Documente Academic
Documente Profesional
Documente Cultură
TagHirap Corporation
(THC)
• a well-established and
reputable domestic
company
• heavily invested on
research and development
of next generation products
On the Brink Corporation
The case of
TagHirap Corporation
1. Liquidity problems
• THC used almost all of its
resources in developing the
product and is now having
difficulty meeting its debts
and obligations
Approval by the
• debtor;
• creditors representing at least 67% of the secured obligations of the debtor;
• creditors representing at least 75% of the unsecured obligations of the debtor; and, creditors holding at least 85% of the total
liabilities, secured and unsecured, of the debtor; and,
• Publication of the notice of the OCRA
Approval or endorsement of creditors holding at least 2/3 of the total liabilities or the debtor
• secured creditors holding more than 50% of the total secured claims of the debtor
• unsecured creditors holding more 50% of the total unsecured claims of the debtor
The case of
TagHirap Corporation
✔
Trade creditors/suppliers
(i.e. convert loan to agreed to continue to supply
equity) materials
The case of
TagHirap Corporation
✔
restructure existing Unsecured creditors agreed
loan agreements to convert loan to equity
• Invite them to become
✔
part owners (i.e.
Trade creditors/suppliers
convert loan to equity) agreed to continue to supply
materials
The case of
TagHirap Corporation
✔
• Convince them to Unsecured creditors agreed
restructure existing to convert loan to equity
loan agreements
• Invite them to
✔
Trade creditors/suppliers
become part owners agreed to continue to supply
(i.e. convert loan to materials
equity)
The case of
TagHirap Corporation
Voluntary Petition
The case of
TagHirap Corporation
Voluntary Petition
The case of
TagHirap Corporation
Liquidation Proceedings
• THC can close business and file a petition for Voluntary
Liquidation (Section 90, FRIA)
• THC can wait for a creditor to file Involuntary Petition
for Liquidation (Section 91, FRIA)
The Remedy of Liquidation
• ultimate objective is to
liquidate asset of debtor to pay
its creditors and terminate
commercial activities
Dissolution of
Corporation
Economic theory behind liquidation
Collective Procedure
• Distinguishes insolvency proceedings from practically
any other legal procedure.
• Endeavors to accommodate all of those who are
affected by or have an interest in the insolvent
debtor.
insolvent debtor
directors and shareholders,
Secured and unsecured creditors
employees,
guarantors of the debtor
Government
etc.
Debt Relief Proceedings: Nature
42
Financial Rehabilitation Rules of
Procedure (2013)
Promulgated by the SC on
August 27, 2013
apply to petitions for
rehabilitation of corporations,
partnerships, and sole
proprietorships.
Rules on Liquidation are
currently being drafted by the
Rules
43
Financial Rehabilitation and
Insolvency Act
FRIA
Declared Policy of FRIA
to encourage debtors and creditors to collectively
and realistically resolve and adjust competing claims
and property rights.
ensure a timely, fair, transparent, effective and
efficient rehabilitation or liquidation of debtors
maintain certainty and predictability in commercial
affairs, preserve and maximize the value of the
assets of these debtors, recognize creditor rights and
respect priority of claims, and ensure equitable
treatment of creditors who are similarly situated.
45
Nature of proceedings under
FRIA
46
Nature of proceedings under
FRIA
47
Rehabilitation Proceeding as a
Remedy
A “debtor” is a
a. sole proprietorship duly registered with the DTI
b. partnership duly registered with SEC
c. corporation duly organized and existing under Philippine
laws
d. individual debtor who has become insolvent as defined
herein.
52
Definition of Debtor
Note that GOCCs and GFIs other than banks are covered by the FRIA
unless their specific charter provides otherwise
53
The case of
TagHirap Corporation
b
a
BestFeels h
Corp. a
y
Devt.
Corp
Group of Debtors
A group of debtors may jointly file a petition for
rehabilitation when:
a. one or more of its members foresee the impossibility
of meeting debts when they respectively fall due;
b. the financial distress would likely adversely affect the
financial condition and/or operations of the other
members of the group; and/or
c. the participation of the other members of the group
is essential under the terms and conditions of the
proposed Rehabilitation Plan.
55
Definition of Creditor
A “creditor” is a holder of a claim against the debtor that
arose on or before the commencement date.
modifies Finasia Investments and Finance Corporation vs.
