In 2014, the World Bank reported the Philippines as one of the countries with the most improved efficiency of insolvency proceedings for 2012-13, which was largely attributable to the passing of Republic Act No 10142, the “Financial Rehabilitation and Insolvency Act of 2010” (FRIA).
In the World Bank’s 2019 Doing Business report, the Philippines ranked 63rd of 190 countries under the “Resolving Insolvency” category, for addressing insolvency issues through judicial proceedings. It has been reported that the Philippines scored 14 out of 16 on the strength of the insolvency framework, indicating a strong legal framework.
Republic Act No 11232, the “Revised Corporation Code” (RCC), which took effect in February 2019, introduced the “one-person corporation”, or single stockholder corporations. This new development impacts, to a certain extent, the remedies of individual insolvent debtors in insolvency proceedings. Although a corporation has a separate juridical personality from its stockholders, the necessary consequence of recognising one-person corporations is effectively allowing an individual, insolvent debtor, with respect to its assets and liabilities used by the corporation, to file rehabilitation and liquidation proceedings through the corporation. Under the FRIA, an individual may file a petition to be declared in a state of suspension of payments, or undergo voluntary or involuntary liquidation, as opposed to rehabilitation and liquidation of juridical debtors.
The restructuring and insolvency markets have not recently experienced changes in financing or restructuring strategies, or changes in distressed debt investing, debt trading and/or distressed M&A transactions.
The FRIA generally governs proceedings for the rehabilitation and/or liquidation of insolvent debtors.
However, the FRIA is not applicable to banks, insurance and pre-need companies, which are governed by the Republic Act No 7653, the "New Central Bank Act” (NCBA), the Republic Act No 10607, the "Insurance Code", and the Republic Act No 9829, the "Pre-Need Code”, respectively, and government agencies or units (FRIA, Section 5).
Rehabilitation proceedings may be:
Liquidation may be initiated by either the debtor or any of its creditors. An individual debtor may also apply for suspension of payments if they have sufficient property but foresees the impossibility of meeting their debts as they fall due.
During rehabilitation proceedings, the court may order the conversion to liquidation proceedings upon finding that there is no substantial likelihood that the debtor will be successfully rehabilitated, or if the rehabilitation plan is not confirmed within one year from the filing of the petition for rehabilitation (FRIA, Sections 92, 25(c), 72 and 75).
Currently, there are no Philippine Laws on mandatory insolvency proceedings.
See 2.3 Obligation to Commence Formal Insolvency Proceedings.
Any creditor or group of creditors with an aggregate claim of at least PHP1 million, or at least 25% of the subscribed capital stock or partners’ contributions, whichever is higher, may initiate involuntary rehabilitation proceedings against the debtor by filing a petition for rehabilitation in court, provided that there is no genuine issue of fact or law on the claim(s) and that the due and demandable payments have not been made for at least 60 days, that the debtor has generally failed to meet its liabilities, or a creditor, other than the petitioning creditor(s), has initiated foreclosure proceedings on properties rendering the debtor insolvent (FRIA, Section 13).
The involuntary liquidation of a juridical debtor may be initiated by at least three creditors with an aggregate claim of at least PHP1 million, or at least 25% of the subscribed capital stock or partnership contributions of the debtor, whichever is higher, by filing a petition for liquidation of the debtor in court, provided there is no genuine issue of fact or law on the claim(s), the due and demandable payments have not been made for at least 180 days, or the debtor has generally failed to meet its liabilities and there is a substantial likelihood rehabilitation will be unsuccessful (FRIA, Section 91).
At any time during the pendency of, or after, a court-supervised or pre-negotiated rehabilitation proceeding, three or more creditors meeting the same criteria above can initiate liquidation proceedings by filing a motion in the same court where the rehabilitation proceedings are pending (FRIA, Section 91).
Further, involuntary liquidation against an individual debtor may be commenced by any creditor(s) with an aggregate claim of at least PHP500,000 by filing a petition for liquidation. The petition shall set forth at least one act of insolvency under Section 105 of the FRIA.
The remedies under the FRIA become available upon insolvency, where the debtor is generally financially unable to pay its liabilities as they fall due in the ordinary course of business, or when liabilities are greater than its assets.
Restructuring and insolvency of banks and quasi-banks (collectively, “banks”) are governed by the NCBA. In case the Monetary Board (MB) of the Bangko Sentral ng Pilipinas finds that a bank is continuously unable or unwilling to maintain a condition of liquidity adequate to protect the interests of depositors and creditors, it may appoint a conservator to take charge of the assets, liabilities and management, and exercise powers to restore viability. Conservatorship shall not exceed one year, and shall be terminated if the MB is satisfied that the bank can continue to operate on its own and conservatorship is no longer necessary. If the continuation of business would result in probable losses to its depositors or creditors, the MB may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation (PDIC) as receiver and direct the PDIC to proceed with the liquidation of the closed bank (NCBA, Sections 29 and 30, as amended).
In the case of insolvency of insurance companies or when continuance would be hazardous to policyholders and creditors, the Insurance Commissioner (“Commissioner”) shall order the company to cease and desist from doing business and designate a receiver to take charge of the assets and liabilities, and administer the same for the benefit of policyholders and creditors. The Commissioner shall then determine within 90 days whether the insurance company may be reorganised or otherwise placed in such condition so that it may be permitted to resume business with safety to its policyholders and creditors. Otherwise, the Commissioner shall order the liquidation, approve a liquidation plan to be immediately implemented, and appoint a liquidator (Insurance Code, Section 256, as amended).
For Pre-Need Companies, whenever a pre-need company is insolvent, or that its continuance would be hazardous to its plan holders and creditors, the Commissioner shall order the company to cease and desist from transacting business and shall designate a receiver to take charge of its trust fund, assets and liabilities, collect all moneys and debts due, and exercise all powers necessary for these purposes. The Commissioner shall determine within 30 days whether the pre-need company may be reorganised or permitted to resume business. If the Commissioner determines that the pre-need company is insolvent, it shall order its liquidation (Pre-Need Code, Section 50).
Financial institutions are generally open to enter into debt restructuring agreements with its debtors, especially those with good credit history. These agreements are typically negotiated and executed without court intervention, in the interest of expediency. Debt restructuring agreements are typically on a single creditor-to-debtor basis.
Philippine Laws generally encourage parties to settle their disputes amicably and voluntarily. However, the FRIA does not require prior mandatory restructuring negotiations before commencement of rehabilitation or insolvency proceedings.
An OCRA should be approved by the debtor, creditors representing at least 67% of the secured obligations and 75% of the unsecured obligations of the debtor, and creditors representing at least 85% of the total liabilities of the debtor (FRIA, Section 84).
