court supervised rehabilitation 1 2

Court Supervised Rehabilitation

Prof. Maria Lulu G. Reyes

The case of On the Brink Corporation

On the Brink Corporation (OtBC) • a well-established and

reputable domestic company

• heavily invested on research and development of next generation products

OtBC

Next Generation Products

On the Brink Corporation


• recently announced that it has developed a fuel saving device that can reduce fuel consumption by at least 60% when attached to the car’s engine.

• Registered and patented the same

OtBCOtBC

OtBC



• announcement was supported with various certifications attesting to the effectiveness of the product

• exhaustive laboratory tests have likewise supported the claim of the company

OtBC



1. Liquidity problems• OtBC used almost all of

its resources in developing the product and is now having difficulty meeting its debts and obligations

• Not enough money to manufacture the products

OtBC



2. Threats of foreclosure and garnishment

• its major creditor, Bankable Credit, has initiated the proceedings to foreclose the new machineries and equipment, which OtBC used as security for its loan obligation

• other secured creditors are also threatening to garnish or foreclose other company assets

OtBC



3. Stoppage of work and supplies delivery • suppliers of the materials

needed for producing the product has also withheld delivery and is demanding immediate payment before it resumes delivery.

• Workers have also filed labor cases against OtBC for unpaid benefits and threatened to strike

OtBC



• invention is worth millions of dollars and company has great potentials

• the moment any of the creditors succeeded in enforcing its claim against the corporation, its chance of developing and selling the product becomes difficult, if not impossible.

On the Brink Corporation

OtBC



• What are the options available to OtBC?

OtBC



OtBC can meet with its creditors to

• Ask for time to find white knight investor.

OtBC





• Convince them to restructure existing loan agreements

OtBC






• Invite them to become part owners (i.e. convert loan to equity)

OtBC







Mode 1: Out-of-Court Rehabilitation or Informal Restructuring Agreement or Rehabilitation Plan (OCRA)

OtBC







Mode 1: Out-of-Court Rehabilitation or Informal Restructuring Agreement or Rehabilitation Plan (OCRA)

Mode 2: Pre-Negotiated Rehabilitation

OtBC



OtBC can meet with its creditors to• Ask for time to find

white knight investor.


• invite them to become part owners (i.e. convert loan to equity)

Out-of-Court Rehabilitation or Informal Restructuring Agreement or Rehabilitation Plan (OCRA)

Pre-Negotiated Rehabilitation

Restructuring Agreement/Rehabilitation Plan

OtBC










OtBC


Approval or endorsement of creditors holding at least 2/3 of the total liabilities or the debtor • secured creditors holding more than 50% of the total secured claims

of the debtor • unsecured creditors holding more 50% of the total unsecured claims

of the debtor









OtBC


Approval by the• debtor;• creditors representing at least 67% of the secured obligations of the debtor;• creditors representing at least 75% of the unsecured obligations of the debtor; and,

creditors holding at least 85% of the total liabilities, secured and unsecured, of the debtor; and,

• Publication of the notice of the OCRA


• OtBC met with its creditors to• Ask for time to find




Trade creditors/suppliers agreed to continue to supply materials

✔

OtBC



• OtBC met with its creditors to• Ask for time to

find white knight investor.




Unsecured creditors agreed to convert loan to equity

✔✔

OtBC



• OtBC met with its creditors to• Ask for time to




Bankable Credit refuses to meet with OtBC and pursued foreclosure proceedings.



✔

✔

OtBC



OtBC met with its creditors to• Ask for time to







✔

✔

Mode 3. Court Supervised Rehabilitation

Involuntary Petition

Voluntary Petition

OtBC



OtBC met with its creditors to• Ask for time to







✔

✔

Mode 4. Liquidation

Voluntary Petition

Involuntary Petition

OtBC



Liquidation Proceedings• OtBC can close business and file a petition for

Voluntary Liquidation (Section 90, FRIA)• OtBC can wait for a creditor to file Involuntary

Petition for Liquidation (Section 91, FRIA)

OtBC


The Remedy of Liquidation

• the historical and traditional method of dealing with the insolvency of a corporation.

• ultimate objective is to liquidate asset of debtor to pay its creditors and terminate commercial activities

• tends to be universal in its concept, acceptance and application

OtBC


The Remedy of Liquidation: Process

PetitionOrder of

Liquidation

Appointment of Liquidator

Closure of Business

Termination of corp powers

Gather/preserve/sale of corp

assets

Adjudication of creditors

claims

Distribution of proceeds (applying priority of

claims principles

Dissolution of

Corporation

Economic theory behind liquidation

• in a competitive market economy, an enterprise that is unable to compete has no place in and should be removed from the market place• insolvency is the principal identifying

mark of an uncompetitive enterprise• If business is needed, new investors

will step in to fill the vacuum if insolvent debtor is removed

Legal Theory Behind Liquidation

• liquidation process can only function effectively if it is regarded as a collective process, from the time of its inception up to distribution of assets and dissolution of the debtor

• Only way to ensure an orderly, transparent and predictable distribution of remaining assets of the debtor


Corporate Rehabilitation Proceedings

1. OtBC can file a voluntary petition for Corporate Rehabilitation

2. A creditor can file a petition for Involuntary Corporate Rehabilitation

Economic Theory Behind Rehabilitation Proceedings

• remedy of liquidation is not always appropriate and efficient• corporation with a reasonable prospect of survival

should be given opportunity if it can be demonstrated that there is greater value and greater benefit for creditors in

the long term keeping essential business and other component parts of

a corporation together is more cost efficient than liquidation

• inefficiency is not always the cause of corporate failures in the market place

Legal Justification Behind Rehabilitation Proceedings

• facilitates quick and easy access to remedies that would make rehabilitation feasible

• provides sufficient protection for all those involved in the process

• provides a structure which permits the negotiation of a commercial plan

Legal Justification for Rehabilitation Proceedings

Enables a majority of creditors to bind all other creditors by the democratic exercise of voting rights (cram down);

Provides for judicial or other supervision to ensure that the process is not subject to unfair manipulation or abuse.

Enables the emphasis on the concept of the collective nature of the procedure.

