Rehabilitation, under the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, 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. The procedure and requirements are discussed below.
| Other options – Corporations: | Options – Individuals: |
| * Pre-negotiated rehabilitation * Informal restructuring * Liquidation | * Suspension of payments * Voluntary insolvency * Involuntary insolvency |
FILING THE PETITION
Court-supervised rehabilitation proceedings, also called corporate rehabilitation, may be voluntary (initiated by the debtor) or involuntary (initiated by the creditor or group of creditors). Pursuant to Republic Act No. 10142, the other remedies relating to insolvent juridical debtors are: (a) out-of-court or informal restructuring agreements or rehabilitation plans; (b) pre-negotiated rehabilitation; and (c) liquidation of insolvent juridical debtors. In certain instances, court-supervised rehabilitation proceedings or pre-negotiated rehabilitation may be converted to liquidation. There are separate requirements for voluntary and involuntary proceedings:
| * Voluntary Court-Supervised Rehabilitation Proceedings for Insolvent Juridical Debtors | * Involuntary Court-Supervised Rehabilitation Proceedings against Insolvent Juridical Debtors |
COMMENCEMENT ORDER
If the court finds the petition for rehabilitation to be sufficient in form and substance, it shall, within 5 working days from the filing of the petition, issue a Commencement Order. If, within the same period, the court finds the petition deficient in form or substance, the court may, in its discretion, give the petitioner/s a reasonable period of time within which to amend or supplement the petition, or to submit such documents as may be necessary or proper to put the petition in proper order. In such case, the 5 working days provided above for the issuance of the Commencement Order shall be reckoned from the date of the filing of the amended or supplemental petition or the submission of such documents. [For the contents and effects of the Commencement Order, see: Commencement Order in Court-Supervised Rehabilitation Proceedings]
The Commencement Order includes a Stay or Suspension Order, which, among others, suspends all actions for the enforcement of claims against the debtor, and prohibits the debtor from disposing any of its properties except in the ordinary course of business.
INITIAL HEARING
The schedule of the initial hearing, which shall not be more than 40 days from the date of filing of the petition, is indicated in the Commencement Order. At the initial hearing, the court shall:
- (a) determine the creditors who have made timely and proper filing of their notice of claims;
- (b) hear and determine any objection to the qualifications or the appointment of the rehabilitation receiver and, if necessary, appoint a new one;
- (c) direct the creditors to comment on the petition and the Rehabilitation Plan, and to submit the same to the court and to the rehabilitation receiver within a period of not more than 20 days; and
- (d) direct the rehabilitation receiver to evaluate the financial condition of the debtor and to prepare and submit a report.
REPORT OF THE REHABILITATION RECEIVER
Within 40 days from the initial hearing, and with or without the comments of the creditors or any of them, the rehabilitation receiver shall submit a report to the court stating his preliminary findings and recommendations on whether:
- (a) the debtor is insolvent and if so, the causes thereof and any unlawful or irregular act or acts committed by the owner/s of a sole proprietorship, partners of a partnership, or directors or officers of a corporation in contemplation of the insolvency of the debtor or which may have contributed to the insolvency of the debtor;
- (b) the underlying assumptions, the financial goals and the procedures to accomplish such goals as stated in the petitioner’s Rehabilitation Plan are realistic, feasible and reasonable;
- (c) there is a substantial likelihood for the debtor to be successfully rehabilitated;
- (d) the petition should be dismissed; and
- (e) the debtor should be dissolved and/or liquidated.
GIVING DUE COURSE, DISMISSAL, CONVERSION
Within 10 days from receipt of the report of the rehabilitation receiver, the court may:
1. Give due course to the petition upon a finding that: (a) the debtor is insolvent; and (b) there is a substantial likelihood for the debtor to be successfully rehabilitated.
- The court shall direct the rehabilitation receiver to review, revise and/or recommend action on the Rehabilitation Plan and submit the same or a new one to the court within a period of not more than 90 days. The court may refer any dispute relating to the Rehabilitation Plan or the rehabilitation proceedings pending before it to arbitration or other modes of dispute resolution, as provided for under Republic Act No. 9285, or the Alternative Dispute Resolution Act of 2004, should it determine that such mode will resolve the dispute more quickly, fairly and efficiently than the court.
