Liquidating Debts Amidst the Pandemic (Part 1)
During the past five years, Philippine economic growth averaged for more than 6% and was projected to exceed 7% this 2020.[1] However, with the island of Luzon, which generates about 70% of the country's gross domestic product, on lockdown for the past 2 months, the country is set to have a major economic blow.[2] Most businesses are operating at a loss, and unemployment rates are increasing with businesses providing non-essential goods and services are closing. With all companies struggling for cash, the liquidation of debts takes the foremost priority in surviving this pandemic.
Financial Rehabilitation Act of 2010
In order to collectively and realistically resolve and adjust competing claims between the debtor and the creditor when the former is not in the position to immediately pay all the due and demandable debts, the Congress enacted the Financial Rehabilitation and Insolvency Act of 2010.[3] While recognizing the rights of the creditors to the payment of what is due to them, the law contemplates a situation where a debtor is best kept as a “going concern” for a period of time in order for it to properly pay all its debts.[4] This is very timely during this pandemic where most businesses are struggling to find cash due to the losses being sustained in its operations.
What is Rehabilitation?
Rehabilitation refers to the restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated.[5]
Accordingly, the rationale of rehabilitation is to “effect a feasible and viable rehabilitation” by preserving a floundering business as a going concern, because the assets of a business are often more valuable when so maintained than they would be liquidated.[6] The purpose of rehabilitation proceedings is precisely to enable the company to gain a new lease on life and thereby allow creditors to be paid their claims from its earnings.[7]
Commingling and Aggregation
Pursuant to the principle of separate juridical entity, each corporation, partnership or individual shall be treated as a separate entity notwithstanding the fact that they own common shares, or that they have common creditors, except when:
(a) There was commingling in fact of assets and liabilities of the debtor and the related enterprise prior to the commencement of the proceedings;
(b) The debtor and the related enterprise have common creditors and it will be more convenient to treat them together rather than separately;
(c) The related enterprise voluntarily accedes to join the debtor as party petitioner and to commingle its assets and liabilities with the debtor's; and
(d) The consolidation of assets and liabilities of the debtor and the related enterprise is beneficial to all concerned and promotes the objectives of rehabilitation.[8]
Proceedings Covered by FRIA
There are six (6) proceedings covered by FRIA, namely:
Suspension of Payment Proceedings for Individual Debtors
Court-supervised Corporate Rehabilitation
Pre-negotiated Rehabilitation
Out of Court Rehabilitation
Liquidation of Insolvent Juridical Debtors
Insolvency of Individual Debtors
The details of these proceedings shall be discussed in detail on our next blog post. Meanwhile, should you need assistance in liquidation or rehabilitation, we, the Sangalang and Gaerlan, Business Lawyers, provide quality service in ensuring a “win-win” situation for both the debtor and the creditors in these trying times.
Christian Andrew Labitoria Gallardo recently graduated with a degree of Juris Doctor at the Ateneo School of Law and is currently an associate of the Sangalang & Gaerlan, Business Lawyers. You may reach him at andrew.gallardo@paladinslaw.org
[1] Daniel Moss, The Philippines was an Economic Star: Until Covid-19, available at https://www.bloomberg.com/opinion/articles/2020-04-01/coronavirus-hits-the-philippines-s-economy-just-as-it-was-surging (last accessed May 22, 2020).
[2] Id.
[3] § 2, An Act Providing for the Rehabilitation or Liquidation of Financially Distressed Enterprises and Individuals, Financial Rehabilitation and Insolvency Act of 2010.
[4] Id.
[5] § 4 (gg), An Act Providing for the Rehabilitation or Liquidation of Financially Distressed Enterprises and Individuals, Financial Rehabilitation and Insolvency Act (FRIA) of 2010, RA 10142.
[6] Wonderbook Corp. v Philippine Bank of Communications, 676 SCRA 489 (2012).
[7] Rubberworld Phils Inc v NLRC, 305 SCRA 721 (1999).
[8] § 7, RA 10142.