Debt Relief Proceedings: Nature

Collective Procedure• Distinguishes insolvency proceedings from

practically any other legal procedure.• Endeavors to accommodate all of those who are

affected by or have an interest in the insolvent debtor. insolvent debtor directors and shareholders, Secured and unsecured creditors employees, guarantors of the debtor Government etc.

Debt Relief Proceedings: Nature

• all about deciding who to pay, in what order to pay, and how much to pay in an efficient and equitable manner

• efficiency and equity sometimes may be competing policy goals

• the way a country pursues those goals, insolvency law says a lot about the attitudes of its legal system

Development of Philippine Laws and Rules on Corporate Rehab

Insolvency Law (Act No. 1956)

KINDS OF INSOLVENCY

1. Voluntary insolvency—an insolvent debtor owing debts exceeding in amount in the sum of P1000, may apply to be discharged from his debts and liabilities by petition to the RTC of the province or city in which he has resided for 6 months next preceding the filing of the petition

2. Involuntary insolvency—an adjudication of insolvency may be made by the petition of 3 or more creditors, residents of the Philippines, whose credits or demands accrued in the Philippines, for the amount of which credits or demands are in the aggregate of not less than P1000.

Development of Philippine Laws and Rules on Corporate RehabSection 5 of P.D. 902-A, as amended, vested the SEC

with jurisdiction

“"petitions of corporations, partnerships or associations to be declared in a state of suspension of payments in cases where the corporation, partnership or association possess sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to (PD 902-A)."

Development of Philippine Laws and Rules on Corporate RehabIn order to effectively exercise its jurisdiction, SEC is

granted the power to

a. appoint a rehabilitation receiver" and

b. create and appoint a management committee x x x to undertake the management of corporations,

partnerships or associations in appropriate cases when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties or paralyzation of business operations of such corporations or entities which may be prejudicial to the interest of minority stockholders, parties-litigants or the general public.


in addition to proceedings for simple suspension of payments, P.D. 902-A introduced a variation: proceedings for suspension of payments where the petition seeks the appointment of a rehabilitation receiver or management committee.


Rules of Procedure on Corporate Recovery Approved on January 15, 2000 Sought to rationalize the procedure on

corporate rehabilitation and suspension of payments, the Rules explicitly provide for an independent action for rehabilitation, i.e. separate from a proceeding for suspension of payments.


Securities Regulation Code Passed on July 19, 2000 transferred jurisdiction from the SEC to the

regular courts over cases enumerated in Section 5 of P.D. 902-A, and allowed the Supreme Court to designate branches of the appropriate Regional Trial Courts to hear and decide cases of such nature

Development of Philippine Laws and Rules on Corporate RehabInterim Rules on Corporate Rehabilitation

Interim Rules resemble to a large extent the SEC Rules of Procedure on Corporate Recovery

Promulgated by the SC on November 2000 and took effect on December 2000.

SC designated 60 RTCs as commercial courts to hear and decide SEC cases.

Republic Act No.10142 - Financial Rehabilitation and Insolvency Act

Passed by Congress in February 2010

Lapsed into law (not signed by the President)

Applicable to existing proceedings unless court deemed it will cause prejudice

42

Financial Rehabilitation Rules of Procedure (2013)

Promulgated by the SC on August 27, 2013

apply to petitions for rehabilitation of corporations, partnerships, and sole proprietorships.

Rules on Liquidation are currently being drafted by the Rules

43

Financial Rehabilitation and

Insolvency ActFRIA

Declared Policy of FRIA

to encourage debtors and creditors to collectively and realistically resolve and adjust competing claims and property rights.

ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors

maintain certainty and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated.

45

Nature of proceedings under FRIA

Proceedings initiated are considered in rem, summary, and non-adversarial in nature.

Jurisdiction over all persons affected by the proceedings is acquired upon publication of the notice of the commencement of the proceedings in any newspaper of general circulation

proceedings operate against the whole world and the orders issued by rehabilitation court are binding not only upon those parties who appear in such proceedings but also upon parties who were summoned by publication but did not appear

46

Nature of proceedings under FRIA

Rehabilitation proceedings are summary and non‐adversarial in nature, and do not contemplate adjudication of claims that must be threshed out in ordinary court proceedings. Adversarial proceedings similar to that in ordinary courts are inconsistent with the commercial nature of a rehabilitation case. The latter must be resolved quickly and expeditiously for the sake of the corporate debtor, its creditors and other interested parties.

Advent Capital and Finance Corporation v. Alcantara, G.R. No. 183050, 25, January 2012

47

Rehabilitation Proceeding as a Remedy

Rehabilitation is xxx available to a corporation who, while illiquid, has assets that can generate more cash if used in its daily operations than sold. Its liquidity issues can be addressed by a practicable business plan that will generate enough cash to sustain daily operations, has a definite source of financing for its proper and full implementation, and anchored on realistic assumptions and goals.

Wonder Book Corporation v. Philippine Bank of Communications676 SCRA 489 (July 16, 2012)

48

Rehabilitation Proceeding as a Remedy

remedy should be denied to corporations whose insolvency appears to be irreversible and whose sole purpose is to delay enforcement of any of the rights of the creditors, which is rendered obvious by the following: a. the absence of a sound and workable business plan;b. baseless and unexplained assumptions, targets and goals; c. speculative capital infusion or complete lack thereof for

the execution of the business plan;d. cash flow cannot sustain daily operations; and e. negative net worth and the assets are near full

depreciation or fully depreciated.

Wonder Book Corporation v. Philippine Bank of Communications676 SCRA 489 (July 16, 2012)

49

Court Supervised Rehabilitation Proceedings: Initiation of

Petition

Corporate Rehabilitation: Who can initiate court supervised rehabilitation

Two types of court supervised rehabilitation proceedings

1. Voluntary petition – filed by the debtor or group of debtors

2. Involuntary petition – filed by a creditor or group of creditors

Definition of Debtor

A “debtor” is a a. sole proprietorship duly registered with the DTI

b. partnership duly registered with SEC

c. corporation duly organized and existing under Philippine laws

d. individual debtor who has become insolvent as defined herein.

