirants to judicial posts.”89 PHILJA plays a vital role in ensuring judicial competence and efficiency through continuing judicial education. The training of our commercial law judges has been pursued earnestly by the Supreme Court through PHILJA. PHILJA recently completed a training module on rehabilitation and liquidation proceedings in insolvency. This module included the following: (1) recent trends and developments in light of the enactment of the FRIA; (2) introduction of significant changes and basic legal concepts and reasoning, including an introduction to primary and secondary source materials relating to the FRIA; (3) discussions on specific roles and tasks; and, (4) accounting issues.
88 See Timothy B. De Sieno and Rupal Shah Palanki, The United States’ Specialized Bankruptcy Courts (Forum for Asian Insolvency Reform, Insolvency Reform in Asia: An Assessment of the Recent Developments and the Role of the Judiciary, Bali, Indonesia, February 7–8, 2001), available at
It is highly recommended that there be a continuing capacity building program for our special commercial court judges on insolvency matters, which should include: (1) best practices and techniques in handling rehabilitation and liquidation cases; (2) updates on rules, procedures and jurisprudence; (3) studies on local and foreign insolvency cases; (4) exposure trips to enable our judges to actually observe foreign insolvency proceedings and interact with foreign bankruptcy judges; (5) introduction to procedures of international insolvency proceedings in light of the cross-border insolvency provisions in the FRIA; (6) dealing with rehabilitation receivers and liquidators; (7) financial and other technical issues such as fixing the compensation of rehabilitation receivers and liquidators; and, (8) guidelines in dealing with ethical disputes that may arise during the proceedings. iii. Specialized Court Personnel Capacity building for our insolvency courts may include tapping specialized personnel to assist them. In Germany, for example, there is a specialized court officer called a “Rechtspfleger” who replaces the judge in a limited area of legal activity.90 The Rechtspfleger is a very important officer in insolvency proceedings. After the proceedings have been opened by the judge, they are from then on presided by the Rechtspfleger. This means that the Rechtspfleger represents the court in the post-opening stage. The judge is no longer involved. Theoretically, the judge may decide to retain control of the proceedings. The judges, however, rarely do so because they have little or no experience with the post-opening stage. Unlike a judge, a Rechtspfleger does not have to attend law school and obtain a Juris Doctor degree. Instead, he has to go through a legal education program especially designed for the Rechtspfleger profession. The German states run internal colleges for that program. Generally, the colleges will only admit students who have the revocable status of a civil servant of the state running the college. The program takes three years to complete. It is made up of both on and off the job training. In some German states, the program includes 12 months of studies at the college, followed by 13 months practical training at an Amtsgericht (County Court) and in the office of a civil law notary, followed by another nine months of studies at the college and concluded by two months of practical training with the office of the public prosecutor. At the end of the program, the students have to take the Rechtspfleger exam. Each student who passes the exam is awarded the degree of Diplomrechtspfleger. The Rechtspfleger decides independently, just like a judge. The Rechtspfleger’s responsibilities include, among others, the following: (a) supervision of legal guardians; (b) rulings on applications for entry in the commercial register; (c) registration of mortgages and similar rights in the registry of deeds; (d) judicial sales of realty; and, (e) execution of civil and criminal judgments.
90 See
In the United States, there is an officer known as a Certified Bankruptcy Assistant (CBA). CBAs are required to attend a Certified Bankruptcy Assistant Program wherein they are provided with a general background in bankruptcy law and enhanced writing skills for professional bankruptcy assistants. Successful completion of the program allows the CBA to have an enhanced knowledge-base and qualifications for private or public employment in the bankruptcy field.
B. Capacity Building for Insolvency Practitioners Bankruptcy law has developed into a very unique, sophisticated and technical area of expertise, and there is an increasing demand for legal ability and proficiency especially from those who practice in this field. For example, rehabilitation receivers and liquidators may be required to periodically attend primer courses on good insolvency practices. The topics offered may include, among others, current developments and trends on insolvency proceedings, compliance mechanisms and relevant periods, and ethical and professional responsibility, including duty of confidentiality. The organization of associations for insolvency practitioners has been done in other countries to help professionalize the ranks of insolvency practitioners. In fact, there is a worldwide federation, known as the International Association of Restructuring, Insolvency and Bankruptcy Professionals (INSOL), composed of national associations of accountants and lawyers who specialize in turnaround and insolvency. Currently, there are over 43 Member Associations with over 9,000 professionals participating as members. INSOL also has ancillary groups that represent the judiciary, regulators, lenders and academics. These groups play an invaluable role within INSOL and provide valuable fora for discussions of mutual problems. Members of INSOL have ready access to various conferences, seminars, publications and activities that would facilitate the exchange of information and ideas, encourage greater international cooperation and communication amongst insolvency professionals. By becoming a member of, or partnering with, these international associations, we will be equipped with vital knowledge and experience to guide our country in developing internationally-accepted legislation and best practices. In Australia, the Insolvency Practitioner Association of Australia (IPAA) has, within the past 20 to 30 years, promulgated a scale of hourly rates for insolvency practitioners. Liquidators are required to be registered.91 Administrators and liquidators in Australia are required to make a statement of independence in the form of a declaration of relevant relationships they have or have had with the company, its associates, any former liquidators or administrators or any charge holder in the preceding 24 months.92 The Australian
91 Collier International Business Insolvency Guide 2, Insolvency Laws of Selected Nations 14.04[4] [v][A] (2005 ed.). 92 Ibid. at 14.04[5][d]. 34 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Securities and Investment Commission may investigate a liquidator’s conduct if he or she has not faithfully performed his or her duties.93
C. “Electronic Filing” System Delay in the proceedings is commonly caused by the difficulty in determining the reckoning date for the running of the period for compliance with the court’s orders and processes. Our present Rules of Court provide that the period to file a responsive pleading starts from receipt of the order/pleading. Thus, in order to delay the proceedings, most parties serve and file their pleadings through registered mail. To solve this problem, the court may require the parties to file and serve their pleadings/ motions electronically. In fact, the United States has created a system where parties and courts may electronically file and serve their pleadings/motions/order. This system is called the Electronic Bankruptcy Noticing (EBN).94 Under the EBN, lawyers, parties and the courts can upload their pleadings and filings, and once uploaded, the same would be accessible by interested persons online. The use of the EBN is free and voluntary, in that the parties must consent to be subject to the electronic filing and notification system. By having an electronic filing (e-filing) database, parties will no longer have an avenue to prolong the proceedings of the case. Moreover, an e-filing system will be good for our environment, as this would reduce the need to print out copies to be furnished all parties of the case.
D. Establishing an expeditious and specialized Appeal System There is also a need to establish a fast track appeal system made up of an insolvency law panel of appellate court judges. This would bring expertise to the appellate level. While appeals cause delay in the disposition of a case, there must still be a mechanism that would allow a timely and proficient review of the orders, resolutions and decisions of the lower courts. This may only be attained if the composition of the reviewing body is properly trained, experienced and knowledgeable in insolvency proceedings.
93 Ibid. at 14.04[5][f][iv]. See also Report 287: ASIC regulation of registered liquidators: January to December 2011 (Australian Securities & Investments Commission, May 2012), available at
IV. Conclusion
The legislative reform of the country’s insolvency system, through the enactment of the FRIA, is a major step towards economic and financial reform. The FRIA has a forward-looking structure by adopting international best practices on insolvency. Foremost is the adoption of pre-negotiated rehabilitation, out-of-court rehabilitation or restructuring agreements, and cross-border insolvency as component parts of the law. With the enactment of the FRIA, we have paved the road to a more effective and responsive insolvency system. Nevertheless, there are several support systems that still need to be developed to realize this objective. As discussed above, these include capacity building for our special commercial courts handling insolvency cases and insolvency practitioners, providing for electronic filings and creating a fast track appeal system similar to those existing in developed nations. With the foregoing in mind, let us now move forward and take a step towards a developed and stable financial economy. 36 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Reaction*
Sen. Edgardo J. Angara**
I prepared a very short PowerPoint presentation just to drive my key comments. But before that, let me just put this whole discussion in context—liquidating or rehabilitating an enterprise is just one aspect of the business cycle of a whole business.
* Delivered at the Ninth Metrobank Foundation Professorial Chair Lectureheld on January 25, 2013, at the Court of Appeals Auditorium, Centennial Building, Court of Appeals, Manila. Transcribed. ** “No statesman of this generation has authored and implemented more far-ranging reforms than Senator Edgardo J. Angara,” says the business magazine BizNews Asia. “His reforms for education, agriculture, healthcare, anti-graft, senior citizens, and the economy have made life significantly much better for many Filipinos and laid the foundation for future growth for the country.” Angara, known as “Mr. Education,” initiated the threefold reform of the country’s educational system, which resulted in the creation of the Commission on Higher Education and Technical Education and Skill Development Authority, as well as the institutionalization of the Free High School Act and the Government Assistance to Students and Teachers in Private Education (GASTPE). As the present Chair of the Senate Committee on Education, Arts and Culture, he was behind the passage of the Kindergarten Education Act and Early Years Act. As president of the University of the Philippines from 1981-1987, he was described as a “resolute technocrat” and a “tough-minded leader.” “Angara’s administration’s solutions to the university’s problems would later go on the record as unprecedented and unsurpassed,” states an official chronicle of his presidency entitled, At the Helm of UP. He is credited for the singular achievement of transforming UP into a system of autonomous universities. Under his leadership, a common General Education program for all campuses was introduced, a seven-year honors medical curriculum installed, fiscal autonomy obtained, and the Philippine Rice Research Institute established. Angara is also the father of healthcare for authoring the National Health Insurance Act (PhilHealth) and the Senior Citizens Act. He modernized the agricultural sector by authoring the Agriculture and Fisheries Modernization Act (AFMA) and implementing it when he served as Secretary of the Department of Agriculture. Angara also established the new National Museum, National Commission on Culture and the Arts, Natatanging Manlilikha Award and National Cultural Heritage Law. National Artist F. Sionil Jose said Angara “showed himself to be the national leader most actively engaged and committed to our cultural uplifting.” NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 37 REACTION First of all, we need to engage businesses or entrepreneurs to go into business, otherwise we would not be able to talk about rehabilitation or liquidation. That is a key to unlocking the wealth of the nation. Now, how do we engage those small and medium enterprises (SMEs) that Atty. Francis Ed. Lim mentioned that comprised almost 99 percent
His initiatives on good governance include the Procurement Reform Act and the GOCC Governance Act. He is promoting good governance in an international scale through the Global Organization of Parliamentarians Against Corruption (GOPAC) as its Vice Chair and in the Southeast Asia Parliamentarians Against Corruption (SEAPAC) as its Charter President. President Corazon C. Aquino once said, “Ed Angara is the face of decent Philippine politics abroad.” Angara’s background in corporate law is equally rich and storied. In 1972, he founded what would become one of the country’s top law firms today, the ACCRA Law Offices. He subsequently served in the boards of many leading companies, including San Miguel, Malayan Insurance, RCBC, Insular Life and IBM. With such remarkable knowledge of business and financial markets, he pushed for the passage of the Credit Information System Act, Personal Equity And Retirement Account Act (PERA), Real Estate Investment Trust Act (REIT), the Financial Rehabilitation and Insolvency Act (FRIA), as well as the reform of the Philippine Deposit Insurance Corporation Charter and Pag-Ibig Fund Charter. Today he is championing the cause of science and technology, through the Congressional Commission on Science, Technology and Engineering (COMSTE), which he chairs. The triumvirate of information and communications technology (ICT) bills he sponsored—Data Privacy, Cybercrime Prevention and creation of a Department of Information and Communications Technology (DICT)—were recently passed and will serve as the foundation of the country’s knowledge and technology-based economy. The former Senator Blas F. Ople called Angara a “national living treasure.” Angara was awarded Spain’s Premio Casa Asia in 2010, making him the first Southeast Asian to win the foreign policy prize. He is the official representative of the Unión Latina to the Philippines, an organization consisting of 37 member-nations of the neo-latin languages. Angara has also been conferred with the Commandeur dans l’ordre des Palmes medal, a citation given by the French Republic to individuals engaged in promoting excellence in higher education. He was also the first Lee Kuan Yew Fellow in the Philippines. He was recently inducted as a Corresponding Academic Member of the prestigious Real Academia Hispano Americana De Ciencias, Artes Y Letras (Royal Hispano-American Academy of Science, Arts and Letters) in Cadiz, Spain, making him the first Asian and first non-Spanish speaker to be elected into the global network of scholars. He was named one of the People of the Year 2011-2012 by People Asia magazine. Angara’s prolific and consistent performance springs from a rich background as an educator, lawyer, banker, farmer, patron of the arts. He has been elected to four consecutive terms, making him the longest serving senator in the post-EDSA Senate. As Nick Joaquin, the Grand Old Man of Philippine Literature, wrote, “If clothes make the man, laws make the solon, for his product describes the lawmaker. On that rule it can be assumed of Senator Edgardo J. Angara that he has range and relevance.” 38 PHILJA JUDICIAL JOURNAL VOL 16:41 2014 of our economy and generates about 95 percent of employment in this country? Well, we need to provide them capital, we need to give them access to credit. And that is exactly what I did. You know banking and finance is not really my strong suit, I am more at home in education, culture, and agriculture. When I became the chair of the banks and financial institutions, I thought that we must build up our capital market, our stock exchange, our bond market, our financial institutions that also cater to the SMEs like the savings banks, the rural banks, and the finance companies. But how do you do that when these financial institutions have, over the years, been an elitist, almost selective and exclusive institution. It is so hard to borrow money, or if they lend you money, you have to mortgage almost your entire estate, including your family home. You are in hock almost for life. Therefore, if enterprises in this country are going to be funded solely through bank borrowings, I do not think that we will be able to engage and stimulate entrepreneurial spirit. That is why I made it a point that I will enlarge the capital market. The first measure that I thought, and Atty. Lim is instrumental in helping me put this together, is the Credit Information Bureau. Because credit information will now provide the lenders, insurance companies, finance companies with the history of practically every borrower. And you do not have to spend a lot of money to hire a battalion of credit investigators because at the click of a mouse you can see the credit history of every borrower. Therefore, the first result is that it is easier to lend to that borrower. Second is that the risks are better known and manageable, and there would be more circulation of money in the economy. So, I did that as a basis for enlarging our capital market. The second is the Personal Equity and Retirement Account (PERA) as mentioned already by Justice Jose C. Vitug. We have almost 10 million Filipinos working overseas. Some of them are covered by the local SSS or pension fund of the place where they work. But a large majority of them are not covered at all by any pension system, whether private or public. And so when they come home, they have nothing to depend on because the yearly remittance or the monthly remittance they sent to their family are used mostly for consumption. So we thought that if we can encourage those who are not yet covered either by local SSS or local GSIS to contribute part of their savings to a fund, then they can look forward to retirement at age 56, like retirement from the military or police. Then, they can withdraw that fund income tax free, and they can build it up through the years. I think the contribution of an OFW is about One Hundred Fifty Thousand Pesos (P150,000) a year tax free. A local person, especially those self-employed, can contribute One Hundred Thousand Pesos (P100,000) a year of their earnings or savings into that retirement fund. Through this mobilization of savings, then we will build up again a development fund and we will increase the so-called savings rate of the Filipino to a higher level than what it is now. Our savings rate in the Philippines is 19 percent. For instance, if you earn One Hundred Pesos (P100) a month, a Filipino will save Nineteen Pesos (P19) of that. But a Malaysian, a Taiwanese, a Korean, a Japanese saves Thirty-five Pesos (P35) out of that P100. That is why they have a very high savings rate. Their savings are the ones that are funding their roads, bridges, schools and clinics. On the other hand, it is other people’s savings that are funding our roads because we are dependent heavily on foreign loans and NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 39 REACTION grants because we do not have our own domestic savings. So that is part of the idea that the family, who is not covered by the pension network of the Philippines, either GSIS for public employees and SSS for private employees, can contribute to a fund and create his own pension. That is PERA. The third is the Real Estate Investment Trust (REIT). This is an instrument that is so well-known and very well-utilized in the region, from Singapore to Hong Kong, to Taiwan, to Shanghai, to Korea, to Japan, to Thailand. What does it do? You know in the Philippines, we have at most US$3 billion worth of real estate that are locked up, whose values are locked up, because there is no mechanism for the public or for anyone to invest it, or liquify it, except the owner who wants to sell it. But how many will buy land? They are all land. So again, this instrument it is not something new. It has been in existence in the US, in England, Germany, and other western countries for so long. It is a very effective mobilizer, or very effective liquifier of hard asset like land into cash. We passed that. It was very hard to pass it, but we got it passed. Then we rehabilitated or we changed the Pre-need Code. Remember the Pre-need Code—the educational plans, the pension plans, the unemployment plans, and the death plans? They are very effective mobilizers of savings. At the time when the industry collapsed, there was about P130 billion locked up in those companies. But through the combination of mismanagement and fraud, just plain chicanery, half of those assets were gone by the time we were able to put together a new Pre-need Code. Now, we are in the process of the revision of the Insurance Code. And that is the last leg of those institutions that effectively mobilized savings in the country and will increase the same. So, that is part, an essential part, a key component of a business and financial system. Without credit, do not talk about enterprise. Now, let me go to competitiveness. Why is the Philippines almost at the bottom ladder of the competitiveness table? It is consistent. In general competitiveness, although we have jumped 10 notches in the past two years, we are still at number 75 out of 130 countries. No, I think we are now at number 65 and we have hit the halfway mark. But we have been consistently at the bottom, bottom-third of the scale. We are very low in doing business competitiveness as Atty. Lim’s table showed. We are very low in innovation. Without innovation, we will remain struggling, we will always remain poor, definitely poor. We are very low in attracting direct foreign investments. This is key to powering our economy. How much does Vietnam attract in direct foreign investments? That means foreigners who set up businesses, employ people, pay them decent jobs, and create employment all around the community. Not the hot money that we now see being invested in stocks, which is flighty—with any sign of danger, that investment in stock will vanish in just one click. Direct investment will stay in the country and will create decent paying jobs. How much did the Philippines attract in foreign investment last year? Less than $2 billion, versus Thailand’s almost $14 billion, and Vietnam’s $7 billion. I would not mention anymore Singapore and Malaysia because they are mind-boggling. So, that ought to be our target. The financial and business system must encourage, must stimulate and attract 40 PHILJA JUDICIAL JOURNAL VOL 16:41 2014 those so-called direct foreign investments in order that what we are seeing now, the uptake in our economy, will become sustainable. Otherwise, it will not. Therefore, this FRIA, this exit strategy is very important because for 100 years we have been operating in an insolvency regime that generally favors the creditor—more creditor- friendly and very harsh on the debtor. And studies now show that those regimes that favor creditors have a larger percentage of failures. And the losses out of the bankruptcy of assets are almost half of the value of the firm under those traditional regimes. And with this introduction of a new paradigm, we have a new bankruptcy regime that is not totally in favor of creditor or totally against debtor but more entrepreneur-friendly, more stimulative of the entrepreneurial spirit. Why? Because if I am a new guy wanting to invest, I am not afraid of the risk of failure because I know at the end of the day, if somehow I will suffer economic losses, I can exit, I can be rehabilitated, or I can be wound up in a fast, less painful, less costly way. But under the present system, it is so difficult and it is so painful, and so expensive, and so wasteful to go under. We have iconic companies in this country. I think this audience is too young to remember, but have you heard of Ang Tibay? Ang Tibay was an iconic brand. It pioneered clothes by a genuine Filipino entrepreneur. What happened to it? It is gone, even the brand is gone. Why? Because there was no orderly speedy liquidation process or rehabilitation mode during that time. Have you heard ofAguinaldos ? That was the Rustan’s of the generations of Teddy Regal. It was so famous. You can go to Aguinaldo’s and find practically all the boutique items there at that time. What happened toAguinaldo’s ? Gone, even the valuable brand is gone. Another one is Victorias Milling. It is probably the most forward-looking, most progressive of the companies because it goes more than milling sugar. It went into manufacturing cranes, manufacturing building structures made of steel. That was how they built up the business. But what happened to it? The banks, PNB, if I remember it right, or it’s a consortium of banks including Metrobank, took over Victorias Milling and then just parceled it out instead of reviving a very valuable asset with a very valuable skilled set of people. That was the price we pay for working under this century-old Bankruptcy Law. Then, as we know now, under the system, almost half of the value of the enterprise would have been gone, either when it is revived or it is liquidated. Fifty percent of the asset value is gone. In the Philippines, I think, all is gone. That is one context I would like you to understand, the importance of this strategic shift in focus from a creditor-friendly emphasis to an entrepreneurial-friendly system. That is what we need in this age of the Internet. In the 21st century, what we need are entrepreneurs, the pioneers. Well, not necessarily the Steve Jobs and Bill Gates of this world, but why not? We may have them in our midst if given the proper incentive from the business and financial system. Three weeks ago, I keynoted a conference of fourth year students of Business Administration, Financial Management and Accounting with “Financial Literacy” as their topic. I thought that was wonderful because Filipinos, I think, are not financially sophisticated. How do you explain the P10 billion scam in a small city like Dipolog or Pagadian? The guy was finally arrested in Kuala Lumpur. But how many millions of Filipinos lost their savings NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 41 REACTION because of their lack of financial literacy? So, this is the over-all context that I want you to understand with the help of Atty. Lim, and with the help of Justice Vitug who is the Chair of the Philippine Stock Exchange. We in Congress—me, in the Senate, and my son Sonny Angara, in the House, who has a degree from London School of Economics—help in explaining the financial intricacies of an Insolvency Law like this. I think Accounting 1 was the only background I have, but by reading and listening to experts I got to understand what the financial market requires, what the capital market requires, and what a forward-looking, a progressive insolvency system can help to ease entrance as well as exit into business. That is the lifeblood of our nation. Because without jobs, without income, what are we talking about? And that is what we are trying to close, the gap between a very few in this country who are very rich, immensely rich and getting richer, and the mass of people at the bottom, millions of them, striving to make both ends meet at the end of the day. Our goal is to enlarge that middle class who will have purchasing power, who will be able to pay for school fees, hospital bills, but most importantly, who can afford the cost of food today which is continually rising. A silent danger that we take for granted is that food is getting scarce and prices are going up. That is, to me, the bottom line of this discussion, and not so much of the technicality. Of course, we lawyers ought to understand technicalities and intricacies because it is our obligation to speak it to the lay public. But at the end of it, we must assure them that this contributes to the vigor of our economy, the free flow of capital, and it will stimulate the entrepreneurial spirit among us Filipinos. That is my contribution in this discussion. I congratulate Atty. Lim and our Chancellor, my friend, and our friendship has gone a long way back. Chancellor Adolfo Azcuna has been the Father of the Constitution twice over. He was a Member of the Constitutional Convention in 1971, to which I was also elected. He was also a member of the Constitutional Commission of 1986 that drafted the current Constitution. And if a new Commission or Convention will be held, I am positive, he will join that Convention for the third time. So, let me end this reaction by saying that our job is not finished. This is a work in progress. In this age of the Internet, in the 21st century, things move so fast. In fact, technology changes every three years. The current applications that we now use in our laptops, or in our Galaxy phones, our Ipads, may change in three years’ time. That is how rapid the change of technology. But more importantly, we are on our toes trying to anticipate these changes going around. In two years’ time, our competition is not between Ilocanos and Ilonggos, between Tagalogs and Warays, between the Visayans and the Muslim brothers. Our competition is between the Filipinos and Indonesians, between Filipinos and Thais, Vietnamese and Singaporeans. That is because in two years’ time, in 2015, we will become one economic community, the ASEAN community. We must be prepared to compete head to head with those Singaporeans and Thais in many aspects of work, of business. What else? Even in lawyering. That is why, when Atty. Lim talked about capacity building, I thought immediately of the 80 percent every year of people who do not pass the Bar. If only 20 percent on the average passes the Bar every year, what happens to the 80 percent? Could we not utilize the skills of these 80 percent who have earned two degrees and who have spent four years of their lives studying law? Can we not employ them? Can the Supreme Court and the Legal Education Board now create a subspecialty that does not 42 PHILJA JUDICIAL JOURNAL VOL 16:41 2014 require passing the Bar? Like what Atty. Lim is saying, we must now professionalize the job of being a liquidator that does not require, perhaps, a very high level of knowledge of law. Now, one of the growing branches of law practice is transcription. Legal transcription is now a career that many of our non-lawyers, the paralegals, are doing. So, what I am suggesting is that even the law profession must change and not just e-file but even do teleconferencing. That you do not have to be present physically because you can do Skype and we can talk to each other. That probably saves us from the agony of having to travel from Senate to Makati in two hours’ time, when in fact it is just less than one hour, or maybe even from Makati to Supreme Court in Padre Faura. We must now use technology. But the law profession and legal education must also adapt to the changing and rapid changes that are occurring all around us as a result of technology. On that note, let me thank you and thank you for listening. 43
Reaction*
Atty. Monico V. Jacob**
Your Honors, Chief Justice Maria Lourdes P. A. Sereno, Justice Arturo D. Brion, Justice Teresita J. Leonardo-de Castro, My professor at law school now PHILJA Chancellor, Justice Adolfo S. Azcuna, My Chair of the Philippine Stock Exchange, the Governance Committee of the Philippine Stock Exchange, Justice Jose C. Vitug, A mentor on Receivership who is also here, Atty. Oliveros Ontivalmos, And of course my good friend, Atty. Francis Ed. Lim, congratulations for delivering such a comprehensive lecture on insolvency. It is a privilege for me to have been invited by the Philippine Judicial Academy to react to the paper of an eminent lawyer who is an expert in the field of corporate recovery and rehabilitation. It also gives me great pleasure to congratulate the Supreme Court, as well as Metrobank for sponsoring lectures such as this. I would also specially like to thank Senator Edgardo J. Angara because, it seems to me, he has been involved in institution-building in areas where we do our business. For example, he was the Chair of the Education Committee and we are in education—the STI Education Services Group. And then, we have a pre-need company called PhilPlans which we acquired from Philam Plans. Lo and behold, it was Senator Angara, again, who built the system for making sure that what happened during the early 2000 will not happen again. We are very happy, Senator Angara, that our company
* Delivered at the Ninth Metrobank Foundation Professorial Chair Lectureheld on January 25, 2013, at the Court of Appeals Auditorium, Centennial Building, Court of Appeals, Manila. Transcribed. ** Monico V. Jacob is presently the concurrent President and CEO of the STI Education Services Group, a network of colleges and educational centers in the Philippines offering courses in Information and Communications Technology, Healthcare, Business, Education and Engineering; PhilPlans First, Inc., a pre-need insurance company offering pension, memorial and educational plans; and Philhealthcare, Inc. which offers health management options for companies. He is also the President of publicly-listed STI Education Systems Holdings, Inc., and insurance companies Banclife Insurance and Philippine Life Assurance Corp. He serves on the board as the Chair of Information and Communications Technology Academy, Inc. (iACADEMY), Global Resource for Outsourced Workers, Inc. (GROW, Inc.) and Total Consolidated Asset Management, Inc. His directorships include Jollibee Foods Corporation, Advent Capital and Finance Corporation, Mindanao Energy Corporation and Phoenix Petroleum Philippines. As a partner in the law firm of Jacob & Jacob, he specialized in energy, corporate law, corporate recovery and rehabilitation work, including receivership and restructuring advisory for companies. 44 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
PhilPlans now has a trust fund of about P41 billion. Atty. Teddy Regala is a member of our Board. And we thank Senator Angara for putting in the necessary systems for making sure that pre-need companies will be viable in the future. Today, I find that Senator Angara is also the author of the Financial Rehabilitation Insolvency Act (FRIA), an institution which seeks to make sure that insolvency becomes a friendly process, a process that benefits the debtor. I went through the comprehensive paper of Atty. Francis Ed. Lim, and at first glance, I thought I would just agree with everything he said. That will be the extent of my participation in this forum. But, with the enactment of a very forward-looking law, the FRIA, and its eventual implementation with the adoption by the Supreme Court of the implementing rules and regulations, I thought there might be some experiences which I could share so that an effective insolvency system may be pursued. Obviously, but sometimes not too obviously, the first consideration in the rehabilitation or in corporate recovery is the business itself. There must be a realization that nursing a business to health cannot be done except by the businesspeople themselves, by the entrepreneurs themselves. The courts, the lawyers, the receivers are support systems to bring the business back to corporate health. And for this, I believe, we have the Securities and Exchange Commission to thank for—for trailblazing
Prior to his current engagements, Mr. Jacob was the Chair and CEO of Petron Corporation. As Chair, he presided over its privatization and implemented and led the partnership of the government with Saudi Aramco in Petron. He also presided over the Initial Public Offering (IPO) of Petron shares which has since been hailed as one of the most successful IPO offerings in the country. He retired from Petron at the close of the Ramos Presidency in July 1998. He was also Chair and CEO of Philippine National Oil Company (PNOC) and all of its subsidiaries. As Chair of the PNOC, he presided over the privatization of the PNOC Dockyard and Engineering Corporation. Before Petron, Mr. Jacob was the General Manager of the National Housing Authority (NHA) where he successfully introduced the joint venture approach to low cost and socialized housing. He was also Chief Executive Officer of the Home Development Mutual Fund, popularly known as the PAG-IBIG Fund, where he decentralized operations and established regional offices nationwide. He also introduced various programs that brought back membership to the Fund. He first joined government in 1986 as Associate Commissioner for the Securities and Exchange Commission. He carried out needed reforms in the capital market and introduced the express lane program. Prior to government, he was a Partner of the law firm Jacob Acaban Corvera Valdez and Del Castillo and was an active trial lawyer. Mr. Jacob is a member of the Management Association of the Philippines (MAP) of which he was President for 1998. He is also a member of the Integrated Bar of the Philippines. Mr. Jacob finished his Bachelor of Arts degree with a Major in Liberal Arts from the Ateneo de Naga University in 1966 and his Bachelor of Laws degree from the Ateneo de Manila University in 1971. He was born on May 6, 1945 and is married to Floranie Polo-Jacob. He is fluent in English, Tagalog and Bicolano. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 45 REACTION corporate recovery that focuses on business and realizes that only the businesspeople can nurse the company back to life. Presidential Decree No. 902-A, as amended, prescribes the manner by which corporate recovery is to be supervised. The rules then, however, were not very clear. But there was reliance on a Receivership Committee appointed by the Securities and Exchange Commission to supervise the bringing back to corporate health of a failed business. The theory behind this reliance, I would like to believe, is the mindset of the receivers. They should have been leaders of business themselves. Thus, they realize that the primary responsibility for corporate health rests on the businesspeople themselves. I recall when we were appointed as the Receivership Committee in Philippine Airlines. My companion then in the Committee were Atty. Cornelio Peralta, who is formerly Chief Executive Officer of Kimberly Clark, and Mr. Art Aguilar, who is now with the Metrobank Group and who just finished his stint as CEO of Marigalo. That is why then, as now, the receiver is prohibited from participating in the operations of the business. Despite the lack of clarity in the rules, we have had some successes and one of them being the Philippine Airlines. Consistent with the rules then, the Receivership Committee did not participate in the operations but supervised the corporation. For this purpose, we met once a week and really followed through on the fulfillment of the rehabilitation plan. However, the principal issue now, as before, during the SEC supervisory rehabilitation was still the viability of the corporation. There was no sense in rehabilitating a company if the fundamental business was no longer there. No matter the efforts, no matter the haircut on debt, no matter the length of the rehabilitation period, the company cannot be revived if the fundamental business is not there. This was the case of National Steel. This was also the case of Philippine Blooming Mills. Subsequently and fortunately, the law transferred rehabilitation cases to the courts. As Atty. Lim said, individual receivers with qualifications mandated by law were appointed and the Supreme Court subsequently adopted several rules on corporate recovery—one in 2002, if I recall, and another set of rules in 2008. The rules became clearer. The guidelines to be followed by the appointed receivers were more exhaustive and provided the parties with concise roadmap. The Supreme Court also designated certain courts as rehabilitation courts and the need for specialization became evident. Unfortunately, as in all cases where intervention of the court and the business becomes imperative, the process became litigious, and the parties got embroiled in pleadings and hearings rather than in reviving the business of the corporation. I have seen this in various rehabilitation cases I have handled before the courts. Where the parties become litigious and lose sight of the objectives of corporate recovery, the business is relegated to the background and the objective became winning the issue contested rather than rehabilitating the company. When a presiding judge, however, has a background in business, and therefore understands the concerns of business, he is able to balance the litigiousness of the parties and the interests of business. I am currently handling a case where the presiding judge understood corporate recovery. And when the parties became litigious, he declared in open court that he thought when he 46 PHILJA JUDICIAL JOURNAL VOL 16:41 2014 approved the rehabilitation plan, his task was over and the parties should now concentrate on the business of rehabilitating the company. To me, this is really the role of a presiding judge in corporate recovery. To carry out this approach, the presiding judge dealt with issues through conferences rather than formal court hearings. In another case where I am also currently the receiver, the presiding judge has been very active in the case and follows through on commitments of the parties through quarterly conferences. While the judge continues to use the formal processes of a court, nonetheless, the interaction is one of mediation and has helped the parties arrived at agreements. It may be pertinent to point out here that the presiding judge not only understood corporate recovery but went beyond the company and took cognizance of the social dimensions of the business. The presiding judge showed more than ordinary concern for the employees who stood to lose their jobs if the company were to be liquidated. While the recovery of the business is the primary purpose, certainly the plight of the employees cannot be ignored. Unfortunately, again, the approach requires the understanding and cooperation of lawyers handling the cases. Where the lawyers insist on court hearings for issues and insist on litigating, the presiding judge has no recourse but to yield. Then, the rehabilitation case becomes embroiled with hearings and appeals which consume the time of the court. But this is true not only of lawyers but also of debtors and creditors themselves. Sometimes, the debtor corporation thinks that having obtained court protection, he can use the court protection to avoid paying his debts. This certainly defeats the purpose of corporate recovery. This is why I support the proposal of Atty. Lim for training of lawyers and judges who handle corporate recovery. While the success of rehabilitation is dependent principally on the debtor-corporation, and the creditors, the lawyers and the presiding judge, together with the receiver, can pave the way for a more pleasant experience. The receiver, for instance should be active in the process. He should not be simply watching on the sidelines but exerting effort to mediate and resolve issues and prevent these issues from being brought to the court for resolution. Our system of appointing the receiver also needs to be examined. The role of the receiver is crucial to the entire process. And yet, while qualifications are set in the rules, anyone can be a receiver in the implementation phase. There is indeed a need for training and accreditation of receivers. Receivers must understand both the processes of the court and the imperatives of business. It is also necessary that receivers, after accreditation, be made to continue training. In certain cases, the creditors tend to want to take over the business and run it, as Senator Angara mentioned in Victoria’s Milling. They would propose a Management Committee. In my experience, a Management Committee seldom works. I have only once proposed a Management Committee because certain circumstances compelled me to do so. It is so much easier to restore corporate health if those who know the business run it and not a Management Committee. Here, the receiver has a role in determining whether a Management Committee will be useful or not. Invariably, it is not. I am reminded of the question, what is a camel? And the answer is, a camel is actually a horse but it was designed by a committee. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 47 REACTION
Let me make reference to the features of the FRIA, which I think are important because I have had problems before and the provisions solved that. The first is debt to equity. The banking laws do not allow conversion of debt to equity because the banks are not supposed to hold on to equity. I had one case where it could have been resolved very well if the banks could accept equity. But since the banks could not, the rehabilitation did not push through. Unfortunately also, the debtor there chose to be litigious and tied up the entire process or proceedings. But with the FRIA and the allowance by the law of debt-to-equity conversion, any failed business may resort to debt-to-equity conversion. The other one, and I think this is very important, is the waiver of taxes. In a rehabilitation case I had, while we were discussing settlement of debts by way ofdacion en pago, the issue became, “Hey, who is going to pay for the capital gains tax?” And naturally, the debtor says, “I cannot pay for the capital gains tax. I have no money. And since the banks have money, maybe the banks can pay for the capital gains tax.” That case went back and forth until we suggested, “Why don’t we just gross up the assets to cover for the capital gains tax and then let the banks or the creditor pay for the capital gains tax?” And that is exactly what we did. For example, if we have an asset worth 100 million and the capital gains tax would reach up to 20 million, all we did was provide another asset so it can go up to 120 million. Valuation, of course, becomes another issue. But valuation is something that we can deal with. Taxes is almost always very difficult. That is why when I saw that the FRIA instituted a taxation waiver I said that “it is really going to be good for corporate rehabilitation.” I wish it was there before. We could have saved some corporations had it been there before. I am also glad that the FRIA has acknowledged that out of court corporate rehabilitation plan. My role is over, and that is exactly what it is. Corporate rehabilitation, if I may repeat, cannot be done by the courts, cannot be done by the lawyers, cannot be done by the receivers. It can only be done by the businesspeople themselves. One may argue that the businesspeople run the business to the ground. In some instances, yes. But in many other instances, it is not the businesspeople who run the business to the ground. There have been other factors which prevented the business from meeting its obligations when they fall due. Once again, allow me to thank all of you for the privilege to share some thoughts this afternoon. I am particularly thankful to PHILJA for inviting me, and to my friend, Atty. Francis Lim, for delivering a very exhaustive paper. I would like to thank the Supreme Court for taking time to take a look at this aspect of the business and making sure this aspect of the business is handled properly. Marami pong salamat. 48 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Closing Remarks*
Hon. Maria Lourdes P. A. Sereno Chief Justice
It is indeed an honor to be among a very prestigious audience. I recognized Sen. Edgardo J. Angara whose brainchild the FRIA is. Of course, I am very heartened that Justice Teresita J. Leonardo-De Castro is here with us, together with Justice Arturo D. Brion, Chair of the FRIA Committee of the Supreme Court. I also like to acknowledge Justice Jose C. Vitug, Justice Adolfo S. Azcuna, Mr. Aniceto M. Sobrepeña, Atty. Francis Ed. Lim, and the honorable Justices of the Court of Appeals. The presentation of Atty. Francis Lim’s paper is actually a very important occasion for the judiciary to really understand what the FRIA means to national development and what the role of the courts will be. So it gives me a great pleasure to see many of our honorable Justices, judges and court employees here today. Why is it very important that we attend this particular occasion? I had the pleasure of reading the entire very long paper of Atty. Francis Lim, which he shortened dramatically to conserve time. And I can tell you that the details are actually very incisive. They are actually a view into the future of what an efficient economy should look like. The fact that he was able to give in his paper the array of options that are available to the legislators as well as to court processes was quite impressive. I laud him for the fact that he was not only talking about the FRIA as it was passed, but he was also encouraging us to look for alternative solutions and to go beyond the present provisions of the FRIA. This is, to me, a genuine scholarship. I admire the fact that there is in his work a partnership that is formed with Senator Angara whose body of legislation is commendable because it has a long view to the national economy and how are we going to compete going forward. Recent phenomena worldwide show that we really need modern insolvency systems. Indeed Senator Angara, I admired the fact that you have tried to modernize the relationship between debtors and creditors with the FRIA. As you said, it used to be that our insolvency laws were too creditor-friendly. Now there is a balancing. And I also admired the fact that you looked at the integrity of the assets and the need to preserve them for the benefit not only of the creditors, not only of the owners of the economy, but also all the other actors who will be impacted by a wrong decision to liquidate rather than to give the company another chance to continue to provide employment and to continue to provide a contribution to the national economy. That was quite impressive, from my point of view. Of course, we are long gone from the period whether there was not enough capital.
