STUDENT ID No. 3143541 MARIAN IVY F.

REYES-FAJARDO
BUSINESS BANKRUPTCY IN THE UNITED STATES: PAPER No. 2

1. What aspects or features of administering a bankruptcy case in the United States differ greatly
from the aspects or features of administering an insolvency case in your home jurisdiction.

The Philippine law on corporate rehabilitation is “An Act Providing for the Rehabilitation or
Liquidation of Financially Distressed Enterprises and Individuals” otherwise known as “FRIA”. The one
feature in the administering of a Chapter 11 bankruptcy case that differs greatly from Philippine law is
Chapter 11’s treatment of executory contracts as an altogether distinct class of contracts deserving its own
set of rules.

FRIA, the Philippine law, does not have a law on executory contracts, as defined under Chapter
11. The reason for this is that Philippine law and American law differ in the definition of the term
“executory contracts”. Under US laws, we learn that contracts are required to have a consideration that
requires that a promise or performance is bargained for. The breach of this promise gives the injured party
a remedy. (Restatement (Second) of Contracts § 17 and § 1). An executory contract is a contract in
which both sides have some obligations that are still due, and which, if not fulfilled, are a material breach
of the contract.

Under Philippine law, a contract is “a meeting of the minds between two persons whereby one
binds himself, with respect to the other, to give something or to render some service” (Article 1305, New
Civil Code of the Philippines). A contract can be a unilateral obligation even without consideration or
one that is essentially gratuitous. Perfection or birth of the contract occurs when there is a meeting of the
minds of both parties. Once perfected, the contract is considered executory. This means that the parties
are now in the stage of the performance of the contract, culminating in the extinguishment thereof.

American law and Philippine law agree that administrative expenses for all post-petition contracts
for goods and services (other than executory contracts, in the case of Chapter 11) in the ordinary course of
business are given priority of payment. With regard to “executory contracts” under Philippine law, that is
contracts that are perfected but are still to be performed or pending performance, FRIA provides:

“Section 57. Treatment of Contracts. – x x x, all valid and subsisting contracts of the
debtor with creditors and other third parties as at the commencement date shall continue in
force: Provided, that within ninety (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. x x x (emphasis supplied).

As in the case of executory contracts in American law, FRIA allows for pending contracts to be
terminated (rejected, in Chapter 11), in which case it will be considered as pre-commencement claims (as
in the case of Chapter 11) or confirmed (accepted, in Chapter 11) in which case it shall, like Chapter 11,
be considered as administrative expenses. Under FRIA, the determination to terminate or confirm a
contract is made not by the debtor alone but with the rehabilitation receiver. There is also no option to
assign, as in the case of Chapter 11. No standard or test is provided in both laws to determine which
contracts are to terminated or confirmed, although case law under Chapter 11 provides for the business
judgment rule.