52

Definition of Debtor

The following are excluded from FRIAa. Banks – jurisdiction with BSP;b. Insurance Companies – jurisdiction with Insurance

Commission;c. Pre‐Need Companies – jurisdiction with Insurance

Commission;d. National or Local Government Units

Note that GOCCs and GFIs other than banks are covered by the FRIA unless their specific charter provides otherwise

53


OtBC


NextGen Group of Companies

OtBC


BestHaus

Corp.

GroWithUs

Finance

LINEAR

Devt.Corp

Group of Debtor

A group of debtors may jointly file a petition for rehabilitation when:

a. one or more of its members foresee the impossibility of meeting debts when they respectively fall due;

b. the financial distress would likely adversely affect the financial condition and/or operations of the other members of the group; and/or

c. the participation of the other members of the group is essential under the terms and conditions of the proposed Rehabilitation Plan.

55

Definition of Creditor

A “creditor” is a holder of a claim against the debtor that arose on or before the commencement date.

modifies Finasia Investments and Finance Corporation vs. Court of Appeals insofar as it holds that the term “claims” is limited “to debts or demands of a pecuniary nature” or to an “assertion of a right to have money paid”.

adopts the ruling in the earlier case of Jimenez vs. BF Homes, Inc., et al, (GR No. 76661 [1987]) where the Supreme Court enunciated the principle that “when the law speaks of ‘all claims’ for actions against corporations under management or receivership being suspended, the words ‘all claims’ mean all kinds of claims and is not limited to money claims only”.

56

Definition of Claim under FRIAa claim includes all claims or demands of whatever

nature or character against a debtor or its property, whether for money or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but not limited to; 1. all claims of the government, whether national or local, including

taxes, tariffs and customs duties; and 2. claims against directors and officers of the debtor arising from

acts done in the discharge of their functions falling within the scope of their authority: Provided, That, this inclusion does not prohibit the creditors or third parties from filing cases against the directors and officers acting in their personal capacities .

57

Voluntary Petition for Corporate

Rehabilitation

Voluntary Corporate Rehabilitation: Who can file

If voluntary, petition can be initiated by any of the following:

1. Owner of sole proprietorship

2. majority of the partners3. stockholders

representing 2/3 of outstanding capital stocks or members.

Minimum Allegations: Voluntary Corporate Rehabilitation

1. The debtor is insolvent• it foresees the impossibility of paying its debts as

they fall due in the ordinary course of business, or • its liabilities are greater than its assets

2. The rehabilitation or continuation of operations is economically feasible

3. The creditors can recover, by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated (w/in 120 days from the preparation of the rehabilitation plan)

Minimum Allegations: Voluntary Corporate Rehabilitation

4. Identification of the debtor, its principal activities and its addresses;

5. Statement of the fact of and the cause of the debtor’s insolvency;

6. The specific relief sought pursuant to the FRIA;

7. The grounds upon which the Petition is based;

8. Other information as may be required under the FRIA depending on the form of relief requested;

The following has to be included “as part and parcel of petition”

Voluntary Corporate Rehabilitation: To include “as part and parcel of petition”

a. Tax clearance or evidence of compromise with the BIR;

b. Income tax returns as received by the BIR for the past 2 years prior to filing of the petition;

c. Audited financial statement of the debtor at the end of its last fiscal year;

d. Interim financial statement not earlier than 30 days prior to the date of the filing of the petition duly certified under oath by the appropriate officer;

e. An inventory of all its assets including receivables and claims against third parties;

Voluntary Corporate Rehabilitation: To include “as part and parcel of petition”

f. Schedule of the debtor’s debts and liabilities, including a list of creditors with their addresses, amounts of claims and collaterals, if any;

g. Schedule of payments and disposition for the 1 year prior to the filing of the petition;

h. A Rehabilitation Plan; and

i. The names of at least three (3) nominees to the position of rehabilitation receiver. [Sec. 12, FRIA; FR Rule 2, Sec. 2]

Involuntary Petition for Corporate

Rehabilitation

Involuntary Corporate Rehabilitation: Who can file

Can be initiated by 1. any creditor or 2. group of creditors with a claim of, or the aggregate of whose claims is, at least P 1 M or at least 25% of the subscribed capital stock or partners' contributions, whichever is higher

[Sec. 13, FRIA; FR Rule 2, Sec. 4]

Involuntary Corporate RehabilitationCan be initiated by any creditor or group of creditors if any of the following is present:

1. there is no genuine issue of fact/law on the claim/s of the petitioner/s and that the due and demandable payments thereon have not been made for at least 60 days or

2. the debtor has failed generally to meet its liabilities as they fall due or

3. Another creditor 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

Involuntary Corporate Rehabilitation: Contents of Petition

a. Identification of the debtor, its principal activities and its addresses;

b. Circumstances showing that the conditions precedent to the filing of a Petition for Involuntary Rehabilitation are satisfied;

c. The specific relief sought pursuant to the FRIA;

d. Other information as may be required under the FRIA depending on the form of relief requested;

Involuntary Corporate Rehabilitation: Contents of Petition

f. Exact address at which documents regarding the debtor and the proceedings may be reviewed and copied; and

g. Documents showing there is substantial likelihood that the debtor may be rehabilitated.

h. A Rehabilitation Plan; and

i. The names of at least three (3) nominees to the position of rehabilitation receiver.

Court action on the Petition

70


If sufficient in form and substance, court has to issue Commencement Order within 5 working days from filing of petition.

If notit may either give the petitioner/s a reasonable period of

time within which to amend or supplement the petition, or submit such documents as may be necessary or proper to put the petition in proper order

71


72

PetitionSufficient in form & substance

Commencement Order

(Suspension Order)

Corrective Order

Sufficient in form & substance

5 days Yes

No5 days

Number of days based on court’s discretion

Yes

Hearing is not required for issuance of Commencement Order

Court is not required to conduct a hearing before issuing a Commencement Order that includes a Stay Order (Sections 7 and 8, Rule 2 of the FR Rules)

Pryce Corporation vs. Court of AppealsG.R. No. 172302 (February 4, 2008)

73

Contents of Commencement Order

1. Identity of the debtor, its principal business or activity/ies and its principal place of business;

2. Summary of ground/s for initiating the proceedings;

3. The relief sought

4. The legal effects of the Commencement Order

5. Declaration that the debtor is under rehabilitation

6. Order for the publication of the Commencement Order

7. Order to serve by personal delivery a copy of the petition on each creditor holding at 10% of total liabilities; or the debtor if petition is involuntary.