2. Dismiss the petition upon a finding that: (a) the debtor is not insolvent; (b) the petition is a sham filing intended only to delay the enforcement of the rights of the creditor/s or of any group of creditors; (c) the petition, the Rehabilitation Plan and the attachments thereto contain any materially false or misleading statements; or (d) the debtor has committed acts of misrepresentation or in fraud of its creditor/s or a group of creditors;
- The court may, in its discretion, order the petitioner to pay damages to any creditor or to the debtor, as the case may be, who may have been injured by the filing of the petition, to the extent of any such injury.
3. Convert the proceedings into one for the liquidation of the debtor upon a finding that: (a) the debtor is insolvent; and (b) there is no substantial likelihood for the debtor to be successfully rehabilitated.
DETERMINATION OF CLAIMS
Within 20 days from his assumption into office, the rehabilitation receiver shall establish a preliminary registry of claims. The rehabilitation receiver shall make the registry available for public inspection and provide publication notice to the debtor, creditors and stakeholders on where and when they may inspect it. All claims included in the registry of claims must be duly supported by sufficient evidence.
Within 30 days from the expiration of the aforementioned 20-day period, the debtor, creditors, stakeholders and other interested parties may submit a challenge to claim/s to the court, serving a certified copy on the rehabilitation receiver and the creditor holding the challenged claim/s. Upon the expiration of the 30-day period, the rehabilitation receiver shall submit to the court the registry of claims which shall include undisputed claims that have not been subject to challenge.
EFFECT OF FAILURE TO FILE NOTICE OF CLAIM
A creditor whose claim is not listed in the schedule of debts and liabilities and who fails to file a notice of claim in accordance with the Commencement Order but subsequently files a belated claim shall not be entitled to participate in the rehabilitation proceedings but shall be entitled to receive distributions arising therefrom.
GOVERNANCE / MANAGEMENT
Unless otherwise provided, the management of the juridical debtor shall remain with the existing management subject to the applicable law/s and agreement/s, if any, on the election or appointment of directors, managers or managing partner. However, all disbursements, payments or sale, disposal, assignment, transfer or encumbrance of property, or any other act affecting title or interest in property, shall be subject to the approval of the rehabilitation receiver and/or the court.
In certain instances, however, the Rehabilitation Receiver or Management Committee may take over the management of the debtor.
ASSETS
Use or Disposition of Assets
Except as otherwise provided by law, no funds or property of the debtor shall be used or disposed of except in the ordinary course of business of the debtor, or unless necessary to finance the administrative expenses of the rehabilitation proceedings. Ordinary course of business refers to transactions in the pursuit of the individual debtor’s or debtor’s business operations prior to rehabilitation or insolvency proceedings and on ordinary business terms.
Sale of Assets
The court, upon application of the rehabilitation receiver, may authorize the sale of unencumbered property of the debtor outside the ordinary course of business upon a showing that the property, by its nature or because of other circumstance, is perishable, costly to maintain, susceptible to devaluation or otherwise in jeopardy.
Sale or Disposal of Encumbered Properties
The court may authorize the sale, transfer, conveyance or disposal of encumbered property of the debtor, or property of others held by the debtor where there is a security interest pertaining to third parties under a financial, credit or other similar transactions if, upon application of the rehabilitation receiver and with the consent of the affected owners of the property, or secured creditor/s in the case of encumbered property of the debtor and, after notice and hearing, the court determines that:
- (a) such sale, transfer, conveyance or disposal is necessary for the continued operation of the debtor’s business; and
- (b) the debtor has made arrangements to provide a substitute lien or ownership right that provides an equal level of security for the counter-party’s claim or right.
Properties held by the debtor where the debtor has authority to sell such as trust receipt or consignment arrangements may be sold or disposed of by the debtor, if such sale or disposal is necessary for the operation of the debtor’s business, and the debtor has made arrangements to provide a substitute lien or ownership right that provides an equal level of security for the counter-party’s claim or right.
Sale or disposal of property shall not give rise to any criminal liability under applicable laws.
Assets of Debtor Held by Third Parties
In the case of possessory pledges, mechanic’s liens or similar claims, third parties who have in their possession or control property of the debtor shall not transfer, convey or otherwise dispose of the same to persons other than the debtor, unless upon prior approval of the rehabilitation receiver. The rehabilitation receiver may also:
- (a) demand the surrender or the transfer of the possession or control of such property to the rehabilitation receiver or any other person, subject to payment of the claims secured by any possessory lien/s thereon;
- (b) allow said third parties to retain possession or control, if such an arrangement would more likely preserve or increase the value of the property in question or the total value of the assets of the debtor; or
- (c) undertake any other disposition of the said property as may be beneficial for the rehabilitation of the debtor, after notice and hearing, and approval of the court.
