Liquidating Debts Amidst the Pandemic (Part 3)

We have learned on the previous article the different modes of rehabilitation that requires court intervention. There are means of rehabilitation however that does not mandate court adjudication. This will not only lessen the expense on the part of the rehabilitating debtor, but it will also work for the convenience of the creditor.

Pre-negotiated Rehabilitation and Out of Court Rehabilitation

The parties may however, before the filing of the petition, come to an agreement regarding the rehabilitation, in which case it is called a pre-negotiated rehabilitation. An insolvent debtor may petition the court for a pre-negotiated rehabilitation when approved by creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor. The court in this case shall have a maximum period of 120 days to act on the petition. If no action was made thereon within the specified period, it shall be deemed approved.[1]

In contrast to a pre-negotiated rehabilitation, an out of court or informal restructuring agreements must be approved by (i) creditors representing at least sixty-seven (67%) of the secured obligations of the debtor; (ii) by creditors representing at least seventy-five percent (75%) of the unsecured obligations of the debtor; and (iii) by creditors holding at least eighty-five percent (85%) of the total liabilities, secured and unsecured, of the debtor. In this case, there will be a standstill period that may be agreed upon by the parties pending negotiation and finalization of the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan. It shall be effective and enforceable not only against the contracting parties but also against the other creditors if:

  1. Such agreement is approved by creditors representing more than fifty percent (50%) of the total liabilities of the debtor;

  2. Notice thereof is publishing in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks; and

  3. The standstill period does not exceed one hundred twenty (120) days from the date of effectivity.[2]

The court may still however assist the debtor and creditors in the implementation of the standstill agreement, or annul the standstill agreement or the out of court rehabilitation proceeding.[3]

Liquidation of Insolvent Juridical Debtors

In cases however where, even with a very optimistic estimate, the chances for recovery is highly unlikely, the liquidation of the company in such a way as to benefit both the debtor-company and its creditors may be resorted to.

It may be initiated by the debtor or the creditor. Similarly, it may be initiated by either parties during the pendency or after a court-supervised or pre-negotiated rehabilitation. Only 3 or more creditors whose aggregate claim is at least either One million pesos (Php1,000,000,00) or at least twenty-five percent (25%0 of the subscribed capital stock or partner's contributions of the debtor, whichever is higher, may apply for and seek the liquidation of an insolvent debtor by filing a petition for liquidation of the debtor with the court. The petition must show that:

  1. There is no genuine issue of fact or law on the claims/s of the petitioner/s,

  2. The due and demandable payments thereon have not been made for at least one hundred eighty (180) days or that the debtor has failed generally to meet its liabilities as they fall due; and

  3. There is no substantial likelihood that the debtor may be rehabilitated.

Insolvency of Individual Debtors

The liquidation proceeding outlined above is for juridical persons only. In cases of individual debtors, the declaration of the state of insolvency may be applies for. This be petitioned for by the debtor (voluntary liquidation) or the creditors (involuntary liquidation). However, only debtors whose properties are not sufficient to cover his liabilities, and owing debts exceeding Five hundred thousand pesos (Php500,000.00), may apply to be discharged from his debts and liabilities. The filing itself shall constitute an act of insolvency.[4] On the other hand, a creditor or group of creditors with a claim of, or with claims aggregating at least Five hundred thousand pesos (Php500, 000.00), may similarly file such petition IF the individual debtor committed an act of insolvency. However, the creditor or group of creditors petitioning must file a bond to the court.[5]

What then are these “acts of insolvency”? The following acts, when made with intent to defraud creditors, constitutes an act of insolvency for the purpose of filing a petition for involuntary liquidation:

  1. That such person is about to depart or has departed from the Philippines;

  2. That such person is absent in the Philippines;

  3. That he conceals himself to avoid the service of legal process;

  4. That he conceals, or is removing, any of his property to avoid its being attached;

  5. That he has suffered his property to remain under attachment or legal process for three (3) days;

  6. That he has confessed or offered to allow judgment in favor of any creditor or claimant;

  7. That he has willfully suffered judgment to be taken against him by default;

  8. That he has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors;

  9. That he has made any assignment or conveyance of his estate, property, rights or credits;

  10. That he has, in contemplation of insolvency, made any payment or conveyance of his estate, property, rights or credits;

