Financial rehabilitation as alternative mitigation against pandemic

By Zyra G Montefolca, ACCRALAW
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In light of the implementation of various community quarantine measures brought by the covid-19 pandemic, many businesses were either prevented from operating or had to do so with limited operational capacity. As a result, many entrepreneurs incurred significant financial losses, forcing some business into closure.

ACCRALAW rehabilitation
Zyra G Montefolca
Associate
ACCRALAW

It is worth noting that the law provides for a remedy other than business closure. Republic Act No. 10142, also known as the Financial Rehabilitation and Insolvency Act of 2010 (FRIA) aims to encourage distressed business enterprises – including sole proprietorships, partnerships, corporations and individual debtors – to undergo rehabilitation. The FRIA is not applicable to banks or quasi-banks, insurance companies and pre-need companies, which are governed by different laws and regulations.

Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency (Wonder Book Corporation v Philippine Bank of Communication, 2012). Rehabilitation may be: (1) court-supervised, which may be voluntary or involuntary; (2) by way of a pre-negotiated rehabilitation plan or (3) through out-of-court or informal proceedings.

Court-supervised rehabilitation

If a business is insolvent and unable to pay its obligations as they become due, an insolvent debtor may voluntarily initiate a court-supervised rehabilitation proceeding by filing a petition with the court.

The persons who can initiate the petition depend on the type of business organization. It shall be the owner in the case of a sole proprietorship, a majority of the partners in case of a partnership, or a majority vote of the board of directors or trustees, and authorized by at least a two-thirds vote of the outstanding capital stock in the case of stock corporations, or of the members in case of a non-stock corporation.

Involuntary court-supervised rehabilitation may be initiated by any creditor or group of creditors with a claim of, or the aggregate of whose claims is, at least PHP1 million (US$20,600) or at least 25% of the subscribed capital stock or partners’ contributions, whichever is higher, by filing a petition with the court. Involuntary court-supervised rehabilitation may be initiated if: (1) there is no genuine issue of fact or law on the claims of the petitioner, and the due and demandable payments have not been made for at least 60 days, or that the debtor has failed generally to meet its liabilities as they fall due; or (2) a creditor, other than the petitioner, 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.

In both instances, a rehabilitation plan must be attached to the petition. This refers to a plan by which the financial well-being and viability of an insolvent debtor can be restored through various means, including but not limited to debt forgiveness, debt rescheduling, reorganization or quasi-reorganization, dacion en pago (dation in payment), debt-equity conversion and sale of the business (or parts of it) as a going concern, or setting up of a new business entity, or other similar arrangements as may be approved by the court or creditors.

Pre-negotiated rehabilitation

In pre-negotiated rehabilitation, an insolvent debtor by itself, or jointly with any of its creditors, may file a verified petition with the court for the approval of the pre-negotiated rehabilitation plan.

The pre-negotiated rehabilitation plan must have been endorsed or approved by creditors holding at least two-thirds of the total liabilities of the debtor, including secured creditors holding more than 50% of the total secured claims of the debtor, and unsecured creditors holding more than 50% of the total unsecured claims of the debtor.

Informal restructuring agreement

An out-of-court or informal restructuring agreement and rehabilitation plan must meet the following minimum requiremaents to qualify: (1) the debtor must agree to it; (2) it must be approved by creditors representing at least 67% of the secured obligations of the debtor; (3) it must be approved by creditors representing at least 75% of the unsecured obligations of the debtor; and (4) it must be approved by creditors holding at least 85% of the total liabilities, secured and unsecured, of the debtor.

Only when rehabilitation is no longer feasible, despite the appointment of a rehabilitation receiver and a rehabilitation committee, can liquidation and the settlement of its obligations ensue. Given the remedies for rehabilitation, distressed enterprises need not immediately resort to closure. Through rehabilitation, there might be a possibility for a losing business to gain a new lease on life.

(This article is for informational and educational purposes only. It is not offered as, and does not constitute, legal advice or legal opinion.)

Zyra G Montefolca is an associate of the Davao Branch of ACCRALAW

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