Court of Appeals insofar as it holds that the term “claims” is
limited “to debts or demands of a pecuniary nature” or to an
“assertion of a right to have money paid”.
adopts the ruling in the earlier case of Jimenez vs. BF
Homes, Inc., et al, (GR No. 76661 [1987]) where the Supreme
Court enunciated the principle that “when the law speaks of
‘all claims’ for actions against corporations under management
or receivership being suspended, the words ‘all claims’ mean
all kinds of claims and is not limited to money claims only”.
56
Definition of Claim under FRIA
57
San Jose Timber, et al. v. SEC, et al., G.R.
No. 162196, 27 February 2012
Rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore
and reinstate the corporation to its former position
of successful operation and solvency. The purpose of
rehabilitation proceedings is to enable the company
to gain a new lease on life and thereby allow
creditors to be paid their claims from its earnings.
The rehabilitation of a financially distressed
corporation benefits its employees, creditors,
stockholders and, in a larger sense, the general
public.
Voluntary Petition for Corporate
Rehabilitation
Voluntary Corporate Rehabilitation: Who
can file
Can be initiated by
1. any creditor or
2. group of creditors
with a claim of, or the aggregate of whose claims is, at
least P 1 M or at least 25% of the subscribed capital stock
or partners' contributions, whichever is higher
71
Court action on the Petition
If not
it may either give the petitioner/s a reasonable period of
time within which to amend or supplement the petition, or
submit such documents as may be necessary or proper
to put the petition in proper order
72
Court action on the Petition
5 days
No Yes
Number of days
based on court’s
discretion Sufficient in
Corrective Order form &
substance
73
Hearing is not required for
issuance of Commencement
Order
Court is not required to conduct a hearing before issuing a
Commencement Order that includes a Stay Order (Sections 7 and 8,
Rule 2 of the FR Rules)
74
Contents of Commencement
Order
1. Identity of the debtor, its principal business or activity/ies
and its principal place of business;
2. Summary of ground/s for initiating the proceedings;
3. The relief sought
4. The legal effects of the Commencement Order
5. Declaration that the debtor is under rehabilitation
6. Order for the publication of the Commencement Order
7. Order to serve by personal delivery a copy of the petition on
each creditor holding at 10% of total liabilities; or the debtor
75 if petition is involuntary.
Contents of Commencement
Order
8. Appointment of a rehabilitation receiver
9. A summary of the requirements and deadlines for creditors to
establish their claims against the debtor and direct all
creditors to file their claims with the court at least five (5)
days before the initial hearing
10. Order to BIR to file and serve on the debtor its comment on
or opposition to the petition or its claim/s against the debtor
11. Ordering prohibiting debtor's suppliers of goods or services
from withholding the supply of goods and services in the
ordinary course of business
12. Order authorizing the payment of administrative expenses as
76 they become due
Contents of Commencement
Order
13. Set the case for initial hearing (not be more than 40 days
from the date of filing of the petition)
14. Make available copies of the petition and rehabilitation
plan for examination and copying by any interested party
15. Indicate the location or locations at which documents
regarding the debtor and the proceedings under Act may
be reviewed and copied;
16. State that any creditor or debtor who is not the petitioner,
may submit the name or nominate any other qualified
person to the position of rehabilitation receiver at least
five (5) days before the initial hearing
77 17. Issue Stay or Suspension Order
Effects of
Commencement Order
1. vest the rehabilitation receiver with all the powers and
functions (e.g. right to review and obtain records to
which the debtor's management and directors have
access )
78
Effects of
Commencement Order
3. Serve as basis rendering null and void any setoff after
the commencement
4. serve as the legal basis for rendering null and void the
perfection of any lien against the debtor's property
5. consolidate the resolution of all legal proceedings by
and against the debtor to the court
79
Stay/ Suspension Order
81
Exceptions to Stay Order
1. cases already pending appeal in the Supreme Court as of
commencement date )
2. subject to discretion of court, cases pending or filed at a
specialized court or quasi-judicial agency which, upon
determination by the court is capable of resolving the claim
more quickly, fairly and efficiently than the court
3. enforcement of claims against sureties and other persons
solidarily liable with the debtor, and 3rd party or
accommodation mortgagors, as well as issuers of letters of
credit unless the property subject of the 3rd party or
accommodation mortgage is necessary for the rehabilitation
of the debtor as determined by the court upon
recommendation by the rehabilitation receiver;
82
Not covered by Stay Order
4. any form of action of clients of a securities market participant to
recover or otherwise claim moneys and securities entrusted to the
latter in the ordinary course of the latter's business; any action of such
securities market participant or the appropriate regulatory agency or
self-regulatory organization to pay or settle such claims or liabilities;
5. actions of a licensed broker or dealer to sell pledged securities of a
debtor pursuant to a securities pledge or margin agreement for the
settlement of securities transactions in accordance with the provisions
of the Securities Regulation Code and its implementing rules and
regulations;
6. clearing and settlement of financial transactions through the facilities
of a BSP registered clearing agency
7. any criminal action against individual debtor or owner, partner,
director or officer of a debtor
83
Panlilio, et al. vs. RTC, et al.
