This content is from: Local Insights

Philippines: Facilitating creditor-debtor dealings

Russel RodriguezJohn Christian Joy Regalado

The Financial Rehabilitation and Insolvency Act of 2010 (FRIA) provides more transparent, effective and efficient dealings between creditors and financially-struggling debtors. According to FRIA, a debtor or creditor may initiate rehabilitation proceedings to restore an insolvent debtor to solvency when (1) this is economically feasible, and (2) the projected recovery under the rehabilitation plan would be greater if the debtor was allowed to continue its business than if it was constrained to cease operations and liquidate its assets.

Rehabilitation may be court-supervised, pre-negotiated or derived from informal restructuring agreements. A court-supervised rehabilitation may be (a) voluntarily instituted, wherein the debtor himself files the petition for rehabilitation, or (b) involuntarily-instituted, wherein the debtor's creditor/s with an aggregate claim of at least PHP1 million ($21,000) or 25% of the subscribed capital stock or partner's contributions, whichever is higher, files the petition. In a pre-negotiated rehabilitation, the debtor, by himself or jointly with creditors, files the petition for approval of a pre-negotiated rehabilitation plan that has been approved by creditors holding two-thirds of the total liabilities of the debtor, including both creditors holding 50% of unsecured claims and creditors holding 50% of secured claims against the debtor.

A salient feature of commencing a court-supervised or pre-negotiated rehabilitation is the issuance by the court of a stay order, which, subject to certain exceptions, (1) suspends all actions or proceedings, and the enforcement of judgement or provisional remedies against the debtor, and (2) prohibits the debtor from disposing of property and making payments of outstanding liabilities as of the commencement date. Further, once the court approves the rehabilitation plan, all dealings and operations of the debtor, as well as creditor claims, are subject to this plan.

Finally, out-of-court or informal restructuring agreements are also recognised provided that (a) they are agreed upon by the debtor and the debtor's creditors holding 85% of the total liabilities of the debtor, including both creditors holding 75% of unsecured claims and creditors holding 67% of secured claims against the debtor, and (b) meet the standards set forth under FRIA. Under this type of rehabilitation, the parties may agree, subject to a publication requirement, on a standstill period that affects even non-parties to the agreement. The publication of an informal restructuring agreement in accordance with law shall have the effect of a court-approved rehabilitation plan.

Under FRIA, only a natural person who is a resident citizen of the Philippines may file a petition for suspension of payments when such person, although solvent, foresees the impossibility of repaying his debts when they respectively fall due. There is no minimum amount of liabilities prescribed and the rules on concurrence and preference of credits do not apply.

The debtor or creditor may nevertheless opt for liquidation of assets when rehabilitation is not feasible. The rehabilitation court may also make this determination at the commencement of the rehabilitation proceedings or during the pendency thereof, and convert the rehabilitation proceedings into one for liquidation. Different liability thresholds are prescribed for natural and juridical debtors under the rules on liquidation.

Pursuant to the Supreme Court A.M. No. 03-03-03-SC, which took effect on August 6 2016, Special Commercial Courts shall have jurisdiction over petitions for rehabilitation of corporations, partnerships and sole proprietorships, liquidation of insolvent individual and juridical debtors, and suspension of payments of individual debtors.

Russel Rodriguez, John Christian Joy Regalado, Jo Margarette Remollo

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