A standstill period may be agreed upon by the parties pending negotiation and finalisation of the OCRA and shall be effective and enforceable not only against the contracting parties but also against other creditors, provided that the agreement is approved by creditors representing more than 50% of the total liabilities of the debtor, notice thereof is published, and that the standstill period does not exceed 120 days. The notice must invite creditors to participate in the negotiation for OCRA and notify them that said agreement will be binding on all creditors if the required majority votes in the preceding paragraph are met (FRIA, Section 85).
An approved OCRA has the same legal effects as a confirmed in court-supervised rehabilitation proceedings, the debtor being bound to comply with its provisions (FRIA, Sections 69 and 85).
Out-of-court restructuring generally does not require the appointment of steering committees.
Any amendment or modification to an OCRA must be made in accordance with the terms of the agreement and with due notice to all creditors (FRIA, Section 87).
New money may be injected through additional stock subscriptions by existing shareholders, stock subscriptions by third parties with corresponding increase in the authorised capital stock of the debtor, or “white knights” who invest in the debtor and acquire an interest through stock subscriptions or other property exchanges.
The creation of super priority liens in favour of new money investors is not typical, considering that prior security interests in specific properties of the debtor acquire priority in right regardless of subsequent encumbrances.
Customers of securities market participants or investors who purchase shares in the capital market have absolute priority over all other claims of whatever nature and kind insofar as trade-related assets of the debtor are concerned (FRIA, Section 136). Thus, white knights that purchase shares of insolvent debtors through the stock exchange enjoy such super priority.
Both the notice regarding the standstill period and rehabilitation plan are required to be published in a newspaper of general circulation, which serves as notice to all creditors of the debtor (FRIA, Sections 85-86).
As stated above, an OCRA will be approved provided that the required number of votes is met, see 3.3 New Money.
A dissenting creditor is not precluded from seeking court action, but the implementation of the OCRA shall not be stayed unless injunctive relief is secured from the Court of Appeals (FRIA, Section 88).
Creditor-approved OCRA results in a “cramdown effect”, which binds creditors regardless of their participation in the negotiation (FRIA, Sections 86 and 69). It is not unusual, however, for dissenting creditors to surface, in which case, a court order addressed to the dissenting creditors stating the cramdown effect may be obtained (FRIA, Section 89; Rule 4, Section 9 of AM No 12-12-11-SC, the “Financial Rehabilitation Rules of the Procedure”, “FRIA Rules”)
Secured creditors may obtain security in the form of real estate (immovable) or chattel (movable) mortgage. Creditors may, alternatively, require pledge of tangible or intangible assets, suretyship, guaranty, or antichresis.
Secured creditors have the option to either claim the security for the loan, through foreclosure, or alternatively, to file an ordinary action for collection before the courts (Sycamore Ventures Corporation vs Metropolitan Bank and Trust Co, GR No 173183, 18 November 2013).
During court-supervised rehabilitation, a secured creditor’s security interest is generally subject to stays or deferrals (FRIA, Section 60). Nevertheless, secured creditors may still enforce their claims against other persons solidarily liable with the debtor, including accommodation mortgagors, unless the property is necessary for the rehabilitation of the debtor; and issuers of letters of credit (FRIA, Section 18).
Secured creditors may file their opposition to the petition for rehabilitation, vote against the approval of, and/or file their objections to, the rehabilitation plan. Nevertheless, the court has the ultimate authority to decide if the debtor will undergo rehabilitation.
In court-supervised liquidation, the Liquidation Order to be issued generally does not affect the right of secured creditors to enforce their lien or foreclose on the property. However, secured creditors may choose to waive their rights under the security or lien and instead, prove their claims in the liquidation proceedings and share in the distribution of assets (FRIA, Section 114).
Secured creditors may vote for or against the appointment of a Liquidator, provided that they have filed their claims (FRIA, Section 115). They may also oppose or challenge the preliminary registry of claims prepared by the liquidator (FRIA, Sections 123 and 125).
As stated above, claims of secured creditors are subject to a stay order in court-supervised rehabilitation (see 4.2 Rights and Remedies). Full payment of secured claims varies from case to case, depending on the difficulty of the rehabilitation case and the timelines in the approved rehabilitation plan. Notably, FRIA does not impose a time limit within which successful rehabilitation must be attained.
In court-supervised liquidation, secured creditors are generally not prevented from enforcing their lien or foreclosing on the property of the debtor, making collection faster (FRIA, Section 114).
Philippine Laws currently do not provide special procedures applicable to foreign secured creditors. However, Philippine Laws restrict ownership of private lands to Filipino citizens, corporations or associations whose capital is at least 60% Filipino-owned.
In court-supervised rehabilitation, the security or lien of a secured creditor shall not be diminished or impaired (FRIA, Section 60). With respect to court-supervised liquidation, the Liquidation Order does not affect the right of secured creditors to enforce their lien (FRIA, Section 114).
FRIA requires both Rehabilitation and the Liquidation Plan to ensure that payments made follow the rules on concurrence and preference of credits established in the Civil Code (FRIA, Sections 62 and 133).
When there is concurrence of credit, such that the properties of the debtor are simultaneously subject to the claims of several creditors, no special rules apply to the payment of claims if the assets are sufficient. The rules on preference of credit apply when the assets of the debtor are insufficient to fully pay all claims (Metropolitan Bank and Trust Company vs SF Naguiat Enterprises, GR No 178407, 18 March 2015).
The rules on preference of credit recognise the superiority of certain credits, and provide that these preferred credits be first satisfied before payment of ordinary credits. It confers a right to first preference in the discharge of the debtor’s assets (Development Bank of the Philippines vs National Labour Relations Commission, GR No 108031, 01 March 1995).
Under the Civil Code, credits are classified into 4 general categories:
Special preferred credits under Article 2241 and 2242, which are considered as mortgages or pledges of real or personal property, enjoy preference with respect to specific movable or immovable property, as provided by the Civil Code, and exclude all other credits to the extent of the value of the property. If there are concurrent liens on the same specific property, the value of the property will be divided among all lien holders, pro rata. The ordinary preferred credits under Article 2244 are not considered liens, but are given preference in the application of the debtor’s assets, following a certain sequence or order of priority. (Metropolitan Bank and Trust Company vs SF Naguiat Enterprises, supra)
For priority for trade-related claims of clients or customers of securities market participants, see 3.3 New Money. For secured creditors, see 4.5 Special Procedural Protections and Rights.
FRIA confers upon trade-related claims absolute priority over other claims of whatever nature or kind insofar as trade-related assets are concerned (FRIA, Section 136).
FRIA likewise prohibits suppliers, after the issuance of the Commencement Order, from withholding supply to the debtor, provided the debtor makes payments (FRIA, Section 16). Existing debts for the supply of goods or services prior to rehabilitation may be considered as special preferred credits with respect to a specific movable property of a debtor (Civil Code, Article 2241).
