Saving a Corporation through Corporate Rehabilitation Proceedings

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Published — June 1, 2022

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

One of the established laws on business in the Philippines define a corporation as an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence (Section 2 of Republic Act No. 11232). Relative to the definition of a corporation is the implied reliance of our business law to the Theory of Concession. Concession theory
(Sundiang & Aquino, Reviewer on Commercial Law, 2017 Edition, Page 182, REX Publishing Company) is a principle in the creation of corporations, under which a corporation is an artificial creature without any existence until it has received the imprimatur of the State acting according to law, through the Securities and Exchange Commission (SEC). In other words, the life of the corporation is a concession made by the State. In view thereof, the rules and procedures for the redemption of the life of a corporation is also governed by the State through its established laws.

In our jurisdiction, the rules and procedures governing the liquidation and rehabilitation in order to officially end the life or to save the life of a corporation is Republic Act No. 10142 or the Financial Rehabilitation and Insolvency Act of 2010 (FRIA). In view thereof, aside from the adherence to the Theory of Concession and the principles attached to it, the enactment of FRIA shows that our laws on business also observe the concept of economic freedom.

Economic Freedom

The index factors of economic freedom are grouped into four (4) broad categories, these are: adhering to open-markets where countries support the productivity-boosting competition of the global marketplace, adopting to the principles of limited government, regulatory efficiency, and the rule of law(Read here). Under the rule of law is freedom to do business. Freedom to do business includes not just starting one’s own enterprise but also the contingency to fold-up and to rehabilitate, if necessary.

Concept of Corporate Rehabilitation

Corporate rehabilitation in general, refers to the restoration of the corporation to a condition of successful operation and solvency if it 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-corporation continues as a going concern than if it is immediately liquidated (Section 4 (gg) of FRIA 2010). The purpose of rehabilitation is to enable the corporation or company to gain a new lease in life and allow its creditor to be paid their claims out of its earnings (Bureau of Internal Revenue vs. Lepanto Ceramics, Inc. 824 SCRA 125, April 24, 2017).

Rehabilitation contemplates continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and salary (Philippine Asset Growth Two, Inc. vs. Fastech Synergy Philippines, Inc. (formerly First Asia System Technology, Inc.) 794 SCRA 625, June 28, 2016). The purpose of rehabilitation is to enable the corporation or company to gain a new lease in life and allow its creditor to be paid their claims out of its earnings (Bureau of Internal Revenue vs. Lepanto Ceramics, Inc. 824 SCRA 125, April 24, 2017).

Nature of Corporate Rehabilitation Proceedings

Rehabilitation proceedings in our jurisdiction, much like the bankruptcy laws of the United States, have equitable and rehabilitative purposes. On the one hand, they attempt to provide for the efficient and equitable distribution of an insolvent debtor’s remaining assets to its creditors; and, on the other, to provide debtors with a “fresh start” by relieving of the weight of their outstanding debts and permitting them to reorganize their affairs (Allied Banking vs In the Matter of the Petition to Have Steel Corp place under Corporate Rehabilitation, G.R. No. 191939, March 14, 2018)

The proceedings under FRIA is in rem in nature and shall be conducted in a summary and non-adversarial matter. Being in rem in nature, 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. (Sec. 4, Rule 1, Financial Rehabilitation Rules of Procedure for Insolvent Debtors (“FR Rules”).

Kinds of Rehabilitation Proceedings

Under FRIA, a corporation may undergo two (2) types of Rehabilitation Proceedings, these are:

1. Court-supervised Rehabilitation (CSR)
   1. Voluntary Proceedings
   2. Involuntary Proceedings
2. Pre-negotiated Rehabilitation (PNR);

Court-Supervised Rehabilitation (CSR)

A voluntary proceeding CSR may be initiated by a corporation through the majority 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 (Sec. 1, Rule 2, FR-Rules). A voluntary proceeding is initiated by filing a Petition for Voluntary Rehabilitation.

On the other hand, an involuntary proceeding CSR may be initiated by any creditor or group of creditors with a claim of, or aggregate of whose claim is at least Php 1,000,000.00 or at least 25% of subscribed capital stock, whichever is higher. An involuntary proceeding is initiated by filing a Petition for Involuntary Rehabilitation.