74

Contents of Commencement Order8. Appointment of a rehabilitation receiver

9. A summary of the requirements and deadlines for creditors to establish their claims against the debtor and direct all creditors to file their claims with the court at least five (5) days before the initial hearing

10. Order to BIR to file and serve on the debtor its comment on or opposition to the petition or its claim/s against the debtor

11. Ordering prohibiting debtor's suppliers of goods or services from withholding the supply of goods and services in the ordinary course of business

12. Order authorizing the payment of administrative expenses as they become due

75

Contents of Commencement Order13. Set the case for initial hearing (not be more than 40 days

from the date of filing of the petition)

14. Make available copies of the petition and rehabilitation plan for examination and copying by any interested party

15. Indicate the location or locations at which documents regarding the debtor and the proceedings under Act may be reviewed and copied;

16. State that any creditor or debtor who is not the petitioner, may submit the name or nominate any other qualified person to the position of rehabilitation receiver at least five (5) days before the initial hearing

17. Issue Stay or Suspension Order

76

Effects of Commencement Order

1. vest the rehabilitation receiver with all the powers and functions (e.g. right to review and obtain records to which the debtor's management and directors have access )

2. Serve as basis for rendering null and void the results of any extrajudicial activity or process to seize property, sell encumbered property, or otherwise attempt to collection or enforce a claim against the debtor

77

Effects of Commencement Order

3. Serve as basis rendering null and void any setoff after the commencement

4. serve as the legal basis for rendering null and void the perfection of any lien against the debtor's property

5. consolidate the resolution of all legal proceedings by and against the debtor to the court

78

Suspension Order

Effects of Stay or Suspension Order1. suspend all actions or proceedings, in court or

otherwise, for the enforcement of claims against the debtor

2. suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor;

3. prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business

4. prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein

80

Not covered by Stay Order

1. cases already pending appeal in the Supreme Court as of commencement date )

2. subject to discretion of court, cases pending or filed at a specialized court or quasi-judicial agency which, upon determination by the court is capable of resolving the claim more quickly, fairly and efficiently than the court

3. enforcement of claims against sureties and other persons solidarily liable with the debtor, and 3rd party or accommodation mortgagors, as well as issuers of letters of credit unless the property subject of the 3rd party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver;

81

Not covered by Stay Order

4. any form of action of clients of a securities market participant to recover or otherwise claim moneys and securities entrusted to the latter in the ordinary course of the latter's business; any action of such securities market participant or the appropriate regulatory agency or self-regulatory organization to pay or settle such claims or liabilities;

5. actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin agreement for the settlement of securities transactions in accordance with the provisions of the Securities Regulation Code and its implementing rules and regulations;

6. clearing and settlement of financial transactions through the facilities of a BSP registered clearing agency

7. any criminal action against individual debtor or owner, partner, director or officer of a debtor

82

Panlilio, et al. vs. RTC, et al. (G.R. NO. 173846, February 2, 2011)

rehabilitation of SIHI and the settlement of claims against the corporation is not a legal ground for the extinction of petitioners’ criminal liabilities.

prosecution of the officers of the corporation has no bearing on the pending rehabilitation of the corporation, especially since they are charged in their individual capacities.

the purpose of the law for the issuance of the stay order is not compromised, since the appointed rehabilitation receiver can still fully discharge his functions as mandated by law.

83

Other legal effects of Suspension or Stay Order

taxes and fees due to the national government and LGUs are considered waived upon issuance of Commencement Order until Rehab plan is approved or petition is dismissed.

Commencement Order and Stay Order apply even to government financial institutions despite provisions in their charter to the contrary

Commencement Order is effective for the duration of the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be successfully rehabilitated

84

Duration and condition for continued effectivity of Commencement Order

Effectivity is for the duration of the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be successfully rehabilitated

Conditions Compliance with the prescribed minimum contents by the

proposed Rehabilitation Plan sufficient monitoring by the rehabilitation receiver of the

debtor's business for creditors’ protectionreasonable attempts of debtor to reach consensus with

creditors on Rehab planabsence of false or misleading statementabsence of acts of misrepresentation or fraud on part

debtorsfavorable endorsement of the plan by the receiver

85

Substantial likelihood of rehabilitation: Factors to consider

Substantial likelihood of successful rehabilitation is determined by:

a. Sufficiency of assets with which to rehabilitate the debtor

b. sufficiency cash flow to maintain the operations of the debtor

c. Good faith on the part of debtorsd. Not a sham petitione. Viability of pursuing rehab plan by debtor

86

Actions to be taken after the issuance of Commencement Order before Initial

Hearing87

Petition

Commencement Order

Establish Preliminary Registry of

Claims

Hear Opposition/ Challenge to claim/s

Submit undisputed

claim/s

W/in 20 days fromassumption into office, Receiver to

30 days

Publish Commencement Order in newspaper of

general circulation

7 days

Filing of Creditors’ claims

Filing of comments by creditors

Initial Hearing

5 days before initial hearing


40 days from the filing of the petition

Debtor to notify each counterparty of the particular contract that is

confirmed; if not confirmed, deemed

terminated

W/in 90 days

Initial Hearing: Purpose

1. Determine the creditors who have made timely and proper filing of their notice of claims Failure to file notice of claim in accordance with Commencement Order

but belatedly file the same is not entitled to participate in the proceedings; but entitled to receive distributions

2. hear and determine any objection to the qualifications of the appointment of the rehabilitation receiver

3. Direct creditors to comment on Petition and Rehab Plan within 20 days

4. Direct Receiver to evaluate financial condition of debtor through a Report within 40 days

88

Actions to be taken after the issuance of Commencement Order

89

Petition

Commencement Order

Establish Preliminary Registry of

Claims

Hear Opposition/ Challenge to claim/s

Submit undisputed

claim/s

W/in 20 days fromassumption into office, Receiver to

30 days

Publish Commencement Order in newspaper of

general circulation

7 days

Filing of Creditors’ claims

Filing of comments by creditors

Initial Hearing

Preliminary Report of Receiver



40 days from the filing of the petition

40 days from the termination of initial hearing

Debtor to notify each counterparty of the particular contract that is

confirmed; if not confirmed, deemed

terminated

W/in 90 days

Report of Receiver: Contents

a. Whether debtor is insolvent – causes thereof and any unlawful or irregular act/s by the debtor

b. Feasibility and reasonableness of underlying assumptions, financial goals and procedures

c. Substantially likelihood of successful rehabilitation

d. Whether petition should be dismissed

e. Whether debtor should be dissolved and/or liquidated.