The rules on concurrence and preference of credits will apply in the implementation of the Rehabilitation or Liquidation Plan (see 5.1 Differing Rights and Priorities).
Unsecured creditors may file their opposition to the petition for rehabilitation and vote against the approval of, and/or file their objections to, the Rehabilitation Plan, but the court shall ultimately decide whether to proceed with rehabilitation proceedings.
In liquidation proceedings, unsecured creditors may vote for or against the appointment of a liquidator, provided that they have filed their claims (FRIA, Section 115). They may also oppose or challenge the preliminary registry of claims prepared by the liquidator (FRIA, Sections 123 and 125).
Pre-judgment attachments and other provisional remedies in court are suspended during rehabilitation proceedings (FRIA, Sections 16-17).
The timeline for full payment is similar to that of secured creditors, subject to timelines in the approved rehabilitation plan (see 4.3 Typical Timelines).
In liquidation proceedings, unsecured claims may be paid after the allocation of the debtor’s assets to satisfy secured claims, and the determination of existing free property, if any.
In case of lease of immovable property, a landlord’s claims for unpaid rent (for one year) enjoy preference with respect to movable properties of the debtor found within the leased immovable property and the fruits thereof, (Civil Code, Article 2241(12)).
As to agricultural tenancy agreements, landlords enjoy preference as to their claims for their share on the fruits or harvest (Civil Code, Article 2241(8)).
Foreign creditors (individuals and corporations whose ownership is less than 40% Filipino) are prohibited from owning land in the Philippines (1987 Philippine Constitution, Article 12, Section 7).
For statutory waterfall of claims, see 5.1 Differing Rights and Priorities.
Special preferred claims enjoy superiority, especially as to specific assets of the debtor. New money claims through credit arrangements, secured by mortgages of the debtor’s unencumbered property or secondary mortgages of encumbered property with the approval of senior secured parties with regard to the encumbered property, which are approved by the court upon the recommendation of the rehabilitation receiver (“receiver”) (FRIA, Section 55), enjoy superiority as to the specific assets.
Employees’ claims at the time of filing the petition enjoy first priority among ordinary preferred credits, unless they constitute legal liens under Articles 2241-2242 of the Civil Code. (FRIA, Section 133; Civil Code, Articles 2244; Republic vs Peralta, supra). On the other hand, employees’ claims during rehabilitation, which are required to carry on the business, are treated as “administrative expenses” after commencement date (FRIA, Section 56).
In rehabilitation proceedings, upon the issuance of the Commencement Order, until the approval of the rehabilitation plan or dismissal of the petition, the imposition of taxes and fees due to the government shall be considered waived (FRIA, Section 19). In liquidation proceedings, there is no express waiver of taxes and fees provided, thus, will be considered as ordinary preferred credits (Civil Code, Article 2244).
As stated in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, court-supervised rehabilitation may be voluntary (debtor-initiated) or involuntary (creditor-initiated). In voluntary rehabilitation, the petition filed by the debtor should be supported by majority of its board of directors or trustees and stockholders representing at least two thirds of the outstanding capital stock or of the members in case of a non-stock corporation (FRIA, Section 12). The threshold requirement for initiating an involuntary rehabilitation proceeding is discussed in 2.4 Procedural Options.
The court, upon finding the petition sufficient in form and substance, will issue a Commencement Order which, among others, will suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor (FRIA, Sections 15-16). Creditors will thereafter be directed to file their respective notices of claim.
At the initial hearing, the court will determine the creditors who have timely filed their claims, as well as direct the receiver to evaluate the financial condition of the debtor and submit a report within 40 days therefrom (FRIA, Section 22).
If the receiver recommends rehabilitation of the debtor, the court may give due course to the petition. Thereafter, the court shall direct the receiver to review, revise and/or recommend action on the rehabilitation plan (FRIA, Section 26). The receiver shall also confer with the debtor and creditors regarding the Plan (FRIA, Section 63).
The statutory contents of the rehabilitation plan are listed in Section 62 of the FRIA which, among others, requires that the treatment for each class of creditors be specified therein, and provide for the equal treatment of all claims within the same class.
The rehabilitation plan shall be approved by all classes of creditors whose rights are adversely modified or affected by the rehabilitation plan. A class is deemed to have approved the plan if members of the said class holding more than 50% of the total claims concur. Otherwise, it shall be deemed rejected (FRIA, Section 64).
Once approved, the receiver shall submit the rehabilitation plan to the court for confirmation (FRIA, Section 65). Creditors may still file their objections to the rehabilitation plan within 20 days from notice from the court that the Plan has been submitted for confirmation.
Notwithstanding the rejection of the Plan by creditors, the court may still confirm it if the following circumstances are present:
The court shall have a maximum period of one year from the date of filing the petition within which to approve the rehabilitation plan (FRIA, Section 72).
As stated above, a court-confirmed rehabilitation plan is binding upon all persons who may be affected by it (FRIA, Section 69).
The rehabilitation proceeding under the FRIA is not confidential but is, in fact, in rem such that jurisdiction over all persons affected by the proceedings shall be considered acquired upon publication of the notice of commencement of proceedings in a newspaper of general circulation (FRIA, Section 3).
Court-supervised rehabilitation shall be terminated by order of the court either declaring a successful implementation of the rehabilitation plan or a failure of rehabilitation (FRIA, Section 74).
Any Commencement Order issued by the court includes a stay or Suspension Order which will suspend all actions or proceedings, in court or otherwise, for the enforcement of claims, as well as suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor (FRIA, Section 16).
During rehabilitation, the debtor continues operating the business under its existing management, unless, upon motion of any interested party, the court directs the receiver or a management committee to assume and exercise the powers of management in any of the following cases:
The debtor can borrow money during the pendency of rehabilitation proceedings, provided that the same is used to enhance rehabilitation and that the receiver recommends a loan, and is approved by the court. Post-commencement debt shall be treated as an administrative expense (FRIA, Section 55).
After the petition for rehabilitation is given due course and a creditors’ meeting is called, the creditors belonging to a class may formally organise a committee among themselves, or, as a body, agree to form a creditor’s committee composed of a representative from each class of creditors, such as: secured creditors; unsecured creditors; trade creditors and suppliers; and employees of the debtor, among others (FRIA, Section 42). This enumeration is not exclusive.
The creditors’ committee shall be the primary liaison between the receiver and creditors. The creditors’ committee cannot exercise or waive any right or give any consent on behalf of any creditor(s) unless specifically authorised in writing (FRIA, Section 43).