The following is the summary of procedure for both voluntary and involuntary rehabilitation proceedings (Sec. 8, Rule 2 of FR Rules):

1. Filing of a verified petition for rehabilitation;
2. Issuance of Commencement Order: 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. The effects of the court’s issuance of a Commencement Order shall retroact to the date of the filing of the petition (Sec 9, Rule 2). Commencement Order shall include Suspension/ Stay Order;
   1. If 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.
3. Filing of Verified Notice of Claim of all the creditors of the debtor or any interested party whose claim is not yet listed in the schedule of debts and liabilities not later than five (5) days before the first initial hearing date fixed in the Commencement Order. (Sec 12, Rule 2)
   1. 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.
4. Filing of Publisher’s Affidavit & Petitioner’s Affidavit. On or before the initial hearing scheduled on the Commencement Order, the petitioner shall file a publisher’s affidavit indicating the full compliance to the publication requirements. Petitioner’s affidavit shall also be filed showing that the service requirement for local creditors and notification requirement for foreign creditors had been complied with, as required in the Commencement Order. These affidavits are jurisdictional in nature. (Sec. 13, Rule 2, F-Rules)
5. Initial hearing on any matter relating to the petition
   1. Determination of creditors who timely filed their claims;
   2. Qualifications of receiver;
   3. Direct the creditors to discuss their comments and opposition to the Rehabilitation plan;
   4. Referral for evaluation of the rehabilitation plan to the rehabilitation receiver who shall submit his recommendations to the court;
   5. 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.
6. 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.
   1. Modifications or revisions of the rehabilitation plan as necessary
7. Submission of final rehabilitation plan and submission by Rehabilitation Receiver to the court within forty (40) days from the last initial hearing, the final report (Sec. 16, Rule 2)
8. Giving Due Course to or Dismissal of Petition, or Conversion of Proceedings (to liquidation) (Secs. 17 – 18, Rule 2). The Court may give due course to the proceedings, and order that the rehabilitation plan must be submitted within a period of not more than ninety (90) days from the date of the order giving due course to the petition. If there are still objections or disputes on the Rehabilitation Plan, the court may refer them to ADR or arbitration.

Summary of the abovementioned procedure is described as follows:

Pre-Negotiated Rehabilitation (PNR)

An insolvent corporation may, by itself or jointly with any of its creditors file a verified petition with the court for approval of Pre-Negotiated Rehabilitation Plan which has been endorsed and approved by the creditors holding at least two-thirds (2/3) of the total liabilities of the corporation-debtor including the secured creditors holding more than 50% of the total secured claim and unsecured creditors holding 50% of unsecured claims (Sec. 76 of FRIA).

Commencement Order of the Court and Suspension or Stay Order

The commencement order which includes the issuance of suspension or stay order by the court is the real-life saver of the corporation in rehabilitation proceedings. The suspension order suspends all actions or proceedings for the enforcement of claims or judgments against the debtor-corporation. It will also prohibit the debtor-corporation from selling, encumbering or disposing of any of its properties and from making any payment of its liabilities (Sec. 16 (q) of FRIA). Under our jurisprudence, the following are the claims against the corporation that are deemed suspended by the Stay Order:

1. All claims or demand of whatever nature or character against a debtor or its property, whether money or otherwise (Malayan Insurance Company, Inc. vs. Victorias Milling Company, Inc. 586 SCRA 45, April 17, 2009)
2. The definition is all-encompassing as it refers to all actions whether for money or otherwise. There are no distinction or exemptions (Sps. Sobrejuanite vs. ASB Development Corporation 471 SCRA 763, September 30, 2005)
3. Cover all claims against a distressed corporation whether for damages founded on a breach of contract of carriage, labor cases, collection suits or any other claims of a pecuniary nature (Malayan Insurance Company vs Victorias Milling Co, Inc)
4. Embraces all phases of the suit, that is, the entire proceedings of an action or suit and not just the payment of claims during the execution stage after the case had become final and executory (Castillo vs Uniwide G.R. No. 169725, April 30, 2010)
5. Even ejectment proceedings are suspended (Tyson’s Super Concrete, Inc. vs. Court of Appeals 461 SCRA 69, June 23, 2005)
6. Even if the relationship is one of trust, the stay order is effective on all creditors of the corporation without distinction, either secured or unsecured (Abrera vs. Barza 599 SCRA 534, September 11, 2009)

Commencement Order shall be effective for the duration of the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor-corporation will be successfully rehabilitated (Sec. 2 of FRIA).

Thus, while the corporation is undergoing rehabilitation, all claims, regardless of nature, are suspended from enforcement. However, once the corporation has successfully rehabilitated or finally liquidated, the enforcement of these secured claims takes precedence (Metropolitan Bank and Trust Company vs. Liberty Corrugated Boxes Manufacturing Corporation 815 SCRA 458, January 25, 2017).

However, there are instances or cases enumerated under FRIA (Section 18) where the suspension order will not take effect, these are:

1. To cases on appeal in the Supreme Court at the time of the issuance of the commencement order;
2. The enforcement of claims against sureties and other persons solidarily liable with the debtor and third party/accommodation mortgagors;
3. The sale by licensed brokers or dealers of pledged securities pursuant to a securities pledge or margin agreement and
4. Any criminal action against the individual debtor or owner, partner, director or officer of a debtor;
5. Also, “claims” in case of violation of Batas Pambansa Blg. 22 or the Bouncing Checks Law are also not suspended.

Nevertheless, while not all claims are temporarily stopped by the Stay Order, still, the money claims that are deemed suspended are sufficient to materially organize a plan to readapt or renew the financial system of a corporation for the continuance of its corporate life.

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.

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