90

Siochi Fishery Enterprises, Inc., vs. BPI (G.R. NO. 193872, October 19, 2011

The most glaring procedural infirmity committed by rehab court is its failure to petition for rehabilitation and Rehabilitation Plan to the rehabilitation receiver despite the explicit and clear mandate of the Interim Rules that if the court is satisfied that there is merit in the petition, it shall give due course to the petition and “immediately” refer the same and its annexes to the rehabilitation receiver x x x

his recommendation bears much weight as it is one of the factors which must be considered by the court if it were to approve the rehabilitation plan

Court made an unwarranted procedural shortcut as its finding that there was merit in respondent corporations’ petition for rehabilitation was made in the same Order approving Rehabilitation Plan.

91

Action on the Petition

92

Petition

Commencement Order

Initial Hearing

Give due course to the Petition

Dismiss the Petition

Convert Proceeding to

Liquidation

Receivers Report

10 days from receipt of Receiver’s Report

Action on the Petition

Within 10 days from receipt of Receiver’s Report1. Give due course to the petition

Debtor is insolventSubstantial likelihood of successful rehabilitation

2. Dismiss the petitionDebtor is not insolventPetition is a sham intended to delay enforcement of creditors’ rightsThere are misleading statements or material misrepresentation in the

petition or attachmentsDebtor has committed acts of misrepresentation or in fraud of

creditors

3. Convert proceedings into Liquidation ifDebtor is insolventNo substantial likelihood of substantial rehabilitation

93

Action on the Petition: Dismissal

If Petition is dismissed because of intent to defraud, court in its discretion may order payment of damages to any creditor or to any person who may have been injured by such filing.

94

Action on the Petition : Given Due Course

Direct Receiver to review, revise and/or recommend action on the Rehab plan and submit the same or a new one within 90 days.

Refer any dispute on rehab plan or proceedings to ADR for a quick, efficient and fair resolution.

95

Action on the Petition96

Petition

Commencement Order

Initial Hearing



Petition

Commencement Order

Initial Hearing


Receiver to Review/Revise/Modify/Replace

Rehabilitation Plan

If there are disputes, refer to

ADRwithin 90 days

Rehab Receiver, Management Committee and Creditors’ Committee

Natural or juridical person may serve as rehab receiver

If juridical person, a natural person possessing all the qualifications and none of the disqualifications must be designated

Liability of rehab receiver (i.e. corporation) and its representatives are solidary

98

Rehab Receiver : Qualifications

Philippine citizen or resident

Good moral character, with integrity, impartiality and independence

Has the requisite knowledge of insolvency and relevant laws and trainings/experience to enable to him to discharge his duties and obligations

No conflict of interest unless waived by those affected

Other qualifications that may be set by the SC later

99

Rehabilitation Receiver

May or may not be be from the nominees of the rehab plan

Creditor or debtor may nominate other person during the initial hearing

Court may appoint creditors’ nominee if supported by more than 50% of the secured and general unsecured creditors.

If debtor is a securities market participant, court has to give priority the nominee of the appropriate securities or investor protection fund.

100

Rehab Receiver, Management Committee and Creditors’ Committee

Rehabilitation Receiver : Power and Duties

1. preserve and maximize value of debtor’s assets during proceedings

2. Determine viability of rehabilitation of debtor

3. Prepare and recommend Rehab Plan to the court

a. Verify accuracy of factual allegations in petition and annexes

b. Verify and correct inventory of all assets and valuation

c. Verify and correct schedule of debts and liabilities

d. Evaluate validity, genuineness and true amount of all claims

e. Take possession, custody and control and preserve value of all assets

101



f. Sue and recover, with court’s approval, of all amounts owed to debtor

g. Have access to all needed information re operation and business of debtor

h. Recover fraudulent conveyances, transfers, payments and disbursements

i. Monitor operations and business of debtor to ensure that all payments and transfer of properties are in ordinary course of business.

102



j. Determine best way to rehabilitate debtor

k. Revise, modify or recommend action on Rehab plan and recommend action on the same

l. assume and exercise the powers of management of the debtor

m. other powers as may, from time to time, be conferred upon him by the court

n. submit a status report on the rehabilitation proceedings every quarter or as may be required

103



NOTE: unless appointed by the court, Receiver is not take over management and control of the debtor; only recommend appointment of management committee for specific reasons.

104

Rehabilitation Receiver : Grounds for Removal

Incompetence, gross negligence, failure to perform or failure to exercise the proper degree of care in the performance of his duties and powers

Lack of a particular or specialized competency required by the specific case

Illegal acts or conduct in the performance of his duties and powers

Lack of qualification or presence of any disqualification Conflict of interest that arises after his appointment; and Manifest lack of independence that is detrimental to the

general body of the stakeholders.

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Rehabilitation Receiver : Compensation

entitled to compensation for reasonable fees and expenses from the debtor according to the terms approved by the court after notice and hearing Includes expenses of direct employees and independent

contractors

Prior to hearing, be entitled to reasonable compensation based on quantum meruit

costs shall be considered administrative expenses.

shall take an oath and file a bond, in such amount to be fixed by the court, conditioned upon the faithful and proper discharge of his powers, duties and responsibilities.