The petition and the rehabilitation plan, preliminary registry of claims, the status reports from the receiver, and such other documents and notices furnished or made available by the receiver can be made available to the creditors (FRIA, Section 16; FRIA Rules, Rule 2, Section 26).
A court-confirmed rehabilitation plan is binding upon all persons who may be affected by it, regardless of whether they participated in the proceedings, opposed the rehabilitation plan or if their claims have been scheduled. Payments shall be made to creditors according to the rehabilitation plan (FRIA, Section 69).
FRIA does not explicitly prohibit the trading of claims against a debtor undergoing rehabilitation. However, any trading of claim is subject to the approval of the receiver and/or the court (FRIA, Section 47).
A group of debtors may jointly file a petition for voluntary rehabilitation when one or more of its members foresee that: there is the possibility of not meeting debts when they fall due; there is financial distress that would adversely affect the financial condition and/or operations of the other members of the group; and/or the participation of other members of the group is essential under the terms and conditions of the proposed rehabilitation plan (FRIA, Section 12).
During the pendency of the rehabilitation, and upon issuance of the Commencement Order, the debtor is prohibited from selling, encumbering, or disposing in any manner any of its properties, except in the ordinary course of business (FRIA, Section 16).
However, the court, upon application of the receiver, may authorise the sale of unencumbered property of the debtor outside the ordinary course of business upon showing that the property, by its nature or other circumstance, is perishable, costly to maintain, susceptible to devaluation or otherwise in jeopardy (FRIA, Section 49).
The court may also authorise the sale, transfer, conveyance or disposal of encumbered property of the debtor if, upon application of the receiver and with the consent of the secured creditor(s) and after notice and hearing, the court determines that the disposal is necessary for the continued operation of the debtor's business and the debtor has made arrangements to provide a substitute lien or ownership right that equally provides security for the counter-party's claim or right (FRIA, Section 50).
Upon authorisation by the court, the receiver shall execute any instrument necessary to transfer the property (FRIA Rules, Rule 2, Sections 48-49; see 6.7 Restrictions on a Company's Use of or Sale of Its Assets).
FRIA does not expressly prohibit “stalking horse” bids or credit bidding in the sale of insolvent debtor’s assets. There likewise appears to be no prohibition on the sale or disposition of assets of the debtor that have been pre-negotiated prior to the commencement of the rehabilitation proceedings, as long as the necessary conditions and approvals are present (see 6.7 Restrictions on a Company's Use of or Sale of Its Assets).
Note that the debtor may confirm a contract prior to the rehabilitation proceedings by obtaining the written consent of the receiver and sending written notice to the counter-parties concerned within 90 days from the issuance of the Commencement Order. Contracts not confirmed are automatically terminated, in which case, any claim for actual damages arising from the termination shall be considered a pre-commencement claim against the debtor, filed with the court as a separate claim. The claim shall be considered in the rehabilitation plan together with the other claims against the debtor (FRIA Rules, Rule 2, Section 56).
The issuance of the Commencement Order shall not in any way diminish or impair the security or lien of a secured creditor, or the value of their lien or security, except that their right to enforce said security or lien may be suspended during the term of the Stay Order (FRIA, Section 60).
Nevertheless, the court, upon recommendation of the receiver, may allow a secured creditor to enforce their security or lien, or foreclose upon property of the debtor securing the claim, if the property is not necessary for rehabilitation. The secured creditor shall be admitted to the rehabilitation proceedings only for the balance of their claim, if any (FRIA, Section 59).
Upon the recommendation of the receiver and approval of the court, the debtor may incur other obligations, such as credit arrangements to enhance rehabilitation, which may be secured by mortgages of its unencumbered property or secondary mortgages of encumbered property, with the approval of senior-secured parties as to the encumbered property. Payments for these shall be considered administrative expenses (FRIA, Section 55).
Values of claims may be determined in the Registry of Claims. The receiver, within 20 days from assumption into office, shall establish a preliminary Registry of Claims which shall be available for inspection by the creditors (FRIA, Section 44). This Registry of Claims shall be submitted to the court together with the challenges, if any (FRIA, Section 45).
The Rehabilitation Plan is required to, among others:
As to existing contracts, within 90 days following the commencement of court-supervised rehabilitation proceedings, the debtor, with the consent of the receiver, shall notify each contractual counter-party of whether it is confirming a particular contract. Contractual obligations of the debtor arising or performed during this period, and afterwards for confirmed contracts, shall be considered administrative expenses. Contracts not confirmed within the required deadline shall be considered terminated. Claims for actual damages, if any, arising from the election to terminate a contract shall be considered a pre-commencement claim against the debtor (FRIA, Section 57).
There is no express provision under the FRIA that allows the release of non-debtor parties from liability and the circumstances thereof.
The set-off of any debt by and between a debtor and creditor after the commencement date is prohibited (FRIA, Section 17).
Breach of the rehabilitation plan by the debtor company may be a ground to terminate the court-supervised rehabilitation proceedings (FRIA, Section 74). If the breach is committed by any party, the court may issue an order to remedy or cure the breach, or enforce the applicable provisions of the rehabilitation plan through a writ of execution (FRIA, Section 74).
Nothing prevents existing equity owners from retaining other property on account of their ownership interests, considering that the corporation has a legal personality separate and distinct from its equity owners.
Statutory liquidation under the FRIA may either be voluntary or involuntary.
The commencement of involuntary liquidation against juridical and individual debtors is discussed in 2.4 Procedural Options.
Voluntary liquidation is commenced by an individual or juridical debtor by filing a verified petition with the court. In the case of an individual debtor, their properties should not be sufficient to cover their liabilities and that they owe debts exceeding PHP500,000.00 (FRIA, Sections 90 and 103).
During the pendency of court-supervised or pre-negotiated rehabilitation proceedings, the juridical debtor may also initiate liquidation proceedings by filing a motion in the same court where rehabilitation proceedings are pending (FRIA, Section 90).
In case of voluntary liquidation, a schedule of debts and liabilities shall be included in the petition. If the petition is found to be sufficient in form and substance, the court shall subsequently issue a Liquidation Order (FRIA, Sections 90 and 104).
The Liquidation Order shall, among others, declare the debtor insolvent, direct payments of any claims and conveyance of any property due the debtor to the liquidator, prohibit payments by the debtor and the transfer of any property by the debtor, direct all creditors to file their claims with the liquidator, as well as set the case for the hearing for the election and appointment of the liquidator (FRIA, Section 112).
Moreover, the juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated. Also, legal title to and control of all the assets of the debtor (except those exempt from execution) shall be vested in the liquidator or court (in case a liquidator has not been appointed yet (FRIA, Section 112). No separate action for the collection of an unsecured claim shall be allowed (FRIA, Section 113), however, the Liquidation Order shall not affect the right of a secured creditor to enforce their lien (FRIA, Section 114).