* Delivered at the Ninth Metrobank Foundation Professorial Chair Lectureheld on January 25, 2013, at the Court of Appeals Auditorium, Centennial Building, Court of Appeals, Manila. Transcribed. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 49 CLOSING REMARKS
I think the problem right now is the fact that there are not enough debtors, there are not enough utilizers of a very liquid financial system. I think Justice Vitug, you know that the system is principally awashed with capital that is why we have these groups of investors coming to the Philippines trying to find companies and ventures to invest in. How, therefore, does the FRIA get into the entire game now that we know that, at this particular period in time, capital formation is no longer our problem? If capital formation is no longer our problem, and I hope that this momentum is sustained for a long period of time, why is FRIA so important? I think it is important because it talks about conservation of assets and preserving it for the good of the economy rather than allowing businesses that have been built up through hardwork and entrepreneurship to just to go under without an intelligent approach to these companies. It is therefore very laudable that, while there might be objections later on to that, the fact that the law looks at the rebalancing of interest, the fact that the law looks at the integrity of that assets, those are already good policy objectives. But the question will be ultimately the testing of the law in its operational terms. The time when we said that we had such an antiquated system is now passing away. We are, with the help of the FRIA, entering into a new age of modernity—of looking at how companies should be seen as really embodying a property that under the constitution bears a social function, if indeed property here in the Philippines, even if it is private property, under the constitution bears a social function. Then the view of the economic assets should be from a holistic national economic point of view rather than for a view that looks at it only from very parochial or narrow investor, equity holder, debtor, creditor interests. And I laud the FRIA for moving us forward. Although, of course, we know it still can be subjected to legal challenges, without, of course, prejudging the validity of the entire law. However, we saw what happened in the United States. They had a very advance regulatory system. They had Federal Deposit Insurance Corporation, they had layers of regulatory agencies which were really looking at capital markets. And what happened? They proved, their systems proved inadequate when Lehman Brothers asked basically for help, when General Motors basically asked for help. It had to take a combination of legislation, of cash infusion, of major intervention by different agencies of government before they could even bring these companies back again to a point where you basically say their demise is not going to make a major hit on the US Economy. The problem, however, that had just been brought up by Atty. Cruz is the problem of cash. In a situation where we had a GM and the Lehman Brothers that are endangered of going under, will the government be in a position to infuse the needed cash and to really have a menu of options to immediately intervene to prevent a major sector of the economy from going under. I think the question is valid because while we are at a positive trajectory, we cannot but anticipate also the most adverse negative repercussions as a fall-out of the inability of the US economy and Europe to move forward. In other words, we have here the safety valves for our economy ultimately to lie. 50 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
So here we have to look at a system whereby the financial crisis that hit Asia in 1997 can be prevented. We used to be in a terrible financial crisis mode. Now we are on a crisis prevention mode, as well as on an establishment mode. That is basically the idea of Senator Angara when he was saying that there are bricks to the economic fundamentals that must be put up one by one in order to provide the platform for a national economy. Now the judiciary has no say on the policy options that the legislature, together with executive, will determine as the best way to ensure the stability of our economy. But we have a great role to play. And to show you how seriously we take our role, not only did we commission the working group which is chaired by Justice Brion and Justice Estela Perlas- Bernabe as Vice Chair, with members Court of Appeals Justice Apolinario Bruselas, Justice Japar Dimaampao, Judge Reynaldo Daway, and Professor Lim himself. We not only did what was required of us by law. We are looking at engaging with the international community in order that we should learn the best practices on how the judiciaries of other countries are responding to the phenomenon of financial insolvency and corporate rehabilitation. We understand that there is lot of movements in the United Nations Commission on International Trade Law that looks at commercial law reform. But we also have judicial colloquia-groups of judges worldwide who are conversing on the topic. That is why the Supreme Court just authorized the travel of Justice Brion and Justice Bernabe to the th10 Judicial Colloquium, specifically on financial rehabilitation and insolvency. We are not just going to be passive receptors here of the bright ideas that are going to come out of Congress. We are going to be sensitive to what is happening in the world outside so that we are in a position to respond having with us the constitutional mandate to ensure that rules of procedure in our courts nationwide really deliver justice for all. After all, we in the Supreme Court are very cognizant of the money-cost of time. And that is why the committee has been working non-stop in order to generate a draft that will be acceptable to the public and will signal that the Court means business in the matter of not standing in the way of conserving the economic assets of the country and achieving the policy objectives of the FRIA. What we need, however, from the legislators are clear directions, non-conflicting policy choices. We want more specific detailed outlines of what must be done and what should be done by the courts in the form of legislation—how the rights are sufficiently addressed, how the obligations are correctly characterized. So we look forward to even more challenges ahead for the courts to prove that it will be very proactive and will really look forward to contributing towards the modernization of our economy. We have already made major strides—the Judicial Affidavit Rule that was spearheaded by Justice Roberto Abad and Justice Antonio T. Carpio; the e-filing provision in the Efficient Use of Paper Rule which is the brainchild of Justice Brion can be the template really for us to consider further e-filing which can even be, for example, considered in specialized cases such as these that have been described this afternoon. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 51 CLOSING REMARKS
The judiciary is not afraid of carrying the ball forward. No longer will it be the passive laggard that have been characterized before. But it will be proactively anticipating all these issues. And you can see there will be more intense trainings by the Philippine Judicial Academy led by Justice Adolfo Azcuna. We will be in the forefront of creating a body of very competent judges who will not be afraid of facing even complicated issues that corporate or even personal rehabilitation and liquidation present. This is a judiciary that will be modern, up to date, not afraid of technology, not afraid even of accounting—even though most of us have only one course in accounting, three units at most. But rest assured that we understand our duty under the Constitution and under the laws. We are not going to stand in the way of economic development but neither are we asked to lead economic development. So we need a clear vision from the legislature. On the other hand, we in the Supreme Court will be fully cognizant of the vision of presenting to you a very stable adjudicatory process that we hope will allay the fears, set aside the fears of the investor community that the judiciary does not understand the fundamentals of economic development. Let me assure the audience that judges understand the imperatives of what is required in order to move the nation forward. But the determination of the tools lies in the hands of the legislators. The secret to rehabilitation lies in the hands of business people. But ours is to provide the platform for procedures that are fair, speedy and responsive. I congratulate everyone who participated today. Most specifically the author, Atty. Lim, thank you. I congratulate also the core of supporters that we have from ACCRA Law that allowed you to engage in this academic exercise and share your expertise not only within your law firm but share it to the general public as well. I congratulate Senator Angara for being a leading light in legislation of this kind. Of course, Justice Brion, Justice Bernabe, Justice Dimaampao, Justice Bruselas and Judge Daway should all be commended for the work that they are saying will be completed soon on the first part of the FRIA on financial rehabilitation. I also thank Justice Vitug and, of course, congratulate Justice Azcuna and the Metrobank Foundation represented here by its President Aniceto M. Sobrepeña. There is a lot of work we need to do. And we have to be hard-nosed about doing the work that is before us. No time is to be wasted. We should look forward with greater energy and with greater focus on what it needs and what it means for the court to contribute to national development. Marami pong salamat sa inyo! 52 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Republic Act No. 10142
An Act Providing for the Rehabilitation or Liquidation of Financially Distressed Enterprises and Individuals
Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:
Chapter I General Provisions
Section 1. Title. – This Act shall be known as the “Financial Rehabilitation and Insolvency Act (FRIA) of 2010.”
Sec. 2. Declaration of Policy. – 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 furtherance thereof, the State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The rehabilitation or liquidation shall be made with a view to ensure or maintain certainty and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to facilitate a speedy and orderly liquidation of these debtors’ assets and the settlement of their obligations.
Sec. 3. Nature of Proceedings. – The proceedings under this Act shall be in rem. Jurisdiction over all persons affected by the proceedings shall be considered as acquired upon publication of the notice of the commencement of the proceedings in any newspaper of general circulation in the Philippines in the manner prescribed by the rules of procedure to be promulgated by the Supreme Court. The proceedings shall be conducted in a summary and non-adversarial manner consistent with the declared policies of this Act and in accordance with the rules of procedure that the Supreme Court may promulgate.
Sec. 4. Definition of Terms. – As used in this Act, the term: (a) Administrative expenses shall refer to those reasonable and necessary expenses: (1) incurred or arising from the filing of a petition under the provisions of this Act; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 53 REPUBLIC ACT NO. 10142
(2) arising from, or in connection with, the conduct of the proceedings under this Act, including those incurred for the rehabilitation or liquidation of the debtor; (3) incurred in the ordinary course of business of the debtor after the commencement date; (4) for the payment of new obligations obtained after the commencement date to finance the rehabilitation of the debtor; (5) incurred for the fees of the rehabilitation receiver or liquidator and of the professionals engaged by them; and (6) that are otherwise authorized or mandated under this Act or such other expenses as may be allowed by the Supreme Court in its rules. (b) Affiliate shall refer to a corporation that directly or indirectly, through one or more intermediaries, is controlled by, or is under the common control of another corporation. (c) Claim shall refer to all claims or demands of whatever nature or character against the debtor or its property, whether for money or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but not limited to: (1) all claims of the government, whether national or local, including taxes, tariffs and customs duties; and (2) claims against directors and officers of the debtor arising from acts done in the discharge of their functions falling within the scope of their authority: Provided, That, this inclusion does not prohibit the creditors or third parties from filing cases against the directors and officers acting in their personal capacities. (d) Commencement date shall refer to the date on which the court issues the Commencement Order, which shall be retroactive to the date of filing of the petition for voluntary or involuntary proceedings. (e) Commencement Order shall refer to the order issued by the court under Section 16 of this Act. (f) Control shall refer to the power of a parent corporation to direct or govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries or affiliates, more than one-half (1/2) of the voting power of an enterprise unless, in exceptional circumstances, it can clearly be demonstrated that such ownership does not constitute control. Control also exists even when the parent owns one-half (1/2) or less of the voting power of an enterprise when there is power: (1) over more than one-half (1/2) of the voting rights by virtue of an agreement with investors; (2) to direct or govern the financial and operating policies of the enterprise under a statute or an agreement; 54 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(3) to appoint or remove the majority of the members of the board of directors or equivalent governing body; or (4) to cast the majority votes at meetings of the board of directors or equivalent governing body. (g) Court shall refer to the court designated by the Supreme Court to hear and determine, at the first instance, the cases brought under this Act. (h) Creditor shall refer to a natural or juridical person which has a claim against the debtor that arose on or before the commencement date. (i) Date of liquidation shall refer to the date on which the court issues the Liquidation Order. (j) Days shall refer to calendar days unless otherwise specifically stated in this Act. (k) Debtor shall refer to, unless specifically excluded by a provision of this Act, a sole proprietorship duly registered with the Department of Trade and Industry (DTI), a partnership duly registered with the Securities and Exchange Commission (SEC), a corporation duIy organized and existing under Philippine laws, or an individual debtor who has become insolvent as defined herein. (l) Encumbered property shall refer to real or personal property of the debtor upon which a lien attaches. (m) General unsecured creditor shall refer to a creditor whose claim or a portion thereof is neither secured, preferred nor subordinated under this Act. (n) Group of debtors shall refer to and can cover only: (1) corporations that are financially related to one another as parent corporations, subsidiaries or affiliates; (2) partnerships that are owned more than fifty percent (50%) by the same person; and (3) 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. (o) Individual debtor shall refer to a natural person who is a resident and citizen of the Philippines that has become insolvent as defined herein. (p) Insolvent shall refer to the financial condition of a debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets. (q) Insolvent debtor’s estate shall refer to the estate of the insolvent debtor, which includes all the property and assets of the debtor as of commencement date, plus the property and assets acquired by the rehabilitation receiver or liquidator after that NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 55 REPUBLIC ACT NO. 10142
date, as well as all other property and assets in which the debtor has an ownership interest, whether or not these property and assets are in the debtor’s possession as of commencement date: Provided, That trust assets and bailment, and other property and assets of a third party that are in the possession of the debtor as of commencement date, are excluded therefrom. (r) Involuntary proceedings shall refer to proceedings initiated by creditors. (s) Liabilities shall refer to monetary claims against the debtor, including stockholder’s advances that have been recorded in the debtor’s audited financial statements as advances for future subscriptions. (t) Lien shall refer to a statutory or contractual claim or judicial charge on real or personal property that legally entitles a creditor to resort to said property for payment of the claim or debt secured by such lien. (u) Liquidation shall refer to the proceedings under Chapter V of this Act. (v) Liquidation Order shall refer to the Order issued by the court under Section 112 of this Act. (w) Liquidator shall refer to the natural person or juridical entity appointed as such by the court and entrusted with such powers and duties as set forth in this Act: Provided, That, if the liquidator is a juridical entity, it must designate a natural person who possesses all the qualifications and none of the disqualifications as its representative, it being understood that the juridical entity and the representative are solidarily liable for all obligations and responsibilities of the liquidator. (x) Officer shall refer to a natural person holding a management position described in or contemplated by a juridical entity’s articles of incorporation, bylaws or equivalent documents, except for the corporate secretary, the assistant corporate secretary and the external auditor. (y) Ordinary course of business shall refer to transactions in the pursuit of the individual debtor’s or debtor’s business operations prior to rehabilitation or insolvency proceedings and on ordinary business terms. (z) Ownership interest shall refer to the ownership interest of third parties in property held by the debtor, including those covered by trust receipts or assignments of receivables. (aa) Parent shall refer to a corporation which has control over another corporation either directly or indirectly through one or more intermediaries. (bb) Party to the proceedings shall refer to the debtor, a creditor, the unsecured creditors’ committee, a stakeholder, a party with an ownership interest in property held by the debtor, a secured creditor, the rehabilitation receiver, liquidator or any other 56 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
juridical or natural person who stands to be benefited or injured by the outcome of the proceedings and whose notice of appearance is accepted by the court. (cc) Possessory lien shall refer to a lien on property, the possession of which has been transferred to a creditor or a representative or agent thereof. (dd) Proceedings shall refer to judicial proceedings commenced by the court’s acceptance of a petition filed under this Act. (ee) Property of others shall refer to property held by the debtor in which other persons have an ownership interest. (ff) Publication noticeshall refer to notice through publication in a newspaper of general circulation in the Philippines on a business day for two (2) consecutive weeks. (gg) Rehabilitationshall refer to the restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated. (hh) Rehabilitation receiver shall refer to the person or persons, natural or juridical, appointed as such by the court pursuant to this Act and which shall be entrusted with such powers and duties as set forth herein. (ii) Rehabilitation Planshall refer to a plan by which the financial well-being and viability of an insolvent debtor can be restored using various means 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 new business entity as prescribed in Section 62 hereof, or other similar arrangements as may be approved by the court or creditors. (jj) Secured claim shall refer to a claim that is secured by a lien. (kk) Secured creditor shall refer to a creditor with a secured claim. (ll) Secured party shall refer to a secured creditor or the agent or representative of such secured creditor. (mm) Securities market participant shall refer to a broker, dealer, underwriter, transfer agent or other juridical persons transacting securities in the capital market. (nn) Stakeholder shall refer, in addition to a holder of shares of a corporation, to a member of a nonstock corporation or association or a partner in a partnership. (oo) Subsidiary shall refer to a corporation more than fifty percent (50%) of the voting stock of which is owned or controlled directly or indirectly through one or more intermediaries by another corporation, which thereby becomes its parent corporation. (pp) Unsecured claim shall refer to a claim that is not secured by a lien. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 57 REPUBLIC ACT NO. 10142
(qq) Unsecured creditor shall refer to a creditor with an unsecured claim. (rr) Voluntary proceedings shall refer to proceedings initiated by the debtor. (ss) Voting creditor shall refer to a creditor that is a member of a class of creditors, the consent of which is necessary for the approval of a Rehabilitation Plan under this Act.
Sec. 5. Exclusions. – The term debtor does not include banks, insurance companies, pre- need companies, and national and local government agencies or units. For purposes of this section: (a) Bank shall refer to any duly licensed bank or quasi-bank that is potentially or actually subject to conservatorship, receivership or liquidation proceedings under the New Central Bank Act (Republic Act No. 7653) or successor legislation; (b) Insurance company shall refer to those companies that are potentially or actually subject to insolvency proceedings under the Insurance Code (Presidential Decree No. 1460) or successor legislation; and (c) Pre-need company shall refer to any corporation authorized/licensed to sell or offer to sell pre-need plans. Provided, That government financial institutions other than banks and government- owned or controlled corporations shall be covered by this Act, unless their specific charter provides otherwise.
Sec. 6. Designation of Courts and Promulgation of Procedural Rules. – The Supreme Court shall designate the court or courts that will hear and resolve cases brought under this Act and shall promulgate the rules of pleading, practice and procedure to govern the proceedings brought under this Act.
Sec. 7. Substantive and Procedural Consolidation. – Each juridical entity shall be considered as a separate entity under the proceedings in this Act. Under these proceedings, the assets and liabilities of a debtor may not be commingled or aggregated with those of another, unless the latter is a related enterprise that is owned or controlled directly or indirectly by the same interests: Provided, however, that the commingling or aggregation of assets and liabilities of the debtor with those of a related enterprise may only be allowed where: (a) there was commingling in fact of assets and liabilities of the debtor and the related enterprise prior to the commencement of the proceedings; (b) the debtor and the related enterprise have common creditors and it will be more convenient to treat them together rather than separately; (c) the related enterprise voluntarily accedes to join the debtor as party petitioner and to commingle its assets and liabilities with the debtor’s; and 58 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(d) the consolidation of assets and liabilities of the debtor and the related enterprise is beneficial to all concerned and promotes the objectives of rehabilitation. Provided, finally,That nothing in this section shall prevent the court from joining other entities affiliated with the debtor as parties pursuant to the rules of procedure as may be promulgated by the Supreme Court.
Sec. 8. Decisions of Creditors. – Decisions of creditors shall be made according to the relevant provisions of the Corporation Code in the case of stock or nonstock corporations or the Civil Code in the case of partnerships that are not inconsistent with this Act.
Sec. 9. Creditors’ Representatives. – Creditors may designate representatives to vote or otherwise act on their behalf by filing notice of such representation with the court and serving a copy on the rehabilitation receiver or liquidator.
Sec. 10. Liability of Individual Debtor, Owner of a Sole Proprietorship, Partners in a Partnership, or Directors and Officers.– Individual debtor, owner of a sole proprietorship, partners in a partnership, or directors and officers of a debtor shall be liable for double the value of the property sold, embezzled or disposed of or double the amount of the transaction involved, whichever is higher, to be recovered for the benefit of the debtor and the creditors, if they, having notice of the commencement of the proceedings, or having reason to believe that proceedings are about to be commenced, or in contemplation of the proceedings, willfully commit the following acts: (a) Dispose or cause to be disposed of any property of the debtor other than in the ordinary course of business or authorize or approve any transaction in fraud of creditors or in a manner grossly disadvantageous to the debtor and/or creditors; or (b) Conceal, or authorize or approve the concealment, from the creditors, or embezzles or misappropriates, any property of the debtor. The court shall determine the extent of the liability of an owner, partner, director or officer under this section. In this connection, in case of partnerships and corporations, the court shall consider the amount of the shareholding or partnership or equity interest of such partner, director or officer, the degree of control of such partner, director or officer over the debtor, and the extent of the involvement of such partner, director or debtor in the actual management of the operations of the debtor.
Sec. 11. Authorization to Exchange Debt for Equity. – Notwithstanding applicable banking legislation to the contrary, any bank, whether universal or not, may acquire and hold an equity interest or investment in a debtor or its subsidiaries when conveyed to such bank in satisfaction of debts pursuant to a Rehabilitation or Liquidation Plan approved by the court: Provided, That such ownership shall be subject to the ownership limits applicable to NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 59 REPUBLIC ACT NO. 10142 universal banks for equity investments and: Provided, further, That any equity investment or interest acquired or held pursuant to this section shall be disposed by the bank within a period of five (5) years or as may be prescribed by the Monetary Board.
Chapter II Court-Supervised Rehabilitation
(A) Initiation Proceedings. (1) Voluntary Proceedings. Section 12. Petition to Initiate Voluntary Proceedings by Debtor. – When approved by the owner in case of a sole proprietorship, or by a majority of the partners in case of a partnership, or, in case of a corporation, by a majority vote of the board of directors or trustees and authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of nonstock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholder’s or member’s meeting duly called for the purpose, an insolvent debtor may initiate voluntary proceedings under this Act by filing a petition for rehabilitation with the court and on the grounds hereinafter specifically provided. The petition shall be verified to establish the insolvency of the debtor and the viability of its rehabilitation, and include, whether as an attachment or as part of the body of the petition, as a minimum, the following: (a) Identification of the debtor, its principal activities and its addresses; (b) Statement of the fact of and the cause of the debtor’s insolvency or inability to pay its obligations as they become due; (c) The specific eliefr sought pursuant to this Act; (d) The grounds upon which the petition is based; (e) Other information that may be required under this Act depending on the form of relief requested; (f) 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; (g) An inventory of all its assets including receivables and claims against third parties; (h) A Rehabilitation Plan; (i) The names of at least three (3) nominees to the position of rehabilitation receiver; and (j) 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. 60 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
A group of debtors may jointly file a petition for rehabilitation under this Act 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/or operations of the other members of the group and/or the participation of the other members of the group is essential under the terms and conditions of the proposed Rehabilitation Plan.
(2) Involuntary Proceedings. Sec. 13. Circumstances Necessary to Initiate Involuntary Proceedings. – Any creditor or group of creditors with a claim, of or the aggregate of whose claims is, at least One Million Pesos (P1 million) or at least twenty-five percent (25%) of the subscribed capital stock or partners’ contributions, whichever is higher, may initiate involuntary proceedings against the debtor by filing a petition for rehabilitation with the court if: (a) there is no genuine issue of fact or law on the claim/s of the petitioner/s, and that the due and demandable payments thereon have not been made for at least sixty (60) days or that the debtor has failed generally to meet its liabilities as they fall due; or (b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor that will prevent the debtor from paying its debts as they become due or will render it insolvent.
Sec. 14. Petition to Initiate Involuntary Proceedings. – The creditor/s’ petition for rehabilitation shall be verified to establish the substantial likelihood that the debtor may be rehabilitated, and include: (a) identification of the debtor, its principal activities and its address; (b) the circumstances sufficient to support a petition to initiate involuntary rehabilitation proceedings under Section 13 of this Act; (c) the specific eliefr sought under this Act; (d) a Rehabilitation Plan; (e) the names of at least three (3) nominees to the position of rehabilitation receiver; (f) other information that may be required under this Act depending on the form of relief requested; and (g) 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. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 61 REPUBLIC ACT NO. 10142
(B) Action on the etitionP and Commencement of Proceedings. Section 15. Action on the Petition. – If the court finds the petition for rehabilitation to be sufficient in form and substance, it shall within five (5) working days from the filing of the petition, issue a Commencement Order. If, within the same period, the court finds the petition deficient in form or substance, the court may, in its discretion, give the petitioner/s a reasonable period of time within which to amend or supplement the petition, or to submit such documents as may be necessary or proper to put the petition in proper order. In such case, the five (5) working days provided above for the issuance of the Commencement Order shall be reckoned from the date of the filing of the amended or supplemental petition or the submission of such documents.
Sec. 16. Commencement of Proceedings and Issuance of a Commencement Order. – The rehabilitation proceedings shall commence upon the issuance of the Commencement Order, which shall: (a) identify the debtor, its principal business or activity/ies and its principal place of business; (b) summarize the ground/s for initiating the proceedings; (c) state the relief sought under this Act and any requirement or procedure particular to the relief sought; (d) state the legal effects of the Commencement Order, including those mentioned in Section 17 hereof; (e) declare that the debtor is under rehabilitation; (f) direct the publication of the Commencement Order in a newspaper of general circulation in the Philippines once a week for at least two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance; (g) if the petitioner is the debtor, direct the service by personal delivery of a copy of the petition on each creditor holding at least ten percent (10%) of the total liabilities of the debtor as determined from the schedule attached to the petition within five (5) days; if the petitioner/s is/are creditor/s, direct the service by personal delivery of a copy of the petition on the debtor within five (5) days; (h) appoint a rehabilitation receiver who may or may not be from among the nominees of the petitioner/s, and who shall exercise such powers and duties defined in this Act as well as the procedural rules that the Supreme Court will promulgate; (i) summarize the requirements and deadlines for creditors to establish their claims against the debtor and direct all creditors to file their claims with the court at least five (5) days before the initial hearing; 62 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(j) direct the Bureau of Internal Revenue (BIR) to file and serve on the debtor its comment on or opposition to the petition or its claim/s against the debtor under such procedures as the Supreme Court may hereafter provide; (k) prohibit the debtor’s suppliers of goods or services from withholding the supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services or goods supplied after the issuance of the Commencement Order; (l) authorize the payment of administrative expenses as they become due; (m) set the case for initial hearing, which shall not be more than forty (40) days from the date of filing of the petition for the purpose of determining whether there is substantial likelihood for the debtor to be rehabilitated; (n) make available copies of the petition and rehabilitation plan for examination and copying by any interested party; (o) indicate the location or locations at which documents regarding the debtor and the proceedings under this Act may be reviewed and copied; (p) 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; (q) include a Stay or Suspension Order which shall: (1) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor; (2) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor; (3) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and (4) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein.
Sec. 17. Effects of the Commencement Order.– Unless otherwise provided for in this Act, the court’s issuance of a Commencement Order shall, in addition to the effects of a Stay or Suspension Order described in Section 16 hereof: (a) vest the rehabilitation receiver with all the powers and functions provided for in this Act, such as the right to review and obtain all records to which the debtor’s management and directors have access, including bank accounts of whatever nature of the debtor, subject to the approval by the court of the performance bond filed by the rehabilitation receiver; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 63 REPUBLIC ACT NO. 10142
(b) prohibit, or otherwise serve as the legal basis for rendering null and void the results of any extrajudicial activity or process to seize property, sell encumbered property, or otherwise attempt to collect on or enforce a claim against the debtor after the commencement date unless otherwise allowed in this Act, subject to the provisions of Section 50 hereof; (c) serve as the legal basis for rendering null and void any set-off after the commencement date of any debt owed to the debtor by any of the debtor’s creditors; (d) serve as the legal basis for rendering null and void the perfection of any lien against the debtor’s property after the commencement date; and (e) consolidate the resolution of all legal proceedings by and against the debtor to the court: Provided, however, That the court may allow the continuation of cases in other courts where the debtor had initiated the suit. Attempts to seek legal or other recourse against the debtor outside these proceedings shall be sufficient to support a finding of indirect contempt of court.
Sec. 18. Exceptions to the Stay or Suspension Order. – The Stay or Suspension Order shall not apply: (a) to cases already pending appeal in the Supreme Court as of commencement date: Provided, That any final and executory judgment arising from such appeal shall be referred to the court for appropriate action; (b) subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency which, upon determination by the court, is capable of resolving the claim more quickly, fairly and efficiently than the court:Provided, That any final and executory judgment of such court or agency shall be referred to the court and shall be treated as a non-disputed claim; (c) to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver; (d) to any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and securities entrusted to the latter in the ordinary course of the latter’s business 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; (e) to the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin agreement for the settlement of securities 64 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
transactions in accordance with the provisions of the Securities Regulation Code and its implementing rules and regulations; (f) the clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly authorized, registered and/or recognized by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as any form of actions of such agencies or entities to reimburse themselves for any transactions settled for the debtor; and (g) any criminal action against the individual debtor or owner, partner, director or officer of a debtor shall not be affected by any proceeding commenced under this Act.
Sec. 19. Waiver of Taxes and Fees Due to the National Government and to Local Government Units (LGUs). – Upon issuance of the Commencement Order by the court, and until the approval of the Rehabilitation Plan or dismissal of the petition, whichever is earlier, the imposition of all taxes and fees, including penalties, interests and charges thereof, due to the national government or to LGUs shall be considered waived, in furtherance of the objectives of rehabilitation.
Sec. 20. Application of Stay or Suspension Order to Government Financial Institutions. – The provisions of this Act concerning the effects of the Commencement Order and the Stay or Suspension Order on the suspension of rights to foreclose or otherwise pursue legal remedies shall apply to government financial institutions, notwithstanding provisions in their charters or other laws to the contrary.
Sec. 21. Effectivity and Duration of Commencement Order. – Unless lifted by the court, the Commencement Order shall be effective for the duration of the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be successfully rehabilitated. In determining whether there is substantial likelihood for the debtor to be successfully rehabilitated, the court shall ensure that the following minimum requirements are met: (a) The proposed Rehabilitation Plan submitted complies with the minimum contents prescribed by this Act; (b) There is sufficient monitoring by the rehabilitation receiver of the debtor’s business for the protection of creditors; (c) The debtor has met with its creditors to the extent reasonably possible in attempts to reach a consensus on the proposed Rehabilitation Plan; (d) The rehabilitation receiver submits a report, based on preliminary evaluation, stating that the underlying assumptions and the financial goals stated in the petitioner’s Rehabilitation Plan are realistic, feasible and reasonable; or, if not, there is, in any case, a substantial likelihood for the debtor to be successfully rehabilitated because, among others: NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 65 REPUBLIC ACT NO. 10142
(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 owner/s, partners, stockholders, directors and officers have been acting in good faith and with due diligence; (4) the petition is not a 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; (e) The petition, the Rehabilitation Plan and the attachments thereto do not contain any materially false or misleading statement; (f) If the petitioner is the debtor, that the debtor has met with its creditor/s representing at least three-fourths (3/4) of its total obligations to the extent reasonably possible and made a good faith effort to reach a consensus on the proposed Rehabilitation Plan; if the petitioner/s is/are a creditor or group of creditors, that the petitioner/s has/have met with the debtor and made a good faith effort to reach a consensus on the proposed Rehabilitation Plan; and (g) The debtor has not committed acts of misrepresentation or in fraud of its creditor/s or a group of creditors.
Sec. 22. Action at the Initial Hearing.– At the initial hearing, the court shall: (a) determine the creditors who have made timely and proper filing of their notice of claims; (b) hear and determine any objection to the qualifications or the appointment of the rehabilitation receiver and, if necessary, appoint a new one 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 the initial hearing the report provided in Section 24 hereof.
Sec. 23. Effect of Failure to File Notice of Claim.– A creditor whose claim is not listed in the schedule of debts and liabilities and who fails to file a notice of claim in accordance with the Commencement Order but subsequently files a belated claim shall not be entitled to participate in the rehabilitation proceedings but shall be entitled to receive distributions arising therefrom. 66 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 24. Report of the Rehabilitation Receiver. – 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.
Sec. 25. Giving Due Course to or Dismissal of Petition, or Conversion of Proceedings. – Within ten (10) days from receipt of the report of the rehabilitation receiver mentioned in Section 24 hereof, the court may: (a) give due course to the petition upon a finding that: (1) the debtor is insolvent; and (2) there is a substantial likelihood for the debtor to be successfully rehabilitated; (b) dismiss the petition upon a finding that: (1) debtor is not insolvent; (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; (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; (c) convert the proceedings into one for the liquidation of the debtor upon a finding that: (1) the debtor is insolvent; and (2) there is no substantial likelihood for the debtor to be successfully rehabilitated as determined in accordance with the rules to be promulgated by the Supreme Court. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 67 REPUBLIC ACT NO. 10142
Sec. 26. Petition Given Due Course. – If the petition is given due course, the court shall direct the rehabilitation receiver to review, revise and/or recommend action on the Rehabilitation Plan and submit the same or a new one to the court within a period of not more than ninety (90) days. The court may refer any dispute relating to the Rehabilitation Plan or the rehabilitation proceedings pending before it to arbitration or other modes of dispute resolution, as provided for under Republic Act No. 9285, or the Alternative Dispute Resolution Act of 2004, should it determine that such mode will resolve the dispute more quickly, fairly and efficiently than the court.
Sec. 27. Dismissal of Petition. – If the petition is dismissed pursuant to paragraph (b) of Section 25 hereof, then the court may, in its discretion, order the petitioner to pay damages to any creditor or to the debtor, as the case may be, who may have been injured by the filing of the petition, to the extent of any such injury.
(C) The Rehabilitation Receiver, Management Committee and Creditors’ Committee. Section 28. Who May Serve as a Rehabilitation Receiver. – Any qualified natural or juridical person may serve as a rehabilitation receiver:Provided, That if the rehabilitation receiver is a juridical entity, it must designate a natural person/s who possess/es all the qualifications and none of the disqualifications as its representative, it being understood that the juridical entity and the representative/s are solidarily liable for all obligations and responsibilities of the rehabilitation receiver.
Sec. 29. Qualifications of a Rehabilitation Receiver. – The rehabilitation receiver shall have the following minimum qualifications: (a) A citizen of the Philippines or a resident of the Philippines in the six (6) months immediately preceding his nomination; (b) Of good moral character and with acknowledged integrity, impartiality and independence; (c) 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 (d) 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. Other qualifications and disqualifications of the rehabilitation receiver shall be set forth in procedural rules, taking into consideration the nature of the business of the debtor and the need to protect the interest of all stakeholders concerned. 68 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 30. Initial Appointment of the Rehabilitation Receiver. – The court shall initially appoint the rehabilitation receiver, who may or may not be from among the nominees of the petitioner. However, at the initial hearing of the petition, the creditors and the debtor who are not petitioners may nominate other persons to the position. The court may retain the rehabilitation receiver initially appointed or appoint another who may or may not be from among those nominated. In case the debtor is a securities market participant, the court shall give priority to the nominee of the appropriate securities or investor protection fund. If a qualified natural person or entity is nominated by more than fifty percent (50%) of the secured creditors and the general unsecured creditors, and satisfactory evidence is submitted, the court shall appoint the creditors’ nominee as rehabilitation receiver.
Sec. 31. Powers, Duties and Responsibilities of the Rehabilitation Receiver. – The rehabilitation receiver shall be deemed an officer of the court with the principal duty of preserving and maximizing the value of the assets of the debtor during the rehabilitation proceedings, determining the viability of the rehabilitation of the debtor, preparing and recommending a Rehabilitation Plan to the court, and implementing the approved Rehabilitation Plan. To this end, and without limiting the generality of the foregoing, the rehabilitation receiver shall have the following powers, duties and responsibilities: (a) To verify the accuracy of the factual allegations in the petition and its annexes; (b) To verify and correct, if necessary, the inventory of all of the assets of the debtor, and their valuation; (c) To verify and correct, if necessary, the schedule of debts and liabilities of the debtor; (d) To evaluate the validity, genuineness and true amount of all the claims against the debtor; (e) To take possession, custody and control, and to preserve the value of all the property of the debtor; (f) To sue and recover, with the approval of the court, all amounts owed to, and all properties pertaining to the debtor; (g) To have access to all information necessary, proper or relevant to the operations and business of the debtor and for its rehabilitation; (h) To sue and recover, with the approval of the court, all property or money of the debtor paid, transferred or disbursed in fraud of the debtor or its creditors, or which constitute undue preference of creditor/s; (i) To monitor the operations and the business of the debtor to ensure that no payments or transfers of property are made other than in the ordinary course of business; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 69 REPUBLIC ACT NO. 10142
(j) With the court’s approval, to engage the services of or to employ persons or entities to assist him in the discharge of his functions; (k) To determine the manner by which the debtor may be best rehabilitated, to review, revise and/or recommend action on the Rehabilitation Plan and submit the same or a new one to the court for approval; (l) To implement the Rehabilitation Plan as approved by the court, if so provided under the Rehabilitation Plan; (m) To assume and exercise the powers of management of the debtor, if directed by the court pursuant to Section 36 hereof; (n) To exercise such other powers as may, from time to time, be conferred upon him by the court; and (o) To submit a status report on the rehabilitation proceedings every quarter or as may be required by the court motu proprio, or upon motion of any creditor or as may be provided, in the Rehabilitation Plan. Unless appointed by the court, pursuant to Section 36 hereof, the rehabilitation receiver shall not take over the management and control of the debtor but may recommend the appointment of a management committee over the debtor in the cases provided by this Act.
Sec. 32. Removal of the Rehabilitation Receiver. – The rehabilitation receiver may be removed at any time by the court, either motu proprio or upon motion by any creditor/s holding more than fifty percent (50%) of the total obligations of the debtor, on such grounds as the rules of procedure may provide which shall include, but are not limited to, the following: (a) Incompetence, gross negligence, failure to perform or failure to exercise the proper degree of care in the performance of his duties and powers; (b) Lack of a particular or specialized competency required by the specific case; (c) Illegal acts or conduct in the performance of his duties and powers; (d) Lack of qualification or presence of any disqualification; (e) Conflict of interest that arises after his appointment; and (f) Manifest lack of independence that is detrimental to the general body of the stakeholders.
Sec. 33. Compensation and Terms of Service. – The rehabilitation receiver and his direct employees or independent contractors shall be entitled to compensation for reasonable fees and expenses from the debtor according to the terms approved by the court after notice and hearing. Prior to such hearing, the rehabilitation receiver and his direct employees shall be entitled to reasonable compensation based on quantum meruit. Such costs shall be considered administrative expenses. 70 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 34. Oath and Bond of the Rehabilitation Receiver. – Prior to entering upon his powers, duties and responsibilities, the rehabilitation receiver shall take an oath and file a bond, in such amount to be fixed by the court, conditioned upon the faithful and proper discharge of his powers, duties and responsibilities.