  11. That being a merchant or tradesman, he has generally defaulted in the payment of his current obligations for a period of thirty (30) days;

  12. That for a period of thirty (30) days, he has failed, after demand, to pay any moneys deposited with him or received by him in a fiduciary; and

  13. That an execution having been issued against him on final judgment for money, he shall have been found to be without sufficient property subject to execution to satisfy the judgment.[6]

During the proceedings, the petitioning creditors may apply to the court for the levy of the properties of the debtor where the individual debtor resides out of the Republic of the Philippines; or has departed therefrom; or cannot, after due diligence, be found therein; or conceals himself to avoid service of the Order to show cause, or any other preliminary process or orders in the matter, upon payment of a bond double the value of their aggregate claims.[7]

Upon the issuance of a liquidation order, the legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed vested in the liquidator or, pending his election or appointment, with the court. All contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within ninety (90) days from the date of his assumption of office, declares otherwise and the contracting party agree.[8]

Similar to that of a Rehabilitation proceeding, no separate action for the collection of an unsecured claim shall be allowed. Such actions already pending will be transferred to the Liquidator for him to accept and settle or contest. No foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.[9] However, a liquidation order shall not prejudice the rights of a secured creditor, unless he waives such right.[10]

Within 20 days from assumption to office, a liquidation officer shall establish a registry of claims of secured and unsecured creditors, to be made available for public inspection. All claims must be proved before being paid.[11] Within three (3) months from his assumption into office, the Liquidator shall submit a Liquidation Plan to the court. The Liquidation Plan shall, as a minimum enumerate all the assets of the debtor and a schedule of liquidation of the assets and payment of the claims.[12]

Liabilities under FRIA

It must be noted that FRIA prescribes strict penalties for the violation of its provisions. Thus, whenever a debtor, having notice of the commencement of the proceedings, or having reason to believe that proceedings are about to be commenced, or in contemplation of the proceedings, commits an act to defraud creditors such as disposing of properties other than in the ordinary course of business, such debtor shall be liable for double the value of the property sold, embezzled or disposed of or double the amount of the transaction involved, whichever is higher.[13]

Not only will the fraudulent debtor be civilly liable, an individual debtor, owner of a sole proprietorship, partners in a partnership, or directors and officers of a debtor, having notice of the commencement of the proceedings, or having reason to believe that proceedings are about to be commenced, or in contemplation of the proceedings, can be held criminally liable for acts intended to defraud creditor.[14]

Conclusion

Nearly 80 companies and academic institutions are racing to produce a vaccine for the dreaded 2019 N-Corona Virus, and of those, five are already testing their vaccine candidates in people.[15] Experts from the field of biotechnology post different predictions as to when exactly will this vaccine be available. Some of the optimistic ones claim that it will be ready by the end of this year, while most claims that it will be available on the middle or later part of 2021.[16] With our country having a fragile and underfunded healthcare system, this virus will hit our economy harder as time progress.

Companies in the middle of a crisis, especially those with good business plans, find solace in the comforts of the Financial Rehabilitation Law. We, at the Sangalang and Gaerlan, Business Lawyers, are assisting clients in their rehabilitation proceedings, in order to save jobs and help our economy in these trying times.

[1] § 81, RA 10142.

[2] § 85, RA10142.

[3] § 88, RA 10142.

[4] § 103, RA 10142.

[5] § 105, RA 10142.

[6] Id.

[7] § 108, RA 10142

[8] § 113, RA 10142.

[9] Id.

[10] § 114, RA 10142.

[11] § 122, RA 10142.

[12] § 129, RA 10142.

[13] § 10, RA 10142.

[14] § 145, RA 10142.

[15] The Guardian, When will a Coronavirus Vaccine Be Ready?, available at https://www.theguardian.com/world/2020/apr/06/when-will-coronavirus-vaccine-be-ready (last accessed May 26, 2020).

[16] Audrey Cher, A Coronavirus Vaccine Cannot be Reasonably Expected until the End of 2021, Professor Says, available at https://www.cnbc.com/2020/05/04/a-coronavirus-vaccine-wont-be-ready-until-the-end-of-2021-professor-says.html (last accessed May 26, 2020).

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