Within 20 days from their assumption into office, the liquidator shall prepare a preliminary registry of claims which can be challenged by the creditors. The registry shall then be submitted to the court for approval (FRIA, Sections 123 and 125).
Within three months from their assumption into office, the liquidator shall submit a Liquidation Plan to the court (FRIA, Section 129).
A liquidator or, with their conformity, a creditor, may initiate and prosecute any action to rescind or declare null and void any transaction executed with intent to defraud a creditor(s) (FRIA, Sections 127-128).
If the debtor and the creditor are mutually debtor and creditor of each other, one debt shall be set-off against the other, and only the balance, if any, shall be allowed in the liquidation proceedings (FRIA, Section 124).
The Liquidation Plan and its implementation shall ensure that the concurrence and preference of credits under the Civil Code shall be observed (FRIA, Section 133).
The liquidator shall render a quarterly report to the court. The liquidator shall likewise file a final accounting with the court, with proof of notice to all creditors. The accounting will be set for hearing. If the court finds the same in order, the court will discharge the liquidator (FRIA, Sections 121-122).
Upon determining that the liquidation has been completed, the court shall issue an order approving the report and order the Securities and Exchange Commission to remove the debtor from the registry of legal entities (FRIA, Section 134). Once removed, the court shall issue an order terminating the liquidation proceedings (FRIA, Section 135).
The liquidator, once appointed, shall have the power to sell any property of the debtor which has come into his/her possession or control (FRIA, Sections 113 and 119).
When duly authorised by the court and the sale is made pursuant to the approved liquidation plan, a purchaser shall acquire good title over the assets sold during liquidation (FRIA, Sections 131 and 133).
There is no express prohibition against “stalking horse” bids or credit bidding in the sale of insolvent debtor’s assets (FRIA, Sections 114 and 131).
Generally, transactions executed prior to the issuance of the liquidation order shall be binding on the parties. However, the liquidator, or, with their conformity, a creditor may initiate an action to rescind or declare void any transaction on grounds similar to that in rehabilitation (FRIA, Section 127 see 6.8 Asset Disposition and Related Procedures). If the creditor fails to secure the conformity of the liquidator, it may seek permission from the court to commence an action.
The liquidator is required to implement the Liquidation Plan, as approved by the court, and payments shall be made to the creditors in accordance therewith (FRIA, Section 132).
Investment or loaning of priority new money is generally not allowed unless the same is sought to maximise the value of the debtor’s assets with the end goal of liquidating the same in satisfaction of the creditors’ claims.
The FRIA does not explicitly provide that liquidation proceedings may be obtained by a corporate group (see 6.6 Use of a Restructuring Procedure to Reorganise a Corporate Group).
See 3.2 Consensual Restructuring and Workout Processes, 6.2 Position of the Company and FRIA, Section 119(G).
Upon issuance of the liquidation order, the juridical debtor shall be deemed dissolved and its corporate existence terminated (FRIA, Section 113(A)). Consequently, the use of the debtor’s assets shall be limited for the purpose of liquidation.
To this end, the liquidator may sell the unencumbered assets of the debtor and convert the same into money in a public auction (FRIA, Section 131). However, a private sale may be allowed (see 6.7 Restrictions on a Company's Use of or Sale of Its Assets).
Section 139 of the FRIA adopts the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (“UNCITRAL Model”).
The UNCITRAL Model provides recognition or other relief of restructuring or insolvency proceedings in other countries, except in proceedings concerning designated entities (such as banks or insurance companies) subject to a special insolvency regime in a State that wishes to exclude the said entities from such recognition or relief (UNCITRAL Model, Article 1).
Thus, a foreign representative may apply to the Philippine court for recognition of the foreign proceeding (UNCITRAL Model, Article 15), subject to limitations provided under Philippine laws. Upon application for recognition, the court may grant provisional reliefs (FRIA Rules, Rule 5, Section 11; UNCITRAL Model, Article 19).
Philippine courts may enter into protocols or arrangements with foreign courts to “co-operate to the maximum extent possible in all court-to-court communications for purposes of information or assistance” (FRIA Rules, Rule 5, Section 18).
The court shall refuse to take any action in any cross-border proceeding if it would be against public policy of the Philippines, or if it finds that the foreign country does not reciprocally extend recognition to Philippine rehabilitation proceedings or does not grant the same rights to a Philippine creditor in a manner substantially in accordance with Philippine law (FRIA Rules, Rules 5, Section 4).
If foreign and local proceedings are taking place concurrently regarding the same debtor, the Philippine court shall co-operate and co-ordinate with the foreign court to ensure that any relief granted in the foreign proceeding is consistent with the relief granted in the local proceeding (FRIA Rules, Rule 5, Section 22).
Foreign creditors are treated equally with local creditors (FRIA Rules, Section 3(A), Rule 5). It is a Philippine policy to “ensure equitable treatment of creditors who are similarly situated” (FRIA, Section 2).
The statutory officers under FRIA are the receiver and liquidator, who are appointed in rehabilitation and liquidation proceedings, respectively.
The receiver is deemed to be an officer of the court whose principal duties are to preserve and maximise the value of the assets of the debtor during the rehabilitation proceedings, determine the viability of the rehabilitation of the debtor, prepare and recommend to the court a rehabilitation plan and, once approved, implement the same (FRIA, Section 31).
The liquidator is likewise deemed to be an officer of the court, whose principal duties are to preserve and maximise the value and to recover the assets of the debtor, in light of its duty to liquidate the assets and discharge to the extent possible all the claims against the debtor (FRIA, Section 119).
Being officers of the court, both the receiver and the liquidator are accountable to the former. Both are required to take an oath and file a bond to ensure the proper and faithful discharge of their respective powers, duties, and responsibilities (FRIA, Sections 34 and 117). The receiver and the liquidator are required to render and submit their report to the court (FRIA, Sections 24, 73 and 121-122).
In cases of court-supervised and pre-negotiated rehabilitation proceedings, the receiver is appointed by the court upon consideration of the nominees of the debtor and/or creditors (FRIA, Section 30).
In liquidation proceedings, the liquidator is selected either by election of creditors who have filed their claims with the court, or by appointment of the court in cases such as failure of election or vacancy (FRIA, Section 116).
In cases of rehabilitation, the debtor continues to exercise management, subject to the receiver’s monitoring, unless the court orders the receiver to assume management (FRIA, Sections 31 and 47). All disbursements, payments or sale, disposal, assignment, transfer or encumbrance of property, or any other act affecting title or interest to the property shall be subject to the approval of the receiver and/or court (FRIA, Section 47).
In liquidation, the liquidator is tasked to manage and dispose of the debtor’s assets with a view towards maximising proceeds therefrom, to pay the creditors and stockholders, and to terminate the debtor’s existence (FRIA, Section 119).
