On 2 December 2008, the Supreme Court en banc issued A.M. No. 00-8-10-SC, approving the RULES OF PROCEDURE ON CORPORATE REHABILITATION (“Rules”). The new Rules took effect on 16 January 2009. Here are the salient features of the new Rules, in contrast to the old Interim Rules of Procedure on Corporate Rehabilitation (“Interim Rules). Unless otherwise indicated, the old provisions remain the same.

[UPDATE: Refer to Court-Supervised Rehabilitation Proceedings under the Financial Rehabilitation and Insolvency Act (FRIA) of 2010; Supreme Court A.M. No. 12-12-11-SC (Financial Rehabilitation Rules of Procedure) and A.M. No. 15-04-06-SC (Financial Liquidation and Suspension of Payments Rules of Procedure for Insolvent Debtors)]

Effect on pending rehabilitation proceedings

Unless the court orders otherwise to prevent manifest injustice, any pending petition for rehabilitation that has not undergone the initial hearing prescribed under the Interim Rules of Procedure for Corporate Rehabilitation at the time of the effectivity (16 January 2009) of the new Rules shall be governed by the Rules. (Rule 9, Sec. 2)

Recognition of foreign proceedings

The provisions on Recognition of Foreign Proceedings (Rule 7) are not expressly provided in the Interim Rules. The procedure will be separately discussed. (Comment: This is a welcome addition because based on our experience, the absence of express provisions gave rise to many issues that only delayed the speedy resolution of the proceedings.)

Types of Petition based on the party filing it

The Interim Rules only cover rehabilitations that are: (1) Debtor-Rehabilitation; and (2) Creditor-Initiated. The two are also lumped in a single Rule (Rule 4).

The new Rules add a third type, the Pre-Negotiated Rehabilitation, and distinctly set forth the applicable provisions for each:

• Rule 4 – Debtor-Initiated Rehabilitation

• Rule 5 – Creditor-Initiated Rehabilitation

• Rule 6 – Pre-Negotiated Rehabilitation

The General Provisions (Rule 3), of course applies to all types. Also, certain provisions on Debtor-Initiated Rehabilitation (Sections 5-12 of Rule 4) are expressly made applicable to Creditor-Initiated Rehabilitation (Rule 5).

Each procedure will be separately discussed.

Venue

The Interim Rules merely provides that the petition shall be filed in the regional trial court (RTC) which has jurisdiction over the principal office of the debtor. The new Rules now explicitly provides (Rule 3, Sec. 2):

1. It should be the office specified in its articles of incorporation or partnership.

2. Where the principal office of the corporation, partnership or association is registered in the SEC as “Metro Manila”, the action must be filed in the RTC of the city or municipality where the head office is located.

3. A joint petition by a group of companies shall be filed in the RTC which has jurisdiction over the principal office of the parent company, as specified in its Articles of Incorporation.

Stay Order

The new Rules (Rule 3, Sec. 7) expressly provide that the “issuance of a stay order does not affect the right to commence actions or proceedings insofar as it is necessary to preserve a claim against the debtor.”

The following are also added to the required contents of the Stay Order:

1. Sub-paragraph (b) in the Interim Rules simply provides that the court shall issue an order “staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and persons not solidarily liable with the debtor”, but the new Rules add a proviso that “the stay order shall not cover claims against letters of credit and similar security arrangements issued by a third party to secure the payment of the debtor’s obligations; provided, further, that the stay order shall not cover foreclosure by a creditor of property not belonging to a debtor under corporate rehabilitation; provided, however, that where the owner of such property sought to be foreclosed is also a guarantor or one who is not solidarily liable, said owner shall be entitled to the benefit of excussion as such guarantor”.

2. Sub-paragraph (b) in the Interim Rules simply provides that the order shall prohibit the debtor from making any payment of its liabilities “as of the date of the petition”, but this phrase was deleted and substituted with: “except as provided in items (e), (f) and (g) of this Section or when ordered by the court pursuant to Section 10 of Rule 3.”

3. This provision was added as sub-paragraph (g): “directing the payment of new loans or other forms of credit accommodations obtained for the rehabilitation of the debtor with prior court approval”.

4.  This provision was also added as sub-paragraph (j):  “directing the petitioner to furnish a copy of the petition and its annexes, as well as the stay order, to the creditors named in the petition and the appropriate regulatory agencies such as, but not limited to, the Securities and Exchange Commission, the Bangko Sentral ng Pilipinas, the Insurance Commission, the National Telecommunications Commission, the Housing and Land Use Regulatory Board and the Energy Regulatory Commission.”

5. The time to file a verified comment by the creditors was increased to 15 days before the date of the first initial hearing, from 10 days under the Interim Rules.

Period of Stay Order

The new Rules retain the language in the Interim Rules that the “stay order shall be effective from the date of its issuance until the approval of the rehabilitation plan or the dismissal of the petition” (Rule 3, Sec. 9), but deleted the proviso in the second paragraph of Rule 4, Sec. 11 of the Interim Rules that the petition shall be dismissed if no rehabilitation plan is approved after 180 days from the date of the initial hearing.