106

Rehabilitation Receiver : Factors for Determining Compensation

1. the size of the debtor under rehabilitation;

2. the time to be spent on such services;

3. the credentials, experience, skills and reputation of the receiver, his direct employees or independent contractors;

4. the benefits accruing to the debtor;

5. the complexity, importance, urgency, and nature of the problems, issues, or tasks addressed; and

6. the customary compensation charged by comparably skilled practitioners in other rehabilitation cases.

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Displacement of Existing Management

court may appoint and direct the rehabilitation receiver to assume the powers of management of the debtor, or appoint a management committee that will undertake the management of the debtor.

a. Actual or imminent danger of dissipation, loss, wastage or destruction of the debtor’s assets or other properties

b. Paralyzation of the business operations of the debtor

c. Gross mismanagement of the debtor or fraud or other wrongful conduct on the part of, or gross or willful violation of this Act by existing management of the debtor

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Hearing required for creation of Management Committee

The creation of a management committee without first conducting an evidentiary hearing for the purpose is an egregious error that amounts to bad faith, leading to the conclusion of gross ignorance of the law, as charged.

In rehabilitation proceedings, the parties must first be given an opportunity to prove (or disprove) the existence of an imminent danger of dissipation, loss, wastage or destruction of the debtor-company’s assets and properties that are or may be prejudicial to the interest of minority stockholders, parties-litigants or the general public.

the rehabilitation court should hear both sides, allow them to present proof and conscientiously deliberate, based on their submissions, on whether the appointment of a management receiver is justified.

(Lorenzana vs. Austria, A.M. No. RTJ-09-2200 (April 2, 2014)

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Procedure for creation of Management Committee

1st member shall be nominated by the debtor; in case the debtor fails, the court shall appoint the first member;

2nd member shall be nominated by the creditor/s holding more than fifty percent (50%) of the total obligations of the debtor; in case the creditors fail, the court shall appoint the second member; and

the third member, who shall act as chairman of the management committee, shall be nominated by the first and second members within 10 days from the appointment.

In case of disagreement between the first and second members, or failure to nominate, the court shall appoint the third member.

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Role of Management Committee

takes the place of the management and the governing body of the debtor and assume their rights and responsibilities Specific powers and duties are prescribed by

Section 33 of the Rules

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Powers of Management Committee

1. to investigate the acts, conduct, properties, liabilities, and financial condition of the corporation, association or partnership under management;

2. to examine under oath the directors and officers of the entity and any other witnesses that the committee may deem appropriate;

3. to report to the court any ascertained fact pertaining to the causes of the problems, fraud, misconduct, mismanagement and irregularities committed by any other person;

4. to use the services of or employ such person or persons, such as lawyers, accountants, auditors, appraisers and staff as are necessary to perform its functions and duties as management committee;

5. to report to the court any material adverse change in the business of the entity under management;

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1. to investigate the acts, conduct, properties, liabilities, and financial condition of the debtor

2. to examine under oath the directors and officers of the debtor

3. to report to the court any ascertained fact pertaining to the causes of the problems, fraud, misconduct, mismanagement and irregularities committed by any other person;

4. to use the services of or employ such person or persons as are necessary to perform its functions and duties as management committee;

5. to report to the court any material adverse change in the business of the entity under management;

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6. to evaluate the existing equity, capital, assets and liabilities, earnings and operations of the entity under management;

7. to determine and recommend to the court the best way to salvage and protect the interest of the creditors, stockholders and the general public, including the rehabilitation of the entity under management;

8. to prohibit and report to the court any encumbrance, transfer, or disposition of the debtor's property outside of the ordinary course of business or beyond what is allowed by the court;

9. to prohibit and report to the court payments made outside the ordinary course of business;

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10. to have unlimited access to the employees, premises, hooks, records and financial documents of the entity under management during business hours;

11. to inspect, copy, photocopy or photograph any document, paper, book, account or letter, whether in the possession of the entity or other persons, that pertain to the business of the debtor;

12. to gain entry into any property owned by the entity under management for the purposes of inspecting, measuring, surveying, or taking photos or videos of any designated relevant object or operation thereon;

13. to bring to the attention of the court any material change affecting the entity's ability to meet its obligations;

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14. to take the appropriate steps to modify, nullify or revoke transactions coming to its knowledge which it deems detrimental or prejudicial to the interest of the entity under management;

15. to recommend the termination of the proceedings and the dissolution of the entity if it determines that the continuance in business of such entity will no longer work to the best interest of the stakeholders and creditors, in accordance with the purposes of the Act;

16. to apply to the court for any order or directive that it may deem necessary or desirable to aid it in the exercise of its powers and performance of its duties and functions, including the power to examine parties and witnesses under oath; and

17. to exercise such other powers as the court may, from time to time confer upon it.

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Conflicts of Interest

If a creditor, owner, partner or stockholder of the debtor

If engaged in a line of business which competes with that of the debtor;

If within five (5) years from the filing of the petition, was a director, officer, owner, partner or employee of the debtor or any of the creditors, or the auditor or accountant of the debtor

If within two (2) years from the filing of the petition, was an underwriter of the outstanding securities of the debtor

117

Conflicts of Interest

related by consanguinity or affinity within the fourth civil degree to any individual creditor, owners of a sale proprietorship-debtor, partners of a partnership- debtor or to any stockholder, director, officer, employee or underwriter of a corporation-debtor

If with any other direct or indirect material interest in the debtor or any of the creditors.

118

Creditors’ Committee

creditors belonging to a class may formally organize a committee among themselves Secured creditors, unsecured creditors, trade creditors and

suppliers and debtor’s employees

Receiver must attend meeting for this purpose

Role is to assist the rehabilitation receiver in communicating with the creditors and shall be the primary liaison between the rehabilitation receiver and the creditors. cannot exercise or waive any right or give any consent on behalf of

any creditor unless specifically authorized in writing by such creditor.

119

Determination of Claims

Receiver has to establish a preliminary registry of claims within 20 days from assumption into officeHas to be made available for public inspection

after publication notice to the debtor, creditors and stakeholders on where and when they may inspect it

Ensure that all claims in the register are supported by sufficient evidence.

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Within 30 days, debtor, creditors, stakeholders and other interested parties has to submit a challenge to claim/s to the court, serving a certified copy on the rehabilitation receiver and the creditor holding the challenged claim.Thereafter, receiver has to submit to the court the

registry of claims which shall include undisputed claims that have not been subject to challenge.