Any natural or juridical person (with an appointed natural person as representative) may serve as receiver or liquidator, provided they are qualified under the FRIA (FRIA, Sections 4(w), 28-29 and 118). The receiver/liquidator must:
Restructuring professionals, attorneys, accountants or other professionals can be appointed as receivers/liquidators provided that they meet the requirements. Moreover, considering the prohibition on conflict of interest, a creditor, owner, partner or stockholder of the debtor; a director, officer, owner, partner, or employee or the auditor or accountant of the debtor; or any other individual with direct or indirect material interest in the debtor or any creditor, cannot serve as receiver or liquidator (FRIA, Section 40).
The receiver or liquidator may be removed at any time by the court, on its own, or on motion of creditor(s) representing at least 50% of the total debts. (FRIA, Sections 32 and 119).
In cases of vacancy for the position of receiver, the court may appoint a replacement receiver from nominees submitted by the debtor and creditors, or any other person qualified (FRIA, Section 35). As to vacancy for the position of liquidator, the court may set another hearing of the liquidator’s election (FRIA, Section 116).
In rehabilitation and liquidation proceedings, it is common to employ accountants and appraisers to ensure proper valuation of the assets, liabilities and cash flows of the debtor, and attorneys to ensure compliance with laws, rules, and court orders, and commonly to represent the parties before the court and in out-of-court negotiations.
In rehabilitation proceedings, management consultants may likewise be employed to provide guidance in making the debtor financially viable through sound business operations.
The receiver and liquidator have the power, with the court’s approval, to employ persons or entities, including experts, and in liquidation to create a creditors’ committee to assist in the discharge of their functions (FRIA, Sections 31, 39 and 119).
The receiver and liquidator, together with their direct employees or independent contractors, are statutorily entitled to compensation from the debtor according to terms approved by the court. These costs are considered administrative expenses for the account of the debtor (FRIA, Sections 4(a)(5), 33 and 120).
Judicial approval is required for the engagement of an independent contractor, employment of direct employees (FRIA, Sections 31, 39 and 119), and the payment of compensation to the advisors (FRIA, Sections 33 and 120).
Although the professional advisors are not similarly situated as the receiver or liquidator as officers of the court (FRIA, Sections 34 and 117), they indirectly owe a duty to the court for the faithful discharge of the powers, duties and responsibilities of the receiver or liquidator, since they are employed to assist the receiver or liquidator in the discharge of functions.
Professional advisors serve as consultants or experts, whose advice and guidance are necessary to ensure the parties are protected legally and financially, and that the objectives of the FRIA are achieved.
Mediation, arbitration and other modes of alternative dispute resolution are recognised under the FRIA. During rehabilitation proceedings, the court may refer any dispute relating to the rehabilitation proceedings to arbitration or other modes of dispute resolution in accordance with Republic Act No 9285 (the “Alternative Dispute Resolution Act of 2004”, the “ADR Act”) should it determine that such mode will resolve the dispute more quickly, fairly and efficiently (FRIA, Section 26).
Moreover, the rehabilitation plan is required to 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 Plan (FRIA, Section 60(w)).
Parties in the Philippines are still in the process of transitioning to the use of alternative modes of dispute resolution. Litigation remains the primary mode of dispute resolution, especially for insolvency proceedings.
The court has the discretion to refer the rehabilitation proceedings to mediation. Moreover, the parties are bound to comply with the conciliation/mediation provision in interpreting and implementing the rehabilitation plan prior to seeking court assistance.
There is no express provision under the FRIA which provides for the enforcement of pre-insolvency agreements to arbitrate. Nevertheless, the court may refer any dispute relating to the rehabilitation proceedings to arbitration, if the court should determine that such mode will resolve the case more quickly, fairly and efficiently that the court (FRIA, Section 26).
Arbitration and mediation are primarily governed by the ADR Act. In addition to the ADR Act, Republic Act No 876 (“Arbitration Law”) governs domestic arbitration, while the UNCITRAL Model Law governs international commercial arbitration.
The Supreme Court issued AM No 07-11-08-SC, or the Special Rules of Court on Alternative Dispute Resolution (“ADR Rules”), which apply to and govern arbitration and mediation.
Arbitrators are appointed by the parties (ADR Act, Section 3; Arbitration Law, Section 8) or the appointing authority determined by agreement of parties, or in a manner pursuant to the applicable institutional arbitration rules (ADR Act, Section 26). In some instances, the court acts as appointing authority (ADR Rules, Rule 6.1).
The ADR Act does not specifically provide for qualifications of arbitrators. Nevertheless, under the Arbitration Law, only those who meet the qualifications provided therein may serve as arbitrator in a domestic arbitration proceeding (Arbitration Law, Section 10).
Directors owe fiduciary duty to stockholders of the corporation considering that directors direct the corporate affairs and properties, and hence, the stockholders’ property interests (Bernas vs Cinco, GR Nos 163356-57, 10 July 2015).
Directors and officers are subject to liabilities from the point they have notice of the commencement of insolvency proceedings, or reason to believe that the proceedings are about to be commenced. From that point, as part of their duties, directors and officers cannot dispose or conceal debtor property in fraud of creditors or in a manner grossly disadvantageous to the debtor and/or creditors. Directors or officers shall be liable for double the value of the property or the amount of transaction, whichever is higher, in cases of disposals just mentioned, or those made other than in the ordinary course of business, or to embezzle or misappropriate any property of the debtor (FRIA, Section 10).
Further, directors, officers or employees may be held criminally liable for the following acts:
There are currently no actual measures by which to determine a debtor’s financial distress or insolvency other than that it is generally unable to pay its liabilities as they fall due in the ordinary course of business. However, creditors may look into a debtor’s financial statements to determine whether its liabilities are greater than its assets.
As a general rule, directors cannot be liable for pre-insolvency obligations of the corporation, the latter being a legal personality separate and distinct from those who comprise it (Bustos vs Millians Shoe, Inc., GR No 185024, 04 April 2017). Thus, directors and officers enjoy limited liability.
In addition to the directors’ liabilities under the FRIA, the RCC imposes liability on directors “who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation” (RCC, Section 30). The RCC likewise imposes criminal liability on directors guilty of fraudulent conduct of business (RCC, Section 165 and 171).
As stated above (see 12.1 Duties of Directors), directors may be held criminally liable for certain acts. Any criminal action against a director shall not be affected by any proceeding commenced under the FRIA (FRIA, Section 18).
There are consulting groups which may provide companies with a Chief Restructuring Officer (“CRO”). The CRO may perform functions such as, but not limited to, advisory and interim management. The CRO remains employed by and accountable to the consulting group, but is engaged as a service provider to the debtor.