Rescission or Nullity of Sale, Payment, Transfer or Conveyance of Assets
The court may rescind or declare as null and void any sale, payment, transfer or conveyance of the debtor’s unencumbered property or any encumbering thereof by the debtor or its agents or representatives after the commencement date which are not in the ordinary course of the business of the debtor. The unencumbered property may be sold, encumbered or otherwise disposed of upon order of the court after notice and hearing:
- (a) if such are in the interest of administering the debtor and facilitating the preparation and implementation of a Rehabilitation Plan;
- (b) in order to provide a substitute lien, mortgage or pledge of property;
- (c) for payments made to meet administrative expenses as they arise;
- (d) for payments to victims of quasi delicts upon a showing that the claim is valid and the debtor has insurance to reimburse the debtor for the payments made;
- (e) for payments made to repurchase property of the debtor that is auctioned off in a judicial or extrajudicial sale; or
- (f) for payments made to reclaim property of the debtor held pursuant to a possessory lien.
Assets Subject to Rapid Obsolescence, Depreciation and Diminution of Value
Upon the application of a secured creditor holding a lien against or holder of an ownership interest in property held by the debtor that is subject to potentially rapid obsolescence, depreciation or diminution in value, the court shall, after notice and hearing, order the debtor or rehabilitation receiver to take reasonable steps necessary to prevent the depreciation. If depreciation cannot be avoided and such depreciation is jeopardizing the security or property interest of the secured creditor or owner, the court shall:
(a) allow the encumbered property to be foreclosed upon by the secured creditor according to the relevant agreement between the debtor and the secured creditor, applicable rules of procedure and relevant legislation. The proceeds of the sale will be distributed in accordance with the order prescribed under the rules of concurrence and preference of credits; or
(b) upon motion of, or with the consent of the affected secured creditor or interest owner, order the conveyance of a lien against or ownership interest in substitute property of the debtor to the secured creditor, provided that other creditors holding liens on such property, if any, do not object thereto, or, if such property is not available;
(c) order the conveyance to the secured creditor or holder of an ownership interest of a lien on the residual funds from the sale of encumbered property during the proceedings; or
(d) allow the sale or disposition of the property, provided that the sale or disposition will maximize the value of the property for the benefit of the secured creditor and the debtor, and the proceeds of the sale will be distributed in accordance with the order prescribed under the rules of concurrence and preference of credits.
POST-COMMENCEMENT LOANS AND OBLIGATIONS
With the approval of the court upon the recommendation of the rehabilitation receiver, the debtor, in order to enhance its rehabilitation, may enter into credit arrangements and incur other obligations as may be essential for its rehabilitation.
TREATMENT OF EMPLOYEES
Compensation of employees required to carry on the business shall be considered an administrative expense. Claims of separation pay for months worked prior to the commencement date shall be considered a pre-commencement claim. Claims for salary and separation pay for work performed after the commencement date shall be an administrative expense.
TREATMENT OF SECURED CREDITORS
Nothing in R.A. 10142 be deemed in any way to diminish or impair the security or lien of a secured creditor, or the value of his lien or security, except that his right to enforce said security or lien may be suspended during the term of the Stay Order. [See discussion: Secured Creditors in Court-Supervised Rehabilitation Proceedings]
TREATMENT OF CONTRACTS
All valid and subsisting contracts of the debtor with creditors and other third parties as at the commencement date shall continue in force, unless cancelled by virtue of a final judgment of a court of competent jurisdiction issued prior to the issuance of the Commencement Order, or at anytime thereafter by the court before which the rehabilitation proceedings are pending.
Within 90 days following the commencement of proceedings, the debtor, with the consent of the rehabilitation receiver, shall notify each contractual counter-party of whether it is confirming the 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 as a result of the election to terminate a contract shall be considered a pre-commencement claim against the debtor.
Nothing in R.A. 10142 shall prevent the cancellation or termination of any contract of the debtor for any ground provided by law.
TERMINATION OF PROCEEDINGS
Upon motion by any stakeholder or the rehabilitation receiver, the court may issue an order: (a) declaring a successful implementation of the Rehabilitation Plan; or (b) a failure of rehabilitation. [See also: Termination of Court-Supervised Rehabilitation Proceedings]
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