Receiver’s decision regarding a claim is appealable to the court.

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Within 30 days, debtor, creditors, stakeholders and other interested parties has to submit a challenge to claim/s to the court, serving a certified copy on the rehabilitation receiver and the creditor holding the challenged claim.

Thereafter, receiver has to submit to the court the registry of claims which shall include undisputed claims that have not been subject to challenge.

Receiver’s decision regarding a claim is appealable to the court.

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Treatment of Secured Creditors

issuance of the Commencement Order and the Suspension or Stay Order does not in any way to diminish or impair the security or lien of a secured creditor, or the value of his lien or security.1. except that his right to enforce said security or lien may

be suspended during the term of the Stay Order.

2. a secured creditor may be allowed to enforce his security or lien, or foreclose upon property of the debtor securing his/its claim, if the said property is not necessary for the rehabilitation of the debtor.

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Lack of Adequate Protection

court may, on motion or motu proprio, terminate, modify, or set conditions for the continuance of the Stay Order, or relieve a claim from the coverage thereof upon showing that a creditor does not have adequate protection over

property securing its claim; or the value of a claim secured by a lien on property

which is not necessary for rehabilitation of the debtor exceeds the fair market value of the said property.

124

Lack of Adequate Protection

A secured creditor lacks adequate protection if it can be shown that:

the debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured;

the debtor fails or refuses to take commercially reasonably steps to maintain the property; or

the property has depreciated to an extent that the creditor is undersecured

125

Remedy of Creditor that Lacks Adequate Protection

Upon showing of a lack of adequate protection, the court shall order the rehabilitation receiver to

make arrangements to provide for the insurance or maintenance of the property,

make payments or otherwise provide additional or replacement security such that the obligation is fully secured.

126

Remedy of Creditor that Lacks Adequate Protection

Upon showing of a lack of adequate protection, the court shall order the rehabilitation receiver to make arrangements to provide for the insurance or maintenance of the property; or to make payments or otherwise provide additional or replacement security such that the obligation is fully secured

If not feasible, modify Stay Order to allow the secured creditor lacking adequate protection to enforce its claim against the debtor unless such remedies would prevent the continuation of the debtor as a going concern or otherwise prevent the approval and implementation of a rehabilitation plan.

127

Content of a Rehabilitation Plan

1. specify the underlying assumptions, the financial goals and the procedures proposed to accomplish such goals

2. compare the amounts expected to be received by the creditors under the Rehabilitation Plan with those that they will receive if liquidation ensues within the next 120 days

3. contain information sufficient to give the various classes of creditors a reasonable basis for determining whether supporting the Plan is in their financial interest

4. establish classes of voting creditors

5. establish subclasses of voting creditors if prior approval has been granted by the court

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6. specify the treatment of each class or subclass described in subsections (d) and (e);

7. provide for equal treatment of all claims within the same class or subclass, unless a particular creditor voluntarily agrees to less favorable treatment;

8. ensure that the payments made under the plan follow the priority established under the provisions of the Civil Code on concurrence and preference of credits and other applicable laws;

9. maintain the security interest of secured creditors and preserve the liquidation value of the security unless such has been waived or modified voluntarily;

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10. disclose all payments to creditors for pre-commencement debts made during the proceedings and the justifications thereof;

11. describe the disputed claims and the provisioning of funds to account for appropriate payments should the claim be ruled valid or its amount adjusted;

12. identify the debtor's role in the implementation of the Plan;

13. state any rehabilitation covenants of the debtor, the breach of which shall be considered a material breach of the Plan;

14. identify those responsible for the future management of the debtor and the supervision and implementation of the Plan, their affiliation with the debtor and their remuneration;

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Contents of a Rehabilitation Plan

15. state any rehabilitation covenants of the debtor, the breach of which shall be considered a material breach of the Plan;

16. identify those responsible for the future management of the debtor and the supervision and implementation of the Plan, their affiliation with the debtor and their remuneration;

17. address the treatment of claims arising after the confirmation of the Rehabilitation Plan;

18. require the debtor and its counter-parties to adhere to the terms of all contracts that the debtor has chosen to confirm

19. arrange for the payment of all outstanding administrative expenses as a condition to the Plan's approval unless such condition has been waived in writing by the creditors concerned;

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Contents of a Rehabilitation Plan

20. arrange for the payment of all outstanding taxes and assessments, or an adjusted amount pursuant to a compromise settlement with the BlR or other applicable tax authorities;

21. include a certified copy of a certificate of tax clearance or evidence of a compromise settlement with the BIR;

22. include a valid and binding r(,solution of a meeting of the debtor's stockholders to increase the shares by the required amount in cases where the Plan contemplates an additional issuance of shares by the debtor;

23. state the compensation and status, if any, of the rehabilitation receiver after the approval of the Plan; and

24. contain provisions for conciliation and/or mediation as a prerequisite to court assistance or intervention in the event of any disagreement in the interpretation or implementation of the Rehabilitation Plan.

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Approval by Creditor

Receiver has to notice creditors and stakeholders that Plan is ready for examination

Within 20 days, convene creditors for purpose of voting on plan’s approvaldeemed rejected unless approved by all classes of creditors

whose rights are adversely modified or affected by the Plan if members of the said class holding more 50% of the total

claims of the said class vote in favor of the Plan based solely on the amount of their respective claims

based on the registry of claims

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Petition

Commencement Order

Initial Hearing


Receiver to Review/Revise/Modify/Replace

Rehabilitation Plan

If there are disputes, refer to

ADRwithin 90 days

Present to Creditors for Approval


Petition

Commencement Order

Initial Hearing


Present to Creditors for

Approval

ApprovedRejected Implementation

Cramdown

Liquidation

Hearing of objections

Despite rejection, court can still approve if:

1. Rehabilitation Plan complies with all the requirements of FRIA

2. rehabilitation receiver recommends the confirmation

3. shareholders, owners or partners of the juridical debtor lose at least their controlling interest as a result of the Rehabilitation Plan

4. Rehabilitation Plan would likely provide the objecting class of creditors with compensation which has a net present value greater than that which they would have received if the debtor were under liquidation

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When to deny remedy of rehabilitation(Wonder Book vs. PBCOM (G.R. No. 187316 Jan 16, 2012

If insolvency appears to be irreversible and whose sole purpose is to delay the enforcement of any of the rights of the creditor rendered obvious by the following:

1. the absence of a sound and workable business plan;

2. baseless and unexplained assumptions, targets and goals;

3. speculative capital infusion or complete lack thereof for the execution of the business plan;

4. cash flow cannot sustain daily operations; and

5. negative net worth and the assets are near full depreciation or fully depreciated.