Sec. 35. Vacancy. – In case the position of rehabilitation receiver is vacated for any reason whatsoever, the court shall direct the debtor and the creditors to submit the name/s of their nominee/s to the position. The court may appoint any of the qualified nominees, or any other person qualified for the position.
Sec. 36. Displacement of Existing Management by the Rehabilitation Receiver or Management Committee. – Upon motion of any interested party, the court may appoint and direct the rehabilitation receiver to assume the powers of management of the debtor, or appoint a management committee that will undertake the management of the debtor, upon clear and convincing evidence of any of the following circumstances: (a) Actual or imminent danger of dissipation, loss, wastage or destruction of the debtor’s assets or other properties; (b) Paralyzation of the business operations of the debtor; or (c) Gross mismanagement of the debtor, or fraud or other wrongful conduct on the part of, or gross or willful violation of this Act by, existing management of the debtor or the owner, partner, director, officer or representative/s in management of the debtor. In case the court appoints the rehabilitation receiver to assume the powers of management of the debtor, the court may: (1) require the rehabilitation receiver to post an additional bond; (2) authorize him to engage the services or to employ persons or entities to assist him in the discharge of his managerial functions; and (3) authorize a commensurate increase in his compensation.
Sec. 37. Role of the Management Committee.– When appointed pursuant to the foregoing section, the management committee shall take the place of the management and the governing body of the debtor and assume their rights and responsibilities. The specific powers and duties of the management committee, whose members shall be considered as officers of the court, shall be prescribed by the procedural rules.
Sec. 38. Qualifications of Members of the Management Committee. – The qualifications and disqualifications of the members of the management committee shall be set forth in the procedural rules, taking into consideration the nature of the business of the debtor and the need to protect the interest of all stakeholders concerned. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 71 REPUBLIC ACT NO. 10142
Sec. 39. Employment of Professionals. – Upon approval of the court, and after notice and hearing, the rehabilitation receiver or the management committee may employ specialized professionals and other experts to assist each in the performance of their duties. Such professionals and other experts shall be considered either employees or independent contractors of the rehabilitation receiver or the management committee, as the case may be. The qualifications and disqualifications of the professionals and experts may be set forth in procedural rules, taking into consideration the nature of the business of the debtor and the need to protect the interest of all stakeholders concerned.
Sec. 40. Conflict of Interest. – No person may be appointed as a rehabilitation receiver, member of a management committee, or be employed by the rehabilitation receiver or the management committee if he has a conflict of interest. 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. Without limiting the generality of the foregoing, an individual shall be deemed to have a conflict of interest if: (a) he is a creditor, owner, partner or stockholder of the debtor; (b) he is engaged in a line of business which competes with that of the debtor; (c) 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; (d) he is, or was, within two (2) years from the filing of the petition, an underwriter of the outstanding securities of the debtor; (e) he is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owner/s of a sale proprietorship-debtor, partners of a partnership-debtor or to any stockholder, director, officer, employee or underwriter of a corporation-debtor; or (f) he has any other direct or indirect material interest in the debtor or any of the creditors. Any rehabilitation receiver, member of the management committee or persons employed or contracted by them possessing any conflict of interest shall make the appropriate disclosure either to the court or to the creditors in case of out-of-court rehabilitation proceedings. Any party to the proceeding adversely affected by the appointment of any person with a conflict of interest to any of the positions enumerated above may however waive his right to object to such appointment and, if the waiver is unreasonably withheld, the court may disregard the conflict of interest, taking into account the general interest of the stakeholders. 72 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 41. Immunity. – The rehabilitation receiver and all persons employed by him, and the members of the management committee and all persons employed by it, shall not be subject to any action, claim or demand in connection with any act done or omitted to be done by them in good faith in connection with the exercise of their powers and functions under this Act or other actions duly approved by the court.
Sec. 42. Creditors’ Committee. – After the creditors’ meeting called pursuant to Section 63 hereof, the creditors belonging to a class may formally organize a committee among themselves. In addition, the creditors may, as a body, agree to form a creditors’ committee composed of a representative from each class of creditors, such as the following: (a) Secured creditors; (b) Unsecured creditors; (c) Trade creditors and suppliers; and (d) Employees of the debtor. In the election of the creditors’ representatives, the rehabilitation receiver or his representative shall attend such meeting and extend the appropriate assistance as may be defined in the procedural rules.
Sec. 43. Role of Creditors’ Committee. – The creditors’ committee when constituted pursuant to Section 42 of this Act shall assist the rehabilitation receiver in communicating with the creditors and shall be the primary liaison between the rehabilitation receiver and the creditors. The creditors’ committee cannot exercise or waive any right or give any consent on behalf of any creditor unless specifically authorized in writing by such creditor. The creditors’ committee may be authorized by the court or by the rehabilitation receiver to perform such other tasks and functions as may be defined by the procedural rules in order to facilitate the rehabilitation process.
(D) Determination of Claims. Section 44. Registry of Claims. – Within twenty (20) days from his assumption into office, the rehabilitation receiver shall establish a preliminary registry of claims. The rehabilitation receiver shall make the registry available for public inspection and provide publication notice to the debtor, creditors and stakeholders on where and when they may inspect it. All claims included in the registry of claims must be duly supported by sufficient evidence.
Sec. 45. Opposition or Challenge of Claims.– Within thirty (30) days from the expiration of the period stated in the immediately preceding section, the debtor, creditors, stakeholders and other interested parties may submit a challenge to claim/s to the court, serving a certified copy on the rehabilitation receiver and the creditor holding the challenged claim/s. Upon the expiration of the thirty (30)-day period, the rehabilitation receiver shall submit to NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 73 REPUBLIC ACT NO. 10142
the court the registry of claims which shall include undisputed claims that have not been subject to challenge.
Sec. 46. Appeal. – Any decision of the rehabilitation receiver regarding a claim may be appealed to the court.
(E) Governance. Section 47. Management. – Unless otherwise provided herein, the management of the juridical debtor shall remain with the existing management subject to the applicable law/s and agreement/s, if any, on the election or appointment of directors, managers or managing partner. However, all disbursements, payments or sale, disposal, assignment, transfer or encumbrance of property, or any other act affecting title or interest in property, shall be subject to the approval of the rehabilitation receiver and/or the court, as provided in the following subchapter.
(F) Use, Preservation and Disposal of Assets and Treatment of Assets and Claims after Commencement Date. Section 48. Use or Disposition of Assets.– Except as otherwise provided herein, no funds or property of the debtor shall be used or disposed of except in the ordinary course of business of the debtor, or unless necessary to finance the administrative expenses of the rehabilitation proceedings.
Sec. 49. Sale of Assets. – The court, upon application of the rehabilitation receiver, may authorize the sale of unencumbered property of the debtor outside the ordinary course of business upon a showing that the property, by its nature or because of other circumstance, is perishable, costly to maintain, susceptible to devaluation or otherwise in jeopardy.
Sec. 50. Sale or Disposal of Encumbered Property of the Debtor and Assets of Third Parties Held by Debtor. – The court may authorize the sale, transfer, conveyance or disposal of encumbered property of the debtor, or property of others held by the debtor where there is a security interest pertaining to third parties under a financial, credit or other similar transactions if, upon application of the rehabilitation receiver and with the consent of the affected owners of the property, or secured creditor/s in the case of encumbered property of the debtor and, after notice and hearing, the court determines that: (a) such sale, transfer, conveyance or disposal is necessary for the continued operation of the debtor’s business; and (b) the debtor has made arrangements to provide a substitute lien or ownership right that provides an equal level of security for the counter-party’s claim or right. Provided, That properties held by the debtor where the debtor has authority to sell such as trust receipt or consignment arrangements may be sold or disposed of by the debtor, if 74 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
such sale or disposal is necessary for the operation of the debtor’s business, and the debtor has made arrangements to provide a substitute lien or ownership right that provides an equal level of security for the counter-party’s claim or right. Sale or disposal of property under this section shall not give rise to any criminal liability under applicable laws.
Sec. 51. Assets of Debtor Held by Third Parties. – In the case of possessory pledges, mechanic’s liens or similar claims, third parties who have in their possession or control property of the debtor shall not transfer, convey or otherwise dispose of the same to persons other than the debtor, unless upon prior approval of the rehabilitation receiver. The rehabilitation receiver may also: (a) demand the surrender or the transfer of the possession or control of such property to the rehabilitation receiver or any other person, subject to payment of the claims secured by any possessory Iien/s thereon; (b) allow said third parties to retain possession or control, if such an arrangement would more likely preserve or increase the value of the property in question or the total value of the assets of the debtor; or (c) undertake any other disposition of the said property as may be beneficial for the rehabilitation of the debtor, after notice and hearing, and approval of the court.
Sec. 52. Rescission or Nullity of Sale, Payment, Transfer or Conveyance of Assets. – The court may rescind or declare as null and void any sale, payment, transfer or conveyance of the debtor’s unencumbered property or any encumbering thereof by the debtor or its agents or representatives after the commencement date which are not in the ordinary course of the business of the debtor: Provided, however, That the unencumbered property may be sold, encumbered or otherwise disposed of upon order of the court after notice and hearing: (a) if such are in the interest of administering the debtor and facilitating the preparation and implementation of a Rehabilitation Plan; (b) in order to provide a substitute lien, mortgage or pledge of property under this Act; (c) for payments made to meet administrative expenses as they arise; (d) for payments to victims of quasi-delicts upon a showing that the claim is valid and the debtor has insurance to reimburse the debtor for the payments made; (e) for payments made to repurchase property of the debtor that is auctioned off in a judicial or extrajudicial sale under this Act; or (f) for payments made to reclaim property of the debtor held pursuant to a possessory lien. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 75 REPUBLIC ACT NO. 10142
Sec. 53. Assets Subject to Rapid Obsolescence, Depreciation and Diminution of Value. – Upon the application of a secured creditor holding a lien against or holder of an ownership interest in property held by the debtor that is subject to potentially rapid obsolescence, depreciation or diminution in value, the court shall, after notice and hearing, order the debtor or rehabilitation receiver to take reasonable steps necessary to prevent the depreciation. If depreciation cannot be avoided and such depreciation is jeopardizing the security or property interest of the secured creditor or owner, the court shall: (a) allow the encumbered property to be foreclosed upon by the secured creditor according to the relevant agreement between the debtor and the secured creditor, applicable rules of procedure and relevant legislation:Provided, That the proceeds of the sale will be distributed in accordance with the order prescribed under the rules of concurrence and preference of credits; or (b) upon motion of, or with the consent of the affected secured creditor or interest owner, order the conveyance of a lien against or ownership interest in substitute property of the debtor to the secured creditor: Provided, That other creditors holding liens on such property, if any, do not object thereto, or, if such property is not available; (c) order the conveyance to the secured creditor or holder of an ownership interest of a lien on the residual funds from the sale of encumbered property during the proceedings; or (d) allow the sale or disposition of the property:Provided, That the sale or disposition will maximize the value of the property for the benefit of the secured creditor and the debtor, and the proceeds of the sale will be distributed in accordance with the order prescribed under the rules of concurrence and preference of credits.
Sec. 54. Post-commencement Interest. – The rate and term of interest, if any, on secured and unsecured claims shall be determined and provided for in the approved Rehabilitation Plan.
Sec. 55. Post-commencement Loans and Obligations. – With the approval of the court upon the recommendation of the rehabilitation receiver, the debtor, in order to enhance its rehabilitation, may: (a) enter into credit arrangements; or (b) enter into credit arrangements, secured by mortgages of its unencumbered property or secondary mortgages of encumbered property with the approval of senior secured parties with regard to the encumbered property; or (c) incur other obligations as may be essential for its rehabilitation. The payment of the foregoing obligations shall be considered administrative expenses under this Act. 76 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 56. Treatment of Employees, Claims. – Compensation of employees required to carry on the business shall be considered an administrative expense. Claims of separation pay for months worked prior to the commencement date shall be considered a pre-commencement claim. Claims for salary and separation pay for work performed after the commencement date shall be an administrative expense.
Sec. 57. Treatment of Contracts. – Unless cancelled by virtue of a final judgment of a court of competent jurisdiction issued prior to the issuance of the Commencement Order, or at anytime thereafter by the court before which the rehabilitation proceedings are pending, all valid and subsisting contracts of the debtor with creditors and other third parties as at the commencement date shall continue in force:Provided, That within ninety (90) days following the commencement of proceedings, the debtor, with the consent of the rehabilitation receiver, shall notify each contractual counter-party of whether it is confirming the particular contract. Contractual obligations of the debtor arising or performed during this period, and afterwards for confirmed contracts, shall be considered administrative expenses. Contracts not confirmed within the required deadline shall be considered terminated. Claims for actual damages, if any, arising as a result of the election to terminate a contract shall be considered a pre-commencement claim against the debtor. Nothing contained herein shall prevent the cancellation or termination of any contract of the debtor for any ground provided by law.
(G) Avoidance Proceedings. Section 58. Rescission or Nullity of Certain Pre-commencement Transactions. – Any transaction occurring prior to commencement date entered into by the debtor or involving its funds or assets may be rescinded or declared null and void on the ground that the same was executed with intent to defraud a creditor or creditors or which constitute undue preference of creditors. Without limiting the generality of the foregoing, a disputable presumption of such design shall arise if the transaction: (a) provides unreasonably inadequate consideration to the debtor and is executed within ninety (90) days prior to the commencement date; (b) involves an accelerated payment of a claim to a creditor within ninety (90) days prior to the commencement date; (c) provides security or additional security executed within ninety (90) days prior to the commencement date; (d) involves creditors, where a creditor obtained, or received the benefit of, more than its pro rata share in the assets of the debtor, executed at a time when the debtor was insolvent; or (e) is intended to defeat, delay or hinder the ability of the creditors to collect claims where the effect of the transaction is to put assets of the debtor beyond the reach of creditors or to otherwise prejudice the interests of creditors. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 77 REPUBLIC ACT NO. 10142
Provided, however, That nothing in this section shall prevent the court from rescinding or declaring as null and void a transaction on other grounds provided by relevant legislation and jurisprudence: Provided, further, That the provisions of the Civil Code on rescission shall in any case apply to these transactions.
Sec. 59. Actions for Rescission or Nullity. (a) The rehabilitation receiver or, with his conformity, any creditor may initiate and prosecute any action to rescind, or declare null and void any transaction described in Section 58 hereof. If the rehabilitation receiver does not consent to the filing or prosecution of such action, any creditor may seek leave of court to commence said action. (b) If leave of court is granted under subsection (a), the rehabilitation receiver shall assign and transfer to the creditor all rights, title and interest in the chose in action or subject matter of the proceeding, including any document in support thereof. (c) Any benefit derived from a proceeding taken pursuant to subsection (a), to the extent of his claim and the costs, belongs exclusively to the creditor instituting the proceeding, and the surplus, if any, belongs to the estate. (d) Where, before an order is made under subsection (a), the rehabilitation receiver (or liquidator) signifies to the court his readiness to institute the proceeding for the benefit of the creditors, the order shall fix the time within which he shall do so and, in that case, the benefit derived from the proceeding, if instituted within the time limits so fixed, belongs to the estate.
(H) Treatment of Secured Creditors. Section 60. 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 in any way to diminish or impair the security or lien of a secured creditor, or the value of his lien or security, except that his right to enforce said security or lien may be suspended during the term of the Stay Order. The court, upon motion or recommendation of the rehabilitation 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.
Sec. 61. 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: (a) a creditor does not have adequate protection over property securing its claim; or 78 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(b) 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. For purposes of this section, a creditor shall be deemed to lack adequate protection if it can be shown that: (a) the debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured; (b) the debtor fails or refuses to take commercially reasonable steps to maintain the property; or (c) 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.
(I) Administration of Proceedings. Section 62. Contents of a Rehabilitation Plan.– The Rehabilitation Plan shall, as a minimum: (a) specify the underlying assumptions, the financial goals and the procedures proposed to accomplish such goals; (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; (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 creditors; (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 NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 79 REPUBLIC ACT NO. 10142
may be necessary to restore the financial well-being and viability 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, 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; (m) identify the debtor’s role in the implementation of the Plan; (n) state any rehabilitation covenants of the debtor, the breach of which shall be considered a material breach of the Plan; (o) identify those responsible for the future management of the debtor and the supervision and implementation of the Plan, their affiliation with the debtor and their remuneration; (p) address the treatment of claims arising after the confirmation of the Rehabilitation Plan; (q) require the debtor and its counter-parties to adhere to the terms of all contracts that the debtor has chosen to confirm; (r) arrange for the payment of all outstanding administrative expenses as a condition to the Plan’s approval unless such condition has been waived in writing by the creditors concerned; (s) arrange for the payment of all outstanding taxes and assessments, or an adjusted amount pursuant to a compromise settlement with the BlR or other applicable tax authorities; (t) include a certified copy of a certificate of tax clearance or evidence of a compromise settlement with the BIR; 80 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(u) include a valid and binding resolution of a meeting of the debtor’s stockholders to increase the shares by the required amount in cases where the Plan contemplates an additional issuance of shares by the debtor; (v) state the compensation and status, if any, of the rehabilitation receiver after the approval of the Plan; and (w) contain provisions for conciliation and/or mediation as a prerequisite to court assistance or intervention in the event of any disagreement in the interpretation or implementation of the Rehabilitation Plan.
Sec. 63. Consultation with Debtor and Creditors. – If the court gives due course to the petition, the rehabilitation receiver shall confer with the debtor and all the classes of creditors, and may consider their views and proposals in the review, revision or preparation of a new Rehabilitation Plan.
Sec. 64. Creditor Approval of Rehabilitation Plan. – The rehabilitation receiver shall notify the creditors and stakeholders that the Plan is ready for their examination. Within twenty (20) days from the said notification, the rehabilitation receiver shall convene the creditors, either as a whole or per class, for purposes of voting on the approval of the Plan. The Plan shall be deemed rejected unless approved by all classes of creditors whose rights are adversely modified or affected by the Plan. For purposes of this section, the Plan is deemed to have been approved by a class of creditors if members of the said class holding more than fifty percent (50%) of the total claims of the said class vote in favor of the Plan. The votes of the creditors shall be based solely on the amount of their respective claims based on the registry of claims submitted by the rehabilitation receiver pursuant to Section 44 hereof. Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the Rehabilitation Plan if all of the following circumstances are present: (a) The Rehabilitation Plan complies with the requirement specified in this Act; (b) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan; (c) The shareholders, owners or partners of the juridical debtor lose at least their controlling interest as a result of the Rehabilitation Plan; and (d) The Rehabilitation Plan would likely provide the objecting class of creditors with compensation which has a net present value greater than that which they would have received if the debtor were under liquidation.
Sec. 65. Submission of Rehabilitation Plan to the Court. – If the Rehabilitation Plan is approved, the rehabilitation receiver shall submit the same to the court for confirmation. Within five (5) days from receipt of the Rehabilitation Plan, the court shall notify the creditors NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 81 REPUBLIC ACT NO. 10142
that the Rehabilitation Plan has been submitted for confirmation, that any creditor may obtain copies of the Rehabilitation Plan and that any creditor may file an objection thereto.
Sec. 66. Filing of Objections to Rehabilitation Plan. – A creditor may file an objection to the Rehabilitation Plan within twenty (20) days from receipt of notice from the court that the Rehabilitation Plan has been submitted for confirmation. Objections to a Rehabilitation Plan shall be limited to the following: (a) The creditors’ support was induced by fraud; (b) The documents or data relied upon in the Rehabilitation Plan are materially false or misleading; or (c) The Rehabilitation Plan is in fact not supported by the voting creditors.
Sec. 67. Hearing on the Objections.– If objections have been submitted during the relevant period, the court shall issue an order setting the time and date for the hearing or hearings on the objections. If the court finds merit in the objection, it shall order the rehabilitation receiver or other party to cure the defect, whenever feasible. If the court determines that the debtor acted in bad faith, or that it is not feasible to cure the defect, the court shall convert the proceedings into one for the liquidation of the debtor under Chapter V of this Act.
Sec. 68. Confirmation of the Rehabilitation Plan. – 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 basis for the objection has been cured, or determines that the debtor has complied with an order to cure the objection, the court shall issue an order confirming the Rehabilitation Plan. The court may confirm the Rehabilitation Plan notwithstanding unresolved disputes over claims if the Rehabilitation PIan has made adequate provisions for paying such claims. For the avoidance of doubt, the provisions of other laws to the contrary notwithstanding, the court shall have the power to approve or implement the Rehabilitation Plan despite the lack of approval, or objection from the owners, partners or stockholders of the insolvent debtor: Provided, That the terms thereof are necessary to restore the financial well-being and viability of the insolvent debtor.
Sec. 69. Effect of Confirmation of the Rehabilitation Plan. – The confirmation of the Rehabilitation Plan by the court shall result in the following: (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, whether or not such persons have participated in the proceedings or opposed the Rehabilitation Plan or whether or not their claims have been scheduled; 82 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(b) The debtor shall comply with the provisions of the Rehabilitation Plan and shall take all actions necessary to carry out the Plan; (c) Payments shall be made to the creditors in accordance with the provisions of the Rehabilitation Plan; (d) Contracts and other arrangements between the debtor and its creditors shall be interpreted as continuing to apply to the extent that they do not conflict with the provisions of 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 implemented; and (f) Claims arising after approval of the Plan that are otherwise not treated by the PIan are not subject to any Suspension Order. The Order confirming the Plan shall comply with Rule 36 of the Rules of Court:Provided, however, That the court may maintain jurisdiction over the case in order to resolve claims against the debtor that remain contested and allegations that the debtor has breached the Plan.
Sec. 70. Liability of General Partners of a Partnership for Unpaid Balances under an Approved Plan. – The approval of the Plan shall not affect the rights of creditors to pursue actions against the general partners of a partnership to the extent they are liable under relevant legislation for the debts thereof.
Sec. 71. Treatment of Amounts of Indebtedness or Obligations Forgiven or Reduced. – Amounts of any indebtedness or obligations reduced or forgiven in connection with a Plan’s approval shall not be subject to any tax, in furtherance of the purposes of this Act.
Sec. 72. Period for Confirmation of the Rehabilitation Plan. – The court shall have a maximum period of one (1) year from the date of the filing of the petition to confirm a Rehabilitation Plan. If no Rehabilitation Plan is confirmed within the said period, the proceedings may, upon motion or motu proprio, be converted into one for the liquidation of the debtor.
Sec. 73. Accounting Discharge of Rehabilitation Receiver. – Upon the confirmation of the Rehabilitation Plan, the rehabilitation receiver shall provide a final report and accounting to the court. Unless the Rehabilitation Plan specifically requires and describes the role of the rehabilitation receiver after the approval of the Rehabilitation Plan, the court shall discharge the rehabilitation receiver of his duties. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 83 REPUBLIC ACT NO. 10142
(J) Termination of Proceedings. Section 74. Termination of Proceedings.– The rehabilitation proceedings under Chapter II shall, upon motion by any stakeholder or the rehabilitation receiver, be terminated by order of the court either declaring a successful implementation of the Rehabilitation Plan or a failure of rehabilitation. There is failure of rehabilitation in the following cases: (a) Dismissal of the petition by the court; (b) The debtor fails to submit a Rehabilitation Plan; (c) Under the Rehabilitation Plan submitted by the debtor, there is no substantial likelihood that the debtor can be rehabilitated within a reasonable period; (d) The Rehabilitation Plan or its amendment is approved by the court but in the implementation thereof, the debtor fails to perform its obligations thereunder, or there is a failure to realize the objectives, targets or goals set forth therein, including the timelines and conditions for the settlement of the obligations due to the creditors and other claimants; (e) The commission of fraud in securing the approval of the Rehabilitation Plan or its amendment; and (f) Other analogous circumstances as may be defined by the rules of procedure. Upon a breach of, or upon a failure of the Rehabilitation Plan, the court, upon motion by an affected party, may: (1) issue an order directing that the breach be cured within a specified period of time, failing which the proceedings may be converted to a liquidation; (2) issue an order converting the proceedings to a liquidation; (3) allow the debtor or rehabilitation receiver to submit amendments to the Rehabilitation Plan, the approval of which shall he governed by the same requirements for the approval of a Rehabilitation Plan under this subchapter; (4) issue any other order to remedy the breach consistent with the present regulation, other applicable law and the best interests of the creditors; or (5) enforce the applicable provisions of the Rehabilitation Plan through a writ of execution.
Sec. 75. Effects of Termination. – Termination of the proceedings shall result in the following: (a) The discharge of the rehabilitation receiver, subject to his submission of a final accounting; and 84 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(b) The lifting of the Stay Order and any other court order holding in abeyance any action for the enforcement of a claim against the debtor. Provided, however, That if the termination of proceedings is due to failure of rehabilitation or dismissal of the petition for reasons other than technical grounds, the proceedings shall be immediately converted to liquidation as provided in Section 92 of this Act.
Chapter III Pre-negotiated Rehabilitation
Section 76. Petition by Debtor. – An insolvent debtor, by itself or jointly with any of its creditors, may file a verified petition with the court for the approval of a pre-negotiated Rehabilitation Plan which has been endorsed or approved by creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor. The petition shall include, as a minimum: (a) a schedule of the debtor’s debts and liabilities; (b) an inventory of the debtor’s assets; (c) the pre-negotiated Rehabilitation Plan, including the names of at least three (3) qualified nominees for rehabilitation receiver; and (d) a summary of disputed claims against the debtor and a report on the provisioning of funds to account for appropriate payments should any such claims be ruled valid or their amounts adjusted.
Sec. 77. Issuance of Order. – Within five (5) working days, and after determination that the petition is sufficient in form and substance, the court shall issue an Order which shall: (a) identify the debtor, its principal business or activity/ies and its principal place of business; (b) declare that the debtor is under rehabilitation; (c) summarize the ground/s for the filing of the petition; (d) direct the publication of the Order in a newspaper of general circulation in the Philippines once a week for at least two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance; (e) direct the service by personal delivery of a copy of the petition on each creditor who is not a petitioner holding at least ten percent (10%) of the total liabilities of the debtor, as determined in the schedule attached to the petition, within three (3) days; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 85 REPUBLIC ACT NO. 10142
(f) state that copies of the petition and the Rehabilitation Plan are available for examination and copying by any interested party; (g) state that creditors and other interested parties opposing the petition or Rehabilitation Plan may file their objections or comments thereto within a period of not later than twenty (20) days from the second publication of the Order; (h) appoint a rehabilitation receiver, if provided for in the Plan; and (i) include a Suspension or Stay Order as described in this Act.
Sec. 78. Approval of the Plan. – Within ten (10) days from the date of the second publication of the Order, the court shall approve the Rehabilitation Plan unless a creditor or other interested party submits an objection to it in accordance with the next succeeding section.
Sec. 79. Objection to the Petition or Rehabilitation Plan. – Any creditor or other interested party may submit to the court a verified objection to the petition or the Rehabilitation Plan not later than eight (8) days from the date of the second publication of the Order mentioned in Section 77 hereof. The objections shall be limited to the following: (a) The allegations in the petition or the Rehabilitation Plan, or the attachments thereto, are materially false or misleading; (b) The majority of any class of creditors do not in fact support the Rehabilitation Plan; (c) The Rehabilitation Plan fails to accurately account for a claim against the debtor and the claim is not categorically declared as a contested claim; or (d) The support of the creditors, or any of them, was induced by fraud. Copies of any objection to the petition or the Rehabilitation Plan shall be served on the debtor, the rehabilitation receiver (if applicable), the secured creditor with the largest claim and who supports the Rehabilitation Plan, and the unsecured creditor with the largest claim and who supports the Rehabilitation Plan.
Sec. 80. Hearing on the Objections.– After receipt of an objection, the court shall set the same for hearing. The date of the hearing shall be no earlier than twenty (20) days and no later than thirty (30) days from the date of the second publication of the Order mentioned in Section 77 hereof. If the court finds merit in the objection, it shall direct the debtor, when feasible, to cure the defect within a reasonable period. If the court determines that the debtor or creditors supporting the Rehabilitation Plan acted in bad faith, or that the objection is non-curable, the court may order the conversion of the proceedings into liquidation. A finding by the court that the objection has no substantial merit, or that the same has been cured, shall be deemed an approval of the Rehabilitation Plan.
Sec. 81. Period for Approval of Rehabilitation Plan. –The court shall have a maximum period of one hundred twenty (120) days from the date of the filing of the petition to approve the 86 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Rehabilitation Plan. If the court fails to act within the said period, the Rehabilitation Plan shall be deemed approved.
Sec. 82. Effect of Approval. – Approval of a Plan under this chapter shall have the same legal effect as confirmation of a Plan under Chapter II of this Act.
Chapter IV Out-of-Court or Informal Restructuring Agreements or Rehabilitation Plans
Section 83. Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans. – An out-of-court or informal restructuring agreement or Rehabilitation Plan that meets the minimum requirements prescribed in this chapter is hereby recognized as consistent with the objectives of this Act.
Sec. 84. Minimum Requirements of Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans. – For an out-of-court or informal restructuring/workout agreement or Rehabilitation Plan to qualify under this chapter, it must meet the following minimum requirements: (a) The debtor must agree to the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan; (b) It must be approved by creditors representing at least sixty-seven percent (67%) of the secured obligations of the debtor; (c) It must be approved by creditors representing at least seventy-five percent (75%) of the unsecured obligations of the debtor; and (d) It must be approved by creditors holding at least eighty-five percent (85%) of the total liabilities, secured and unsecured, of the debtor.
Sec. 85. Standstill Period. – A standstill period that may be agreed upon by the parties pending negotiation and finalization of the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan contemplated herein shall be effective and enforceable not only against the contracting parties but also against the other creditors:Provided, That (a) such agreement is approved by creditors representing more than fifty percent (50%) of the total liabilities of the debtor; (b) notice thereof is published in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks; and (c) the standstill period does not exceed one hundred twenty (120) days from the date of effectivity. The notice must invite creditors to participate in the negotiation for out-of-court rehabilitation or restructuring agreement and notify them that said agreement will be binding on all creditors if the required majority votes prescribed in Section 84 of this Act are met. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 87 REPUBLIC ACT NO. 10142
Sec. 86. Cram Down Effect.– A restructuring/workout agreement or Rehabilitation Plan that is approved pursuant to an informal workout framework referred to in this chapter shall have the same legal effect as confirmation of a Plan under Section 69 hereof. The notice of the Rehabilitation Plan or restructuring agreement or Plan 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.
Sec. 87. Amendment or Modification. – Any amendment of an out-of-court restructuring/ workout agreement or Rehabilitation Plan must be made in accordance with the terms of the agreement and with due notice on all creditors.
Sec. 88. Effect of Court Action or Other Proceedings. – Any court action or other proceedings arising from, or relating to, the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan shall not stay its implementation, unless the relevant party is able to secure a temporary restraining order or injunctive relief from the Court of Appeals.
Sec. 89. Court Assistance. – The insolvent debtor and/or creditor may seek court assistance for the execution or implementation of a Rehabilitation Plan under this chapter, under such rules of procedure as may be promulgated by the Supreme Court.
Chapter V Liquidation of Insolvent Juridical Debtors
Section 90. Voluntary Liquidation. – An insolvent debtor may apply for liquidation by filing a petition for liquidation with the court. The petition shall be verified, shall establish the insolvency of the debtor and shall contain, whether as an attachment or as part of the body of the petition: (a) a 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; (b) an inventory of all its assets including receivables and claims against third parties; and (c) the names of at least three (3) nominees to the position of liquidator. At any time during the pendency of court-supervised or pre-negotiated rehabilitation proceedings, the debtor may also initiate liquidation proceedings by filing a motion in the same court where the rehabilitation proceedings are pending to convert the rehabilitation proceedings into liquidation proceedings. The motion shall be verified, shall contain or set forth the same matters required in the preceding paragraph, and state that the debtor is seeking immediate dissolution and termination of its corporate existence. 88 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
If the petition or the motion, as the case may be, is sufficient in form and substance, the court shall issue a Liquidation Order mentioned in Section 112 hereof.
Sec. 91. Involuntary Liquidation.– Three (3) or more creditors the aggregate of whose claims is at least either One Million Pesos (P1 million) or at least twenty-five percent (25%) of the subscribed capital stock or partner’s contributions of the debtor, whichever is higher, may apply for and seek the liquidation of an insolvent debtor by filing a petition for liquidation of the debtor with the court. The petition shall show that: (a) there is no genuine issue of fact or law on the claim/s of the petitioner/s, and that the due and demandable 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. At any time during the pendency of or after a rehabilitation court-supervised or pre-negotiated rehabilitation proceedings, three (3) or more creditors whose claims is at least either One Million Pesos (P1 million) or at least twenty-five percent (25%) of the subscribed capital or partner’s contributions of the debtor, whichever is higher, may also initiate liquidation proceedings by filing a motion in the same court where the rehabilitation proceedings are pending to convert the rehabilitation proceedings into liquidation proceedings. The motion shall be verified, shall contain or set forth the same matters required in the preceding paragraph, and state that the movants are seeking the immediate liquidation of the debtor. If the petition or motion is sufficient in form and substance, the court shall issue an Order: (1) directing the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks; and (2) directing the debtor and all creditors who are not the petitioners to file their comment on the petition or motion within fifteen (15) days from the date of last publication. If, after considering the comments filed, the court determines that the petition or motion is meritorious, it shall issue the Liquidation Order mentioned in Section 112 hereof.
Sec. 92. Conversion by the Court into Liquidation Proceedings.– During the pendency of court-supervised or pre-negotiated rehabilitation proceedings, the court may order the conversion of rehabilitation proceedings to liquidation proceedings pursuant to: (a) Section 25(c) of this Act; or (b) Section 72 of this Act; or (c) Section 75 of this Act; or (d) Section 90 of this Act; or at any other time upon the recommendation of the rehabilitation receiver that the rehabilitation of the debtor is not feasible. Thereupon, the court shall issue the NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 89 REPUBLIC ACT NO. 10142
Liquidation Order mentioned in Section 112 hereof.
Sec. 93. Powers of the Securities and Exchange Commission (SEC).– The provisions of this chapter shall not affect the regulatory powers of the SEC under Section 6 of Presidential Decree No. 902-A, as amended, with respect to any dissolution and liquidation proceeding initiated and heard before it.
Chapter VI Insolvency of Individual Debtors
(A) Suspension of Payments. Section 94. Petition. – An individual debtor who, possessing sufficient property to cover all his debts but foreseeing the impossibility of meeting them when they respectively fall due, may file a verified petition that he be declared in the state of suspension of payments by the court of the province or city in which he has resided for six (6) months prior to the filing of his petition. He shall attach to his petition, as a minimum: (a) a schedule of debts and liabilities; (b) an inventory of assets; and (c) a proposed agreement with his creditors.
Sec. 95. Action on the Petition. – If the court finds the petition sufficient in form and substance, it shall, within five (5) working days from the filing of the petition, issue an Order: (a) calling a meeting of all the creditors named in the schedule of debts and liabilities at such time not less than fifteen (15) days nor more than forty (40) days from the date of such Order and designating the date, time and place of the meeting; (b) directing such creditors to prepare and present written evidence of their claims before the scheduled creditors’ meeting; (c) directing the publication of the said order in a newspaper of general circulation published in the province or city in which the petition is filed once a week for two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of the issuance of the Order; (d) directing the clerk of court to cause the sending of a copy of the Order by registered mail, postage prepaid, to all creditors named in the schedule of debts and liabilities; (e) forbidding the individual debtor from selling, transferring, encumbering or disposing in any manner of his property, except those used in the ordinary operations of commerce or of industry in which the petitioning individual debtor is engaged, so long as the proceedings relative to the suspension of payments are pending; 90 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(f) prohibiting the individual debtor from making any payment outside of the necessary or legitimate expenses of his business or industry, so long as the proceedings relative to the suspension of payments are pending; and (g) appointing a commissioner to preside over the creditors’ meeting.
Sec. 96. Actions Suspended. – Upon motion filed by the individual debtor, the court may issue an order suspending any pending execution against the individual debtor:Provided, that properties held as security by secured creditors shall not be the subject of such suspension order. The suspension order shall Iapse when three (3) months shall have, passed without the proposed agreement being accepted by the creditors or as soon as such agreement is denied. No creditor shall sue or institute proceedings to collect his claim from the debtor from the time of the filing of the petition for suspension of payments and for as long as proceedings remain pending except: (a) those 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 (b) secured creditors.
Sec. 97. Creditors’ Meeting. – The presence of creditors holding claims amounting to at least three-fifths (3/5) of the liabilities shall be necessary for holding a meeting. The commissioner appointed by the court shall preside over the meeting and the clerk of court shall act as the secretary thereof, subject to the following rules: (a) The clerk shall record the creditors present and amount of their respective claims; (b) The commissioner shall examine the written evidence of the claims. If the creditors present hold at least three-fifths (3/5) of the liabilities of the individual debtor, the commissioner shall declare the meeting open for business; (c) The creditors and individual debtor shall discuss the propositions in the proposed agreement and put them to a vote; (d) To form a majority, it is necessary: (1) that two-thirds (2/3) of the creditors voting unite upon the same proposition; and (2) that the claims represented by said majority vote amount to at least three-fifths (3/5) of the total liabilities of the debtor mentioned in the petition; and (e) After the result of the voting has been announced, all protests made against the majority vote shall be drawn up, and the commissioner and the individual debtor together with all creditors taking part in the voting shall sign the affirmed propositions. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 91 REPUBLIC ACT NO. 10142
No creditor who incurred his credit within ninety (90) days prior to the filing of the petition shall be entitled to vote.
Sec. 98. Persons Who May Refrain From Voting. – Creditors who are unaffected by the Suspension Order may refrain from attending the meeting and from voting therein. Such persons shall not be bound by any agreement determined upon at such meeting, but if they should join in the voting they shall be bound in the same manner as are the other creditors.
Sec. 99. Rejection of the Proposed Agreement.– The proposed agreement shall be deemed rejected if the number of creditors required for holding a meeting do not attend thereat, or if the two (2) majorities mentioned in Section 97 hereof are not in favor thereof. In such instances, the proceeding shall be terminated without recourse and the parties concerned shall be at liberty to enforce the rights which may correspond to them.
