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New corporate rehabilitation and insolvency framework

Philbert E Varona

On February 2 2010, the Philippine Congress adopted Republic Act No. 10142, entitled the Financial Rehabilitation and Insolvency Act of 2010 (Fria). The Fria lapsed into law and became effective on July 18 2010.

The Fria replaces and repeals the Insolvency Law (Act No. 1956), which was enacted in 1909 and was almost universally acknowledged as outdated and obsolete. The Fria also impliedly amends the Interim Rules on Corporate Rehabilitation first issued by the Supreme Court in 2000 (and amended in 2008), given several inconsistencies between those rules and the new Fria. It is expected that the Supreme Court will issue new rules on procedure to govern corporate rehabilitation in conformity with the Fria.

Under the Fria, a debtor is considered insolvent if it 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." The Fria provides for the following modes of rehabilitating an insolvent corporate debtor:

  • Court-supervised rehabilitation proceedings – these may be commenced by either the debtor (or a group of affiliated debtors) or by creditors representing a specified minimum amount of claims. The court conducts the rehabilitation proceedings, appoints a receiver and determines which claims against the debtor are valid, with the goal of putting a rehabilitation plan in place. A plan must be approved by the debtor and creditors representing more than 50% of the claims of each class of creditors. The rehabilitation plan must be agreed upon and the court must approve such plan, within one year from the date of commencement of the proceedings. If the plan is not finalised or the court does not approve the plan within such period, the matter will proceed to liquidation of the debtor. All claims against the debtor are suspended while rehabilitation proceedings are pending in court.
  • Pre-negotiated rehabilitation – in these proceedings, a debtor files a petition with the court for the approval of a rehabilitation plan which has been previously agreed upon by the debtor and its creditors representing at least 2/3 of the debtor's total liabilities (and at least 67% and 75% of the debtor's secured and unsecured obligations, respectively). The court is required to approve the plan within 120 days from the date the petition is filed, failing which, the plan shall be deemed approved. The court may also order that the matter proceed to the liquidation of the debtor if it finds that the plan is not meritorious or the parties acted in bad faith. All claims against the debtor are suspended while rehabilitation proceedings are pending in court.
  • Out-of-court or informal restructuring agreements or rehabilitation plans – in this scenario, the debtor and creditors representing at least 85% of the debtor's total liabilities (and at least 67% and 75% of the debtor's secured and unsecured obligations, respectively) agree on a restructuring or rehabilitation plan. As long as these thresholds are met, the plan is binding on the parties (and on the debtor's other creditors) even without court approval. A standstill period may be enforced during the negotiations, provided that such standstill is approved by creditors representing more than 50% of the debtor's total liabilities. The standstill period may not, however, exceed 120 days.

One change introduced by the Fria is the option granted to the debtor to choose which of its contracts it wishes to confirm, by delivering written notice of confirmation to the relevant counterparties. Any contract that is not so confirmed by the debtor within a period of 90 days from the commencement of the rehabilitation proceedings shall be considered terminated. Damages arising therefrom will be considered a claim arising prior to the commencement of the proceedings.

Another notable change is that while court-supervised proceedings are pending, all taxes and fees due from the debtor to the national and local governments shall be considered waived. Similarly, the amount by which any indebtedness or obligation of the debtor is reduced or forgiven shall not be subject to any tax.

Banks, insurance companies and pre-need companies are not covered by the Fria. The rehabilitation of such entities is governed by other laws.

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