137

Sole Grounds for Objection to a Plan

1. creditors' support was induced by fraud

2. documents or data relied upon in the Rehabilitation Plan are materially false or misleading

3. Rehabilitation Plan is in fact not supported by the voting creditors

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Hearing on the Objections

Objections must be made during the relevant period

Court issues order setting time and date for the hearing of objections

If objection is meritorious, court can eitherOrder Receiver to cure the defect, if feasible orIf court determines that debtor acted in bad faith, or that it

is not feasible to cure the defect, convert the proceedings into one for the liquidation.

139

Confirmation of Rehab Plan

Issued ifno objections are filed within the relevant period Even with objections, they lack merit or basis has

been cured

Court may confirm Rehab plan notwithstanding unresolved disputes over claims if the Rehabilitation Plan has made adequate provisions for paying such claims.

140

Termination of Proceedings

Successful implementation

Failure of rehabilitationDismissal of the petition by the court debtor fails to submit a Rehabilitation Plan Even with rehab plan, there is no substantial

likelihood that the debtor can be rehabilitated within a reasonable period commission of fraud in securing the approval of the Rehabilitation Plan or its amendment

Analogous circumstances.

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Termination of Proceedings: Failure to complete rehab proceeding within 1 year

the RTC erred in giving due course to the petitioner’s action. utterly disregarded the Rules on Corp Rehabn in the guise of liberal

construction and granted the petition for rehabilitation based on insufficient evidence.

NBC inventory did not mention the condition of its listed assets and merely enumerated certain real properties and their respective sizes and market values.

Rehab court should have dismissed the petition as it had not approved any rehabilitation plan within the period specified by law.

when petitioner declined to comply with the simpler rules of rehabilitation, when the documentation of its assets were inadequate, and the when the creditors’ opposition offered insurmountable basis for shelving the entire effort. . . obviously, its continued operation would no longer be viable.

(North Bulacan Corporation vs. PBCOM, G.R. No. 183140, August 2, 2010)

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Petition

Commencement Order

Initial Hearing


Presentation of Rehab Plan to Creditors

Approval

Implementation

SuccessfulRestoredLiquidation

Failure

Effects of Confirmation of Rehab Plan

binding upon all affected parties – debtor, creditors – whether they participated in the proceedings or opposed the Plan or whether or not their claims have been scheduled.

Debtor has to carry out the plan

Payments shall be made according to the provisions of the Rehab Plan

Contracts and other arrangements between the debtor and its creditors to be interpreted as continuing to apply to the extent that they do not conflict with the provisions of the Rehabilitation Plan

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Effects of Confirmation of Rehab Plan

compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on creditors regardless of whether or not the Plan is successfully implement; and

claims arising after approval of the Plan that are otherwise not treated by the Plan are not subject to any Suspension Order.

145

Remedies when rehab plan is approved

Motion to dismiss in the SC is not appropriate when rehab plan has already been approved by rehabilitation court and in fact already being implemented.

BPI vs. Shemberg Biotech Corporation, G.R. No. 162291, August 11, 2010

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Proper Mode of Appeal

proper mode of appeal is through a petition for certiorari to the Court of Appeals under Rule 65 of the Rules of Court within fifteen (15) days from notice of the decision or order, based on Section 2, Rule 6, FR Rules modifying the Court’s ruling in New Frontier Sugar Corporation v. RTC, Branch 39, Iloilo City which previously held that the proper mode of appeal in cases of corporate rehabilitation is through a petition for review under Rule 43 of the Rules of Court to be filed within fifteen (15) days from notice of the decision or final order of the RTC.

China Banking Corporation vs. Cebu Printing and Packaging Corporation, G.R. No. 172880, August 11, 2010

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Liquidation vs. Corporate Rehabilitation

• all about deciding who to pay, in what order to pay, and how much to pay in an efficient and equitable manner

• efficiency and equity sometimes may be competing policy goals

• the way a country pursues those goals, insolvency law says a lot about the attitudes of its legal system

The Pro Debtor – Pro Creditor Continuum

• Different countries implement the doctrines differently.

• how pro-debtor or pro-creditor is the country’s bankruptcy regime?

• a pro-debtor regime encourages entrepreneurial risk-taking.

• a pro-creditor regime encourages the provision of liquidity to business.


What is a “pro-debtor” regime?

• one that dwells on increasing the size of the debtor’s estate by destroying creditor rights.

• every effort is made to maximize the value of the debtor’s assets for ultimate distribution to creditors.

• debtors and their employees ought to be saved, and if need be, all creditors ought to contribute to this rescue.


What is a “pro-creditor” regime?

• connotes that creditors ought to be able to avoid losses that result from the default of a debtor.

• allows creditors to avail themselves of protection through security interests and set-offs.

• allows a wide class of third party owners to claim their property held by the bankrupt ahead of other creditors.


• operating at either extreme on the continuum is problematic.

• credit may be hard to come by for many firms in a pro-debtor regime, simply because lending institutions fear the all-too-favorable rules for debtors.

• rules that are skewed too far in favor of creditors hardly create an environment friendly for entrepreneurs.


1 2 3 4 5 6 7 8 9 10

Hong Kong and Singapore

Australia, England, and Ireland

Germany, Netherlands, Sweden, Switzerland

Japan, Korea, New Zealand, Norway, and Scotland

Canada and the United States

Austria, Denmark, and South Africa

Italy

Greece, Portugal, Spain, and most Latin America countries

Belgium and Luxembourg

France

Most Pro-Creditor

Most Pro-Debtor