Sec. 100. Objections.– If the proposal of the individual debtor, or any amendment thereof made during the creditors’ meeting, is approved by the majority of creditors in accordance with Section 97 hereof, any creditor who attended the meeting and who dissented from and protested against the vote of the majority may file an objection with the court within ten (10) days from the date of the last creditors’ meeting. The causes for which objection may be made to the decision made by the majority during the meeting shall be: (a) defects in the call for the meeting, in the holding thereof, and in the deliberations had thereat which prejudice the rights of the creditors; (b) fraudulent connivance between one or more creditors and the individual debtor to vote in favor of the proposed agreement; or (c) fraudulent conveyance of claims for the purpose of obtaining a majority. The court shall hear and pass upon such objection as soon as possible and in a summary manner. In case the decision of the majority of creditors to approve the individual debtor’s proposal or any amendment thereof made during the creditors’ meeting is annulled by the court, the court shall declare the proceedings terminated and the creditors shall be at liberty to exercise the rights which may correspond to them.
Sec. 101. Effects of Approval of Proposed Agreement. – If the decision of the majority of the creditors to approve the proposed agreement or any amendment thereof made during the creditors’ meeting is upheld by the court, or when no opposition or objection to said decision has been presented, the court shall order that the agreement be carried out and all parties bound thereby to comply with its terms. The court may also issue all orders which may be necessary or proper to enforce the agreement on motion of any affected party. The Order confirming the approval of the proposed agreement or any amendment thereof made during the creditors’ meeting shall be binding upon all creditors whose claims are included in the schedule of debts and liabilities submitted by the individual debtor and who were properly summoned, but not upon: (a) those creditors having claims for personal labor, maintenance, expenses of last illness and 92 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
funeral of the wife or children of the debtor incurred in the sixty (60) days immediately prior to the filing of the petition, and (b) secured creditors who failed to attend the meeting or refrained from voting therein.
Sec. 102. Failure of Individual Debtor to Perform Agreement. – If the individual debtor fails, wholly or in part, to perform the agreement decided upon at the meeting of the creditors, all the rights which the creditors had against the individual debtor before the agreement shall revest in them. In such case the individual debtor may be made subject to the insolvency proceedings in the manner established by this Act.
(B) Voluntary Liquidation. Section 103. Application. – An individual debtor whose properties are not sufficient to cover his liabilities, and owing debts exceeding Five Hundred Thousand Pesos (P500,000), may apply to be discharged from his debts and liabilities by filing a verified petition with the court of the province of city in which he has resided for six (6) months prior to the filing of such petition. He shall attach to his petition a schedule of debts and liabilities and an inventory of assets. The filing of such petition shall be an act of insolvency.
Sec. 104. Liquidation Order.– If the court finds the petition sufficient in form and substance, it shall, within five (5) working days, issue the Liquidation Order mentioned in Section 112 hereof.
(C) Involuntary Liquidation. Section 105. Petition; Acts of Insolvency.– Any creditor or group of creditors with a claim of, or with claims aggregating, at least Five Hundred Thousand Pesos (P500,000) may file a verified petition for liquidation with the court of the province or city in which the individual debtor resides. The following shall be considered acts of insolvency, and the petition for liquidation shall set forth or allege at least one of such acts: (a) That such person is about to depart or has departed from the Republic of the Philippines, with intent to defraud his creditors; (b) That being absent from the Republic of the Philippines, with intent to defraud his creditors, he remains absent; (c) That he conceals himself to avoid the service of legal process for the purpose of hindering or delaying the liquidation or of defrauding his creditors; (d) That he conceals, or is removing, any of his property to avoid its being attached or taken on legal process; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 93 REPUBLIC ACT NO. 10142
(e) That he has suffered his property to remain under attachment or legal process for three (3) days for the purpose of hindering or delaying the liquidation or of defrauding his creditors; (f) That he has confessed or offered to allow judgment in favor of any creditor or claimant for the purpose of hindering or delaying the liquidation or of defrauding any creditor or claimant; (g) That he has willfully suffered judgment to be taken against him by default for the purpose of hindering or delaying the liquidation or of defrauding his creditors; (h) That he has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors and thereby hinder or delay the liquidation or defraud anyone of his creditors; (i) That he has made any assignment, gift, sale, conveyance or transfer of his estate, property, rights or credits with intent to hinder or delay the liquidation or defraud his creditors; (j) That he has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his estate, property, rights or credits; (k) That being a merchant or tradesman, he has generally defaulted in the payment of his current obligations for a period of thirty (30) days; (l) That for a period of thirty (30) days, he has failed, after demand, to pay any moneys deposited with him or received by him in a fiduciary capacity; and (m) That an execution having been issued against him on final judgment for money, he shall have been found to be without sufficient property subject to execution to satisfy the judgment. The petitioning creditor/s shall post a bond in such sum as the court shall direct, conditioned that if the petition for liquidation is dismissed by the court, or withdrawn by the petitioner, or if the debtor shall not be declared an insolvent, the petitioners will, pay to the debtor all costs, expenses, damages occasioned by the proceedings, and attorney’s fees.
Sec. 106. Order to Individual Debtor to Show Cause. – Upon the filing of such creditors’ petition, the court shall issue an Order requiring the individual debtor to show cause, at a time and place to be fixed by the said court, why he should not be adjudged an insolvent. Upon good cause shown, the court may issue an Order forbidding the individual debtor from making payments of any of his debts, and transferring any property belonging to him. However, nothing contained herein shall affect or impair the rights of a secured creditor to enforce his lien in accordance with its terms. 94 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 107. Default. – lf the individual debtor shall default or if, after trial, the issues are found in favor of the petitioning creditors, the court shall issue the Liquidation Order mentioned in Section 112 hereof.
Sec. 108. Absent Individual Debtor. – In all cases where the individual debtor resides out of the Republic of the Philippines; or has departed therefrom; or cannot, after due diligence, be found therein; or conceals himself to avoid service of the Order to show cause, or any other preliminary process or orders in the matter, then the petitioning creditors, upon submitting the affidavits requisite to procure an Order of publication, and presenting a bond in double the amount of the aggregate sum of their claims against the individual debtor, shall be entitled to an Order of the court directing the sheriff of the province or city in which the matter is pending to take into his custody a sufficient amount of property of the individual debtor to satisfy the demands of the petitioning creditors and the costs of the proceedings. Upon receiving such Order of the court to take into custody property of the individual debtor, it shall be the duty of the sheriff to take possession of the property and effects of the individual debtor, not exempt from execution, to an extent sufficient to cover the amount provided for, and to prepare, within three (3) days from the time of taking such possession, a complete inventory of all the property so taken, and to return it to the court as soon as completed. The time for taking the inventory and making return thereof may be extended for good cause shown to the court. The sheriff shall also prepare a schedule of the names and residences of the creditors, and the amount due each, from the books of the debtor, or from such other papers or data of the individual debtor available as may come to his possession, and shall file such schedule or list of creditors and inventory with the clerk of court.
Sec. 109. All Property Taken to be Held for All Creditors; Appeal Bonds; Exceptions to Sureties. – In all cases where property is taken into custody by the sheriff, if it does not embrace all the property and effects of the debtor not exempt from execution, any other creditor or creditors of the individual debtor, upon giving bond to be approved by the court in double the amount of their claims, singly or jointly, shall be entitled to similar orders and to like action, by the sheriff, until all claims be provided for, if there be sufficient property or effects. All property taken into custody by the sheriff by virtue of the giving of any such bonds shall be held by him for the benefit of all creditors of the individual debtor whose claims shall be duly proved as provided in this Act. The bonds provided for in this section and the preceding section to procure the order for custody of the property and effects of the individual debtor shall be conditioned that if, upon final hearing of the petition in insolvency, the court shall find in favor of the petitioners, such bonds and all of them shall be void; if the decision be in favor of the individual debtor, the proceedings shall be dismissed, and the individual debtor, his heirs, administrators, executors or assigns shall be entitled to recover such sum of money as shall be sufficient to cover the damages sustained by him, not to exceed the amount of the respective bonds. Such damages shall be fixed and allowed by the court. If either the petitioners or the debtor shall appeal from the decision of the NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 95 REPUBLIC ACT NO. 10142 court, upon final hearing of the petition, the appellant shall be required to give bond to the successful party in a sum double the amount of the value of the property in controversy, and for the costs of the proceedings. Any person interested in the estate may take exception to the sufficiency of the sureties on such bond or bonds. When excepted to, the petitioner’s sureties, upon notice to the person excepting of not less than two (2) nor more than five (5) days, must justify as to their sufficiency; and upon failure to justify, or if others in their place fail to justify at the time and place appointed, the judge shall issue an Order vacating the order to take the property of the individual debtor into the custody of the sheriff, or denying the appeal, as the case may be.
Sec. 110. Sale Under Execution.– If, in any case, proper affidavits and bonds are presented to the court or a judge thereof, asking for and obtaining an Order of publication and an Order for the custody of the property of the individual debtor and thereafter the petitioners shall make it appear satisfactorily to the court or a judge thereof that the interest of the parties to the proceedings will be subserved by a sale thereof, the court may order such property to be sold in the same manner as property is sold under execution, the proceeds to be deposited in the court to abide by the result of the proceedings.
Chapter VII Provisions Common to Liquidation in Insolvency of Individual and Juridical Debtors
Section 111. Use of Term Debtor. – For purposes of this chapter, the term debtor shall include both individual debtor as defined in Section 4(o) and debtor as defined in Section 4(k) of this Act.
(A) The Liquidation Order. Section 112. Liquidation Order. – The Liquidation Order shall: (a) declare the debtor insolvent; (b) order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved; (c) order the sheriff to take possession and control of all the property of the debtor, except those that may be exempt from execution; (d) order the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks; 96 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(e) direct payments of any claims and conveyance of any property due the debtor to the liquidator; (f) prohibit payments by the debtor and the transfer of any property by the debtor; (g) direct all creditors to file their claims with the liquidator within the period set by the rules of procedure; (h) authorize the payment of administrative expenses as they become due; (i) state that the debtor and creditors who are not petitioner/s may submit the names of other nominees to the position of liquidator; and (j) set the case for hearing for the election and appointment of the liquidator, which date shall not be less than thirty (30) days nor more than forty-five (45) days from the date of the last publication.
Sec. 113. Effects of the Liquidation Order. Upon– the issuance of the Liquidation Order: (a) the juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated; (b) legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed vested in the liquidator or, pending his election or appointment, with the court; (c) 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; (d) no separate action for the collection of an unsecured claim shall be allowed. Such 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 (e) no foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.
Sec. 114. Rights of Secured Creditors. – The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law. A secured creditor may: (a) waive his rights under the security or lien, prove his claim in the liquidation proceedings and share in the distribution of the assets of the debtor; or (b) maintain his rights under his security or lien. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 97 REPUBLIC ACT NO. 10142
If the secured creditor maintains his rights under the security or lien: (1) the value of the property may be fixed in a manner agreed upon by the creditor and the liquidator. When the value of the property is less than the claim it secures, the liquidator may convey the property to the secured creditor and the latter will be admitted in the liquidation proceedings as a creditor for the balance; if its value exceeds the claim secured, the liquidator may convey the property to the creditor and waive the debtor’s right of redemption upon receiving the excess from the creditor; (2) the liquidator may sell the property and satisfy the secured creditor’s entire claim from the proceeds of the sale; or (3) the secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws.
(B) The Liquidator. Section 115. Election of Liquidator.– Only creditors who have filed their claims within the period set by the court, and whose claims are not barred by the statute of limitations, will be allowed to vote in the election of the liquidator. A secured creditor will not be allowed to vote, unless: (a) he waives his security or lien; or (b) has the value of the property subject of his security or lien fixed by agreement with the liquidator, and is admitted for the balance of his claim. The creditors entitled to vote will elect the liquidator in open court. The nominee receiving the highest number of votes cast in terms of amount of claims, and who is qualified pursuant to Section 118 hereof, shall be appointed as the liquidator.
Sec. 116. Court-Appointed Liquidator. – The court may appoint the liquidator if: (a) on the date set for the election of the liquidator, the creditors do not attend; (b) the creditors who attend, fail or refuse to elect a liquidator; (c) after being elected, the liquidator fails to qualify; or (d) a vacancy occurs for any reason whatsoever. In any of the cases provided herein, the court may instead set another hearing for the election of the liquidator. Provided, further, That nothing in this section shall be construed to prevent a rehabilitation receiver, who was administering the debtor prior to the commencement of the liquidation, from being appointed as a liquidator.
Sec. 117. Oath and Bond of the Liquidator. – Prior to entering upon his powers, duties and responsibilities, the liquidator shall take an oath and file a bond, in such amount to be fixed by the court, conditioned upon the proper and faithful discharge of his powers, duties and responsibilities. 98 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 118. Qualifications of the Liquidator. – The liquidator shall have the qualifications enumerated in Section 29 hereof. He may be removed at any time by the court for cause, either motu proprio or upon motion of any creditor entitled to vote for the election of the liquidator.
Sec. 119. Powers, Duties and Responsibilities of the Liquidator. – The liquidator shall be deemed an officer of the court with the principal duty of preserving and maximizing the value and recovering the assets of the debtor, with the end of liquidating them and discharging to the extent possible all the claims against the debtor. The powers, duties and responsibilities of the liquidator shall include, but not be limited to: (a) to sue and recover all the assets, debts and claims, belonging or due to the debtor; (b) to take possession of all the property of the debtor except property exempt by law from execution; (c) to sell, with the approval of the court, any property of the debtor which has come into his possession or control; (d) to redeem all mortgages and pledges, and to satisfy any judgment which may be an encumbrance on any property sold by him; (e) to settle all accounts between the debtor and his creditors, subject to the approval of the court; (f) to recover any property or its value, fraudulently conveyed by the debtor; (g) to recommend to the court the creation of a creditors’ committee which will assist him in the discharge of his functions and which shall have powers as the court deems just, reasonable and necessary; and (h) upon approval of the court, to engage such professionals as may be necessary and reasonable to assist him in the discharge of his duties. In addition to the rights and duties of a rehabilitation receiver, the liquidator shall have the right and duty to take all reasonable steps to manage and dispose of the debtor’s assets with a view towards maximizing the proceedings therefrom, to pay creditors and stockholders, and to terminate the debtor’s legal existence. Other duties of the liquidator in accordance with this section may be established by procedural rules. A liquidator shall be subject to removal pursuant to procedures for removing a rehabilitation receiver.
Sec. 120. Compensation of the Liquidator. – The liquidator and the persons and entities engaged or employed by him to assist in the discharge of his powers and duties shall be entitled to such reasonable compensation as may be determined by the liquidation court, which shall not exceed the maximum amount as may be prescribed by the Supreme Court. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 99 REPUBLIC ACT NO. 10142
Sec. 121. Reporting Requirements. – The liquidator shall make and keep a record of all moneys received and all disbursements made by him or under his authority as liquidator. He shall render a quarterly report thereof to the court, which report shall be made available to all interested parties. The liquidator shall also submit such reports as may be required by the court from time to time as well as a final report at the end of the liquidation proceedings.
Sec. 122. Discharge of Liquidator. – In preparation for the final settlement of all the claims against the debtor, the liquidator will notify all the creditors, either by publication in a newspaper of general circulation or such other mode as the court may direct or allow, that he will apply with the court for the settlement of his account and his discharge from liability as liquidator. The liquidator will file a final accounting with the court, with proof of notice to all creditors. The accounting will be set for hearing. If the court finds the same in order, the court will discharge the liquidator.
(C) Determination of Claims. Section 123. Registry of Claims. – Within twenty (20) days from his assumption into office, the liquidator shall prepare a preliminary registry of claims of secured and unsecured creditors. Secured creditors who have waived their security or lien, or have fixed the value of the property subject of their security or lien by agreement with the liquidator and is admitted as a creditor for the balance, shall be considered as unsecured creditors. The liquidator shall make the registry available for public inspection and provide publication notice to creditors, individual debtors, owner/s of the sole proprietorship-debtor, the partners of the partnership-debtor and shareholders or members of the corporation-debtor, on where and when they may inspect it. All claims must be duly proven before being paid.
Sec. 124. Right of Set-off. – If the debtor and a creditor are mutually debtor and creditor of each other, one debt shall be set off against the other, and only the balance, if any, shall be allowed in the liquidation proceedings.
Sec. 125. Opposition or Challenge to Claims.– Within thirty (30) days from the expiration of the period for filing of applications for recognition of claims, creditors, individual debtors, owner/s of the sole proprietorship-debtor, partners of the partnership-debtor and shareholders or members of the corporation-debtor and other interested parties may submit a challenge to a claim or claims to the court, serving a certified copy on the liquidator and the creditor holding the challenged claim. Upon the expiration of the thirty (30)-day period, the rehabilitation receiver shall submit to the court the registry of claims containing the undisputed claims that have not been subject to challenge. Such claims shall become final upon the filing of the register and may be subsequently set aside only on grounds of fraud, accident, mistake or inexcusable neglect. 100 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 126. Submission of Disputed Claims to Court. – The liquidator shall resolve disputed claims and submit his findings thereon to the court for final approval. The liquidator may disallow claims.
(D) Avoidance Proceedings. Section 127. Rescission or Nullity of Certain Transactions. – Any transaction occurring prior to the issuance of the Liquidation Order or, in case of the conversion of the rehabilitation proceedings to liquidation proceedings prior to the commencement date, entered into by the debtor or involving its assets, may be rescinded or declared null and void on the ground that the same was executed with intent to defraud a creditor or creditors or which constitute undue preference of creditors. The presumptions set forth in Section 58 hereof shall apply.
Sec. 128. Actions for Rescission or Nullity. (a) The liquidator or, with his conformity, a creditor may initiate and prosecute any action to rescind, or declare null and void any transaction described in the immediately preceding paragraph. If the liquidator does not consent to the filing or prosecution of such action, any creditor may seek leave of the court to commence said action. (b) If leave of court is granted under subsection (a) hereof the liquidator shall assign and transfer to the creditor all rights, title and interest in the chose in action or subject matter of the proceeding, including any documentation support thereof. (c) Any benefit derived from a proceeding taken pursuant to subsection (a) hereof, to the extent of his claim and the costs, belongs exclusively to the creditor instituting the proceeding, and the surplus, if any, belongs to the estate. (d) Where, before an order is made under subsection (a) hereof, the liquidater signifies to the court his readiness to institute the proceeding for the benefit of the creditors, the order shall fix the time within which he shall do so and, in that case, the benefit derived from the proceedings, if instituted within the time limits so fixed, belongs to the estate.
(E) The Liquidation Plan. Section 129. The Liquidation Plan. – Within three (3) months from his assumption into office, the Liquidator shall submit a Liquidation Plan to the court. The Liquidation Plan shall, as a minimum, enumerate all the assets of the debtor, all the claims against the debtor and a schedule of liquidation of the assets and payment of the claims.
Sec. 130. Exempt Property to be Set Apart. – It shall be the duty of the court, upon petition and after hearing, to exempt and set apart, for the use and benefit of the said insolvent, such real and personal property as is by law exempt from execution, and also a homestead; but NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 101 REPUBLIC ACT NO. 10142
no such petition shall be heard as aforesaid until it is first proved that notice of the hearing of the application therefor has been duly given by the clerk, by causing such notice to be posted in at least three (3) public places in the province or city at least ten (10) days prior 10)to the time of such hearing, which notice shall set forth the name of the said insolvent debtor, and the time and place appointed for the hearing of such application, and shall briefly indicate the homestead sought to be exempted or the property sought to be set aside; and the decree must show that such proof was made to the satisfaction of the court, and shall be conclusive evidence of that fact.
Sec. 131. Sale of Assets in Liquidation.– The liquidator may sell the unencumbered assets of the debtor and convert the same into money. The sale shall be made at public auction. However, a private sale may be allowed with the approval of the court if: (a) the goods to be sold are of a perishable nature, or are liable to quickly deteriorate in value, or are disproportionately expensive to keep or maintain; or (b) the private sale is for the best interest of the debtor and his creditors. With the approval of the court, unencumbered property of the debtor may also be conveyed to a creditor in satisfaction of his claim or part thereof.
Sec. 132. Manner of Implementing the Liquidation Plan. – The liquidator shall implement the Liquidation Plan as approved by the court. Payments shall be made to the creditors only in accordance with the provisions of the Plan.
Sec. 133. Concurrence and Preference of Credits. – The Liquidation Plan and its implementation shall ensure that the concurrence and preference of credits as enumerated in the Civil Code of the Philippines and other relevant laws shall be observed, unless a preferred creditor voluntarily waives his preferred right. For purposes of this chapter, credits for services rendered by employees or laborers to the debtor shall enjoy first preference under Article 2244 of the Civil Code, unless the claims constitute legal liens under Articles 2241 and 2242 thereof.
Sec. 134. Order Removing the Debtor from the List of Registered Entities at the Securities and Exchange Commission. – Upon determining that the liquidation has been completed according to this Act and applicable law, the court shall issue an Order approving the report and ordering the SEC to remove the debtor from the registry of legal entities.
Sec. 135. Termination of Proceedings.– Upon receipt of evidence showing that the debtor has been removed from the registry of legal entities at the SEC, the court shall issue an Order terminating the proceedings. 102 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(F) Liquidation of a Securities Market Participant. Section 136. Liquidation of a Securities Market Participant. – The foregoing provisions of this chapter shall be without prejudice to the power of a regulatory agency or self-regulatory organization to liquidate trade-related claims of clients or customers of a securities market participant which, for purposes of investor protection, are hereby deemed to have absolute priority over all other claims of whatever nature or kind insofar as trade-related assets are concerned. For purposes of this section, trade-related assets include cash, securities, trading right and other assets owned and used by the securities market participant in the ordinary course of its business.
Chapter VIII Proceedings Ancillary to Other Insolvency or Rehabilitation Proceedings
(A) Banks and Other Financial Institutions Under Rehabilitation Receivership Pursuant to a State-funded or State-mandated Insurance System. Section 137. Provision of Assistance. – The court shall issue orders, adjudicate claims and provide for other relief necessary to assist in the liquidation of a financial institution under rehabilitation receivership established by a state-funded or state-mandated insurance system.
Sec. 138. Application of Relevant Legislation. – The liquidation of banks, financial institutions, insurance companies and pre-need companies shall be determined by relevant legislation. The provisions in this Act shall apply in a suppletory manner.
(B) Cross-Border Insolvency Proceedings. Section 139. Adoption of Uncitral Model Law on Cross-Border Insolvency. – Subject to the provision of Section 136 hereof and the rules of procedure that may be adopted by the Supreme Court, the Model Law on Cross-Border Insolvency of the United Nations Center for International Trade and Development is hereby adopted as part of this Act.
Sec. 140. Initiation of Proceedings. – The court shall set a hearing in connection with an insolvency or rehabilitation proceeding taking place in a foreign jurisdiction, upon the submission of a petition by the representative of the foreign entity that is the subject of the foreign proceeding. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 103 REPUBLIC ACT NO. 10142
Sec. 141. Provision of Relief. – The court may issue orders: (a) suspending any action to enforce claims against the entity or otherwise seize or foreclose on property of the foreign entity located in the Philippines; (b) requiring the surrender of property of the foreign entity to the foreign representative; or (c) providing other necessary relief.
Sec. 142. Factors in Granting Relief. – In determining whether to grant relief under this subchapter, the court shall consider: (a) the protection of creditors in the Philippines and the inconvenience in pursuing their claims in a foreign proceeding; (b) the just treatment of all creditors through resort to a unified insolvency or rehabilitation proceeding; (c) whether other jurisdictions have given recognition to the foreign proceeding; (d) the extent that the foreign proceeding recognizes the rights of creditors and other interested parties in a manner substantially in accordance with the manner prescribed in this Act; and (e) the extent that the foreign proceeding has recognized and shown deference to proceedings under this Act and previous legislation.
Chapter IX Funds for Rehabilitation of Government-Owned and Controlled Corporations
Section 143. Funds for Rehabilitation of Government-owned and Controlled Corporations. – Public funds for the rehabilitation of government-owned and -controlled corporations shall be released only pursuant to an appropriation by Congress and shall be supported by funds actually available as certified by the National Treasurer. The Department of Finance, in collaboration with the Department of Budget and Management, shall promulgate the rules for the use and release of said funds.
Chapter X Miscellaneous Provisions
Section 144. Applicability of Provisions. – The provisions in Chapter II, insofar as they are applicable, shall likewise apply to proceedings in Chapters III and IV. 104 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 145. Penalties.– An owner, partner, director, officer or other employee of the debtor who commits any one of the following acts shall, upon conviction thereof, be punished by a fine of not more than One Million Pesos (P1 million) and imprisonment for not less than three (3) months nor more than five (5) years for each offense: (a) if he shall, having notice of the commencement of the proceedings, or having reason to believe that proceedings are about to be commenced, or in contemplation of the proceedings, hide or conceal, or destroy or cause to be destroyed or hidden any property belonging to the debtor; or if he shall hide, destroy, alter, mutilate or falsify, or cause to be hidden, destroyed, altered, mutilated or falsified, any book, deed, document or writing relating thereto; or if he shall, with intent to defraud the creditors of the debtor, make any payment, sale, assignment, transfer or conveyance of any property belonging to the debtor; (b) if he shall, having knowledge or belief of any person having proved a false or fictitious claim against the debtor, fail to disclose the same to the rehabilitation receiver or liquidator within one (1) month after coming to said knowledge or belief; or if he shall attempt to account for any of the debtor’s property by fictitious losses or expenses; or (c) if he shall knowingly violate a prohibition or knowingly fail to undertake an obligation established by this Act.
Sec. 146. Application to Pending Insolvency, Suspension of Payments and Rehabilitation Cases. – This Act shall govern all petitions filed after it has taken effect. All further proceedings in insolvency, suspension of payments and rehabilitation cases then pending, except to the extent that in the opinion of the court their application would not be feasible or would work injustice, in which event the procedures set forth in prior laws and regulations shall apply.
Sec. 147. Application to Pending Contracts. – This Act shall apply to all contracts of the debtor regardless of the date of perfection.
Sec. 148. Repealing Clause. – The Insolvency Law (Act No. 1956), as amended, is hereby repealed. All other laws, orders, rules and regulations or parts thereof inconsistent with any provision of this Act are hereby repealed or modified accordingly.
Sec. 149. Separability Clause. – If any provision of this Act shall be held invalid, the remainder of this Act not otherwise affected shall remain in full force and effect.
Sec. 150. Effectivity Clause.– This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) national newspapers of general circulation.
Approved, July 18, 2010. 105
A.M. No. 00-8-10-SC Rules of Procedure on Corporate Rehabilitation Approved December 2, 2008
Rule 1 Coverage
Section 1. Scope. – These Rules shall apply to petitions for rehabilitation of corporations, partnerships and associations pursuant to Presidential Decree No. 902-A, as amended.
Sec. 2. Applicability to Rehabilitation Cases Transferred from the Securities and Exchange Commission. – Cases for rehabilitation transferred from the Securities Exchange Commission to the Regional Trial Courts pursuant to Republic Act No. 8799, otherwise known as The Securities Regulation Code, shall likewise be governed by these Rules.
Rule 2 Definition of Terms and Construction
Section 1. Definition of Terms. – For purpose of these Rules: “Administrative Expenses” shall refer to (a) reasonable and necessary expenses that are incurred in connection with the filing of the petition; (b) expenses incurred in the ordinary course of business after the issuance of the stay order, excluding interest payable to the creditors for loans and credit accommodations existing at the time of the issuance of the stay order; and (c) other expenses that are authorized under these Rules. “Affidavit of General Financial Condition” shall refer to a verified statement on the general financial condition of the debtor required in Section 2, Rule 4 of these Rules. “Affiliate” is a corporation that directly or indirectly, through one or more intermediaries, is controlled by, or is under the common control of another corporation, which thereby becomes its parent corporation. “Asset” is anything of value that can be in the form of money, such as cash at the bank or amounts owed; fixed assets such as property or equipment; or intangibles including intellectual property, the book value of which is shown in the last three audited financial statements immediately preceding the filing of the petition. In case the debtor is less than three years in operation, it is sufficient that the book value is based on the audited financial statement/s for the two years or year immediately preceding the filing of petition, as the case may be. “Board of Directors” shall include the executive committee or the management of a partnership or association. 106 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
“Claim” shall include all claims or demands of whatever nature or charter against a debtor or its property, whether for money or otherwise. “Control” is the power of a parent corporation to direct or govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one-half (1/2) of the voting power of an enterprise unless, in exceptional circumstances, it can clearly be demonstrated that such ownership does not constitute control. Control also exists even when the parent owns one-half (1/2) or less of the voting power of an enterprise when there is power. (a) Over more than one-half of the voting rights by virtue of an agreement with investors; (b) To direct or govern the financial and operating policies of the enterprise under a statute or an agreement; (c) To appoint or remove the majority of the members of the board of directors or equivalent governing body; or (d) To cast the majority votes at meetings of the board of directors or equivalent governing body. “Creditor” shall mean any holder of a claim. “Court” shall refer to the proper Regional Trial Court designated to hear and decide the cases contemplated under these Rules. “Days” shall refer to calendar days unless otherwise provided in these Rules. “Debtor” shall mean any corporation, partnership or association or a group of companies, whether supervised or regulated by the Securities and Exchange Commission or other government agencies, on whose behalf a petition for rehabilitation has been filed under these Rules. “Foreign court” means a judicial or other authority competent to control or supervise a foreign proceeding. “Foreign proceeding” means a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of rehabilitation or reorganization. “Foreign representative” means person or entity, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or rehabilitation of the debtor or to act as a representative of the foreign proceeding. “Group of companies” refers to, and can cover only, corporations that are financially related to one another as parent corporations, subsidiaries and affiliates. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 107 A.M. NO. 00-8-10-SC When the petition covers a group of companies, all reference under these Rules to “debtor” shall include and apply to the group of companies. “Liabilities” shall refer to monetary claims against the debtor, including stockholder’s advances that have been recorded in the debtor’s audited financial statements as advances for future subscriptions. “Parent” is a corporation which has control over another corporation directly or indirectly through one or more intermediaries. “Rehabilitation” shall mean the restoration of the debtor to a position of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the corporation continues as a going concern than if it immediately liquidated. “Secured claim” shall refer to any claim whose payment or fulfillment is secured by contract or by law, including any claim or credit enumerated under Articles 2241 and 2242 of the Civil Code and Article 110, as amended, of the Labor Code of the Philippines. “Subsidiary” means a corporation more than fifty percent (50%) of the voting stock of which is owned or controlled directly or indirectly through one or more intermediaries by another corporation, which thereby becomes its parent corporation. “Unsecured claim” shall mean any claim other than a secured claim.
Sec. 2. Construction. – These Rules shall be liberally construed to carry out the objectives of Sections 5(d), 6(c) and 6(d) of Presidential Decree No. 902-A, as amended, and to assist the parties in obtaining a just, expeditious and inexpensive determination of cases. Where applicable, the Rules of Court shall apply suppletorily to proceedings under these Rules.
Rule 3 General Provisions
Section 1. Nature of Proceedings. – Any proceeding initiated under these Rules shall be considered in rem. Jurisdiction over all persons affected by the proceedings shall be considered as acquired upon publication of the notice of the commencement of the proceedings in any newspaper or general circulation in the Philippines in the manner prescribed by these Rules. The proceedings shall also be summary and non-adversarial in nature. The following pleadings are prohibited: (a) Motion ot dismiss; (b) Motion orf a bill of particulars; (c) Petition for relief; 108 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(d) Motion orf extension; (e) Motion orf postponement; (f) Third-party complaint; (g) Intervention; (h) Motion ot hear affirmative defenses; and (i) Any pleading or motion which is similar to or of like effect as any of the foregoing. Any pleading, motion, opposition, defense or claim filed by any interested party shall be supported by verified statements that the affiant has read the same and that the factual allegations therein are true and correct of his personal knowledge or based on authentic records, and shall contain as annexes such documents as may be deemed by the party submitting the same as supportive of the allegations in the affidavits. The court may decide matters on the basis of affidavits and other documentary evidence. Where necessary, the court shall conduct clarificatory hearings before resolving any matter submitted to it for resolution.
Sec. 2. Venue. – Petitions for rehabilitation pursuant to these Rules shall be filed in the [R]egional [T]rial [C]ourt which has jurisdiction over the principal office of the debtor as specified in its articles of incorporation or partnership. Where the principal office of the corporation, partnership or association is registered in the Securities and Exchange Commission as Metro Manila, the action must be filed in the regional trial court of the city or municipality where the head office is located. A joint petition by a group of companies shall be filed in the Regional Trial Court which has jurisdiction over the principal office of the parent company, as specified in its Articles of Incorporation.
Sec. 3. Service of Pleadings and Documents. – When so authorized by the court, any pleading and/or document required by these Rules may be filed with the court and/or served upon the other parties by facsimile transmission (fax) or electronic mail (e-mail). In such cases, the date of transmission shall be deemed to be the date of service. Where the pleading or document is voluminous, the court may, upon motion, waive the requirement of service; provided that a copy thereof together with all its attachments is duly filed with the court and is made available for examination and reproduction by any party, andprovided , further, that a notice of such filing and availability is duly served on the parties.
Sec. 4. Trade Secrets and Other Confidential Information. – Upon motion, the court may issue an order to protect trade secrets or other confidential research, development or commercial information belonging to the debtor.
Sec. 5. Executory Nature of Orders. – Any order issued by the court under these Rules is immediately executory. A petition to review the order shall not stay the execution of the NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 109 A.M. NO. 00-8-10-SC order unless restrained or enjoined by the appellate court. Unless otherwise provided in these Rules, the review of any order or decision of the court or an appeal therefrom shall be in accordance with the Rules of Court; provided, however, that the reliefs ordered by the trial or appellate courts shall take into account the need for resolution of proceedings in a just, equitable and speedy manner.
Sec. 6. Nullification of Illegal Transfers and Preferences. – Upon motion the court may nullify any transfer of property or any other conveyance, sale, payment or agreement made in violation of its stay order or in violation of these Rules.
Sec. 7. Stay Order. – If the court finds the petition to be sufficient in form and substance, it shall, not later than five (5) working days from the filing of the petition, issue an order: (a) appointing a rehabilitation receiver and fixing his bond; (b) staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and persons not solidarily liable with the debtor; provided, that the stay order shall not cover claims against letters of credit and similar security arrangements issued by a third party to secure the payment of the debtor’s obligations;provided , further, that the stay order shall not cover foreclosure by a creditor of property not belonging to a debtor under corporate rehabilitation; provided, however, that where the owner of such property sought to be foreclosed is also a guarantor or one who is not solidarily liable, said owner shall be entitled to the benefit of excussion as such guarantor; (c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business; (d) prohibiting the debtor from making any payment of its liabilities except as provided in items (e), (f) and (g) of this Section or when ordered by the court pursuant to Section 10 of Rule 3; (e) prohibiting the debtor’s suppliers of goods or services from withholding supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order; (f) directing the payment in full of all administrative expenses incurred after the issuance of the stay order; (g) directing the payment of new loans or other forms of credit accommodations obtained for the rehabilitation of the debtor with prior court approval; (h) fixing the dates of the initial hearing on the petition not earlier than forty-five (45) days but not later than sixty (60) days from the filing thereof; (i) directing the petitioner to publish the Order in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks; (j) directing the petitioner to furnish a copy of the petition and its annexes, as well as the stay order, to the creditors named in the petition and the appropriate regulatory agencies such as, but not limited to, the Securities and Exchange Commission, the Bangko Sentral ng Pilipinas, the Insurance Commission, the National Telecommunications Commission, the Housing and Land Use Regulatory Board and the Energy Regulatory Commission; (k) directing the petitioner that foreign creditors with no known addresses in the Philippines be individually given a copy of the stay order at their foreign addresses; (l) directing all creditors and all interested parties (including the regulatory agencies concerned) to file and serve on the debtor a verified comment on or opposition to the petition, with supporting affidavits and documents, not later than fifteen (15) days before the date of the first initial hearing 110 PHILJA JUDICIAL JOURNAL VOL 16:41 2014 and putting them on notice that their failure to do so will bar them from participating in the proceedings; and (m) directing the creditors and interested parties to secure from the court copies of the petition and its annexes within such time as to enable themselves to file their comment on or opposition to the petition and to prepare for the initial hearing of the petition. The issuance of a stay order does not affect the right to commence actions or proceedings insofar as it is necessary to preserve a claim against the debtor.
Sec. 8. Service of Stay Order on Rehabilitation Receiver. – The petitioner shall immediately serve a copy of the stay order on the rehabilitation receiver appointed by the court, who shall manifest his acceptance or non-acceptance of his appointment not later than ten (10) days from receipt of the order.
Sec. 9. Period of Stay Order. – The stay order shall be effective from the date of its issuance until the approval of the rehabilitation plan or the dismissal of the petition.
Sec. 10. Relief from, Modification, or Termination of Stay Order. (a) The court may, upon motion, terminate, modify, or set conditions for the continuance of the stay order, or relieve a claim from the coverage thereof upon showing that (1) any of the allegations in the petition, or any of the contents of any attachment, or the verification thereof has ceased to be true; (2) a creditor does not have adequate protection over property securing its claims; (3) the debtor’s secured obligation is more than the fair market value of the property subject of the stay and such property is not necessary for the rehabilitation of the debtor; or (4) the property covered by the stay order is not essential or necessary to the rehabilitation and the creditor’s failure to enforce its claim will cause more damage to the creditor than to the debtor. (b) For purposes of this Section, the creditor lacks adequate protection if it can be shown that: (1) The debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured; (2) The debtor fails or refuses to take commercially reasonable steps to maintain the property; or (3) The property has depreciated to an extent that the creditor is undersecured. (c) Upon showing of the creditor’s lack of adequate protection, the court shall order the rehabilitation receiver to (1) make arrangements to provide for the insurance or maintenance of the property, or (2) 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 shall modify the stay order to allow the secured creditor lacking adequate protection to enforce its claim against the debtor;provided , however, that the court may deny the creditor the remedies in this paragraph if such remedies NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 111 A.M. NO. 00-8-10-SC would prevent the continuation of the debtor as a going concern or otherwise prevent the approval and implementation of a rehabilitation plan.