There is no concept of shadow directorship under Philippine Laws, however, such concept is akin to the concept of beneficial ownership. Directors or trustees, regardless of capacity, may be held liable as discussed above (see 12.2 Direct Fiduciary Breach Claims).
Owners and partners of debtors are subject to the same duties and liabilities as directors (see 12.1 Duties of Directors).
As regards stockholders, they are generally not liable for debts of the corporation, hence, to the creditors it is considered that a corporation has a legal personality separate and distinct from those comprising it, unless the separate legal personality is pierced on grounds provided under the law and jurisprudence. Thus, a stockholder’s liability is limited to its subscription in the corporation. (Bustos vs Millians Shoe, Inc, supra) Nevertheless, it has been recognised that a stockholder is personally liable for the financial obligations of the corporation to the extent of their unpaid subscription (Donnina Halley vs Printwell, Inc, GR No 157549, 30 May 2011).
In rehabilitation proceedings, transactions entered into by the debtor or those involving its assets that transpired prior to commencement date may be rescinded or declared void on the ground that the said transaction was executed with intent to defraud a creditor or creditors, or giving undue preference to creditors (FRIA, Section 58).
The grounds mentioned are likewise applicable in liquidation proceedings (FRIA, Section 127). In such case, any transaction occurring prior to the issuance of the Liquidation Order or, in conversion of the rehabilitation to liquidation proceedings prior to the commencement date, entered into by the debtor or involving its assets may be rescinded or declared void.
There is no look-back period provided under Philippine Laws. Any transaction occurring prior to the commencement date or the issuance of a Liquidation Order may be examined.
In the event of rehabilitation or liquidation proceedings, the claim to annul transactions, as described in 13.1 Historical Transactions, shall be made through an action either instituted by the receiver or liquidator, as the case may be, or by any creditor but with the conformity of the receiver.
In case the receiver or liquidator does not consent to the filing or prosecution of such action, any creditor may file and/or prosecute such action, subject to court approval after determining that the rights of the creditors will be prejudiced if the action is not filed and/or prosecuted. Before court approval, the receiver or liquidator may still signify their readiness to institute the proceeding for the benefit of the creditors (FRIA, Sections 59 and 128; FRIA Rules, Rule 2, Section 58).
Valuations are crucial in restructuring and insolvency-related proceedings. Valuation is required to prove the debtor’s state of insolvency through the submission of an inventory of assets, schedule of debts and liabilities, and financial statements. Valuation is also used in liquidation analysis for the court to determine whether the rehabilitation plan is viable, and whether there is a substantial likelihood of rehabilitation, or whether the stakeholders would be better off if the debtor pays their claims through the piecemeal sale of assets (FRIA Rules, Rule 2, Section 61(B)).
Valuation plays a role in the protection of rights of secured creditors and the receiver’s power to sell properties, specifically in ascertaining the value of assets for protection against devaluation or obsolescence (see 4.5 Special Procedural Protections and Rights).
Valuations are typically initiated by the receiver or creditors that previously executed security transactions over specific assets of the debtor.
Currently, there is no jurisprudence expressly requiring valuations in relation to restructuring and insolvency, and establishing the methods to be used. Nevertheless, valuation by independent third parties is given value by the courts (Wonder Book Corp vs Philippine Bank of Communications, GR No 187316, 16 July 2012).
Overview of Insolvency in the Philippines
The World Bank, through its Doing Business project, provides objective measurements relating to business regulations and their enforcement across 190 economies, including the Philippines. It looks at the economic regulations with regard to the different aspects of doing business, from starting a business to resolving insolvency (for all references to World Bank data in this report, see doingbusiness.org/en/data/exploreeconomies/philippines#DB_ri).
Ease of resolving insolvency
Based on the World Bank’s data on the ease of resolving insolvency for the years 2015 to 2019, the Philippines garnered a score of 55.18 for the year 2015. It increased to 55.25 in 2016 and went down to 55.24 in 2017, before settling at 55.22 for the years 2018 and 2019. Resolving insolvency means addressing insolvency issues through judicial proceedings. The regional average for resolving insolvency in East Asia and the Pacific for 2019 is 40.40. Currently, the Philippines is ranked 63 out of 190 economies or nations.
Accessibility of insolvency proceedings
On the other hand, accessibility of insolvency proceedings in the Philippines was valued at 2.5 out of 5 for the years 2015 to 2019. The index is based on several components, such as whether the insolvent debtors and/or creditors can initiate liquidation and/or reorganisation proceedings and the standards used for commencement of insolvency proceedings. Moreover, based on its case study of companies undergoing insolvency proceedings in the Philippines, the World Bank also concluded that the outcome of most insolvency proceedings for the years 2015 to 2019 has been a piecemeal sale of the company’s assets. The maximum recoverable amount from these sales is typically 70% of the value of the insolvent debtor-company. Relevantly, based on the World Bank’s data, creditors take an average of 2.7 years (in calendar years) to recover their credit, from the time of the insolvent company’s default until payment, taking into consideration the various court actions filed by the insolvent company. This has been consistent for the years 2015 to 2019.
Cost of resolving insolvency
According to the World Bank study, the cost of resolving insolvency in the Philippines for the years 2015 to 2019 has been at 32% of the value of the insolvent debtor’s total estate. The World Bank does not indicate the basis upon which the value of the debtor’s assets is measured, particularly whether it is book value or fair market value. The cost of resolving insolvency includes all administrative expenses, based on the responses to the questionnaire provided by the World Bank's respondents in the Philippines. Specifically, this comprises the court fees, fees for necessary insolvency administrators, assessors, lawyers and auctioneers, among others. The World Bank has not disclosed what other fees are indicated by its respondents. As an illustration, if the total assets of the debtor are valued at PHP1 million, the debtor will most likely spend around PHP320,000 in trying to rehabilitate or liquidate the company.
The recovery rate
At the same time, the recovery rate in the Philippines, which measures the amount recovered by secured creditors out of their total secured claim in insolvency proceedings, was 21.2% of the value of the debtor’s assets in 2015, 21.4% in 2016 and 21.3% for the years 2017 to 2019. This indicates that the secured creditors could not even recover a quarter of their total claim against the debtor in insolvency proceedings. The score of the strength of the insolvency framework in the Philippines, which considers the commencement of proceedings index, management of debtor’s assets index, reorganisation proceedings index, and creditor participation index, is currently on a high of 14 out of 16 for the years 2015 to 2019. This indicates that the Philippines has a strong legal framework applicable to judicial liquidation and rehabilitation proceedings and that this legal framework is being actively implemented.