Relief from, modification, or termination of Stay Order

Another ground was added to the original 3 grounds to terminate, modify, or set conditions for the continuance of the stay order under the Interim Rules – that “the property covered by the stay order is not essential or necessary to the rehabilitation and the creditor’s failure to enforce its claim will cause more damage to the creditor than to the debtor.” (Rule 3, Sec. 10)

Reports

The new Rules now indicate that the report “shall include, at the minimum, interim financial statements of the debtor.” (Rule 3, Sec. 16)

Dismissal of rehabilitation receiver

Under the Interim Rules, the court may, motu propio or on its own initiative, dismiss the rehabilitation receiver. This is deleted under the new Rules. (Rule 3, Sec. 17)

Repayment Period

The new Rules now provides that if “the rehabilitation plan extends the period for the debtor to pay its contractual obligations, the new period should not extend beyond 15 years from the expiration of the stipulated term existing at the time of filing of the petition.” (Rule 3, Sec. 19)

Termination of proceedings

Under the Interim Rules, the court may, motu propio or on its own initiative, terminate the proceedings. This is deleted under the new Rules. (Rule 3, Sec. 23) Also, the same provision expressly adds the “dismissal of the petition” in the enumeration of grounds for termination of the proceedings. (Comment: While this is not included in the enumeration under Rule 4, Sec. 27 of the Interim Rules, this was understood to be one of the grounds for termination, expressly mentioned in Rule 4, Sec. 11 of the Interim Rules.)

Prohibited pleadings

The following prohibited pleadings are added under Rule 3, Sec. 1 of the new Rules:

• 1. Motion to hear affirmative defenses; and

• 2. Any pleading or motion which is similar to or of like effect as any of the foregoing.

On the other hand, the following grounds were removed from the list of prohibited pleadings:

• 1. Petition for Relief

• 2. Memorandum

• 3. Reply or Rejoinder

• 4. Motion for New Trial or Reconsideration. 

A party may file a motion for reconsideration of any order issued by the court prior to the approval of the rehabilitation plan. No relief can be extended to the party aggrieved by the court’s order on the motion through a special civil action for certiorari under Rule 65 of the Rules of Court. Such order can only be elevated to the Court of Appeals (CA) as an assigned error in the petition for review of the decision or order approving or disapproving the rehabilitation plan. An order issued after the approval of the rehabilitation plan can be reviewed only through a special civil action for certiorari under Rule 65 of the Rules of Court. (Rule 8, Sec. 1)

Review of decision on Rehabilitation Plan

The new Rules now expressly provide that an order approving or disapproving a rehabilitation plan can only be reviewed through a petition for review to the CA under Rule 43 of the Rules of Court within 15 days from notice of the decision or order. (Rule 8, Sec. 2) (Comment: Please also refer to A.M. No. 00-8-10-SC [September 4, 2001] and A.M. No. 04-9-07-SC [September 14, 2004].)

Definitions

Under the new Rules, the following terms are expressly defined as follows:

“Administrative Expenses” shall refer to (a) reasonable and necessary expenses that are incurred in connection with the filing of the petition; (b) expenses incurred in the ordinary course of business after the issuance of the stay order, excluding interest payable to the creditors for loans and credit accommodations existing at the time of the issuance of the stay order; and (c) other expenses that are authorized under these Rules.

“Affiliate” is a corporation that directly or indirectly, through one or more intermediaries, is controlled by, or is under the common control of another corporation, which thereby becomes its parent corporation.

“Asset” is anything of value that can be in the form of money, such as cash at the bank or amounts owed; fixed assets such as property or equipment; or intangibles including intellectual property, the book value of which is shown in the last three audited financial statements immediately preceding the filing of the petition. In case the debtor is less than three years in operation, it is sufficient that the book value is based on the audited financial statement/s for the two years or year immediately preceding the filing of the petition, as the case may be.

“Control” is the power of a parent corporation to direct or govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one–half (1/2) of the voting power of an enterprise unless, in exceptional circumstances, it can clearly be demonstrated that such ownership does not constitute control. Control also exists even when the parent owns one-half (1/2) or less of the voting power of an enterprise when there is power:

• (a) Over more than one-half (1/2) of the voting rights by virtue of an agreement with investors;

• (b) To direct or govern the financial and operating policies of the enterprise under a statute or an agreement;

• (c) To appoint or remove the majority of the members of the board of directors or equivalent governing body; or

• (d) To cast the majority votes at meetings of the board of directors or equivalent governing body.

“Days” shall refer to calendar days unless otherwise provided in these Rules.

“Foreign court” means a judicial or other authority competent to control or supervise a foreign proceeding.

“Foreign proceeding” means a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of rehabilitation or re-organization.

“Foreign representative” means a person or entity, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or rehabilitation of the debtor or to act as a representative of the foreign proceeding.

“Group of companies” refers to, and can cover only, corporations that are financially related to one another as parent corporations, subsidiaries and affiliates. When the petition covers a group of companies, all reference under these Rules to “debtor” shall include and apply to the group of companies.

“Liabilities” shall refer to monetary claims against the debtor, including stockholder’s advances that have been recorded in the debtor’s audited financial statements as advances for future subscriptions.

“Parent” is a corporation which has control over another corporation directly or indirectly through one or more intermediaries.

“Rehabilitation” shall mean the restoration of the debtor to a position 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 corporation continues as a going concern than if it is immediately liquidated.

“Secured claim” shall refer to any claim whose payment or fulfillment is secured by contract or by law, including any claim or credit enumerated under Articles 2241 and 2242 of the Civil Code and Article 110, as amended, of the Labor Code of the Philippines.

“Subsidiary” means a corporation more than fifty percent (50%) of the voting stock of which is owned or controlled directly or indirectly through one or more intermediaries by another corporation, which thereby becomes its parent corporation.

“Unsecured claim” shall mean any claim other than a secured claim.