Sec. 11. Qualifications of Rehabilitation Receiver. (a) In the appointment of the rehabilitation receiver, the following qualifications shall be taken into consideration by the court: (1) Expertise and acumen to manage and operate a business similar in size and complexity to that of the debtor; (2) Knowledge in management, finance and rehabilitation of distressed companies; (3) General familiarity with the rights of creditors in suspension of payments or rehabilitation and general understanding of the duties and obligations of a rehabilitation receiver; (4) Good moral character, independence and integrity; (5) Lack of conflict of interest as defined in this Section; and (6) Willingness and ability to file a bond in such amount as may be determined by the court. (b) Without limiting the generality of the following, a rehabilitation receiver may be deemed to have a conflict of interest if: (1) He is a creditor or stockholder of the debtor; (2) He is engaged in a line of business which competes with the debtor; (3) He is, or was within two (2) years from the filing of the petition, a director, officer, or employee of the debtor or any of its present 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 creditor, stockholder, director, officer, employee, or underwriter of the debtor; or (6) He has any other direct or indirect material interest in the debtor or any creditor.
Sec. 12. Powers and Functions of Rehabilitation Receiver. – The rehabilitation receiver shall not take over the management and control of the debtor but shall closely oversee and monitor the operations of the debtor during the pendency of the proceedings. For this purpose, the rehabilitation receiver shall have the powers, duties and functions of a receiver under Presidential Decree No. 902-A, as amended, and the Rules of Court. The rehabilitation receiver shall be considered as an officer of the court. He shall be primarily tasked to study the best way to rehabilitate the debtor and to ensure that the value 112 PHILJA JUDICIAL JOURNAL VOL 16:41 2014 of the debtor’s property is reasonably maintained pending the determination of whether or not the debtor should be rehabilitated, as well as implement the rehabilitation plan after its approval. Accordingly, he shall have the following powers and functions: (a) To verify the accuracy of the petition, including its annexes such as the Schedule of Debts and Liabilities and the Inventory of Assets submitted in support of the petition; (b) To accept and incorporate, when justified, amendments to the Schedule of Debts and Liabilities; (c) To recommend to the court the disallowance of claims and rejection of amendments to the Schedule of Debts and Liabilities that lack sufficient proof and justification; (d) To submit to the court and make available for review by the creditors, a revised Schedule of Debts and Liabilities; (e) To investigate the acts, conduct, properties, liabilities and financial condition of the debtor, the operation of its business and the desirability of the continuance thereof; and, any other matter relevant to the proceeding or to the formulation of a rehabilitation plan; (f) To examine under oath the directors and officers of the debtor and any other witnesses that he may deem appropriate; (g) To make available to the creditors documents and notices necessary for them to follow and participate in the proceedings; (h) To report to the court any fact ascertained by him pertaining to the causes of the debtor’s problems, fraud, preferences, dispositions, encumbrances, misconduct, mismanagement and irregularities committed by the stockholders, directors, management, or any other person against the debtor; (i) To employ such person or persons such as lawyers, accountants, appraisers and staff as are necessary in performing his functions and duties as rehabilitation receiver; (j) To monitor the operations of the debtor and to immediately report to the court any material adverse change in the debtor’s business; (k) To evaluate the existing assets and liabilities, earnings and operations of the debtor; (l) To determine and recommend to the court the best way to salvage and protect the interests of the creditors, stockholders and the general public; (m) To study the rehabilitation plan proposed by the debtor or any rehabilitation plan submitted during the proceedings, together with any comments made thereon; (n) To prohibit and report to the court any encumbrance, transfer or disposition of the debtor’s property outside of the ordinary course of business or what is NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 113 A.M. NO. 00-8-10-SC allowed by the court; (o) To prohibit and report to the court any payments outside of the ordinary course of business; (p) To have unlimited access to the debtor’s employees, premises, books, records and financial documents during business hours; (q) To inspect, copy, photocopy or photograph any document, paper, book, account or letter, whether in the possession of the debtor or other persons; (r) To gain entry into any property for the purpose of inspecting, measuring, surveying or photographing it or any designated relevant object or operation thereon; (s) To take possession, control and custody of the debtor’s assets; (t) To notify counterparties and the court as to contracts that the debtor has decided to continue to perform or breach; (u) To be notified of and to attend all meetings of the board of directors and stockholders of the debtor; (v) To recommend any modification of an approved rehabilitation plan as he may deem appropriate; (w) To bring to the attention of the court any material change affecting the debtor’s ability to meet the obligations under the rehabilitation plan; (x) To recommend the appointment of a management committee in the cases provided for under Presidential Decree No. 902-A, as amended; (y) To recommend the termination of the proceedings and the dissolution of the debtor if he determines that the continuance in business of such entity is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors or the general public; (z) To apply to the court for any order or directive that he may deem necessary or desirable to aid him in the exercise of his powers and performance of his duties and functions; and (aa) To exercise such other powers as may from time to time be conferred upon him by the court.
Sec. 13. Oath and Bond. – Before entering upon his powers, duties and functions, the rehabilitation receiver must be sworn in to perform them faithfully, and must post a bond executed in favor of the debtor in such sum as the court may direct, to guarantee that he will faithfully discharge his duties and obey the orders of the court. If necessary, he shall also declare under oath that he will perform the duties of a trustee of the assets of the debtor, will act honestly and in good faith, and deal with the assets of the debtor in a commercially reasonable manner. 114 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 14. Fees and Expenses. – The rehabilitation receiver and the persons hired by him shall be entitled to reasonable professional fees and reimbursement of expenses which shall be considered as administrative expenses.
Sec.15. Immunity from Suit. – The rehabilitation receiver shall not be subject to any action, claim or demand in connection with any act done or omitted by him in good faith in the exercise of his functions and powers herein conferred.
Sec. 16. Reports. – The rehabilitation receiver shall file a written report every three (3) months to the court or as often as the court may require on the general condition of the debtor. The report shall include, at the minimum, interim financial statements of the debtor.
Sec. 17. Dismissal of Rehabilitation Receiver. – A rehabilitation receiver may, upon motion, be dismissed by the court on the following grounds: (a) if he fails, without just cause, to perform any of his powers and functions under these Rules; or (b) on any of the grounds for removing a trustee under the general principles of trusts.
Sec. 18. Rehabilitation Plan. – The rehabilitation plan shall include (a) the desired business targets or goals and the duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation which shall include the manner of its implementation, giving due regard to the interests of secured creditors such as, but not limited, to the non-impairment of their security liens or interests; (c) the material financial commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which may include debt to equity conversion, restructuring of the debts, dacion en pago or sale exchange or any disposition of assets or of the interest of shareholders, partners or members; (e) a liquidation analysis setting out for each creditor that the present value of payments it would receive under the plan is more than that which it would receive if the assets of the debtor were sold by a liquidator within a six-month period from the estimated date of filing of the petition; and (f) such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan.
Sec. 19. Repayment Period. – If the rehabilitation plan extends the period for the debtor to pay its contractual obligations, the new period should not extend beyond fifteen (15) years from the expiration of the stipulated term existing at the time of filing of the petition.
Sec. 20. Effects of Rehabilitation Plan. – The approval of the rehabilitation plan by the court shall result in the following: (a) The plan and its provisions shall be binding upon the debtor and all persons who may be affected thereby, including the creditors, whether or not such persons have participated in the proceedings or opposed the plan or whether or not their claims have been scheduled; (b) The debtor shall comply with the provisions of the plan and shall take all actions necessary to carry out the plan; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 115 A.M. NO. 00-8-10-SC (c) Payments shall be made to the creditors in accordance with the provisions of the plan; (d) Contracts and other arrangements between the debtor and its creditors shall be interpreted as continuing to apply to the extent that they do not conflict with the provisions of the plan; and (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 implemented.
Sec. 21. Revocation of Rehabilitation Plan on Grounds of Fraud. – Upon motion, within ninety (90) days from the approval of the rehabilitation plan, and after notice and hearing, the court may revoke the approval thereof on the ground that the same was secured through fraud.
Sec. 22. Alteration or Modification of Rehabilitation Plan. – An approved rehabilitation plan may, upon motion, be altered or modified if, in the judgment of the court, such alteration or modification is necessary to achieve the desired targets or goals set forth therein.
Sec. 23. Termination of Proceedings. – The court shall, upon motion or upon recommendation of the rehabilitation receiver, terminate the proceeding in any of the following cases: (a) Dismissal of the petition; (b) Failure of the debtor to submit the rehabilitation plan; (c) Disapproval of the rehabilitation plan by the court; (d) Failure to achieve the desired targets or goals as set forth in the rehabilitation plan; (e) Failure of the debtor to perform its obligations under the plan; (f) Determination that the rehabilitation plan may no longer be implemented in accordance with its terms, conditions, restrictions or assumptions; or (g) Successful implementation of the rehabilitation plan.
Sec. 24. Discharge of Rehabilitation Receiver. – Upon termination of the rehabilitation proceedings, the rehabilitation receiver shall submit his final report and accounting within such period of time as the court will allow him. Upon approval of his report and accounting, the court shall order his discharge.
Rule 4 Debtor-Initiated Rehabilitation
Section 1. Who May Petition. – Any debtor who foresees the impossibility of meeting its debts when they respectively fall due, may petition the proper regional trial court for rehabilitation. 116 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
A group of companies may jointly file a petition for rehabilitation under these Rules when one or more of its constituent corporations foresee the impossibility of meeting debts when they respectively fall due, and the financial distress would likely adversely affect the financial condition and/or operations of the other member companies of the group and/or the participation of the other member companies of the group is essential under the terms and conditions of the proposed rehabilitation plan.
Sec. 2. Contents of Petition. (a) The petition filed by the debtor must be verified and must set forth with sufficient particularity all the following material facts: (1) the name and business of the debtor; (2) the nature of the business of the debtor; (3) the history of the debtor; (4) the cause of its inability to pay its debts; (5) all the pending actions or proceedings known to the debtor and the courts or tribunals where they are pending; (6) threats or demands to enforce claims or liens against the debtor; and (7) the manner by which the debtor may be rehabilitated and how such rehabilitation may benefit the general body of creditors, employees and stockholders. (b) The petition shall be accompanied by the following documents: (1) An audited financial statement of the debtor at the end of its last fiscal year; (2) Interim financial statements as of the end of the month prior to the filing of the petition; (3) A Schedule of Debts and Liabilities which lists all the creditors of the debtor, indicating the name and last address of record of each creditor; the amount of each claim as to principal, interest, or penalties due as of the date of filing; the nature of the claim; and any pledge, lien, mortgage judgment or other security given for the payment thereof; (4) An Inventory of Assets which must list with reasonable specificity all the assets of the debtor, stating the nature of each asset, the location and condition thereof, the book value or market value of the asset, and attaching the corresponding certificate of title therefor in case of real property, or the evidence of title or ownership in case of movable property, the encumbrances, liens or claims thereon, if any, and the identities and addresses of the lienholders and claimants. The Inventory shall include a Schedule of Accounts Receivable which must indicate the amount of each, the persons from whom due, the date of maturity and the degree of collectibility categorizing them as highly collectible to remotely collectible; (5) A rehabilitation plan which conforms with the minimal requirements set out in Section 18 of Rule 3; (6) A Schedule of Payments and Disposition of Assets which the debtor may have effected within three (3) months immediately preceding the filing of the petition; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 117 A.M. NO. 00-8-10-SC (7) A Schedule of Cash Flow of the debtor for three (3) months immediately preceding the filing of the petition, and a detailed schedule of the projected cash flow for the succeeding three (3) months; (8) A Statement of Possible Claims by or against the debtor which must contain a brief statement of the facts which might give rise to the claim and an estimate of the probable amount thereof; (9) An Affidavit of General Financial Condition which shall contain answers to the questions or matters prescribed in Annex “A” hereof; (10) At least three (3) nominees for the position of rehabilitation receiver as well as their qualifications and addresses, including but not limited to their telephone numbers, fax numbers and e-mail address; and (11) A certificate attesting under oath that (i) the filing of the petition has been duly authorized; and (ii) the directors and stockholders of the debtor have irrevocably approved and/or consented to, in accordance with existing laws, all actions or matters necessary and desirable to rehabilitate the debtor including, but not limited to, amendments to the articles of incorporation and by-laws or articles of partnership; increase or decrease in the authorized capital stock; issuance of bonded indebtedness; alienation, transfer, or encumbrance of assets of the debtor; and modification of shareholders’ rights. (c) Five (5) copies of the petition shall be filed with the court.
Sec. 3. Verification by Debtor. – The petition filed by the debtor must be verified by an affidavit of a responsible officer of the debtor and shall be in a form substantially as follows: I, ______, (position) of (name of petitioner), do solemnly swear that the petitioner has been duly authorized to file the petition and that the stockholders and board of directors (or governing body) have approved and/or consented to, in accordance with law, all actions or matters necessary or desirable to rehabilitate the debtor. The petition is being filed to protect the interests of the debtor, the stockholders, the investors and the creditors of the debtor, which warrant the appointment of a rehabilitation receiver. There is no petition for insolvency filed with any other body, court or tribunal affecting the petitioner. The Inventory of Assets and the Schedule of Debts and Liabilities contains a full, correct and true description of all debts and liabilities and of all goods, effects, estate and property of whatever kind of class belonging to petitioner. The Inventory also contains a full, correct and true statement of all debts owing or due to petitioner, or to any person or persons in trust for petitioner and of all securities and contracts whereby any money may hereafter become due or payable to petitioner or by or through which any benefit or advantage may accrue to petitioner. The petition contains a concise statement of the facts giving rise, or which might give rise, to any cause of action in favor of petitioner. Petitioner has no land, money, stock, expectancy, or property of any kind, except those set forth in the Inventory of Assets. Petitioner has, in no instance, created or acknowledged a debt for a greater sum than the true and correct amount. Petitioner, its officers, directors and stockholders have not, directly or indirectly, concealed, fraudulently sold or otherwise fraudulently disposed 118 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
of, any part of petitioner’s real or personal property, estate, effects or rights of action, and petitioner, its officers, directors and stockholders have not in any way compounded with any of its creditors in order to give preference to such creditors, or to receive or to accept any profit or advantage therefrom, or to defraud or deceive in any manner any creditor to whom petitioner is indebted. Petitioner, its officers, directors, and stockholders have been acting in good faith and with due diligence.
Sec. 4. Opposition to or Comment on Petition. – Every creditor of the debtor or any interested party shall file his verified opposition to or comment on the petition not later than fifteen (15) days before the date of the initial hearing fixed in the stay order. After such time, no creditor or interested party shall be allowed to file any comment thereon or opposition thereto without leave of court. If the Schedule of Debts and Liabilities omits a claim or liability, the creditor concerned shall attach to its comment or opposition a verified statement of the obligations allegedly due it.
Sec. 5. Initial Hearing. (a) On or before the initial hearing set in the order mentioned in Section 7 of Rule 3, the petitioner shall file a publisher’s affidavit showing that the publication requirements and a petitioner’s affidavit showing that the notification requirement for foreign creditors had been complied with, as required in the stay order. (b) Before proceeding with the initial hearing, the court shall determine whether the jurisdictional requirements set forth above had been complied with. After finding that such requirements are met, the court shall ensure that the parties consider in detail all of the following: (1) Amendments to the rehabilitation plan proposed by the debtor; (2) Simplification of the issues; (3) The possibility of obtaining stipulations and admission of facts and documents, including resort to request for admission under Rule 26 of the Rules of Court; (4) The possibility of amicably agreeing on any issue brought up in the comments on, or opposition to, the petition; (5) Referral of any accounting, financial and other technical issues to an expert; (6) The possibility of submitting the petition for decision on the basis of the comments, opposition, affidavit and other documents on record; (7) The possibility of a new rehabilitation plan voluntarily agreed upon by the debtor and its creditors; and (8) Such other matters as may aid in the speedy and summary disposition of the case. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 119 A.M. NO. 00-8-10-SC Sec. 6. Additional Hearings. – The court may hold additional hearings as part of the initial hearing contemplated in these Rules but the initial hearing must be concluded not later than ninety (90) days from the initial date of the initial hearing fixed in the stay order.
Sec. 7. Order After Initial Hearing. (a) Within twenty (20) days after the last hearing, the court shall issue an order which shall: (1) Give due course to the petition and immediately refer the petition and its annexes to the rehabilitation receiver who shall evaluate the rehabilitation plan and submit his recommendations to the court not later than ninety (90) days from the date of the last initial hearing, if the court is satisfied that there is merit to the petition, otherwise the court shall immediately dismiss the petition; and (2) Recite in detail the matters taken up in the initial hearing and the actions taken thereon, including a substitute rehabilitation plan contemplated in Sections 5(b)(7) and (8) of this Rule; (b) If the debtor and creditors agree on a new rehabilitation plan pursuant to Section 5(b)(7) of this Rule, the order shall so state the fact and require the rehabilitation receiver to supply the details of the plan and submit it for the approval of the court not later than sixty (60) days from the date of the last initial hearing. The court shall approve the new rehabilitation plan not later than ninety (90) days from the date of the last initial hearing upon concurrence of the following: (1) Approval or endorsement of creditors holding at least two-thirds (2/3) of the total liabilities of the debtor including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor; (2) The rehabilitation plan complies with the requirements specified in Section 18 of Rule 3; (3) The rehabilitation plan would provide the objecting class of creditors with payments whose present value projected in the plan would be greater than that which they would have received if the assets of the debtor were sold by a liquidator within a six (6)-month period from the date of filing of the petition; and (4) The rehabilitation receiver has recommended approval of the plan. The approval by the court of the new rehabilitation plan shall have the same effect as approval of a rehabilitation plan under Section 20 of Rule 3.
Sec. 8. Creditors’ Meetings. – If no new rehabilitation plan is agreed upon by the debtor and the creditors, the rehabilitation receiver, at any time before he submits his evaluation on the debtor-proposed rehabilitation plan to the court as prescribed in Section 7(a)(1) of this Rule, shall, either alone or with the debtor, meet with the creditors or any interested party to discuss the plan with a view to clarifying or resolving any matter connected therewith. 120 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 9. Comments on or Opposition to Rehabilitation Plan. – Any creditor or interested party of record may file comments on or opposition to the proposed rehabilitation plan, with a copy given to the rehabilitation receiver, not later than sixty (60) days from the date of the last initial hearing. The court shall conduct summary and non-adversarial proceedings to receive evidence, if necessary, in hearing the comments on and opposition to the plan.
Sec. 10. Modification of Proposed Rehabilitation Plan. – The debtor may modify its rehabilitation plan in the light of the comments of the rehabilitation receiver and creditors or any interested party and submit a revised or substitute rehabilitation plan for the final approval of the court. Such rehabilitation plan must be submitted to the court not later than ten (10) months from the date of filing of the petition.
Sec. 11. Approval of Rehabilitation Plan. – The court may approve a rehabilitation plan even over the opposition of creditors of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. The opposition of creditors is manifestly unreasonable if the following are present: (a) The rehabilitation plan complies with the requirements specified in Section 18 of Rule 3; (b) The rehabilitation plan would provide the objecting class of creditors with payments whose present value projected in the plan would be greater than that which they would have received if the assets of the debtor were sold by a liquidator within a six (6)-month period from the date of filing of the petition; and (c) The rehabilitation receiver has recommended approval of the plan. In approving the rehabilitation plan, the court shall ensure that the rights of the secured creditors are not impaired. The court shall also issue the necessary orders or processes for its immediate and successful implementation. It may impose such terms, conditions, or restrictions as the effective implementation and monitoring thereof may reasonably require, or for the protection and preservation of the interests of the creditors should the plan fail.
Sec. 12. Period to Decide Petition. – The court shall decide the petition within one (1) year from the date of filing of the petition, unless the court, for good cause shown, is able to secure an extension of the period from the Supreme Court.
Rule 5 Creditor-Initiated Rehabilitation
Section 1. Who May Petition. – Any creditor or creditors holding at least twenty percent (20%) of the debtor’s total liabilities may file a petition with the proper regional trial court for rehabilitation of a debtor that cannot meet its debts as they respectively fall due. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 121 A.M. NO. 00-8-10-SC Sec. 2. Requirements for Creditor-Initiated Petitions. – Where the petition is filed by a creditor or creditors under this Rule, it is sufficient that the petition is accompanied by a rehabilitation plan and a list of at least three (3) nominees to the position of rehabilitation receiver and verified by a sworn statement that the affiant has read the petition and that its contents are true and correct of his personal knowledge or based on authentic records and that the petition is being filed to protect the interests of the debtor, the stockholders, the investors and the creditors of the debtor.
Sec. 3. Applicability of Provisions Relating to Debtor-Initiated Rehabilitation. – The provisions of Sections 5 to 12 of Rule 4 shall apply to rehabilitation under this Rule.
Rule 6 Pre-Negotiated Rehabilitation
Section 1. Pre-negotiated Rehabilitation Plan. – A debtor that foresees the impossibility of meeting its debts as they fall due may, by itself or jointly with any of its creditors, file a verified petition for the approval of a pre-negotiated rehabilitation plan. The petition shall comply with Section 2 of Rule 4 and be supported by an affidavit showing the written approval or endorsement of creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor.
Sec. 2. Issuance of Order. – If the court finds the petition sufficient in form and substance, it shall, not later than five (5) working days from the filing of the petition, issue an order which shall: (a) Identify the debtor, its principal business or activity/ies and its principal place of business; (b) Direct the publication of the order in a newspaper of general circulation once a week for at least two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance; (c) Direct the service by personal delivery of a copy of the petition on each creditor who is not a petitioner holding at least five percent (5%) of the total liabilities of the debtor, as determined in the schedule attached to the petition, within three (3) days; (d) Direct the petitioner to furnish a copy of the petition and its annexes, as well as the stay order, to the relevant regulatory agency; (e) State that copies of the petition and the rehabilitation plan are available for examination and copying by any interested party; (f) Direct creditors and other parties interested (including the Securities and Exchange Commission and the relevant regulatory agencies such as, but not 122 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
limited to, the Bangko Sentral ng Pilipinas, the Insurance Commission, the National Telecommunications Commission, the Housing and Land Use Regulatory Board and the Energy Regulatory Commission) in opposing the petition or rehabilitation plan to file their verified objections thereto or comments thereon within a period of not later than twenty (20) days from the second publication of the order, with a warning that failure to do so will bar them from participating in the proceedings; (g) Appoint the rehabilitation receiver named in the plan, unless the court finds that he is not qualified under these Rules in which case it may appoint a qualified rehabilitation receiver of its choice; (h) Stay enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and persons not solidarily liable with the debtor; provided, that the stay order shall not cover claims against letters of credit and similar security arrangements issued by a third party to secure the payment of the debtor’s obligations;provided further, that the stay order shall not cover foreclosure by a creditor of property not belonging to a debtor under corporate rehabilitation; provided, however, that where the owner of such property sought to be foreclosed is also a guarantor or one who is not solidarily liable, said owner shall be entitled to the benefit of excussion as such guarantor; (i) Prohibit the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business; (j) Prohibit the debtor from making any payment of its liabilities outstanding as of the date of filing of the petition; (k) Prohibit the debtor’s suppliers of goods or services from withholding supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order; (l) Direct the payment in full of all administrative expenses incurred after the issuance of the stay order; and (m) Direct the payment of new loans or other forms of credit accommodations obtained for the rehabilitation of the debtor with prior court approval.
Sec. 3. Approval of Plan. – Within ten (10) days from the date of the second publication of the order referred to in Section 2 of this Rule, the court shall approve the rehabilitation plan unless a creditor or other interested party submits a verified objection to it in accordance with the next succeeding section.
Sec. 4. Objection to Petition or Rehabilitation Plan. – Any creditor or other interested party may submit to the court a verified objection to the petition or the rehabilitation plan. The objections shall be limited to the following: NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 123 A.M. NO. 00-8-10-SC (a) The petition or the rehabilitation plan or their attachments contain material omissions or are materially false or misleading; (b) The terms of rehabilitation are unattainable; or (c) The approval or endorsement of creditors required under Section 1 of this Rule has not been obtained. Copies of any objection to the petition or the rehabilitation plan shall be served on the petitioning debtor and/or creditors.
Sec. 5. Hearing on Objections. – The court shall set the case for hearing not earlier than ten (10) days and no later than twenty (20) days from the date of the second publication of the order mentioned in Section 2 of this Rule on the objections to the petition or rehabilitation plan. If the court finds that the objection is in accordance with the immediately preceding section, it shall direct the petitioner to cure the defect within a period fifteen (15) days from receipt of the order.
Sec. 6. Period for Approval of Rehabilitation Plan. – The court shall decide the petition not later than one hundred twenty (120) days from the date of the filing of the petition. If the court fails to do so within said period, the rehabilitation plan shall be deemed approved.
Sec. 7. Effects of Approval of Rehabilitation Plan. – Approval of the rehabilitation plan under this Rule shall have the same legal effect as approval of a rehabilitation plan under Section 20 of Rule 3.
Sec. 8. Revocation of Approved Rehabilitation Plan. – Not later than thirty (30) days from the approval of a rehabilitation plan under this Rule, the plan may, upon motion and after notice and hearing, be revoked on the ground that the approval was secured by fraud or that the petitioner has failed to cure the defect ordered by the court pursuant to Section 5 of this Rule.
Sec. 9. Effect of Rule on Pending Petitions. – Any pending petition for rehabilitation that has not undergone the initial hearing prescribed under the Interim Rules of Procedure for Corporate Rehabilitation at the time of the effectivity of these Rules may be converted into a rehabilitation proceeding under this Rule.
Rule 7 Recognition of Foreign Proceedings
Section 1. Scope of Application. – This Rule applies where (a) assistance is sought in a Philippine court by a foreign court or a foreign representative in connection with a foreign proceeding; (b) assistance is sought in a foreign State in connection with a domestic proceeding governed by these Rules; or (c) a foreign proceeding and a domestic proceeding are concurrently taking place. 124 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
The sole fact that a petition is filed pursuant to this Rule does not subject the foreign representative or the foreign assets and affairs of the debtor to the jurisdiction of the local courts for any purpose other than the petition.
Sec. 2. Non-Recognition of Foreign Proceeding. – Nothing in this Rule prevents the court from refusing to take an action governed by this Rule if (a) the action would be manifestly contrary to the public policy of the Philippines; and (b) if the court finds that the country of which the petitioner is a national does not grant recognition to a Philippine rehabilitation proceeding in a manner substantially in accordance with this Rule.
Sec. 3. Petition for Recognition of Foreign Proceeding. – A foreign representative may apply with the Regional Trial Court where the debtor resides for recognition of the foreign proceeding in which the foreign representative has been appointed. A petition for recognition shall be accompanied by: (a) A certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; or (b) A certificate from the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign representative; or (c) In the absence of evidence referred to in subparagraphs (a) and (b), any other evidence acceptable to the court of the existence of the foreign proceeding and of the appointment of the foreign representative.
Sec. 4. Recognition of Foreign Proceeding. – A foreign proceeding shall be recognized if: (a) The proceeding is a foreign proceeding as defined herein; (b) The person or body applying for recognition is a foreign representative as defined herein; and (c) The petition meets the requirements of Section 3 of this Rule;
Sec. 5. Period to Recognize Foreign Proceeding. – A petition for recognition of a foreign proceeding shall be decided within thirty (30) days from the filing thereof.
Sec. 6. Notification to Court. – From the time of filing the petition for recognition of the foreign proceeding, the foreign representative shall inform the court promptly of: (a) Any substantial change in the status of the foreign proceeding or the status of the foreign representative’s appointment; and (b) Any other foreign proceeding regarding the same debtor that becomes known to the foreign representative.
Sec. 7. Provisional Relief that May be Granted upon Application for Recognition of Foreign Proceeding. – From the time of filing a petition for recognition until the same is decided NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 125 A.M. NO. 00-8-10-SC upon, the court may, upon motion of the foreign representative where relief is urgently needed to protect the assets of the debtor or the interests of the creditors, grant relief of a provisional nature, including: (a) Staying execution against the debtor’s assets; (b) Entrusting the administration or realization of all or part of the debtor’s assets located in the Philippines to the foreign representative or another person designated by the court in order to protect and preserve the value of assets that, by their nature or because of other circumstances, are perishable, susceptible to devaluation or otherwise in jeopardy; (c) Any relief mentioned in Sections 9(a)(1), (2) and (7) of this Rule.
Sec. 8. Effects of Recognition of Foreign Proceeding. – Upon recognition of a foreign proceeding: (a) Commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities is stayed;provided , that such stay does not affect the right to commence individual actions or proceedings to the extent necessary to preserve a claim against the debtor. (b) Execution against the debtor’s assets is stayed; and (c) The right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended.
Sec. 9. Relief That May be Granted After Recognition of Foreign Proceeding. (a) Upon recognition of a foreign proceeding, where necessary to protect the assets of the debtor or the interests of the creditors, the court may, upon motion of the foreign representative, grant any appropriate relief including: (1) Staying the commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities to the extent they have not been stayed under Section 8(a) of this Rule; (2) Staying execution against the debtor’s assets to the extent it has not been stayed under Section 8(b) of this Rule; (3) Suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to the extent this right has not been suspended under Section 8(c) of this Rule; (4) Providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities; (5) Entrusting the administration or realization of all or part of the debtor’s assets located in the Philippines to the foreign representative or another person designated by the court; 126 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(6) Extending the relief granted under Section 7 of this Rule; (7) Granting any additional relief that may be available to the rehabilitation receiver under these laws. (b) Upon recognition of a foreign proceeding, the court may, at the request of the foreign representative, entrust the distribution of all or part of the debtor’s assets located in the Philippines to the foreign representative or another person designated by the court; provided that the court is satisfied that the interests of local creditors are adequately protected.
Sec. 10. Protection of Creditors and Other Interested Persons. (a) In granting or denying relief under this Rule or in modifying or terminating the relief under paragraph (c) of this Section, the court must be satisfied that the interests of the creditors and other interested persons, including the debtor, are adequately protected. (b) The court may subject the relief granted under Section 7 or Section 9 of this Rule to conditions it considers appropriate. (c) The court may, upon motion of the foreign representative or a person affected by the relief granted under Section 7 or Section 9 of this Rule, or on its own motion, modify or terminate such relief.
Sec. 11. Actions to Avoid Acts Detrimental to Creditors. – Upon recognition of a foreign proceeding, the foreign representative acquires the standing to initiate actions to avoid or otherwise render ineffective acts detrimental to creditors that are available under these Rules.
Sec. 12. Intervention by Foreign Representative in Philippine Proceedings. – Upon recognition of a foreign proceeding, the foreign representative may intervene in any action or proceeding in the Philippines in which the debtor is a party.
Sec. 13. Cooperation and Direct Communication with Foreign Courts and Foreign Representatives. – In matters covered by this Rule, the court shall cooperate to the maximum extent possible with foreign courts or foreign representatives. The court is entitled to communicate directly with, or request information or assistance directly from, foreign courts or foreign representatives.
Sec. 14. Forms of Cooperation. – Cooperation may be implemented by any appropriate means, including but not limited to the following: (a) Appointment of a person or body to act at the discretion of the court; (b) Communication of information by any means considered appropriate by the court; (c) Coordination of the administration and supervision of the debtor’s assets and affairs; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 127 A.M. NO. 00-8-10-SC (d) Approval or implementation by courts of agreements concerning the coordination of proceedings; (e) Coordination of concurrent proceedings regarding the same debtor; (f) Suspension of proceedings against the debtor; (g) Limiting the relief of assets that should be administered in a foreign proceeding pending in a jurisdiction other than the place where the debtor has its principal place of business (foreign non-main proceeding) or information required in that proceeding; and (h) Implementation of rehabilitation or reorganization plan for the debtor. Nothing in this Rule limits the power of the court to provide additional assistance to the foreign representative under other applicable laws.
Sec. 15. Commencement of Local Proceeding after Recognition of Foreign Proceeding. – After the recognition of a foreign proceeding, a local proceeding under these Rules may be commenced only if the debtor is doing business in the Philippines, the effects of the proceedings shall be restricted to the assets of the debtor located in the country and, to the extent necessary to implement cooperation and coordination under Sections 13 and 14 of this Rule, to the other assets of the debtor that, under local laws, must be administered in that proceeding.
Sec. 16. Local and Foreign Proceedings. – Where a foreign proceeding and a local proceeding are taking place concurrently regarding the same debtor, the court shall seek cooperation and coordination under Sections 13 and 14 of this Rule. Any relief granted to the foreign proceeding must be made consistent with the relief granted in the local proceeding.
Rule 8 Procedural Remedies
Section 1. Motion for Reconsideration. – A party may file a motion for reconsideration of any order issued by the court prior to the approval of the rehabilitation plan. No relief can be extended to the party aggrieved by the court’s order on the motion through a special civil action for certiorari under Rule 65 of the Rules of Court. Such order can only be elevated to the Court of Appeals as an assigned error in the petition for review of the decision or order approving or disapproving the rehabilitation plan. An order issued after the approval of the rehabilitation plan can de reviewed only through a special civil action for certiorari under Rule 65 of the Rules of Court.
Sec. 2. Review of Decision or Order on Rehabilitation Plan. – An order approving or disapproving a rehabilitation plan can only be reviewed through a petition for review to the Court of Appeals under Rule 43 of the Rules of Court within fifteen (15) days from notice of the decision or order. 128 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Rule 9 Final Provisions
Section 1. Severability. – If any provision or section of these Rules is held invalid, the other provisions or sections shall not be affected thereby.
Sec. 2. Transitory Provision. – Unless the court orders otherwise to prevent manifest injustice, any pending petition for rehabilitation that has not undergone the initial hearing prescribed under the Interim Rules of Procedure for Corporate Rehabilitation at the time of the effectivity of these Rules shall be governed by these Rules.
Sec. 3. Effectivity. – These Rules shall take effect on January 16, 2009 following its publication in two (2) newspapers of general circulation in the Philippines.
December 2, 2008. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 129 A.M. NO. 00-8-10-SC Annex “A” Affidavit of General Financial Condition
(1) Are you an officer of the debtor referred to in these proceedings? (2) What is your full name and what position do you hold in the debtor? (3) What is the full name of the debtor and what is the address of its head office? (4) When was it formed or incorporated? (5) When did the debtor commence business? (6) What is the nature of its business? What is the market share of the debtor in the industry in which it is engaged? (7) Who are the parties, members, or stockholders? How many employees? (8) What is the capital of the debtor? (9) What is the capital contribution and what is the amount of the capital, paid and unpaid, of each of the partners or shareholders? (10) Do any of these people hold the shares in trust for others? (11) Who are the directors and officers of the debtors? (12) Has the debtor any subsidiary corporation? If so, give particulars? (13) Has the debtor properly maintained its books and are they updated? (14) Were the books audited annually? (15) If so, what is the name of the auditor and when was the last audited statement drawn up? (16) Have all proper returns been made to the various government agencies requiring same? (17) When did the debtor first become aware of its problems? (18) Has the debtor within the twelve [(12)] months preceding the filing of the petition: (a) made any payments, returned any goods or delivered any property to any of its creditors, except in the normal course of business? (b) executed any mortgage, pledge, or security over any of its properties in favor of any creditor? (c) transferred or disposed of any of its properties in payment of any debt? (d) sold, disposed of, or removed any of its property except in the ordinary course of business? 130 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(e) sold any merchandise at less than fair market value or purchased merchandise or services at more than fair market value? (f) made or been a party to any settlement of property in favor of any person? If, so, give particulars. (19) Has the debtor recorded all sales or dispositions of assets? (20) What were the sales for the last three [(3)] years and what percentage of the sales represented the profit or mark-up? (21) What were the profits or losses for the debtor for the last three[(3)] years? (22) What are the causes of the problems of the debtor? Please provide particulars? (23) When did you first notice these problems and what actions did the debtor take to rectify them? (24) How much do you estimate is needed to rehabilitate the debtor? (25) Has any person expressed interest in investing new money into the debtor? (26) Are there any pending and threatened legal actions against the debtor? If so, please provide particulars. (27) Has the debtor discussed any restructuring or repayment plan with any of the creditors? Please provide status and details. (28) Has any creditor expressed interest in restructuring the debts of the debtor? If so, please give particulars. (29) Have employees’ wages and salaries been kept current? If not, how much are in arrears and what time period do the arrears represent? (30) Have obligation to the government and its agencies been kept current? If not, how much are in arrears and what time period do the arrears represent? 131
A.M. No. 12-12-11-SC The Financial Rehabilitation Rules of Procedure (2013) Approved on August 27, 2013
Rule 1 Coverage and General Provisions
Section 1. Title. – These Rules shall be known and cited as the “Financial Rehabilitation Rules of Procedure (2013).”
Sec. 2. Scope. – These Rules shall apply to petitions for rehabilitation of corporations, partnerships, and sole proprietorships, filed pursuant to Republic Act No. 10142, otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010. These Rules shall similarly govern all further proceedings in suspension of payments and rehabilitation cases already pending, except to the extent that, in the opinion of the court, its application would not be feasible or would work injustice, in which event the procedures originally applicable shall continue to govern.
Sec. 3. Construction of Rules. – These Rules shall be liberally construed to promote a timely, fair, transparent, effective, and efficient rehabilitation of debtors, in accordance with the declared policy of the Act.
Sec. 4. Nature of Proceedings. – The proceedings under these Rules shall be in rem. Jurisdiction over all persons affected by the proceedings is acquired upon publication of the notice of the commencement of the proceedings and the commencement order or any similar order of the proceedings in one (1) newspaper of general circulation in the Philippines for two (2) consecutive weeks. The proceedings shall be summary and non-adversarial in nature. The following pleadings are prohibited: (A) motion ot dismiss; (B) motion orf a bill of particulars; (C) petition for relief; (D) motion orf extension; (E) motion orf postponement and other motions of similar intent; (F) reply; (G) rejoinder; 132 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(H) intervention; and (I) any pleading or motion that is similar to or of like effect as any of the foregoing. For stated and fully supported compelling reasons, the court may allow the filing of motions for extension or postponement, provided, the same shall be verified and under oath. Any pleading, motion, or other submission submitted by any interested party shall be supported by verified statements that the affiant has read the submission and its factual allegations are true and correct of his personal knowledge or based on authentic records, and shall contain supporting annexes, which the submitting party shall attest as faithful reproductions of the originals. An unverified submission shall be considered as not filed. An improperly verified submission may be considered as not filed, at the discretion of the judge. Upon motion, the originals of the annexes to a submission may be produced in court for examination or comparison by a party to the proceedings. All pleadings or motions shall be filed in three (3) printed and two (2) digital copies in CD format. Annexes to the pleadings and other submissions shall be in printed form. The court may decide matters on the basis of affidavits, counter-affidavits, and other documentary evidence, conducting clarificatory hearings when necessary. Any order issued by the court under these Rules is immediately executory. Review of any order of the court shall be in accordance with Rule 6 of these Rules. Provided, however, that the reliefs ordered by the trial or appellate courts shall take into account the need for resolution of the proceedings in a just, equitable, and speedy manner.