Management of the debtor's assets
The management of debtor’s assets index of the Philippines is at 5.5 out of 6 for the years 2015 to 2019. This means that the treatment of the insolvent debtor’s assets is more advantageous from the perspective of the debtor-company’s stakeholders. This indicates that under Philippine insolvency laws, the debtor can continue to execute contracts essential to its survival or reject overly burdensome contracts. Furthermore, the debtor can avoid preferential transactions and undervalued transactions after the proceedings are initiated and post-commencement finance is granted priority over all secured and unsecured creditors. The reorganisation proceeding index is at 3.0 out of 3.0, indicating that the Philippines is greatly compliant with internationally accepted practices, while the creditor participation index is at 3.0 out of 4.0, indicating that in the Philippines, creditors are given adequate opportunity to participate in insolvency proceedings.
In the past decade, a number of industries in the Philippines have undergone insolvency and rehabilitation. Of note is the insurance industry, which saw a surge of companies facing insolvency. As of March 2013, 11 pre-need firms were placed under liquidation by a liquidator appointed by the Securities and Exchange Commission (SEC), while five companies underwent court rehabilitation, receivership or liquidation. See SEC, Status of Pre-need Corporations Retained with the Securities and Exchange Commission in View of its Residual Power under Republic Act No 9829, otherwise known as "The Pre-need Code of the Philippines" (as of 27 March 2013), available at www.sec.gov.ph/wp-content/uploads/2015/11/Troubled-Pre-need-Corporations.pdf.The decline in the pre-need sector has been attributed to several factors, such as the continued sale of open-plans despite the deregulation of school tuition fees since 1992 (in case of educational plans) and poor management and unsound investment decisions wherein some pre-need companies venture into high-return but equally high- risk investments in an attempt to cover their shortfall (see Policy Brief of the Senate Economic Planning Office, “What the pre-need industry needs”, available at www.senate.gov.ph/publications/PB%202009-02%20-%20%20What%20the%20pre-need%20industry%20needs.pdf).
In the banking sector, a number of banks have been placed under Philippine Deposit Insurance Corporation (PDIC) receivership and/or liquidation by the Monetary Board in the past ten years. From 2009 up to September 2019, almost 200 banks were placed under PDIC receivership and/or liquidation. Of this number, around 14 banks have already obtained approved final asset distribution plans. As of 30 September 2019, there were around 327 banks under PDIC liquidation with no approved final asset distribution plan, and around 49 banks with approved final asset distribution plans. In March 2011, the Monetary Board placed one of the biggest banks under PDIC receivership when its liabilities exceeded its assets by about PHP8.4 billion. The bank, which is a thrift bank that has numerous branches across the country, was placed under PDIC receivership as it was no longer capable of paying its liabilities, and it was eventually placed under PDIC liquidation in October 2011 (for banks under PDIC liquidation, seewww.pdic.gov.ph/files/banks_under_liquidation.pdf).
In January 2019, one of the biggest corporate bankruptcies in the Philippines occurred when a regional trial court placed one of the country’s largest shipbuilders under receivership, and started a court-supervised rehabilitation. The corporation, which is the Philippine unit of a South Korean company, was then the biggest investor in the Subic Bay Freeport Zone. The corporation’s creditors include five of the country’s largest universal and commercial banks, which had a combined loan exposure of around USD412 million. The insolvency was apparently attributable to the corporation’s clients supposedly evading payments and cancelling shipbuilding contracts. This coincides with the account of “heavy-tail contracts” which involve contracts where significant payment is made only towards the end of production. This type of contract forces shipbuilding companies to seek significant loans in order to fulfil their obligations.
Local Legislation Affecting Rehabilitation/Liquidation
Recent local legislation may possibly affect future rehabilitation or liquidation proceedings in the Philippines.
In January 2018, Republic Act No 10963 or the Tax Reform for Acceleration and Inclusion Act (TRAIN) took effect. The TRAIN aims to enhance the progressivity of the Philippine tax system through rationalisation of the internal revenue system, in order to promote sustainable and inclusive economic growth. The TRAIN features lower income taxes for taxpayers and higher consumption taxes for certain goods. This lowering of income taxes may positively affect and indirectly assist insolvent entities in the form of tax savings. Fortunately, the TRAIN does not impact the provision under Republic Act No 10142 or the Financial Rehabilitation and Insolvency Act (FRIA) of 2010 for the waiver of taxes and fees due to the national government and to local government units upon the issuance of the commencement order by the rehabilitation court (FRIA, Section 19).
Revised Corporation Code
More recently, Republic Act No 11232 or the Revised Corporation Code of the Philippines (Revised Corporation Code) came into effect on 23 February 2019, repealing the previous Corporation Code. The Revised Corporation Code introduced the “One-Person Corporation”, or a corporation with a single stockholder, which may be a natural person, trust or an estate (Revised Corporation Code, Chapter III, section 116). Then, on 25 April 2019, the SEC issued SEC Memorandum Circular No 7, Series of 2019, providing for guidelines on the establishment of a One-Person Corporation. This new development impacts, to a certain extent, the available remedies in insolvency proceedings of insolvent debtors under the FRIA.
It is a general rule that a corporation is considered to have a legal personality separate and distinct from those who comprise it. Thus, a stockholder’s liability is limited to its subscription in the corporation (Bustos v Millians Shoe, Inc, GR No 185024, 4 April 2017). However, in cases of One-Person Corporations, the sole shareholder has the burden to show that the One-Person Corporation has been adequately financed, so the doctrine of limited liability will apply. This effectively puts the burden on the sole stockholder to show that the properties of the corporation are separate and independent from the sole stockholder’s personal property. Should the sole stockholder fail to show this, they shall bear solidary liability for the debts and liabilities of the One-Person Corporation.
These matters relating to One-Person Corporations now affect the remedies extended to the insolvent debtor under the FRIA. Notably, under the FRIA, an individual debtor may file a petition for the suspension of payments by the courts, or for voluntary or involuntary liquidation. Furthermore, an individual who is an owner of a sole proprietorship may file for a court-supervised rehabilitation, pre-negotiated rehabilitation proceeding, or out-of-court informal restructuring agreements or rehabilitation plans (FRIA, Sections 4(k), 12, 76 and 84). Notably, the remedy of suspension of payments is available only to an individual debtor, and not to a juridical debtor (FRIA, Chapter VI). As mentioned above, should the sole stockholder fail to show the independence of the properties of the One-Person Corporation from its personal properties, and thus, bear solidary liability for the debts of the One-Person Corporation, it is arguable whether the sole shareholder may avail itself of remedies available to individual debtors, such as the suspension of payments.
Moreover, the burden of proving the independence of the properties of the One-Person Corporation from the personal properties of the sole stockholder will affect the remedies available to creditors, especially those who have secure and preferred rights over specific properties. To date, however, there has been no court ruling on the new matters brought about by the Revised Corporation Code.