No one thought that with all the progress people have made, a pandemic would still
be able to get into people’s lives. Humanity, was, and can never be prepared for something as unforeseeable and unrelenting as the deadly Covid-19.
With the virus engulfing the globe, a lot of businesses were driven to the ground. Jobs were lost. Debts piled up. The economy took a deep dive. Due to these, corporations and other organizations were left with very few choices; some of which are to liquidate, to declare insolvency, or to file for rehabilitation.
Insolvency is the financial condition of a debtor, who is unable to pay his liabilities as they fall due in the ordinary course of business. A sole proprietorship, partnership, or corporation may have liabilities that are greater than its assets. When the party reaches insolvency, it may either pursue rehabilitation or liquidation.
In Pryce Corporation v. China Banking Corporation, (G.R. No. 172302, 18 February 2014) the
Supreme Court held that “Corporate rehabilitation is one of many statutorily provided
remedies for businesses that experience a downturn. Rather than leave the various creditors
unprotected, legislation now provides for an orderly procedure of equitably and fairly
addressing their concerns. Corporate rehabilitation allows a court-supervised process to
rejuvenate a corporation. It provides a corporation’s owners a sound chance to re-engage
the market, hopefully with more vigor and enlightened services, having learned from a painful
experience. Necessarily, a business in the red and about to incur tremendous losses may not
be able to pay all its creditors. Rather than leave it to the strongest or most resourceful
amongst all of them, the state steps in to equitably distribute the corporation’s limited
resources. Rather than let struggling corporations slip and vanish, the better option is to
allow commercial courts to come in and apply the process for corporate rehabilitation.”
It should be noted that, under FRIA 2010, a debtor not only includes corporations duly organized and existing under Philippine laws, but also sole proprietorships duly registered
with the DTI as well as partnerships duly registered with the SEC. An individual debtor who
has become insolvent is also covered under the law.
There are three routes a debtor can choose from when he opts to rehabilitate
Court-Supervised Rehabilitation
Under Court-Supervised Rehabilitation, the debtor may choose between Voluntary
Proceedings and Involuntary Proceedings. For Voluntary Proceedings, he has to file a
petition with the court. On the other hand, in Involuntary Proceedings, it is the creditor/s
who initiates an involuntary proceeding against the debtor by filing a petition for
rehabilitation with the court.
When the court finds the petition for rehabilitation to be sufficient in form and in substance,
it shall issue a Commencement Order. Upon its issuance, the rehabilitation proceedings will
commence, up until the issuance of a Stay or Suspension Order, which shall:
(a) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims
against the debtor;
(b) suspend all actions to enforce any judgment, attachment or other provisional remedies
against the debtor;
(c) prohibit the debtor from selling, encumbering, transferring or disposing in any manner
any of its properties except in the ordinary course of business; and
(d) prohibit the debtor from making any payment of its liabilities outstanding as of the
commencement date, except as may be provided under the law.
Pre-negotiated Rehabilitation
When it comes to Pre-Negotiated Rehabilitation, the 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.
If the petition is sufficient in form and in substance, the court will likewise issue an order. If there happens to be objections to the rehabilitation plan, the court will also hear these objections. If these objections are bereft of merit, the rehabilitation plan will be approved.
Out-of-Court or Informal Restructuring Agreements or Rehabilitation Plans
An Out-of-Court or Informal Restructuring Agreement or Rehabilitation Plan simply needs to
be in compliance with the minimum requirements prescribed under FRIA. These
requirements include
(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 (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.
In times like this, when businesses or organizations face the inevitable, it is important to
know what options they still have. The Supreme Court held in a case that the rationale in
corporate rehabilitation is to resuscitate businesses in financial distress, because assets are
often more valuable when so maintained than they would be when liquidated.