Sec. 5. Definition of Terms. – In addition to the terms already defined in the Act, the following terms are hereunder defined for purposes of rehabilitation: (a) Administrative expenses shall refer to those reasonable and necessary expenses (1) incurred in connection with the filing of a petition under these Rules, including filing and reasonable and necessary professional fees in preparing the petition; (2) arising from, or in connection with the conduct of the rehabilitation proceedings under these Rules; (3) incurred in the ordinary course of business of the debtor after the commencement date; (4) for the payment of new obligations obtained after the commencement date to finance the rehabilitation of the debtor; (5) incurred for the reasonable and necessary fees of the rehabilitation receiver, the management committee, and/or of the professionals they may engage; and (6) those otherwise authorized or mandated under the Act or such other expenses authorized under these Rules. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 133 A.M. NO. 12-12-11-SC (b) Affidavit of General Financial Condition (Annex “A” of these Rules) shall refer to a verified statement on the general financial condition of the debtor, as required in Section 2(B) (10), Rule 2 of these Rules. (c) Asset is anything of value which may be either tangible or intangible. Tangible assets can be current assets or fixed assets. Current assets may include cash on hand, money in banks or inventory, while fixed assets may include plant, building, property and equipment. Intangible assets may include intellectual property (such as copyrights, patents, and trademarks) and financial assets (such as accounts receivable, subscription receivables, and bonds and stocks). The value of these assets must appear in the latest audited financial statements immediately preceding the filing of the petition. In case the debtor is less than three (3) years in operation, it is sufficient that the book value is based on the audited financial statement/s for the two (2) years or year immediately preceding the filing of the petition, as the case may be. (d) Business day shall refer to any day other than Saturday, Sunday, or any non-working day. (e) Commencement date shall refer to the date on which the court issues a commencement order. The effects of the commencement order shall retroact to the date of filing of the petition for voluntary or involuntary proceedings. (f) Foreign court means a judicial or other authority competent to control or supervise a foreign proceeding. (g) Foreign proceeding means a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency, in which proceeding, the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of rehabilitation, reorganization, or liquidation. (h) Foreign main proceeding means a foreign proceeding taking place in the State where the debtor has the center of its main interests. (i) Foreign non-main proceeding means a foreign proceeding, other than a foreign main proceeding, taking place in a State where the debtor has an establishment, or any place of operations where the debtor carries out a non-transitory economic activity with human means and goods or services. (j) Foreign representative means a person or entity, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or rehabilitation of the debtor or to act as a representative of the foreign proceeding. (k) Insolvency shall refer to the financial incapacity of the debtors to pay their liabilities as they fall due in the ordinary course of business or whenever their liabilities are greater than their assets. (l) Liquidation shall refer to the proceedings under Chapter V of the Act. 134 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(m) Management committee is composed of persons, natural or juridical, appointed by the court, pursuant to Section 32, Rule 2 of these Rules. It shall take the place of the management and governing body of the debtor, and assume their powers, rights and responsibilities under the law. (n) Proceedings, unless the term is used in a different context, shall refer to court-supervised rehabilitation proceedings or pre-negotiated rehabilitation proceedings, which are commenced by the court’s issuance of a commencement order and which shall last until the court declares the termination of the proceedings pursuant to Section 73, Rule 2 of these Rules. (o) Publication notice shall refer to notice through publication in a newspaper of general circulation in the Philippines on a business day for two (2) consecutive weeks. (p) Rehabilitation receiver shall refer to the person or persons, natural or juridical, appointed as such by the court pursuant to the Act and which shall be entrusted with such powers, duties, and responsibilities as set forth herein. Where the rehabilitation receiver is a juridical entity, the term includes the juridical entity’s designated representative. (q) Standstill period shall refer to the period agreed upon by the debtor and its creditors to enable them to negotiate and enter into an out-of-court or informal restructuring/ workout agreement or rehabilitation plan pursuant to Rule 4 of these Rules. The standstill agreement may include provisions identical with or similar to the legal effects of a commencement order under Section 9, Rule 2 of these Rules. (r) Stay or Suspension Order shall refer to an order issued in conjunction with the commencement order that 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. (s) Working day shall have the same meaning as business day.
Sec. 6. Venue. – All petitions pursuant to these Rules shall be filed in the Regional Trial Court which has jurisdiction over the principal office of the debtor alleged to be insolvent as specified in its articles of incorporation or partnership or in its registration papers with the Department of Trade and Industry (DTI) in cases of sole proprietorship, as the case may be. Where the principal office of the corporation, partnership or association as registered in the Securities and Exchange Commission (SEC) is in Metro Manila, the action must be filed in the Regional Trial Court of the city or municipality where the head office is located. A petition for voluntary or involuntary rehabilitation involving a group of debtors shall be filed in the Regional Trial Court which has jurisdiction over the principal office of any of the debtors alleged to be insolvent, as specified in its articles of incorporation or partnership, or registration papers with the DTI in cases of sole proprietorship, as the case may be. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 135 A.M. NO. 12-12-11-SC Sec. 7. Notification to Foreign Creditors of a Proceeding under These Rules. – Except when otherwise indicated under a particular rule, (A) whenever under these Rules notice is to be given to creditors in the Philippines, such notice shall also be given to the known foreign creditors with no addresses in the Philippines. The court may order that appropriate steps be taken with a view to notifying any foreign creditor whose address is not yet known. (B) such notice shall be made to the foreign creditors individually, unless the court considers that, under the circumstances, some other form of notice would be more appropriate. (C) when a notice of commencement of a proceeding under these Rules is to be given to foreign creditors, the notice shall (1) indicate a reasonable time period for filing claims and specify the place for their filing; (2) indicate whether secured creditors need to file their secured claims; and (3) contain any other information required to be included in such notice to creditors pursuant to these Rules and the orders of the court.
Sec. 8. Substantive and Procedural Consolidation.– Each juridical entity shall be considered as a separate entity under the proceedings in these Rules and its assets and liabilities may not be commingled or aggregated with those of another, unless the latter is a related enterprise that is owned or controlled directly or indirectly by the same interests. The commingling or aggregation of assets and liabilities of the debtor with those of a related enterprise may only be allowed where (A) there was commingling in fact of assets and liabilities of the debtor and the related enterprise prior to the commencement of the proceedings; (B) the debtor and the related enterprise have common creditors and it will be more convenient to treat them together rather than separately; (C) the related enterprise voluntarily accedes to join the debtor as party-petitioner and to commingle its assets and liabilities with the debtor’s; and (D) the consolidation of assets and liabilities of the debtor and the related enterprise is beneficial to all concerned and promotes the objectives of rehabilitation. The court, upon proper motion, may join other entities affiliated with the debtor as parties for a complete determination of the claims in the proceedings.
Sec. 9. Decisions of Creditors. – Decisions of creditors shall be made according to the relevant provisions of the Corporation Code in the case of stock or non-stock corporations or the Civil Code in the case of partnerships that are not inconsistent with the Act and these Rules.
Sec. 10. Creditors’ Representatives. – Creditors may designate representatives to vote or otherwise act on their behalf or on behalf of their class, by filing notice of such 136 PHILJA JUDICIAL JOURNAL VOL 16:41 2014 representation, with supporting documents, with the court and serving a copy on the rehabilitation receiver and the parties whose appearances have been accepted by the court.
Sec. 11. Liability of Individual Debtor, Owner of a Sole Proprietorship, Partners in a Partnership, or Directors and Officers. – The owner of a sole proprietorship, the partners in a partnership, or the directors and officers of a corporate debtor shall be liable for double the value of the property sold, embezzled or disposed of, or double the amount of the transaction involved, whichever is higher, to be recovered for the benefit of the debtor and the creditors, if they, having notice of the commencement of the proceedings, or having reason to believe that proceedings are about to be commenced, or in contemplation of the proceedings, willfully commit the following acts: (A) Dispose or cause to be disposed of any property of the debtor other than in the ordinary course of business or authorize or approve any transaction in fraud of creditors or in a manner grossly disadvantageous to the debtor and/or creditors; or (B) Conceal, authorize or approve the concealment from the creditors, or embezzle or misappropriate, any property of the debtor. The court shall determine the extent of the liability of an owner, partner, director or officer under this Section. In this connection, in case of partnerships and corporations, the court shall consider the amount of the shareholding or partnership or equity interest of such partner, director or officer, the degree of control of such partner, director or officer over the debtor, and the extent of the involvement of such partner, director or debtor in the actual management of the operations of the debtor.
Sec. 12. Authorization to Exchange Debt for Equity. – Any bank, whether universal or not, may acquire and hold an equity interest or investment in a debtor or its subsidiaries when conveyed to such bank in satisfaction of debts pursuant to a Rehabilitation Plan approved by the court: Provided, That such ownership shall be subject to the ownership limits applicable to universal banks for equity investments; and Provided, further, that any equity investment or interest acquired or held pursuant to this section shall be disposed by the bank within a period of five (5) years or as may be prescribed by the Monetary Board.
Rule 2 Court-Supervised Rehabilitation
(A) INITIATION OF PROCEEDINGS (1) VOLUNTARY PROCEEDINGS Section 1. Who May Petition. – When approved by (a) the owner, in case of a sole proprietorship; (b) a majority of the partners, in case of a partnership; or NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 137 A.M. NO. 12-12-11-SC (c) a majority vote of the board of directors or trustees and authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or at least two-thirds (2/3) of the members in a non-stock corporation, in case of a corporation; an insolvent debtor may initiate voluntary proceedings under this Rule by filing a petition for rehabilitation with the court based on the grounds hereinafter specifically provided. A group of debtors may file a petition for rehabilitation under this Rule when (1) one or more of its members foresee the impossibility of meeting debts when they respectively fall due, and (2) the financial distress would likely adversely affect the financial condition and/or operations of the other members of the group or the participation of the other members of the group is essential under the terms and conditions of the proposed Rehabilitation Plan.
Sec. 2. Contents of the Petition. – (A) The petition filed by the debtor must be verified and must set forth with sufficient particularity all of the following material facts: (1) the name, business, and principal address and other addresses of the debtor; (2) the nature of the business and principal activities of the debtor, and the addresses where these activities are conducted; (3) the history of the debtor; (4) the fact and the cause of the debtor’s insolvency; (5) the specific eliefr sought under this Rule; (6) the grounds upon which the petition is based; (7) all pending actions or proceedings by or against the debtor/s and the courts or tribunals where they are pending; (8) the threats or demands to enforce claims or liens against the debtor/s; (9) the manner by which the debtor may be rehabilitated and how such rehabilitation may benefit the general body of creditors, employees and stockholders; and (10) the exact address/es at which documents regarding the debtor and the proceedings may be reviewed and copied. B. The petition shall be accompanied by the following documents: 1. the income tax returns stamped as received by the BIR for the past two (2) years prior to the year of filing; 2. an audited financial statement of the debtor at the end of its last fiscal year; 3. interim financial statements not earlier than thirty (30) days prior to the filing of the petition and certified under oath by the appropriate officer, except when the petition is filed within thirty (30) days after the end of the fiscal year; 138 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(4) a Schedule of Debts and Liabilities which lists all the creditors of the debtor, indicating the name and last address of record of each creditor; the amount of each claim as to principal, interest, or penalties due thirty (30) days prior to the date of filing; the nature of the claim; and any pledge, lien, mortgage, judgment or other security given for the payment thereof; (5) an Inventory of Assets which must list with reasonable particularity all the assets of the debtor, whether in the possession of the debtor or third parties, stating the nature of each asset; the location and condition thereof; the book value and market value of the asset, and attaching the corresponding certified copy of the certificate of title thereof in case of real property, or the evidence of title or ownership in case of movable property; the encumbrances, liens or claims thereon, if any, and the identities and addresses of the lien holders and claimants. The Inventory shall include (i) a Schedule of Accounts Receivable which must indicate the amount of each, the persons from whom due and their correct addresses, the dates of maturity, and the degrees of collectability categorizing them as highly collectible to remotely collectible, and (ii) a Schedule of Existing Claims against third parties which must indicate the name and last address of record of each third party against whom the debtor has a claim, the nature and amount of the claim, including the principal, interest, or penalties due from each third party and any pledge, lien, mortgage, judgment or other security or collateral given for the payment of each claim, and a brief statement of the facts which gave rise to the claim; (6) a Rehabilitation Plan which conforms with the minimal requirements set out in Section 61, Rule 2 of these Rules; (7) a Schedule of Payments and Disposition of Assets which the debtor effected within one (1) year immediately preceding the filing of the petition; (8) a Schedule of Cash Flow of the debtor for three (3) months immediately preceding the filing of the petition, and a detailed schedule of the projected cash flow for the succeeding three (3) months; (9) a Statement of Possible Claims by or against the debtor which must contain a brief statement of the facts which might give rise to the claim and an estimate of the probable amount thereof; (10) an Affidavit of General Financial Condition which shall contain answers to the questions or matters prescribed in Annex “A” of these Rules; and (11) a list containing at least three (3) nominees for the position of rehabilitation receiver as well as their qualifications and addresses, including but not limited to their telephone numbers, fax numbers and email addresses. All attachments to the petition shall be deemed part and parcel of the verified petition. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 139 A.M. NO. 12-12-11-SC Sec. 3. Verification by the Debtor. – The petition filed by the debtor must be verified by an affidavit of a responsible officer of the debtor, whose authority must be attached to the petition, and shall be in a form substantially as follows: “I, ______, (position) of (name of petitioner), do solemnly swear that: (A) the petitioner has been duly authorized to file the petition and that the stockholders (or members or partners) and board of directors (or governing body) have approved and/or consented to, in accordance with law, all actions or matters necessary or desirable to rehabilitate the debtor, including the conversion of the rehabilitation proceedings to liquidation proceedings if so ordered by the court; (B) the petition is being filed to protect the interests of the debtor, the stockholders, the investors and the creditors of the debtor, which warrants the appointment of a rehabilitation receiver; (C) there is no petition for insolvency filed with any other body, court or tribunal affecting the petitioner; (D) the Inventory of Assets and the Schedule of Debts and Liabilities contain the full, correct and true description of all debts and liabilities and of all goods, effects, estate and property of whatever kind or class belonging to the petitioner; (E) the Inventory of Assets also contains a full, correct and true statement of all debts owing or due to the petitioner, or to any person or persons in trust for the petitioner and of all securities and contracts whereby any money may hereafter become due or payable to the petitioner or by or through which any benefit or advantage may accrue to the petitioner; (F) the petition contains a concise statement of the facts giving rise, or which might give rise, to any cause of action in favor of the petitioner; (G) the petitioner has no land, money, stock, expectancy, or property of any kind, except those set forth in the Inventory of Assets; (H) the petitioner has, in no instance, created or acknowledged a debt for a greater sum than the true and correct amount; (I) the petitioner, its officers, directors and stockholders have not, directly or indirectly, concealed, fraudulently sold or otherwise fraudulently disposed of any part of the petitioner’s real or personal property, estate, effects or rights of action, and the petitioner, its officers, directors and stockholders have not in any way compounded with any of its creditors in order to give preference to such creditors, or to receive or to accept any profit or advantage therefrom, or to defraud or deceive in any manner any creditor to whom the petitioner is indebted; and (J) the petitioner, its officers, directors, and stockholders have been acting in good faith and with due diligence.” 140 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
2. INVOLUNTARY PROCEEDINGS Sec. 4. Who May Petition. – Any creditor or group of creditors with a claim of, or the aggregate of whose claims is at least One Million Pesos (P1,000,000) or at least twenty-five percent (25%) of the subscribed capital stock or partners’ contributions, whichever is higher, may initiate involuntary proceedings under this Rule by filing a petition for rehabilitation of a debtor with the court and on the grounds hereinafter specifically provided.
Sec. 5. Grounds to Initiate Involuntary Proceedings. – Involuntary proceedings may be initiated against the debtor by filing a petition with the court if: (A) there is no genuine issue of fact or law on the claim/s of the petitioner/s, and that the due and demandable payments thereon have not been made for at least sixty (60) days; or (B) the debtor has failed generally to meet its liabilities as they fall due; or (C) at least one creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor that will prevent the debtor from paying its debts as they become due or will render it insolvent.
Sec. 6. Contents of the Petition for Involuntary Proceedings. – The petition for rehabilitation shall be verified to establish the substantial likelihood that the debtor may be rehabilitated. The petition shall include
(A) the name, business, and principal address and other known addresses of the debtor; (B) the nature of the business and the principal activities of the debtor; (C) the circumstances sufficient to support a petition to initiate involuntary rehabilitation proceedings under this Rule; (D) the specific eliefr sought under this Rule; (E) a Rehabilitation Plan; (F) the names of at least three (3) nominees to the position of rehabilitation receiver, as well as their qualifications, office and email addresses; (G) the exact address/es at which documents regarding the debtor and the proceedings may be reviewed and copied, if known to the petitioner/s; and (H) documents showing that there is substantial likelihood that the debtor may be rehabilitated.
(B) Provisions Common to Voluntary and Involuntary Proceedings/Action on Petition and Commencement of Proceedings Sec. 7. Action on the petition. – If the court finds the petition for rehabilitation to be sufficient in form and substance, it shall, within five (5) working days from the filing of the petition, issue a Commencement Order. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 141 A.M. NO. 12-12-11-SC If, within the same period, the court finds the petition deficient in form or substance, the court may, in its discretion, give the petitioner/s not exceeding five (5) working days from receipt of notice of the order of the court within which to amend or supplement the petition, or to submit such documents as may be necessary or proper to put the petition in proper order. In such case, the five (5) working days provided above shall be reckoned from the date of the filing of the amended or supplemental petition or the submission of such documents. The court shall dismiss the petition if the deficiency is not complied within the extended five (5)-day period.
Sec. 8. Commencement of Proceedings and Issuance of a Commencement Order. – The rehabilitation proceedings shall be deemed to have commenced from the date of filing of the petition. The Commencement Order shall: (A) state the name, address, and business of the debtor; (B) state the nature of the business and principal activities of the debtor; (C) summarize the ground/s for initiating the proceedings; (D) state the relief sought and any requirement or procedure particular to the relief sought; (E) state the legal effects of the Commencement Order, including those mentioned in Section 9 of this Rule; (F) declare that the debtor is under rehabilitation; (G) direct the petitioner/s to cause the publication of the notice of the Commencement order and the Commencement Order in a newspaper of general circulation in the Philippines once a week for at least two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance; (H) if the petitioner is the debtor, direct the debtor to serve, by personal delivery, a copy of the petition on (i) each creditor holding at least ten percent (10%) of the total liabilities of the debtor as determined from the schedule attached to the petition, (ii) the Bureau of Internal Revenue (BIR), and (iii) the appropriate or relevant regulatory agencies such as, but not limited to, the Securities and Exchange Commission (SEC), the Bangko Sentral ng Pilipinas (BSP), the Insurance Commission, the Housing and Land Use Regulatory Board (HLURB), and the Energy Regulatory Board, within five (5) days from the issuance of the order; (I) if the petitioner/s is/are creditor/s, direct the creditors to serve by personal delivery a copy of the petition on the debtor within five (5) days from the issuance of the order; (J) direct the petitioner to ensure that foreign creditors with no known addresses in the Philippines be served a copy of the Commencement Order at their foreign addresses in such a manner that will ensure that the foreign creditor will receive a copy of the order at least fifteen (15) days before the initial hearing; 142 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(K) appoint a rehabilitation receiver; (L) summarize the requirements and deadlines for creditors to establish their claims against the debtor; (M) direct creditors to file their verified notices of claims with the court at least five (5) days before the initial hearing date, with a warning that their failure to do so on time will bar them from participating in the rehabilitation proceedings but will not prejudice their right to receive distributions if recommended by the rehabilitation receiver and approved by the court, in accordance with Section 12 of this Rule; (N) direct all creditors, the BIR, and all interested parties (including the regulatory agencies concerned) to file and serve on the debtor a verified comment on or opposition to the petition, with supporting affidavits and documents, not later than fifteen (15) days before the date of the first initial hearing; (O) prohibit the debtor’s suppliers of goods or services from withholding the supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services or goods supplied after the issuance of the Commencement Order; (P) authorize the payment of administrative expenses as they become due; (Q) set the case for initial hearing at a date no later than forty (40) days from the date of filing of the petition for the purpose of determining whether there is substantial likelihood for the debtor to be rehabilitated; (R) make available copies of the petition and rehabilitation plan for examination and copying by any interested party; (S) indicate exact address/es at which documents regarding the debtor and the proceedings may be reviewed and copied; (T) 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; (U) state that all contracts not confirmed in writing by the debtor within ninety (90) days following the issuance of the commencement order shall be considered automatically terminated; and (V) include a Stay or Suspension Order, which shall (i) suspend all actions or proceedings in court or otherwise, for the enforcement of all claims against the debtor; (ii) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor; (iii) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 143 A.M. NO. 12-12-11-SC (iv) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein. The issuance of a stay order does not affect the right to commence actions or proceedings in order to preserve ad cautelam a claim against the debtor and to toll the running of the prescriptive period to file the claim. For this purpose, the plaintiff may file the appropriate court action or proceeding by paying the amount of One Hundred Thousand Pesos (P100,000) or one-tenth (1/10) of the prescribed filing fee, whichever is lower. The payment of the balance of the filing fee shall be a jurisdictional requirement for the reinstatement or revival of the case.
Sec. 9. Effects of the Commencement Order. – The effects of the court’s issuance of a Commencement Order shall retroact to the date of the filing of the petition and, in addition to the effects of a Stay or Suspension Order described in the foregoing section, shall (A) vest the rehabilitation receiver with all the powers and functions provided for under the Act, such as the right of access, and the right to review and obtain records to which the debtor’s management and directors have access, including bank accounts of whatever nature of the debtor, subject to the approval by the court of the performance bond posted by the rehabilitation receiver; (B) prohibit or otherwise serve as the legal basis for rendering null and void the results of any extrajudicial activity or process to seize property, sell encumbered property, or otherwise attempt to collect on or enforce a claim against the debtor after the commencement date unless otherwise allowed under these Rules, subject to the provisions of Section 49 of this Rule; (C) serve as the legal basis for rendering null and void any set-off after the commencement date of any debt owed to the debtor by any of the debtor’s creditors; (D) serve as the legal basis for rendering null and void the perfection of any lien against the debtor’s property after the commencement date; (E) consolidate all legal proceedings by and against the debtor to the court: Provided, however, That the court may allow the continuation of cases in other courts where the debtor had initiated the suit; and (F) exempt the debtor from liability for taxes and fees, including penalties, interests and charges thereof due to the national government or the LGU as provided in Section 19 of the Act. Attempts to seek legal or other recourse against the debtor outside of these proceedings shall be sufficient to support a finding of indirect contempt of court. 144 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 10. Exceptions to the Stay or Suspension Order. – The Stay or Suspension Order shall not apply (A) to cases already pending appeal in the Supreme Court as of commencement date: Provided, that any final and executory judgment arising from such appeal shall be referred to the rehabilitation court for appropriate action; (B) subject to the discretion of the court, to cases pending or filed with a specialized court or quasi-judicial agency which, upon determination by the rehabilitation court upon motion made, is capable of resolving the claim more quickly, fairly and efficiently than the court: Provided, That any final and executory judgment of such court or agency shall be referred to the court and shall be treated as a non-disputed claim; (C) to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver; (D) to any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and securities entrusted to the latter in the ordinary course of the latter’s business 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; (E) to the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin agreement for the settlement of securities transactions in accordance with the provisions of the Securities Regulation Code and its implementing rules and regulations; (F) to the clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly authorized, registered and/or recognized by the appropriate regulatory agency like the BSP and the SEC, as well as any form of actions of such agencies or entities to reimburse themselves for any transactions settled for the debtor; and (G) to any criminal action against individual debtor or owner, partner, director or officer of a debtor. The enforcement of the civil liability arising from the offense charged, deemed instituted with the criminal action, shall be covered by the Stay Order.
Sec. 11. Effectivity and Duration of Commencement Order. – The Commencement Order shall be effective for the duration of the rehabilitation proceedings, unless (a) earlier lifted by the court, (b) the rehabilitation plan is seasonably confirmed or approved, or (c) the rehabilitation proceedings are ordered terminated by the court pursuant to Section 73 of this Rule. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 145 A.M. NO. 12-12-11-SC Sec. 12. Notice of Claim. – Every creditor of the debtor or any interested party whose claim is not yet listed in the schedule of debts and liabilities shall file his verified notice of claim not later than five (5) days before the first initial hearing date fixed in the Commencement Order. If a creditor files a belated claim, he shall not be entitled to participate in the proceedings but shall be entitled to receive distributions arising therefrom if recommended and approved by the rehabilitation receiver, and approved by the court.
Sec. 13. Compliance with Jurisdictional Requirements. – On or before the first initial hearing set in the Commencement Order, the petitioner shall file a publisher’s affidavit showing that the publication requirements and a petitioner’s affidavit showing that the service requirement for local creditors and notification requirement for foreign creditors had been complied with, as required in the Commencement Order. Before proceeding with the initial hearing, the court shall determine whether the jurisdictional requirements set forth above had been complied with.
Sec. 14. Action at the Initial Hearing. – After making a determination that the jurisdictional requirements have been complied with, the court shall (A) determine the creditors who have made timely and proper filing of their notice of claims and issue an order that the creditors not named therein shall not be entitled to participate in the proceedings but shall be entitled to receive distributions arising from the proceedings; (B) hear and determine any objection to the qualifications and appointment of the rehabilitation receiver and, if necessary, appoint a new one; and (C) direct the creditors to discuss their comments on the petition and the Rehabilitation Plan submitted pursuant to Section 8(N) of this Rule; (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 the last initial hearing the report provided in Section 16 of this Rule; and (E) determine the reasonableness of the rehabilitation receiver’s fees stated in the Rehabilitation Plan, which shall be presumed reasonable unless the creditors object to it.
Sec. 15. Additional Hearings. – The court may hold additional hearings as may be necessary to continue the initial hearing process but these hearings must be concluded not later than ninety (90) days from the first hearing date fixed in the Commencement Order.
Sec. 16. Report of the Rehabilitation Receiver. – Within forty (40) days from the termination of the initial hearing, and with or without the comments from the creditors, the rehabilitation receiver shall submit a report to the court stating his preliminary findings and recommendations on whether 146 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(A) the debtor is insolvent; 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 that the debtor could be successfully rehabilitated; (D) the petition should be dismissed; and (E) the debtor should be dissolved and/or liquidated.
Sec. 17. Giving Due Course To or Dismissal of Petition, or Conversion of Proceedings. – Within ten (10) days from receipt of the report of the rehabilitation receiver mentioned in the immediately preceding section, the court may (A) give due course to the petition upon a finding that (1) the debtor is insolvent, and (2) there is a substantial likelihood that the debtor could be successfully rehabilitated; (B) dismiss the petition upon a finding that (1) the debtor is not insolvent, (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, (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 fraud to its creditor/s or a group of creditors; (C) convert the proceedings into one for the liquidation of the debtor upon a finding that (1) the debtor is insolvent and there is no substantial likelihood for the debtor to be successfully rehabilitated as determined, and (2) there is failure of rehabilitation.
Sec. 18. Petition Given Due Course. – If the petition is given due course, the court shall direct the rehabilitation receiver to confer with the debtor and all the classes of creditors to consider their views and proposals in the review or revision of the Rehabilitation Plan or the preparation of a new one. The Rehabilitation Plan must be submitted to the court within a period of not more than ninety (90) days from the date of the issuance of the order giving due course to the petition. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 147 A.M. NO. 12-12-11-SC The court may refer any dispute relating to the Rehabilitation Plan or the rehabilitation proceedings pending before it to arbitration or other modes of dispute resolution, as provided for under Republic Act No. 9285, or the Alternative Dispute Resolution Act of 2004, should it determine that such mode will resolve the dispute more quickly, fairly, and efficiently than the court. The referral to arbitration or other modes of dispute resolution shall not be made if it will prejudice the one [(1)]-year period for the confirmation of the rehabilitation plan under Section 70 of the Act.
Sec. 19. Dismissal of Petition. – If the petition is dismissed pursuant to Section 17(B) of this Rule, then the court may, in its discretion, order the petitioner to pay damages to any creditor or to the debtor, as the case may be, who may have been injured by the filing of the petition, to the extent of any such injury.
(C) THE REHABILITATION RECEIVER, MANAGEMENT COMMITTEE, AND CREDITOR’S COMMITTEE Sec. 20. Who May Serve as a Rehabilitation Receiver. – Any qualified natural or juridical person may serve as a rehabilitation receiver. A rehabilitation receiver who is a juridical entity must designate, as its representative, a natural person who possesses all the qualifications and none of the disqualifications under this Rule. The juridical entity and the representative are solidarily liable for all the obligations and responsibilities of a rehabilitation receiver.
Sec. 21. Qualifications of a Rehabilitation Receiver. – (A) The rehabilitation receiver who is a natural person must comply with the following minimum qualifications and requirements: (1) He is a citizen of the Philippines or a resident of the Philippines for at least six (6) months immediately preceding his nomination; (2) He is of good moral character and with acknowledged integrity, impartiality and independence; (3) As far as practicable, he has expertise and acumen to manage and operate a business similar in size and complexity to that of the debtor; (4) He has an operating knowledge in management, finance and rehabilitation of distressed companies; (5) He has a general familiarity with the rights of creditors subject to suspension of payments or rehabilitation and a general understanding of the duties and obligations of a rehabilitation receiver; (6) He has not been earlier dismissed as a rehabilitation receiver pursuant to Section 27 of this Rule; (7) He has no conflict of interest as defined in this Rule; and 148 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(8) He is willing and able to file a bond in such amount as may be determined by the court. (B) The rehabilitation receiver, which is a juridical person, must comply with the following qualifications and requirements: (1) It is duly authorized to do business in the Philippines for at least six (6) years prior to its appointment; (2) It is of good standing as certified by the appropriate regulatory agency/ies; (3) It has no conflict of interest as defined in this Rule; (4) It has not been earlier dismissed as a rehabilitation receiver pursuant to Section 27 of this Rule; (5) It must submit the name of the person designated to discharge the responsibilities and powers of a rehabilitation receiver and the names of the employees and other persons authorized to assist the designated representative, together with a sworn certification that these persons possess the qualifications and none of the disqualifications enumerated above; (6) It must submit a sworn undertaking, duly approved in accordance with law, binding itself to be solidarily liable with the persons designated by it to discharge the functions and responsibilities of a rehabilitation receiver; (7) It is willing and able to file a bond in such amount as may be determined by the court; (8) It is not disqualified to discharge the duties of a rehabilitation receiver under the Constitution and other relevant laws; (C) In addition, the designated representative of the juridical person must comply with the following requirements: (1) The representative must be duly designated and authorized to act for and on behalf of the juridical entity; (2) The designated representative must be a director, officer, stockholder or partner of the juridical entity; and (3) The designated representative must submit a sworn undertaking that he shall be solidarily liable with his firm for all the obligations and responsibilities of a rehabilitation receiver.
Sec. 22. Conflict of Interest. – No person may be appointed as a rehabilitation receiver or as a member of a management committee, or be engaged by the rehabilitation receiver or the management committee if he has a conflict of interest. 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 NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 149 A.M. NO. 12-12-11-SC the proceedings. A conflict of interest of an individual employed or contracted by the rehabilitation receiver or the management committee or its members shall be deemed to be a conflict of interest of the rehabilitation receiver or the management committee. Without limiting the generality of the following, a rehabilitation receiver may be deemed to have a conflict of interest if: (A) he is a creditor, owner, partner or stockholder of the debtor; (B) he is engaged in a line of business which competes with the debtor; (C) he is, or was within five (5) years from the filing of the petition, a director, officer, owner, partner, or employee or the auditor or accountant of the debtor; (D) he is, or was within two (2) years from the filing of the petition, an underwriter of the outstanding securities of the debtor; (E) he is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owner/s of a sole proprietorship-debtor, partners of a partnership-debtor, or to any stockholder, director, officer, employee, or underwriter of the corporation-debtor; or (F) he has any other direct or indirect material interest in the debtor or any creditor.
Sec. 23. Disclosure of Conflict of Interest. – Conflict of interest as set forth in the preceding Section shall be disclosed at all times throughout the proceedings to the court and to the creditors. Further, disclosure of any conflict of interest must be made (A) by the nominees for the position of rehabilitation receiver before their names are submitted for appointment; (B) by the rehabilitation receiver and its designated representative in case of juridical person, within fifteen (15) days from the appointment as rehabilitation receiver or as a member of the management committee; and (C) by the rehabilitation receiver and its designated representative in case of juridical person, within ten (10) days from the time the rehabilitation receiver and/or its designated representative learns of any fact described in the preceding section while the rehabilitation proceedings are pending. The same rule shall apply to persons who assist the rehabilitation receiver or the management committee as professionals, experts or employees. They shall file their disclosure within ten (10) days from the date they are contracted or are employed.
Sec. 24. Objection to Conflict of Interest. – Within ten (10) days from receipt of the disclosure of conflict of interest provided under the preceding Section, any party to the proceedings adversely affected by the appointment of the persons to the positions mentioned above may file his objection to the appointment of the rehabilitation receiver or a member of the management committee, or to the employment by them of professionals, experts or employees. The court may disregard the conflict of interest if it finds that it will not be detrimental to the general interest of the stakeholders. 150 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Failure to file a timely objection shall be deemed a waiver of the conflict of interest rule. Should the court decide that the objection has merit and that the conflict of interest will be detrimental to the general interest of the stakeholders, it shall dismiss the rehabilitation receiver having conflict of interest and appoint a new one. Should the person concerned be a member of the management committee or one employed by the rehabilitation receiver or the management committee as a professional or expert, the court shall dismiss the person having conflict of interest and direct the rehabilitation receiver or management committee to appoint or employ a new one in his place, as the case may be.
Sec. 25. Initial Appointment of the Rehabilitation Receiver. – The court shall initially appoint the rehabilitation receiver, who may or may not be from among the nominees of the petitioner. At the initial hearing of the petition, the creditors and the debtor who are not petitioners may nominate other persons to the position. The court may retain the rehabilitation receiver initially appointed or appoint another who may or may not be from among those nominated. In case the debtor is a securities market participant, the court shall give priority to the nominee of the appropriate securities or investor protection fund. If a qualified natural person or entity is nominated by more than fifty percent (50%) of the secured creditors and the general unsecured creditors, and satisfactory evidence of the creditors’ support is submitted, the court shall appoint the creditors’ nominee as rehabilitation receiver.
Sec. 26. Powers, Duties and Functions of Rehabilitation Receiver. – The rehabilitation receiver shall be deemed an officer of the court with the principal duty of preserving and maximizing the value of the assets of the debtor during the rehabilitation proceedings, determining the viability of the rehabilitation of the debtor, preparing and recommending a Rehabilitation Plan to the court, and implementing the approved Rehabilitation Plan. To this end, and without limiting the generality of the foregoing, the rehabilitation receiver shall have the following powers, duties and responsibilities: (A) to verify the accuracy of the petition, and correct, if necessary, the annexes such as the Schedule of Debts and Liabilities and the Inventory of Assets submitted in support to the petition; (B) to accept and incorporate, when justified, amendments to the Schedule of Debts and Liabilities; (C) to evaluate the validity, genuineness and true amount of all the claims against the debtor and to recommend to the court the disallowance of claims and rejection of amendments to the Schedule of Debts and Liabilities that lack sufficient proof and justification; (D) to submit to the court, and make available for the creditors’ review, a revised Schedule of Debts and Liabilities; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 151 A.M. NO. 12-12-11-SC (E) to investigate the acts, conduct, properties, liabilities and financial condition of the debtor, the operation of its business and the desirability of the continuance thereof, and any other matter relevant to the proceeding or to the formulation of a Rehabilitation Plan; (F) to sue and recover, with the approval of the court, all amounts owed to, and all properties pertaining to the debtor, including all property or money of the debtor paid, transferred or disbursed in fraud of the debtor or its creditors, or which constitute undue preference of creditor/s; (G) to examine under oath the directors and officers of the debtor and any other witnesses that he may deem appropriate; (H) to make available to the creditors the documents and notices necessary for them to follow and participate in the proceedings; (I) to report to the court any fact ascertained by him to pertain to the causes of the debtor’s problems, fraud, preferences, dispositions, encumbrances, misconduct, mismanagement and irregularities committed by the stockholders, directors, management, or any other person against the debtor; (J) to employ such specialized professionals and other experts such as lawyers, accountants, auditors, appraisers and staff, with the approval of the court, whose services are necessary in assisting the rehabilitation receiver in performing his duties and functions in accordance with Section 37 of this Rule; (K) to monitor the operations of the debtor and to immediately report to the court any material adverse change in the debtor’s business; (L) to evaluate the existing assets and liabilities, earnings and operations of the debtor; (M) to determine and recommend to the court the best way to salvage and protect the interests of the creditors, stockholders and the general public; (N) to study the Rehabilitation Plan proposed by the debtor or any Rehabilitation Plan submitted during the proceedings, together with any comments made thereon; (O) to prohibit and report to the court any encumbrance, transfer or disposition of the debtor’s property outside of the ordinary course of business or what is allowed by the court; (P) to prohibit and report to the court any payments made by the debtor outside of the ordinary course of business; (Q) to have unlimited access to the debtor’s employees, premises, books, records and financial documents during business hours; (R) to inspect, copy, photocopy or photograph any document, paper, book, account or letter, whether in the possession of the debtor or other persons, that pertain to the business of the debtor; 152 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(S) to gain entry into any property owned by the debtor for the purpose of inspecting, measuring, surveying or photographing it or any designated relevant object or operation thereon; (T) to take possession, control and custody, and to preserve the value of all of the debtor’s assets; (U) to notify counterparties and the court as to contracts that the debtor has decided to confirm, pursuant to Section 56 of this Rule; (V) to be notified of and to attend all meetings of the board of directors and stockholders of the debtor; (W) to recommend any modification of an approved Rehabilitation Plan as he may deem appropriate; (X) to bring to the attention of the court any material change affecting the debtor’s ability to meet the obligations under the Rehabilitation Plan; (Y) to recommend the appointment of a management committee in the cases provided for under Section 31 of this Rule; (Z) within the soonest possible time, to submit a report to the management committee, if one has been constituted pursuant to Section 31 of this Rule, on the status and condition of the debtor and on the actions taken by the receiver with regard to the proceedings; (AA) to recommend the termination of the proceedings and the dissolution of the debtor if he determines that the debtor’s continuance in business is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors or the general public; (BB) to apply to the court for any order or directive that he may deem necessary or desirable to aid him in the exercise of his powers and performance of his duties and functions; (CC) to make quarterly reports on the status and progress of the rehabilitation, or as often as may be required by the court; and (DD) to exercise such other powers as may from time to time be conferred upon him by the court. The court may limit the powers and functions of the rehabilitation receiver, as may be appropriate.
Sec. 27. Removal of the Rehabilitation Receiver. – The rehabilitation receiver may be removed at any time by the court, either motu proprio or upon motion by the debtor or any creditor/s holding more than fifty percent (50%) of the total obligations of the debtor, on such grounds as these Rules may provide, which shall include, but not limited to, the following: NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 153 A.M. NO. 12-12-11-SC (A) incompetence, gross negligence, failure to perform or failure to exercise the proper degree of care in the performance of his duties and powers; (B) lack of a particular or specialized competency required by the specific case; (C) illegal acts or conduct in the performance of his duties and powers; (D) lack of qualification or presence of any disqualification; (E) conflict of interest that arises after his appointment; (F) manifest lack of independence that is detrimental to the general body of the stakeholders; (G) failure, without just cause, to perform any of his powers and functions under these Rules; or (H) on any of the grounds for removing a trustee under the general principles of trusts.
Sec. 28. Compensation and Terms of Service.– (A) The rehabilitation receiver and his direct employees or independent contractors shall be entitled to compensation, to be paid by the debtor, for reasonable fees and expenses according to the terms approved by the court after notice and hearing. Prior to such hearing, the rehabilitation receiver, his direct employees and his independent contractors shall be entitled to reasonable compensation based on quantum meruit. Such costs shall be considered administrative expenses. In determining the amount of reasonable compensation, the court shall consider the nature, extent and value of the services provided, taking into account the following factors, among others: (1) the size of the debt under rehabilitation; (2) the time ot be spent on such services; (3) the credentials, experience, skills and reputation of the receiver, his direct employees or independent contractors; (4) the benefits accruing to the debtor; (5) the complexity, importance, urgency, and nature of the problems, issues, or tasks addressed; and (6) the customary compensation charged by comparably skilled practitioners in other rehabilitation cases. (B) If any substantial or material change in the circumstances intervenes affecting the compensation fixed, the court may, upon motion of the debtor, rehabilitation receiver, or the creditors, order a review or revision of the compensation set by the court. (C) The rehabilitation receiver and his direct employees or independent contractors shall disclose in writing, at the earliest opportunity, to the court, with notice to all the parties, 154 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
all forms of arrangements or agreements in the handling of the receivership such as, but not limited to, commissions, fees, fee-sharing arrangements, and payments in kind. Failure to comply with this duty shall be a ground for removal from office of the person concerned and for forfeiture of the rehabilitation receiver’s bond.
Sec. 29. Oath and Bond. – Prior to entering upon his powers, duties and responsibilities, the rehabilitation receiver shall take an oath and file a bond in the amount fixed by the court, conditioned upon the faithful and proper discharge of his powers, duties and responsibilities.
Sec. 30. Vacancy. – In case the position of rehabilitation receiver is vacated for any reason whatsoever, the court shall direct the debtor and the creditors to submit the name/s of their nominee/s to the position. The court may appoint any of the qualified nominees, or any other person qualified. In case the rehabilitation receiver is a juridical person and its designated representative resigns or is otherwise separated from it, it must manifest to the court this fact and the reason/s for the separation, within ten (10) days from its occurrence, together with the name and other personal circumstances of the new representative. The new representative must have the qualifications and none of the disqualifications set forth in Section 21 of this Rule.
Sec. 31. Displacement of Existing Management by the Rehabilitation Receiver or Management Committee. – Upon motion of any interested party and within the soonest possible time, the court may appoint and direct the rehabilitation receiver to assume the powers of management of the debtor, or appoint a management committee that will undertake the management of the debtor, upon clear and convincing evidence of any of the following circumstances: (A) actual or imminent danger of dissipation, loss, wastage or destruction of the debtor’s assets or other properties; or (B) paralyzation of the business operations of the debtor; or (C) gross mismanagement of the debtor, fraud or other wrongful conduct on the part of, or gross or willful violation of the Act by the existing management of the debtor or the owner, partner, director, officer or representative/s in management of the debtor. In case the court appoints the rehabilitation receiver to assume the management of the debtor, the court may: (1) require the rehabilitation receiver to post an additional bond; (2) authorize him to engage the services or to employ persons or entities to assist him in the discharge of his managerial functions; and (3) authorize a commensurate increase in his compensation. In case the rehabilitation receiver is a juridical person, the acts of its designated representative shall be presumed to be carried out in accordance with the authority vested NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 155 A.M. NO. 12-12-11-SC in him by the juridical entity which he represents. In case of conflict, the decision of the governing body of the juridical entity shall prevail. However, the rehabilitation receiver and its representative/s shall remain solidarily liable for all obligations and responsibilities, subject to the right of withdrawal prior to the implementation of the disputed decision.
Sec. 32. Role of the rehabilitation receiver upon assumption of management of the debtor. – When directed by the court to assume management of the debtor as provided in the foregoing section, the rehabilitation receiver shall continue to exercise the same powers under Section 26 of this Rule in addition to those powers and duties expressly given to the management committee as provided in the succeeding section or those necessarily implied therefrom.
Sec. 33. Role of the Management Committee. – When appointed pursuant to Section 31 of this Rule, the management committee shall have the power to take custody of and control all assets and properties owned or possessed by the debtor. It shall take the place of the management and governing body of the debtor, and assume their powers, rights and responsibilities. The management committee may overrule or revoke the actions of the previous management or the governing body of the debtor. Without limiting the generality of the foregoing, the specific powers and duties of the management committee, whose members shall also be considered as officers of the court, are the following: (A) to investigate the acts, conduct, properties, liabilities, and financial condition of the corporation, association or partnership under management; (B) to examine under oath the directors and officers of the entity and any other witnesses that the committee may deem appropriate; (C) to report to the court any ascertained fact pertaining to the causes of the problems, fraud, misconduct, mismanagement and irregularities committed by any other person; (D) to use the services of or employ such person or persons, such as lawyers, accountants, auditors, appraisers and staff as are necessary to perform its functions and duties as management committee; (E) to report to the court any material adverse change in the business of the entity under management; (F) to evaluate the existing equity, capital, assets and liabilities, earnings and operations of the entity under management; (G) to determine and recommend to the court the best way to salvage and protect the interest of the creditors, stockholders and the general public, including the rehabilitation of the entity under management; 156 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(H) to prohibit and report to the court any encumbrance, transfer, or disposition of the debtor’s property outside of the ordinary course of business or beyond what is allowed by the court; (I) to prohibit and report to the court payments made outside the ordinary course of business; (J) to have unlimited access to the employees, premises, books, records and financial documents of the entity under management during business hours; (K) to inspect, copy, photocopy or photograph any document, paper, book, account or letter, whether in the possession of the entity or other persons, that pertain to the business of the debtor; (L) to gain entry into any property owned by the entity under management for the purposes of inspecting, measuring, surveying, or taking photos or videos of any designated relevant object or operation thereon; (M) to bring to the attention of the court any material change affecting the entity’s ability to meet its obligations; (N) to take the appropriate steps to modify, nullify or revoke transactions coming to its knowledge which it deems detrimental or prejudicial to the interest of the entity under management; (O) to recommend the termination of the proceedings and the dissolution of the entity if it determines that the continuance in business of such entity will no longer work to the best interest of the stakeholders and creditors, in accordance with the purposes of the Act; (P) to apply to the court for any order or directive that it may deem necessary or desirable to aid it in the exercise of its powers and performance of its duties and functions, including the power to examine parties and witnesses under oath; and (Q) to exercise such other powers as the court may, from time to time, confer upon it. The court may limit the powers and functions of the appointed management committee, as may be appropriate.
Sec. 34. Composition of the Management Committee. – Unless the court otherwise provides, the management committee appointed pursuant to Section 31 of this Rule shall be composed of three qualified members appointed by the court, as follows: (A) the first member shall be nominated by the debtor; in case the debtor fails, the court shall appoint the first member; (B) the second member shall be nominated by the creditor/s holding more than fifty percent (50%) of the total obligations of the debtor; in case the creditors fail, the court shall appoint the second member; and NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 157 A.M. NO. 12-12-11-SC (C) the third member, who shall act as chairman of the management committee, shall be nominated by the first and second members within 10 days from the appointment. In case of disagreement between the first and second members, or failure to nominate, the court shall appoint the third member. In case the decision to appoint a management committee is due to Section 31(c) of this Rule, the court shall appoint the first member. In all cases, the court may (1) require the members of the management committee to post a bond; (2) authorize the management committee to employ or engage the services or to employ or engage persons or entities to assist it in the discharge of its duties and functions, pursuant to Section 37 of this Rule on the employment or use of professionals; and (3) authorize the setting of the compensation of the members of the management committee, pursuant to Section 28 of this Rule.
Sec. 35. Action by Management Committee. – A majority of all members shall be necessary for the management committee to act or make a decision.
Sec. 36. Qualifications of Members of the Management Committee. – The members of the management committee shall have the same qualifications and none of the disqualifications as those prescribed for the rehabilitation receiver by this Rule. In case a member of the management committee is a juridical person, the relevant provisions governing juridical persons as rehabilitation receivers shall apply.
Sec. 37. Employment or Use of Professionals. – The rehabilitation receiver or the management committee shall submit the identities and other personal circumstances of the professionals or experts they want to engage or to assist them in the exercise of their powers and functions. Court approval shall be made after notice and hearing, taking into account the following factors, among others: (A) reasons for the appointment; (B) disclosure of conflict of interest; (C) compensation, fees, or other arrangements; (D) scope of work involved; (E) the specific area of expertise of the person to be appointed; (F) confidentiality; (G) expected work time to be spent in relation to the engagement and extent of services required; and (H) other arrangements, as the court may deem appropriate. 158 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
The persons engaged by the rehabilitation receiver or the management committee may be considered either employees or independent contractors, as the case may be.
Sec. 38. Immunity from Suit. – The rehabilitation receiver, the members of the management committee, and all persons they engage shall not be subject to any action, claim or demand for any act or omission in good faith in the exercise of their powers and functions under the Act, these Rules, or other actions approved by the court.
Sec. 39. Organization of the Creditor’s Committee. – After the petition is given due course, the court shall issue an order directing the rehabilitation receiver to call a meeting with the debtor and all classes of creditors, to take place in not less than two (2) weeks nor more than four (2) weeks from the date of the order, to consider the organization of a creditors’ committee. The order shall designate the day, hour and place of the meeting, and shall be published as often as may be prescribed by the court, but in no case less than two (2) consecutive weeks, in a newspaper of general circulation in the Philippines, if there be one, and if there be none, in a newspaper which, in the court’s judgment, will best give notice to the creditors of the debtor. The debtor shall be personally notified of this order. After this meeting is called and held, the creditors belonging to a class may formally organize a committee among themselves. In addition, the creditors may, as a body, agree to form a creditors’ committee composed of a representative from each class of creditors, such as the following: (A) secured creditors; (B) unsecured creditors; (C) trade creditors and suppliers; and (D) employees of the debtor. A creditors’ committee may be organized if the creditors, representing at least a majority of all the claims as reflected in the registry of claims determined pursuant to Section 44 of this Rule, cast their votes for its creation.
Sec. 40. Election of Representatives to the Creditor’s Committee. –The creditors from each class shall be entitled to elect their representative to the creditors’ committee. Each creditor shall vote in proportion to his interest vis-à-vis the total claims of all the creditors within the same class as determined by the rehabilitation receiver based on the registry of claims submitted to the court under Section 44 of this Rule, provided, that such determination shall only be for the purpose of voting under this section and shall not be binding on any creditor as to the nature and amount of its claim. In case of a juridical creditor, the designated representative bearing the necessary authority shall be entitled to vote. Voting may be done personally, by mail or by proxy, provided that if a vote is cast through mail or by proxy, the same should be accompanied by the necessary authority to cast the NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 159 A.M. NO. 12-12-11-SC vote for the particular creditor. Voting by electronic mail or means shall be in accordance with the Rules on Electronic Evidence.
Sec. 41. Election of Chairman of the Creditors’ Committee. – When the representatives of each class of creditors to the creditors’ committee have been elected, the rehabilitation receiver shall convene the chosen representatives to elect the chairman of the creditors’ committee. The representative of each class of creditors shall be entitled to cast only one (1) vote in the election of the chairman of the creditors’ committee. Any tie shall be resolved by drawing of lots. The chairman shall then be responsible for convening the creditors’ committee, whenever necessary, to discuss, deliberate, and confer with the rehabilitation receiver, on any view or proposal in the preparation, review or revision of a Rehabilitation Plan for the debtor.
Sec. 42. Role of Creditors’ Committee. – The creditors’ committee, when constituted pursuant this Rule, shall be the primary liaison between the rehabilitation receiver and the creditors. The creditors’ committee cannot exercise or waive any right or give any consent on behalf of any creditor unless specifically authorized in writing by such creditor. The creditors’ committee may be authorized by the court or by the rehabilitation receiver to perform such other tasks and functions to facilitate the rehabilitation process. The creditors’ committee’s act shall be valid if a majority of its members voted, and a majority of the members who have cast their votes have voted in favor of the resolution. The creditors’ committee, if already constituted, shall be notified of all actions relative to the rehabilitation proceedings; otherwise, the individual creditors shall be so notified by the rehabilitation receiver. The members of the creditors’ committee shall be entitled to a reasonable fee as compensation, which shall be treated as an administrative expense, subject to the prior determination and approval by the court.
Sec. 43. Determination of Class of Creditors. – The rehabilitation receiver shall determine within a reasonable time the class to which each creditor belongs; provided that each creditor shall be given the opportunity to challenge the rehabilitation receiver’s determination of its classification by presenting evidence to prove its claims. Such challenge shall first be brought before the rehabilitation receiver for his reconsideration within five (5) days from notice of such determination by the rehabilitation receiver. Any denial by the rehabilitation receiver of such challenge may be brought to the court within five (5) days from notice thereof. The decision of the court on this matter shall be final and executory only insofar as the classification of the said creditor for purposes of representation in the creditors’ committee is concerned but not as to the determination of the nature of its claim. 160 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
D. DETERMINATION OF CLAIMS Sec. 44. Registry of Claims. – Within twenty (20) days from his assumption into office, the rehabilitation receiver shall establish a preliminary registry of claims based on the schedule of debts and liabilities provided in the petition. The rehabilitation receiver shall make the registry available for public inspection and give notice to the debtor, creditors and stakeholders on where and when they may inspect it by causing the publication of the place/s and date/s of inspection in a newspaper of general circulation in the Philippines once every week for two (2) consecutive weeks. The period of inspection shall not exceed fifteen (15) days from the last publication. All claims included in the registry of claims must be duly supported by sufficient evidence.
Sec. 45. Opposition or Challenge of Claims. – Within thirty (30) days from the expiration of the period to inspect the registry of claims, the debtor, creditors, stakeholders and other interested parties may submit to the court a challenge to the claim/s, as listed in the registry of claims serving a certified copy on the rehabilitation receiver and the creditor holding the challenged claim/s. Upon the expiration of the thirty (30)-day period, the rehabilitation receiver shall submit to the court the registry of claims. The registry of claims shall include the following lists of (1) claims that have not been subject to challenge; (2) claims resolved by the rehabilitation receiver after these have been challenged; and (3) disputed but unresolved claims.
Sec. 46. Appeal. – The aggrieved party may seek the review of the decision of the rehabilitation receiver on a claim by filing a motion with the rehabilitation court within five (5) days from receipt of the rehabilitation receiver’s assailed decision, which shall be decided by the court at the soonest possible time.
E. USE, PRESERVATION AND DISPOSAL OF ASSETS AND TREATMENT OF ASSETS AND CLAIMS AFTER COMMENCEMENT DATE Sec. 47. Use or Disposition of Assets. – Except as otherwise provided herein, no funds or property of the debtor shall be used or disposed of except in the ordinary course of business of the debtor, or unless necessary to finance the administrative expenses of the rehabilitation proceedings.
Sec. 48. Sale of Assets. – The court, upon the rehabilitation receiver’s application, with notice to the debtor, creditors or creditors’ committee, if one has already been formed, may authorize the sale of the unencumbered property of the debtor outside the ordinary course of business upon a showing that the property, by its nature or because of any other circumstance, is (a) perishable; (b) costly to maintain; (c) susceptible to devaluation; or (d) otherwise in jeopardy. The application shall be through a motion which shall be served on the debtor and the creditors in a manner that will ensure its receipt at least three (3) days before NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 161 A.M. NO. 12-12-11-SC the hearing, unless the court for good reason sets the hearing on shorter notice. If the creditors’ committee had already been formed, the motion shall be served on the creditors’ committee. If the court grants the motion, the order shall specify the cause for the necessity of the sale, which may either be through a public auction or a private sale, determined to be in the best interest of all parties. Unless impracticable, an itemized statement of the property sold, the name of each purchaser, and the price received for each item or lot or for the property as a whole (if sold in bulk) shall be filed with the court on completion of a sale. After a sale is authorized under this Section, the rehabilitation receiver shall execute any instrument necessary or ordered by the court to transfer the property to the purchaser.
Sec. 49. Sale or Disposal of Encumbered Property of the Debtor and Assets of Third Parties Held by Debtor. (A) In cases of (1) encumbered property belonging to the debtor, or (2) property of third persons held by the debtor where there is a security interest pertaining to third parties under a financial, credit or other similar transactions, the court may, upon the rehabilitation receiver’s application, after due notice and hearing, authorize the sale, transfer, conveyance or disposition of the property, upon a showing that: (A) the affected owner or secured creditor/s have given their consent; (B) the sale, transfer, conveyance or disposal is necessary for the continued operation of the debtor’s business; and (C) the debtor has made arrangements to provide a substitute lien or ownership right that provides an equal level of security for the counter-party’s claim or right. (B) In cases where the debtor has prior authority to sell the property such as trust receipt or consignment arrangements, the court may, upon the debtor’s application, authorize the sale or disposal of the property, upon a showing that: (1) the sale or disposal is necessary for the operation of the debtor’s business, and (2) the debtor has made arrangements to provide a substitute lien or ownership right that provides an equal level of security for the counter-party’s claim or right. (C) The application shall be through a motion which shall be served on the debtor and the owner/s or concerned creditors in a manner that will ensure its receipt at least three (3) days before the hearing, unless the court for good reason sets the hearing on 162 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
shorter notice. If the creditors’ committee has already been formed, the motion shall be served on the creditors’ committee. The affected party is given a non-extendible period of three (3) days from receipt of the motion within which to file his comment or opposition. The court shall resolve the motion within five (5) days from the date of the hearing. (D) If the court grants the motion, the order shall specify the manner by which the sale shall be conducted which may either be a public auction or private sale and other terms and conditions that the court may, in its discretion, determine to be in the best interest of all concerned parties. (E) Unless impracticable, an itemized statement of the property sold, the name of each purchaser, and the price received for each item or lot or for the property as a whole if sold in bulk shall be filed with the court on completion of a sale. (F) After a sale or disposition is authorized under this Section, the rehabilitation receiver or debtor, as the case may be, shall execute any instrument necessary or ordered by the court to effectuate the transfer to the purchaser. (G) The sale or disposal of property under this Section shall not give rise to any criminal liability under applicable laws.
Sec. 50. Assets of Debtor Held by Third Parties. – Third parties who have in their possession or control property of the debtor that is subject of possessory pledges, mechanic’s liens or similar claims shall not transfer, convey or otherwise dispose of the property to persons other than to the debtor, except with prior approval of the rehabilitation receiver. The rehabilitation receiver may also (A) demand the surrender or the transfer of the possession or control of the property to the rehabilitation receiver or another person, subject to payment of the claims secured by any possessory lien/s thereon or the replacement of the possessory lien, with the consent of the secured creditor; (B) allow the third party to retain possession or control of the property if such an arrangement would more likely preserve or increase the value of the property in question or the total value of the assets of the debtor; or (C) otherwise dispose of the property as may be beneficial for the rehabilitation of the debtor, after notice and hearing and approval of the court, subject to payment of the claims secured by any possessory lien/s thereon or replacement of the possessory lien with the consent of the secured creditor.
Sec. 51. Rescission or Nullity of Sale, Payment, Transfer or Conveyance of Assets. – Upon motion, after notice and hearing, the court may rescind or declare as null and void any sale, payment, transfer or conveyance of the debtor’s unencumbered property or any NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 163 A.M. NO. 12-12-11-SC encumbering thereof by the debtor or its agents or representatives after the commencement date which are not in the ordinary course of the business of the debtor. The following sales or dispositions, made outside of the ordinary course of business of the debtor, upon order of the court, upon motion and after notice and hearing, may not be nullified under this Section if made for the following purposes: (A) to administer the debtor and facilitate the preparation and implementation of a Rehabilitation Plan; (B) to provide a substitute lien, mortgage or pledge of property under this Rule; (C) to pay or meet administrative expenses as they arise; (D) to pay victims of quasi-delicts upon a showing that the claim is valid and the debtor has insurance to reimburse the debtor for the payments made; (E) to repurchase property of the debtor that is auctioned off in a judicial or extrajudicial sale under these Rules; or (F) to reclaim or redeem property of the debtor held pursuant to a possessory lien.
Sec. 52. Assets Subject to Rapid Obsolescence, Depreciation and Diminution of Value. – Upon the application of a secured creditor holding a lien against or one holding an ownership interest in property held by the debtor that is subject to potentially rapid obsolescence, depreciation or diminution in value, the court shall, after notice and hearing, order the debtor or rehabilitation receiver to take reasonable steps necessary to prevent the obsolescence, depreciation or diminution of the value of the property. If such rapid obsolescence, depreciation and diminution cannot be avoided to the prejudice of the security or property interest of the secured creditor or owner, the court shall: (A) allow the encumbered property to be foreclosed upon by the secured creditor according to the relevant agreement between the debtor and the secured creditor, applicable rules of procedure, and relevant legislation: Provided, That the proceeds of the sale will be distributed in accordance with the order prescribed under the rules of concurrence and preference of credits (including Civil Code provisions thereon); (B) upon motion or with the consent of the affected secured creditor or interest owner, order the conveyance of a lien against or ownership interest in substitute property of the debtor to the secured creditor: Provided, That other creditors holding liens on such property, if any, do not object thereto, or, if such property is not available; (C) order the conveyance to the secured creditor or holder of an ownership interest of a lien on the residual funds from the sale of encumbered property during the proceedings; or (D) allow the sale or disposition of the property: Provided, That the sale or disposition will maximize the value of the property for the benefit of the secured creditor and the debtor, and the proceeds of the sale will be distributed in accordance with the order prescribed under the rules of concurrence and preference of credits (including Civil Code provisions thereon). 164 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
The application of the secured creditor shall be made by motion and shall be served on the debtor, the rehabilitation receiver, the affected creditors, and the creditors’ committee (if one had already been formed), in a manner that will ensure its receipt at least three (3) days before the hearing, unless the court, for good reason shown, sets the hearing on shorter notice.
Sec. 53. Post-commencement Interest. – The rate and term of interest, if any, on secured and unsecured claims shall be determined and provided for in the approved Rehabilitation Plan.
Sec. 54. Post-commencement Loans and Obligations. – With the approval of the court, upon the duly supported recommendation of the rehabilitation receiver, the debtor, in order to enhance its rehabilitation, may (A) enter into new credit arrangements, excluding restructured obligations; (B) enter into new credit arrangements (excluding restructured obligations), secured by mortgages of its unencumbered property or secondary mortgages of encumbered property with the approval of the senior secured parties with regard to the encumbered property; or (C) incur other obligations as may be essential for its rehabilitation. The payment of the foregoing obligations shall be considered administrative expenses under these Rules.
Sec. 55. Treatment of Employees’ Claims. – The claims for separation pay and salary of employees for months worked prior to the commencement date shall be considered a pre-commencement claims. The compensation of employees required to carry on the business during the rehabilitation proceedings shall be considered an administrative expense. Claims for salary and separation pay for work actually performed after the commencement date shall be an administrative expense.
Sec. 56. Treatment of Contracts. – Unless cancelled by virtue of a final judgment of a court of competent jurisdiction issued prior to the issuance of the Commencement Order, or at anytime thereafter by the court before which the rehabilitation proceedings are pending, all valid and subsisting contracts of the debtor with creditors and other third parties as of the commencement date shall continue to be in force; Provided, That within ninety (90) days following the issuance of the Commencement Order, the debtor, with the written consent of the rehabilitation receiver, shall send a written notice to each contractual counter-party stating that it is confirming the particular contract. Contractual obligations of the debtor arising or performed during this period, and afterwards for confirmed contracts, shall be considered administrative expenses. Contracts not confirmed within the [ninety] (90)-day deadline shall be considered automatically terminated. Claims for actual damages, if any, arising as a result of the election to terminate a contract shall be considered pre-commencement claims against the debtor, to be filed with the rehabilitation court as a separate claim. The claim shall be considered in the rehabilitation plan together with the other claims against the debtor. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 165 A.M. NO. 12-12-11-SC Nothing contained herein shall prevent the cancellation or termination of any contract of the debtor for any ground provided by law.
F. AVOIDANCE PROCEEDINGS Sec. 57. Rescission or Nullity of Certain Pre-commencement Transactions. – Any transaction prior to the commencement date entered into by the debtor or involving its funds or assets may be rescinded or declared null and void on the ground that it was executed with intent to defraud a creditor or creditors or that it constitutes undue preference of creditors. Without limiting the generality of the foregoing, a disputable presumption of these designs shall arise if the transaction: (A) provides unreasonably inadequate consideration to the debtor and is executed within ninety (90) days prior to the commencement date; (B) involves an accelerated payment of a claim to a creditor within ninety (90) days prior to the commencement date; (C) provides security or additional security executed within ninety (90) days prior to the commencement date; (D) involves creditors who obtained or received more than their pro rata share in the assets of the debtor, on a transaction executed at a time when the debtor was insolvent; or (E) is intended to defeat, delay or hinder the ability of the creditors to collect claims, where the effect of the transaction is to put assets of the debtor beyond the reach of creditors or to otherwise prejudice the interests of creditors. Nothing in this Section shall prevent the court from rescinding or declaring as null and void a transaction on other grounds provided by relevant legislation and jurisprudence, including the provisions of the Civil Code on rescission.
Sec. 58. Actions for Rescission or Nullity. – (A) The rehabilitation receiver or, with his conformity, any creditor may initiate and prosecute any action to rescind, or declare null and void any transaction described in Section 57 of this Rule. If the rehabilitation receiver does not consent to the filing or prosecution of such action, any creditor or the creditors’ committee may file and/or prosecute such action upon the approval of the court and after a determination that the rights of the creditors will be prejudiced if the action is not filed and/or prosecuted. (B) If leave of court is granted under subsection (A), the rehabilitation receiver shall assign and transfer to the creditor or the creditors’ committee all rights, title and interest in the chose in action or subject matter of the proceeding, including any document in support thereof. 166 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Any benefit derived from a proceeding instituted by the creditor, to the extent of his claim and the costs, belongs exclusively to him, and the surplus, if any, belongs to the estate. Where, before an order is made under subsection (a), the rehabilitation receiver (or liquidator) signifies to the court his readiness to institute the proceeding for the benefit of the creditors, the order shall fix the time within which he shall do so and, in that case, the benefit derived from the proceeding, if instituted within the time limits so fixed, belongs to the estate. The action shall be filed in the court and shall be governed by the rules on summary procedure.
G. TREATMENT OF SECURED CREDITORS Sec. 59. No Diminution of Secured Creditor Rights. – The issuance of the Commencement Order and the Suspension or Stay Order, and any other provision of the Act, shall not in any way diminish or impair the security or lien of a secured creditor, or the value of his lien or security, except that his right to enforce the security or lien may be suspended during the term of the Stay Order. The court, upon motion or recommendation of the rehabilitation 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 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, if any, of his claim.
Sec. 60. 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: (a) a creditor does not have adequate protection over the property securing its claim; or (b) 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 property. For purposes of this Section, a creditor shall be deemed to lack adequate protection if it can be shown that (A) the debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured; (B) the debtor fails or refuses to take commercially reasonable steps to maintain the property; or (C) the property has depreciated to an extent that the creditor is under-secured. Upon showing of the creditor’s 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 NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 167 A.M. NO. 12-12-11-SC 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. If a motion is filed, it must be served on the debtor and the rehabilitation receiver in a manner that will ensure its receipt at least three (3) days before the hearing, unless the court, for good reason shown, sets the hearing on shorter notice. If a creditors’ committee has been formed, the motion shall also be served on the creditors’ committee.
H. ADMINISTRATION OF PROCEEDINGS Sec. 61. Contents of a Rehabilitation Plan. – The Rehabilitation Plan, as a minimum, shall (A) specify the underlying assumptions, the financial goals and procedures proposed to accomplish these goals, including the duration and coverage of the rehabilitation; (B) contain a liquidation analysis setting out for each creditor or each class of creditor, as applicable, the amounts they expect to receive under the Rehabilitation Plan and those that they will receive if liquidation ensues within one hundred twenty (120) days after the filing of the petition; (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 creditors; (E) establish subclasses of voting creditors if prior approval has been granted by the court; (F) indicate how the insolvent debtor will be rehabilitated, among others, through: debt forgiveness; debt rescheduling; reorganization or quasi-reorganization;dacion en pago; debt-to-equity conversion; payment of unpaid subscriptions by shareholders; sale of the business as a going concern; setting-up of a new business entity or other similar arrangements, to restore the financial well-being and viability 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, unless a particular creditor agrees to a less favorable treatment; (I) ensure that the payments made under the Rehabilitation Plan (which shall include proposed dates of payment and specific amounts on such dates to be paid to each and every creditor) will 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 this has been waived or modified voluntarily; 168 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(K) include relevant foreign ownership limits or information, if any; (L) disclose all payments to creditors for pre-commencement debts made during the proceedings and the justifications for these payments; (M) describe the disputed claims and the provisioning of funds to account for appropriate payments should the claim be ruled valid or its amount adjusted; (N) identify the debtor’s role in the implementation of the Rehabilitation Plan; (O) state any rehabilitation covenants of the debtor, whose breach shall be considered a material breach of the Rehabilitation Plan; (P) identify those responsible for the future management of the debtor and the supervision and implementation of the Rehabilitation Plan, their affiliation with the debtor and their remuneration; (Q) address the treatment of claims arising after the confirmation of the Rehabilitation Plan; (R) require the debtor and its counter-parties to adhere to the terms of all contracts that the debtor has chosen to confirm; (S) arrange for the payment of all outstanding administrative expenses as a condition to the Rehabilitation Plan’s approval unless such condition has been waived in writing by the creditors concerned; (T) arrange for the payment of all outstanding taxes and assessments, or an adjusted amount pursuant to a compromise settlement with the BlR or other applicable tax authorities; (U) include a certified copy of a certificate of tax clearance or evidence of a compromise settlement with the BIR; (V) include a valid and binding resolution of a meeting of the debtor’s stockholders to increase the shares by the required amount in cases where the Rehabilitation Plan contemplates an additional issuance of shares by the debtor; (W) state the compensation and status, if any, of the rehabilitation receiver before and after the approval of the Rehabilitation Plan; (X) contain provisions for conciliation and mediation as a prerequisite to court assistance or intervention; (Y) include material financial undertakings or commitments to support the Rehabilitation Plan; (Z) contain provisions for monitoring the implementation of the Rehabilitation Plan, including, requiring the rehabilitation receiver and/or debtor to make reports from time to time; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 169 A.M. NO. 12-12-11-SC (AA) contain the manner of its implementation, giving due regard to the interests of secured creditors such as the non-impairment of their security liens or interests; and (BB) contain such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the Rehabilitation Plan. The court may require such other information it may deem necessary to determine the viability of the Rehabilitation Plan.
Sec. 62. Creditor Approval of Rehabilitation Plan. – The rehabilitation receiver shall notify the creditors and stakeholders that the Rehabilitation Plan is ready for their examination. Within twenty (20) days from the date of the notification, the rehabilitation receiver shall convene the creditors, either as a whole or per class, for purposes of voting on the approval of the Rehabilitation Plan. Voting may be done in person, by a duly authorized representative, or by mail, including secure electronic mail, received on or before the meeting. The Rehabilitation Plan shall be deemed rejected unless approved by all classes of creditors whose rights are adversely modified or affected by the Plan. For purposes of this Section, the Rehabilitation Plan is deemed to have been approved by a class of creditors if members of the said class holding more than fifty percent (50%) of the total claims of the said class vote in favor of the Plan. The votes of the creditors shall be based solely on the amount of their respective claims based on the registry of claims submitted by the rehabilitation receiver pursuant to Section 44 of this Rule. The rehabilitation receiver shall notify the court, the creditors or creditors’ committee and the stakeholders of the approval or rejection of the Rehabilitation Plan within five (5) days from the date of such voting. Notwithstanding the rejection of the Rehabilitation Plan, the court may,motu proprio or upon motion of any interested party within ten (10) days from notice of the rejection of the Rehabilitation Plan, confirm the Plan if all of the following circumstances are present: (A) the Rehabilitation Plan complies with the requirements specified in the Act and these Rules; (B) the rehabilitation receiver recommends the confirmation of the Rehabilitation Plan; (C) the shareholders, owners or partners of the juridical debtor lose at least their controlling interest as a result of the Rehabilitation Plan; and (D) the Rehabilitation Plan would likely provide the objecting class of creditors with compensation, which has a net present value greater than that which they would have received if the debtor were under liquidation.
Sec. 63. Submission of Rehabilitation Plan to the Court. – If the Rehabilitation Plan is approved, the rehabilitation receiver shall submit the Plan to the court for confirmation. Within five (5) days from receipt of the Rehabilitation Plan, the court shall notify the creditors 170 PHILJA JUDICIAL JOURNAL VOL 16:41 2014 that the Rehabilitation Plan has been submitted for confirmation; that any creditor may obtain copies of the Rehabilitation Plan; and that any creditor may file an objection thereto.
Sec. 64. Filing of Objections to Rehabilitation Plan. – A creditor may file a verified opposition containing its written objections to the Rehabilitation Plan accompanied by affidavits and supporting documents within twenty (20) days from receipt of notice from the court that the Rehabilitation Plan has been submitted for confirmation. Objections to a Rehabilitation Plan shall be limited to the following: (A) the creditors’ support was induced by fraud; (B) the documents or data relied upon in the Rehabilitation Plan are materially false or misleading; or (C) the Rehabilitation Plan is in fact not supported by the voting creditors.
Sec. 65. Hearing on the Objections. – If objections have been submitted during the relevant period and the court finds them sufficient in form and substance, it shall issue an order setting the date and time for the hearing or hearings on the objections, which shall not be later than ten (10) days from the expiration of the period to file objections. After hearing, if the court finds merit in the objection, it shall order the rehabilitation receiver or other party to cure the defect, whenever feasible. If the court determines that the debtor acted in bad faith, or that it is not feasible to cure the defect, the court shall convert the proceedings into one for the liquidation of the debtor.
Sec. 66. Confirmation of the rehabilitation plan. – The court shall issue an order confirming the Rehabilitation Plan in any of the following instances: (A) no objections are filed within the twenty (20)-day period from receipt of notice from the court that a Rehabilitation Plan has been submitted to court; (B) the court finds the objections lacking in merit; (C) the basis for the objection has been cured; or (D) the debtor has complied with the order to cure the objection. The court may confirm the Rehabilitation Plan notwithstanding unresolved disputes over claims if the Rehabilitation Plan has made adequate provisions for paying such claims. Notwithstanding the first paragraph of this Section, if the court finds that there is no substantial likelihood that the debtor can be rehabilitated, it shall not confirm the Rehabilitation Plan and, instead, declare a failure of rehabilitation in accordance with Section 73 of this Rule. The provisions of other laws to the contrary notwithstanding, the court shall have the power to approve or implement the Rehabilitation Plan despite the lack of approval, or objection from the owners, partners or stockholders of the insolvent debtor: provided, NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 171 A.M. NO. 12-12-11-SC that the terms thereof are necessary to restore the financial well-being and viability of the insolvent debtor. The order confirming the Rehabilitation Plan shall specify the portions approved by the court and the portions rejected during consideration or cured by the rehabilitation receiver.
Sec. 67. Effects of Confirmation of Rehabilitation Plan. – The confirmation of the Rehabilitation Plan by the court shall result in the following: (A) the Plan and its provisions shall bind the debtor and all persons who may be affected thereby, including the creditors, whether or not such persons have participated in the proceedings or opposed the Plan or whether or not their claims have been scheduled; (B) the debtor shall comply with the provisions of the Plan and shall take all actions necessary to carry them out; (C) payments shall be made to the creditors in accordance with the provisions of the Plan; (D) contracts and other arrangements between the debtor and its creditors shall remain valid and continue to apply to the extent that they do not conflict with the provisions of the Plan; (E) any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on the creditors regardless of whether or not the Plan is successfully implemented; and (F) claims arising after the approval of the Plan that are otherwise not treated by the Plan are not subject to any Suspension Order. The Order confirming the Plan shall comply with Rule 36 of the Rules of Court: Provided, however, That the court may maintain jurisdiction over the case in order to resolve claims against the debtor that remain contested and allegations that the debtor has breached the Plan.
Sec. 68. Liability of General Partners of a Partnership or for Unpaid Balances under an Approved Plan. – The approval of the Rehabilitation Plan shall not affect the rights of creditors to pursue separate actions against general partners of a partnership to the extent they are liable under relevant legislation for the debts thereof.
Sec. 69. Treatment of Amounts of Indebtedness or Obligations Forgiven or Reduced. – Amounts of any indebtedness or obligations reduced or forgiven in connection with a Plan’s approval shall not be subject to any tax in furtherance of the purposes of the Act.
Sec. 70. Period for Confirmation of the Rehabilitation Plan. – The court shall have a maximum period of one (1) year from the date of the filing of the petition to confirm a Rehabilitation Plan for the debtor. 172 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
If no Rehabilitation Plan is confirmed within this period, the proceedings may, upon motion by any interested party, the rehabilitation receiver, ormotu proprio, be converted into one for the liquidation of the debtor.
Sec. 71. Discharge of Rehabilitation Receiver. – Upon the confirmation of the Rehabilitation Plan, the rehabilitation receiver shall submit a report and accounting to the court within thirty (30) days from such confirmation for the approval of the court. Upon approval of the report and accounting, the court shall order the rehabilitation receiver’s discharge unless the Rehabilitation Plan specifically describes the role of the rehabilitation receiver and/or requires the rehabilitation receiver to assume certain duties and responsibilities even after the confirmation of the Rehabilitation Plan. In such case, the court shall order his discharge after the termination of the rehabilitation proceedings and the approval of his final report and accounting.
Sec. 72. Amendments to the Approved Rehabilitation Plan. – After the confirmation of the Rehabilitation Plan, the debtor, rehabilitation receiver or any creditor may file a verified motion for leave to amend the Plan. The motion shall state the reasons warranting the amendment of the Rehabilitation Plan and the proposed amendments, with a copy given to the rehabilitation receiver. Within five (5) days from filing of the motion, the court motu proprio shall grant or deny the motion. If the court grants the motion, it shall set the proposed amendments for hearing not later than fifteen (15) days from date of the order. The order, which shall include the proposed amendments, shall be published once in a newspaper of general circulation in the Philippines not later than five (5) days from date of the order. The proposed amendments shall be subject to the same requirements set forth in Section 63 of this Rule. The court shall act on the proposed amendments not later than forty-five (45) days from the date of the filing of the motion for leave to amend the Rehabilitation Plan.
I. TERMINATION OF PROCEEDINGS Sec. 73. Termination of Proceedings. – At any time from the filing of the petition, any interested party or the rehabilitation receiver may file a motion for the termination of the proceedings. After hearing the motion, the court may order the proceedings terminated by either declaring a successful implementation of the Rehabilitation Plan or a failure of rehabilitation. There is failure of rehabilitation in the following cases: (A) Dismissal of the petition by the court; (B) Failure to submit a Rehabilitation Plan; (C) A Rehabilitation Plan is not confirmed by the court; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 173 A.M. NO. 12-12-11-SC (D) Under the Rehabilitation Plan submitted by the debtor, there is no substantial likelihood that the debtor can be rehabilitated within a reasonable period based on the requirements of Section 21 of the Act; (E) The Rehabilitation Plan or its amendment is approved by the court but in the implementation thereof, the debtor fails to perform its obligations thereunder or there is a failure to realize the objectives, targets or goals set forth therein, including the timelines and conditions for the settlement of the obligations due to the creditors and other claimants; (F) Determination that the Rehabilitation Plan may no longer be implemented in accordance with its terms, conditions, restrictions, or assumptions; (G) There is a finding that fraud was committed in securing the approval of the Rehabilitation Plan or its amendment; (H) In cases falling under Section 65 of this Rule, where, after finding merit in the objection/s raised against the confirmation of the Rehabilitation Plan, the defect is not cured within such time as the court may order, or if the court determines that the debtor acted in bad faith, or that it is not feasible to cure the defect; and (I) Failure of the debtor to comply with these Rules, the Rules of Court, or any order of the court. Upon a breach of, or failure of the Rehabilitation Plan, the court, upon motion by an affected party, and after hearing, may (1) issue an order directing that the breach be cured within a specified period of time, failing which the proceedings may be converted to liquidation proceedings; (2) issue an order converting the proceedings to liquidation proceedings; (3) allow the debtor or rehabilitation receiver to submit amendments whose approval shall be governed by the same requirements for creditor approval and court confirmation of a Rehabilitation Plan under this Rule; (4) issue any other order to remedy the breach consistent with the Act and these Rules, other applicable law and the best interests of the creditors; or (5) enforce the applicable provisions of the Rehabilitation Plan through a writ of execution.
Sec. 74. Effects of Termination. – Termination of the proceedings shall result in the following: (A) the discharge of the rehabilitation receiver subject to his submission of a final accounting; and (B) the lifting of the Stay Order and any other court order holding in abeyance any action for the enforcement of a claim against the debtor. 174 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
If the termination of proceedings is due to failure of rehabilitation or dismissal of the petition for reasons other than technical grounds, the proceedings shall be immediately converted to liquidation as provided in Section 92 of the Act.
Rule 3 Pre-negotiated Rehabilitation
Section 1. Pre-negotiated Rehabilitation Plan. – An insolvent debtor, by itself or jointly with any of its creditors, may file a verified petition with the court for the approval of a Pre-Negotiated Rehabilitation Plan. The petition shall comply with Section 2(A), Rule 2 of these Rules, where applicable, and be supported by an affidavit showing the written approval or endorsement of creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor. Further, the petition shall also include as a minimum the following: (A) a Schedule of Debts and Liabilities which lists all the creditors of the debtor, indicating the name and last address of record of each creditor; the amount of each claim as to principal, interest, or penalties due thirty (30) days prior to the date of filing; the nature of the claim; and any pledge, lien, mortgage, judgment or other security given for the payment thereof; (B) an Inventory of Assets which must list with reasonable particularity all the assets of the debtor, whether in the possession of the debtor or third parties, stating the nature of each asset, its location and condition, its book value and market value, and attaching the corresponding certified copy of the certificate of title thereof in case of real property, or the evidence of title or ownership in case of movable property, the encumbrances, liens or claims thereon, if any; and the identities and addresses of the lien holders and claimants. The Inventory shall include (1) a Schedule of Accounts Receivable which must indicate the amount of each account, the persons from whom due and their correct addresses, the dates of maturity, and the potential for collectability categorizing them as highly collectible to remotely collectible; and (2) a Schedule of Existing Claims against third parties which must indicate the name and last address of record of each third party against whom the debtor has a claim; the nature and amount of the claim, including the principal, interest, or penalties due from each third party and any pledge, lien, mortgage, judgment or other security or collateral given for the payment of each claim; and a brief statement of the facts which gave rise to the claim; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 175 A.M. NO. 12-12-11-SC (C) a summary of disputed claims against the debtor and a report on the provisioning of funds to account for appropriate payments should any such claims be ruled valid or their amounts adjusted; (D) an Affidavit of General Financial Condition which shall contain answers to the questions or matters prescribed in Annex “A” of these Rules; and (E) the Pre-Negotiated Rehabilitation Plan, including the names of at least three (3) qualified nominees for rehabilitation receiver; All attachments to the petition shall be deemed part and parcel of the verified petition.
Sec. 2. Issuance of Order. – Within five (5) working days from the date of filing the petition, if the court determines that the petition is sufficient in form and substance, it shall issue an Order which shall: (A) identify the debtor, its principal business or activity/ies and its principal place of business; (B) declare that the debtor is under rehabilitation; (C) summarize the ground/s for the filing of the petition; (D) direct the publication of the Order in a newspaper of general circulation in the Philippines once a week for at least two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance; (E) direct the service by personal delivery of a copy of the petition on each creditor who is not a petitioner holding at least ten percent (10%) of the total liabilities of the debtor, as determined in the schedule attached to the petition, within three (3) days from the issuance of the Order; (F) state that copies of the petition and the Pre-Negotiated Rehabilitation Plan are available for examination and copying by any interested party; (G) state that if no verified objection to the petition or the Pre-Negotiated Rehabilitation Plan is submitted with the court within eight (8) days from the date of the second publication of the Order required under Subsection (D) above, the court shall approve the Pre-Negotiated Rehabilitation Plan within ten (10) days from the date of the second publication of the Order, pursuant to Section 4 of this Rule; (H) state that creditors and other interested parties may submit their comments on the petition or the Pre-Negotiated Rehabilitation Plan within a period of not later than twenty (20) days from the second publication of the Order, under Section 6 of this Rule; (I) appoint a rehabilitation receiver, if not provided for in the Pre-Negotiated Rehabilitation Plan; and (J) impose a Suspension or Stay Order as described in these Rules. 176 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 3. Effectivity and Duration of Order. – The Order shall have the same effects as a Commencement Order under Section 9, Rule 2 of these Rules. It shall retroact to the date of the filing of the petition and shall be effective for one hundred twenty (120) days from the filing of the petition unless earlier lifted by the court on account of (a) the approval of the Pre-Negotiated Rehabilitation Plan, or (b) the termination of the rehabilitation proceedings.
Sec. 4. Approval of Plan. – If no verified objection to the petition or the Rehabilitation Plan is filed within eight (8) days from the date of the second publication of the Order provided in the preceding section, the court shall approve the rehabilitation plan within ten (10) days from the date of the second publication of such order. The approved rehabilitation plan shall not be implemented until after the lapse of twenty (20) days from the date of the second publication of the Order, unless the court conducts a hearing pursuant to Section 7 of this Rule to consider the comments filed within twenty (20) days from the date of the second publication of the Order.
Sec. 5. Objection to the Petition or Rehabilitation Plan. – Any creditor or other interested party can only object on the following limited grounds: (A) the allegations in the petition or the Pre-Negotiated Rehabilitation Plan, or the attachments thereto, are materially false or misleading; (B) the majority of any class of creditors do not in fact support the Pre-Negotiated Rehabilitation Plan; (C) the support of the creditors or any of them was induced by fraud; or (D) the Pre-Negotiated Rehabilitation Plan fails to accurately account for a claim against the debtor and the claim is not categorically declared as a contested claim. The objection must be submitted to and received by the court not later than eight (8) days from the date of the second publication of the Commencement Order. Copies of any objection to the petition or the Pre-Negotiated Rehabilitation Plan shall be served on the debtor, the rehabilitation receiver (if applicable), the secured creditor with the largest claim and who supports the Pre-Negotiated Rehabilitation Plan, and the unsecured creditor with the largest claim and who supports the Pre-Negotiated Rehabilitation Plan.
Sec. 6. Comments. – Any creditor or other interested party may submit his comments on the petition or the Pre-Negotiated Rehabilitation Plan based on grounds other than those enumerated in Section 5 of this Rule.
Sec. 7. Hearing on the Objections and Comments. – After receipt of objections under Section 5 and comments under Section 6, both of this Rule, the court shall set the case for hearing not earlier than twenty (20) days nor later than thirty (30) days from the date of the second publication of the Order issued pursuant to Section 2 of this Rule. If the court finds the objection meritorious, it shall direct the debtor, when feasible, to cure the defect within fifteen (15) days from receipt of the order. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 177 A.M. NO. 12-12-11-SC If the court determines that the debtor or creditors supporting the Pre-Negotiated Rehabilitation Plan acted in bad faith, or that the objection is non-curable, the court may convert the rehabilitation proceedings into liquidation. A finding by the court that the objection has no substantial merit or that the same has been cured shall be deemed an approval of the Pre-Negotiated Rehabilitation Plan.
Sec. 8. Period for Approval of Rehabilitation Plan. – The court shall have a maximum period of one hundred twenty (120) days from the filing of the petition to approve or disapprove the Pre-Negotiated Rehabilitation Plan filed under this Rule. If the court fails to so act within the said period, the Pre-Negotiated Rehabilitation Plan shall be deemed approved. In such a case, the court shall certify that no action has been made within the one hundred twenty (120)-day period and the Pre-Negotiated Plan is deemed approved pursuant to Section 81 of the Act.
Sec. 9. Effects of Approval of Rehabilitation Plan. – Approval of the Pre-Negotiated Rehabilitation Plan under this Rule shall have the same legal effect as confirmation of a rehabilitation plan under Section 66, Rule 2 of these Rules.
Rule 4 Out-of-court or Informal Restructuring Agreement or Rehabilitation Plan
Section 1. Out-of-court or Informal Restructuring Agreements or Rehabilitation Plan. – An out-of-court or informal restructuring/workout agreement or rehabilitation plan (OCRA) under the Act shall comply with both requirements: (A) Approval by the (1) debtor; (2) creditors representing at least sixty-seven percent (67%) of the secured obligations of the debtor; (3) creditors representing at least seventy-five percent (75%) of the unsecured obligations of the debtor; and, (4) creditors holding at least eighty-five percent (85%) of the total liabilities, secured and unsecured, of the debtor; and, (B) Publication of the notice of the OCRA once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the Philippines, as prescribed in Section 4 of this Rule. 178 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 2. Standstill Period. – A standstill period may be agreed upon by the parties and shall be effective and enforceable not only against the contracting parties but also against the other creditors provided it complies with the following conditions: (A) approval of the agreement for a standstill period by creditors representing more than fifty percent (50%) of the total liabilities of the debtor; (B) publication of the notice of the agreement in a newspaper of general circulation in the Philippines, once a week for two (2) consecutive weeks; and (C) the standstill period shall not exceed one hundred twenty (120) days from the date of effectivity. The notice of the standstill agreement shall substantially state the following minimum requirements: (1) the identity of the debtor, its principal business or activity/ies, and its principal place of business; (2) the total amount of the liabilities of the debtor, classified into secured and unsecured; (3) that a contact person is identified, together with his contact details, which should include existing office address, phone numbers, and email addresses; (4) that creditors are invited to participate in the negotiations for an OCRA and may do so by contacting the person specified in the notice; (5) that the creditors representing more than fifty percent (50%) of the total liabilities of the debtor have agreed to observe a standstill period which shall not exceed one hundred (120) days from its date of effectivity; (6) that the terms and conditions agreed upon by the parties shall be strictly observed during the standstill period; (7) that the standstill period shall be effective after publication of the notice once a week for two (2) consecutive weeks in a newspaper of general circulation in the Philippines; and (8) that the OCRA shall be binding on the debtor and all affected persons, including the creditors, whether or not they will participate in the negotiations, if approved by all of the following: (a) the debtor; (b) the creditors representing at least sixty-seven percent (67%) of the secured obligations of the debtor; (c) the creditors representing at least seventy-five percent (75 %) of the unsecured obligations of the debtor; and (d) the creditors holding at least eighty-five percent (85%) of the total liabilities, secured and unsecured, of the debtor. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 179 A.M. NO. 12-12-11-SC Sec. 3. Expiration of the Standstill Period. – The standstill period shall expire upon (1) the lapse of [one hundred twenty] (120) days from the effectivity of the standstill agreement, (2) the effectivity of the OCRA, or (3) the termination of the negotiations for the OCRA as declared by creditors representing more than fifty percent (50%) of the total liabilities of the debtor, whichever comes first.
Sec. 4. Publication of the OCRA. – The notice of the OCRA shall be published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the Philippines. The notice shall contain the following: (A) the salient provisions of the OCRA; (B) the OCRA is available for inspection or reproduction in the offices of the debtor at the expense of the requesting party; (C) the number of secured creditors who approved the OCRA, indicating how much they represent, in terms of percentage, among the secured obligations of the debtor, which should be at least sixty-seven percent (67%); (D) the number of unsecured creditors who approved the OCRA, indicating how much they represent, in terms of percentage, among the unsecured obligations of the debtor, which should be at least seventy-five percent (75%); (E) the total number of creditors, secured or unsecured, who approved the OCRA, indicating how much they represent, in terms of percentage, among the total liabilities of the debtor, which should be at least eighty-five percent (85%); (F) upon its effectivity, the OCRA and its provisions shall be binding upon the debtor and all affected persons, including the creditors, whether or not they participated in the proceedings or opposed the plan or whether or not their claims have been scheduled; (G) payments shall be made to the creditors in accordance with the provisions of the OCRA; and (H) the manner and other requirements for the amendment or modification of the OCRA. The OCRA shall take effect upon the lapse of fifteen (15) days from the date of the last publication of its notice.
Sec. 5. Cram Down Effect. – An OCRA that is approved pursuant to this Rule shall have the same legal effect as the confirmation of a rehabilitation plan under a court-supervised rehabilitation under Section 66, Rule 2 of these Rules.
Sec. 6. Amendment or Modification. – No amendment or modification of the OCRA shall be valid unless it (a) conforms to the manner and other requirements specified by the parties for the amendment or modification of the OCRA, and (b) complies with the requirements listed in Section 1 of this Rule. The amended or modified OCRA shall take effect upon the lapse of fifteen (15) days from the date of the last publication of the required notice. 180 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 7. Effect of Court Action or Other Proceedings. – The Regional Trial Courts, as courts of general jurisdiction, shall have jurisdiction over the following: (A) a petition for court assistance to execute or implement the standstill agreement of the OCRA under Section 9 of this Rule; and (B) a petition for annulment of the standstill agreement or the OCRA under Section 11 of this Rule. Any court action or other proceedings arising from, or relating to, the OCRA shall not stay its implementation, unless a temporary restraining order or preliminary prohibitory injunction is issued by the Court of Appeals in an original action under Rule 65 of the Rules of Court.
Sec. 8. Venue. – The petition for court assistance to execute or implement, or for the annulment of either the standstill agreement or the OCRA may be filed with the Regional Trial Court having jurisdiction over the place in which the insolvent debtor resides or has its principal place of business.
Sec. 9. Petition for Court Assistance. – An application for court assistance to execute or implement a standstill agreement or an OCRA may be filed by the insolvent debtor and/ or creditor, as the case may be, and shall be in the form of a petition which contains, as a minimum, the following: (A) the identity of the debtor, its principal business of activity/ies, and its principal place of business; (B) if the petition is filed by the creditor, the identity of the creditor and its principal place of business; (C) the identity and addresses of the party/ies against whom the assistance is sought; (D) a statement of the dates the standstill agreement or the OCRA was executed and became effective; (E) an allegation that the requisite creditor approval for a standstill agreement or for an OCRA has been obtained, in accordance with Section 2(A) or Section 1(A) of this Rule, respectively; (F) an allegation that the notice of the standstill agreement or the OCRA has been duly published in accordance with Section 2(B) or 1(C) of this Rule, respectively; (G) The salient provisions of the standstill agreement or the OCRA, including the provisions sought to be enforced; and (H) the specific ormf of assistance or relief sought. A petition for court assistance shall be accompanied by a copy of the standstill agreement or the OCRA. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 181 A.M. NO. 12-12-11-SC Sec. 10. Forms of Assistance. – The court may assist in the execution or implementation of the standstill agreement or the OCRA by issuing a writ of execution to enforce its terms. Nothing in this Rule limits the power of the court to provide any other form of additional assistance as may be necessary to execute or implement the standstill agreement or the OCRA, including the award of damages properly pleaded and proved, and to protect the interests of the creditors, the debtor, and other interested parties.
Sec. 11. Petition for Annulment of an OCRA. The– debtor or creditor may file a petition to annul (1) the standstill agreement or (2) the OCRA based on the ground of non-compliance with the requirements for a standstill agreement under Section 2 of this Rule, or an OCRA under Section 1 of this Rule. Vitiation of consent due to fraud, intimidation, or violence may be raised as a ground to annul the standstill agreement or the OCRA if committed against such number of creditors required for the approval of the standstill agreement or OCRA, as the case may be. The petition shall allege, as a minimum, the following: (A) the identity of the debtor, its principal business or activity/ies, and its principal place of business; and (B) the ground for the petition. The petition shall be accompanied by a copy of the standstill agreement or the OCRA and the amendments/modifications, if any, and shall be filed not later than thirty (30) days from the effectivity thereof.
Sec. 12. Service of Summons. – Upon the filing of the petition, the court shall immediately issue and cause to be served the corresponding summons to the respondents within five (5) days from receipt of the petition. The summons shall be accompanied with a copy of the petition, with all its attachments, and shall be served on all the person(s) indicated as respondents. The summons shall direct the respondent to file a comment and/or opposition to the petition within a non-extendible period of five (5) days from receipt of the summons. The summons, orders and other court processes may be served by the sheriff, his deputy or other proper court officer or, for justifiable reasons, by the counsel or representative of the petitioner, or any suitable person authorized or deputized by the court issuing the summons. Any private person who is authorized or deputized by the court to serve summons, orders and other court processes shall, for that purpose, be considered an officer of the court. Service of summons to a respondent residing in the Philippines shall be made in person or by substituted service, in accordance with the Rules of Court. Should either personal or substituted service fail, summons may be served by publication in a manner the court deems appropriate under the circumstances. In the case 182 PHILJA JUDICIAL JOURNAL VOL 16:41 2014 of juridical entities, summons by publication shall be done by indicating the names of its officers or its duly authorized representative. Service of summons to a respondent not residing in the Philippines shall be effected out of the Philippines through any of the following means: (a) By personal service coursed through the appropriate court in the foreign country, with the assistance of the Department of Foreign Affairs; (b) By publication once in a newspaper of general circulation in the country where the respondent may be found and by serving a copy of the summons and the court order by registered mail at the last known address of the respondent; (c) By facsimile or any recognized electronic means that could generate proof of service; or (d) By such other means as the court may in its discretion direct.
Sec. 13. Comment or Opposition. – The respondent shall file a verified comment or opposition to the petition, together with supporting affidavits and documents, within five (5) days from receipt of the summons and ensuring receipt thereof by the petitioner and the court not less than three (3) days before the date of the summary hearing under Section 15 of this Rule. In an action for court assistance, a respondent may raise the defense that the standstill agreement or the OCRA is void for failure to comply with the requirements under Section 2 or Section 1 of this Rule, respectively. A respondent may raise the invalidity of the standstill agreement or the OCRA on the ground of vitiation of consent only if it affects such number of creditors required for the approval of the standstill agreement of the OCRA, as the case may be. The failure to raise either defense shall constitute as waiver and preclude the respondent from filing a separate petition to annul the standstill agreement or the OCRA.
Sec. 14. Court Order on Petition. – On the basis of the allegations of the petition and the comment or opposition, and their supporting documents, the court shall determine whether there is a genuine issue of material facts. In case the respondent fails to file a comment or opposition the petition, the court may conduct clarificatory hearings. If the court determines that there is no genuine issue of material fact, the court shall rule whether the petition shall be granted. The court shall issue the order within five (5) days from receipt of the comment or opposition.
Sec. 15. Summary Hearing. – If the court determines that there exists a genuine issue of material facts, it shall conduct a summary hearing not later than twenty (20) days from the filing of the petition. The [one hundred twenty] (120)-day standstill period shall continue to run during the pendency of an action involving a standstill agreement. Upon the finality of the decision, NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 183 A.M. NO. 12-12-11-SC the parties shall have the remaining balance of the period to enforce the decision, which in any case shall not be less than sixty (60) days. The court shall render judgment which shall be not later than sixty (60) days from the filing of the petition.
Sec. 16. Review of Decision or Order in OCRA. – The judgment in an action to implement or enforce a standstill agreement shall be final and immediately executory. The judgment in any action involving the OCRA shall be final within ten (10) days from receipt of the decision and is immediately executory. A judgment of the court under this Rule may be elevated to the Court of Appeals under Rule 65 of the Rules of Court. A final judgment shall be without prejudice to the parties availing of the other modes of rehabilitation under Rule 2 or 3 of these Rules.
Rule 5 Cross-Border Insolvency Proceedings
Section 1. Scope of Application. – This Rule applies where (A) assistance is sought in a Philippine court by a foreign court or a foreign representative in connection with a foreign proceeding; (B) assistance is sought in a foreign State in connection with a proceeding governed by the FRIA and these Rules; or (C) a foreign proceeding and a proceeding governed by the FRIA and these Rules are concurrently taking place; or (D) [c]reditors in a foreign State have an interest in requesting the commencement of, or participating in, a proceeding under Rules 2, 3, and 4 of these Rules. The sole fact that a petition is filed pursuant to this Rule does not subject the foreign representative or the foreign assets and affairs of the debtor to the jurisdiction of the local courts for any purpose other than the petition for recognition and resulting related proceedings.
Sec. 2. Authorization of a Rehabilitation Receiver to Act in a Foreign State. – A rehabilitation receiver is authorized to act in a foreign State on behalf of a proceeding under these Rules, as permitted by the applicable foreign law.
Sec. 3. Access of Foreign Creditors to a Proceeding under These Rules. – (A) Subject to Sections 1 and 4 of this Rule, to paragraph 2 of this Section, and to the rule of reciprocity, foreign creditors have the same rights regarding proceedings commenced under Rules 2, 3, and 4 of these Rules as creditors in the Philippines. 184 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(B) Paragraph 1 above does not affect the ranking of claims in a proceeding under the relevant laws.
Sec. 4. Rules on Public Policy and Reciprocity. – The court shall refuse to take any action in any proceeding contemplated under Section 1 of this Rule if (A) the action ouldw be manifestly contrary to the public policy of the Philippines; and (B) the court finds that the country where the foreign rehabilitation proceeding is taking place does not extend recognition to a Philippine rehabilitation proceeding, or that the country of which the petitioner-foreign creditor is a national does not grant the same rights to a Philippine creditor in a manner substantially in accordance with these Rules.
Sec. 5. Petition for Recognition of Foreign Proceeding. (A) A foreign representative may apply with the Regional Trial Court which has jurisdiction over the place where the debtor resides or holds principal office for recognition of the foreign proceeding in which the foreign representative has been appointed. (B) Whenever a petition for recognition of a foreign proceeding is filed after a proceeding under these Rules has been commenced, the petition for recognition of the foreign proceeding shall be filed with the same court. (C) A petition for recognition shall be accompanied by (1) a certified copy of the order commencing the foreign proceeding and appointing the foreign representative; or (2) a certificate from the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign representative; or (3) in the absence of evidence referred to in subparagraphs (1) and (2), any other evidence acceptable to the court of the existence of the foreign proceeding and of the appointment and identity of the foreign representative; and (4) any additional evidence that the court may deem necessary, and allege how the petition is affected by the factors in granting relief specified under Section 13 of this Rule. (D) An application for recognition shall also be accompanied by a statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative. (E) The court may require a translation of documents supplied in support of the application for recognition into an official language of this State.
Sec. 6. Notice of Filing of Petition for Recognition. – Within three (3) days from the filing of the petition for recognition of a foreign proceeding, the court shall acknowledge the fact of filing and issue a Notice of filing of the petition, which shall be published once in a NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 185 A.M. NO. 12-12-11-SC newspaper of general circulation within five (5) days from its issuance. The Notice shall likewise state that any opposition to the petition should be filed within five (5) days from publication.
Sec. 7. Presumptions Concerning Recognition. – If the order or certificate referred to in paragraph (C), subparagraphs (1) or (2), of Section 5 of this Rule is attached to the petition for recognition, the court may disputably presume that (A) a foreign proceeding is a proceeding as defined under Section 5(g), Rule 1 of these Rules; (B) the foreign representative is a person or body as defined under Section 5(j), Rule 1 of these Rules and has established its identity; (C) the documents submitted in support of the petition for recognition are authentic, whether or not they have been legalized; and (D) the debtor’s registered office, or habitual residence in the case of an individual, is the centre of the debtor’s main interests.
Sec. 8. Recognition of Foreign Proceeding. – Subject to Section 4 of this Rule, a foreign proceeding shall be recognized if (A) the proceeding is a foreign proceeding as defined under these Rules; (B) the person or body applying for recognition is a foreign representative as defined under these Rules; and (C) the petition meets the requirements of Section 6 of this Rule. The foreign proceeding may be recognized either as a foreign main proceeding or a foreign non-main proceeding, as defined and understood under Section 5(h) and (i), Rule 1 of these Rules. The court may modify or terminate the Order granting recognition, if it is shown that the grounds for granting it were fully or partially lacking or have ceased to exist.
Sec. 9. Period to Recognize Foreign Proceeding. – A petition for recognition of a foreign proceeding shall be decided within thirty (30) days from its filing.
Sec. 10. Notification to Court. –From the time of filing the petition for recognition of the foreign proceeding, the foreign representative shall inform the court promptly of: (A) any substantial change in the status of the foreign proceeding or the status of the foreign representative’s appointment; and (B) any other foreign proceeding regarding the same debtor that becomes known to the foreign representative, and how the changes or developments affect or have affected the petition. 186 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Sec. 11. Provisional Relief That May be Granted upon Application for Recognition of a Foreign Proceeding. – From the time of the complete publication of the notice of the fact of filing under Section 6 of this Rule until the same is decided upon, the court may, upon motion of the foreign representative where relief is urgently needed to protect the assets of the debtor or the interests of the creditors and there is prima facie showing that the petition is meritorious, grant relief of a provisional nature, including: (A) staying execution against the debtor’s assets; (B) entrusting the administration or realization of all or part of the debtor’s assets located in the Philippines to the foreign representative or another person designated by the court in order to protect and preserve the value of assets that, by their nature or because of other circumstances, are perishable, susceptible to devaluation or otherwise in jeopardy; (C) any relief mentioned in Section 13(A)(3), (4) and (6) of this Rule. Unless extended, the provisional relief granted under this section terminates when the application for recognition is decided upon. The court may refuse to grant the provisional relief under this section if such relief would interfere with the administration of a foreign main proceeding.
Sec. 12. Effects of Recognition of Foreign Proceeding. (A) Upon recognition of a foreign main proceeding: (1) commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities is stayed, provided that, such stay does not affect the right to commence actions or proceedings to preserve ad cautelam a claim against the debtor. For this purpose, the plaintiff may file the appropriate court action or proceeding against the debtor by paying the amount of One Hundred Thousand Pesos (P100,000) or one-tenth (1/10) of the prescribed filing fee, whichever is lower. The payment of the balance of the filing fee shall be a jurisdictional requirement for the continuation of the proceedings in the ad cautelam claim; (2) execution against the debtor’s assets is stayed in accordance with Section 9, Rule 2 of these Rules; and (3) the right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended in accordance with Section 9, Rule 2 of these Rules. (B) Upon recognition of a foreign proceeding, the foreign representative is entitled to participate, through counsel, in any proceeding involving the debtor filed under these Rules. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 187 A.M. NO. 12-12-11-SC (C) The recognition of the foreign proceeding does not affect the right of Philippine creditors to commence or continue a rehabilitation or liquidation proceeding under these Rules or the right to file or continue claims in these proceedings. (D) The order granting recognition of the foreign proceeding shall be published in two separate newspapers of general circulation not later than five days from its issuance.
Sec. 13. Relief That May be Granted After Recognition of Foreign Proceeding. (A) Upon recognition of a foreign proceeding, where necessary to protect the assets of the debtor or the interests of the creditors, the court may, upon motion of the foreign representative, grant any appropriate relief including: (1) staying the commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities to the extent they have not been stayed under Section 12(A)(1) of this Rule; (2) staying execution against the debtor’s assets to the extent it has not been stayed under Section 12(A)(2) of this Rule; (3) suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to the extent that this right has not been suspended under Section 12(A)(3) of this Rule; (4) providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities; (5) entrusting the administration or realization of all or part of the debtor’s assets located in the Philippines to the foreign representative or another person designated by the court; (6) granting any additional relief that may be available to the rehabilitation receiver under the law or these Rules. (B) Upon recognition of a foreign proceeding, the court may, at the request of the foreign representative, entrust the distribution of all or part of the debtor’s assets located in the Philippines to the foreign representative or another person designated by the court: provided that the court is satisfied that the interests of local creditors are adequately protected.
Sec. 14. Factors in Granting Relief. – In determining whether to grant relief under this Rule, the court shall consider (A) the protection of creditors in the Philippines and the inconvenience in pursuing their claim in a foreign proceeding; (B) the just treatment of all creditors through resort to a unified insolvency or rehabilitation proceedings; (C) whether other jurisdictions have given recognition to the foreign proceeding; 188 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(D) the extent that the foreign proceeding recognizes the rights of creditors and other interested parties in a manner substantially in accordance with the manner prescribed in this Rule; and (E) the extent that the foreign proceeding has recognized and shown deference to proceedings under the Act and previous legislation.
Sec. 15. Protection of Creditors and Other Interested Persons. (A) The court may impose conditions in the grant of relief under Sections 11 and 13 of this Rule, as it may deem appropriate. (B) The court may, motu proprio or upon motion of the foreign representative, or of a person affected by the relief granted under Sections 11 and 13 of this Rule, modify or terminate such relief.
Sec. 16. Actions to Avoid Acts Detrimental to Creditors. – Upon recognition of a foreign proceeding, the foreign representative, through counsel, acquires the standing to initiate actions to avoid or otherwise render ineffective acts detrimental to creditors that are available under these Rules.
Sec. 17. Intervention by Foreign Representative in Philippine Proceedings. – Upon recognition of a foreign proceeding, the foreign representative may intervene, through counsel, in any action or proceeding in the Philippines in which the debtor is a party.
Sec. 18. Cooperation and Direct Communication with Foreign Courts. – In matters covered by this Rule, the court shall cooperate to the maximum extent possible in all court-to-court communications for purposes of information or assistance.
Sec. 19. Cooperation and Direct Communication between the Rehabiitation Receiver or Liquidator and Foreign Courts or Foreign Representatives. (A) In matters referred to in Section 1 of this Rule, a rehabilitation receiver or liquidator shall, in the exercise of its functions and subject to the supervision of the court, cooperate to the maximum extent possible with foreign courts or foreign representatives. (B) The rehabilitation receiver or liquidator is entitled, in the exercise of its functions and subject to the supervision of the court, to communicate directly with foreign courts or foreign representatives.
Sec. 20. Forms of Cooperation. – Cooperation may be implemented by any appropriate means, including but not limited to the following: (A) appointment of a person or body to act at the discretion of the court; (B) communication of information by any means considered appropriate by the court; (C) coordination of the administration and supervision of the debtor’s assets and affairs; NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 189 A.M. NO. 12-12-11-SC (D) approval or implementation by courts of agreements concerning the coordination of proceedings; (E) coordination of concurrent proceedings regarding the same debtor; (F) suspension of proceedings against the debtor; (G) limiting the relief to assets that should be administered in a foreign proceeding pending in a jurisdiction other than the place where the debtor has its principal place of business (foreign non-main proceeding) or information required in that proceeding; and (H) implementation of rehabilitation or re-organization plan for the debtor. Nothing in this Rule limits the power of the court to provide additional assistance to the foreign representative under other applicable laws.
Sec. 21. Commencement of Local Proceeding After Recognition of Foreign Proceeding. – After the recognition of a foreign proceeding, a local proceeding under these Rules may be commenced only if the debtor is doing business in the Philippines. The effects of the proceedings shall be restricted to the assets of the debtor located in the country and, to the extent necessary to implement cooperation and coordination under Sections 19 and 20 of this Rule, to the other assets of the debtor that, under local laws, must be administered in that proceeding.
Sec. 22. Local and Foreign Proceedings.– Where a foreign proceeding and a local proceeding are taking place concurrently regarding the same debtor, the court shall seek cooperation and coordination under Sections 19 and 20 of this Rule. Any relief granted to the foreign proceeding must be made consistent with the relief granted in the local proceeding.
Rule 6 Procedural Remedies
Section 1. Motion for Reconsideration. – A party may file a motion for reconsideration of any order issued by the court prior to the approval of the Rehabilitation Plan. No relief can be extended to the party aggrieved by the court’s order on the motion through a special civil action for certiorari under Rule 65 of the Rules of Court. An order issued after the approval of the Rehabilitation Plan can be reviewed only through a special civil action for certiorari under Rule 65 of the Rules of Court.
Sec. 2. Review of Decision or Order on Rehabilitation Plan. – An order approving or disapproving a rehabilitation plan can only be reviewed through a petition for certiorari to the Court of Appeals under Rule 65 of the Rules of Court within fifteen (15) days from notice of the decision or order. 190 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
Rule 7 Miscellaneous and Final Provisions
Section 1. Applicability of Provisions. – The provisions in Rules 2 (Court-Supervised Rehabilitation), insofar as they are applicable, shall likewise apply to proceedings in Rule 3 (Pre-Negotiated Rehabilitation) and Rule 4 (Out-of-Court or Informal Restructuring Agreements).
Sec. 2. Effectivity. – These Rules shall take effect fifteen (15) days after their complete publication in the Official Gazette or in at least two (2) newspapers of national circulation in the Philippines. NINTH METROBANK FOUNDATION PROFESSORIAL CHAIR LECTURE: TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM 191 A.M. NO. 12-12-11-SC Annex “A” Affidavit of General Financial Condition
(1) Are you an officer of the debtor referred to in these proceedings? (2) What is your full name and what position do you hold in the debtor? (3) What is the full name of the debtor and what is the address of its head office? (4) When was it formed or incorporated? (5) When did the debtor commence business? (6) What is the nature of its business? What is the market share of the debtor in the industry in which it is engaged? (7) Who are the parties, members, or stockholders? How many employees? (8) What is the capital of the debtor? (9) What is the capital contribution and what is the amount of the capital, paid and unpaid, of each of the partners or shareholders? (10) Do any of these people hold the shares in trust for others? (11) Who are the directors and officers of the debtors? (12) Does the debtor have any subsidiary corporation? If so, give particulars? (13) Has the debtor properly maintained its books and are they updated? (14) Were the books audited annually? (15) If so, what is the name of the auditor and when was the last audited statement drawn up? (16) Were all the proper returns made to the various government agencies which required them? (17) When did the debtor first become aware of its problems? (18) Has the debtor, within the [twelve] (12) months preceding the filing of the petition (a) made any payments, returned any goods or delivered any property to any of its creditors, except in the normal course of business? (b) executed any mortgage, pledge, or security over any of its properties in favor of any creditor? (c) transferred or disposed of any of its properties in payment of any debt? (d) sold, disposed of, or removed any of its property except in the ordinary course of business? (e) sold any merchandise at less than fair market value or purchased merchandise or services at more than fair market value? 192 PHILJA JUDICIAL JOURNAL VOL 16:41 2014
(f) made or been a party to any settlement of property in favor of any person? If yes, give particulars. (19) Has the debtor recorded all sales or dispositions of assets? (20) What were the sales for the last three [(3)] years and what percentage of the sales represented the profit or mark-up? (21) What were the profits or losses for the debtor for the last three [(3)] years? (22) What are the causes of the problems of the debtor? Please provide particulars? (23) When did you first notice these problems and what actions did the debtor take to rectify them? (24) How much, in your estimate, is needed to rehabilitate the debtor? (25) Has any person expressed interest in investing new money to the debtor? (26) Are there any pending and threatened legal actions against the debtor? If so, please provide particulars. (27) Has the debtor discussed any restructuring or repayment plan with any of the creditors? Please provide status and details. (28) Has any creditor expressed interest in restructuring the debts of the debtor? If so, please give particulars. (29) Have employees’ wages and salaries been kept current? If not, how much are in arrears and what time period do the arrears represent? (30) Have obligation to the government and its agencies been kept current? If not, how much are in arrears and what time period do the arrears represent?