(G.R. NO. 173846, February 2, 2011)
84
Other legal effects of Suspension or
Stay Order
taxes and fees due to the national government and LGUs are
considered waived upon issuance of Commencement Order
until Rehab plan is approved or petition is dismissed.
85
Duration and condition for continued
effectivity of Commencement Order
Effectivity is for the duration of the rehabilitation
proceedings for as long as there is a substantial likelihood
that the debtor will be successfully rehabilitated
Conditions
Compliance with the prescribed minimum contents by the
proposed Rehabilitation Plan
sufficient monitoring by the rehabilitation receiver of the
debtor's business for creditors’ protection
reasonable attempts of debtor to reach consensus with creditors
on Rehab plan
absence of false or misleading statement
absence of acts of misrepresentation or fraud on part debtors
86 favorable endorsement of the plan by the receiver
Substantial likelihood of rehabilitation:
Factors to consider
Substantial likelihood of successful rehabilitation is
determined by:
a. Sufficiency of assets with which to rehabilitate the
debtor
b. sufficiency cash flow to maintain the operations of the
debtor
c. Good faith on the part of debtors
d. Not a sham petition
e. Viability of pursuing rehab plan by debtor
87
Actions to be taken after the issuance of
Commencement Order before Initial Hearing
Petition
Commencement Order
W/in 20 days from 7 days
W/in 90 days
assumption into office,
Receiver to Publish Commencement Order in
newspaper of general circulation Debtor to notify each
counterparty of the
Establish 5 days before initial hearing particular contract that is
Preliminary
confirmed; if not
Registry of Filing of Creditors’ claims confirmed, deemed
Claims
terminated
30 days 15 days before initial hearing
Hear Filing of comments by creditors
Opposition/
Challenge to 40 days from the filing of the petition
claim/s
Initial Hearing
Submit
88 undisputed
claim/s
Initial Hearing: Purpose
Commencement Order
W/in 20 days from 7 days
W/in 90 days
assumption into office,
Receiver to Publish Commencement Order in
newspaper of general circulation Debtor to notify each
counterparty of the
Establish 5 days before initial hearing particular contract that is
Preliminary
confirmed; if not
Registry of Filing of Creditors’ claims confirmed, deemed
Claims
terminated
30 days 15 days before initial hearing
Hear Filing of comments by creditors
Opposition/
Challenge to 40 days from the filing of the petition
claim/s
Initial Hearing
The most glaring procedural infirmity committed by rehab court is its failure
to petition for rehabilitation and Rehabilitation Plan to the rehabilitation
receiver despite the explicit and clear mandate of the Interim Rules that if the
court is satisfied that there is merit in the petition, it shall give due course to
the petition and “immediately” refer the same and its annexes to the
rehabilitation receiver x x x
his recommendation bears much weight as it is one of the factors which must
be considered by the court if it were to approve the rehabilitation plan
Court made an unwarranted procedural shortcut as its finding that there was
merit in respondent corporations’ petition for rehabilitation was made in the
same Order approving Rehabilitation Plan.
92
Action on the Petition
Petition
Commencement Order
Initial Hearing
Receivers Report
10 days from receipt of Receiver’s Report
94
Action on the Petition:
Dismissal
95
Action on the Petition : Given
Due Course
96
Action on the Petition
Petition
Commencement Order
Initial Hearing
97
Action on the Petition
Petition
Commencement Order
Initial Hearing
Receiver to
Review/Revise/ If there are disputes, refer
within 90 days Modify/Replace to ADR
Rehabilitation Plan
98
Rehab Receiver, Management Committee
and Creditors’ Committee
Rehabilitation Receiver
May or may not be be from the nominees of the rehab
plan
Creditor or debtor may nominate other person during the
initial hearing
Court may appoint creditors’ nominee if supported by
more than 50% of the secured and general unsecured
creditors.
If debtor is a securities market participant, court has to
give priority the nominee of the appropriate securities or
investor protection fund.
101
Rehabilitation Receiver :
Power and Duties
103
Rehabilitation Receiver :
Power and Duties
105
Rehabilitation Receiver :
Grounds for Removal
106
Rehabilitation Receiver :
Compensation
109
Hearing required for creation
of Management Committee
112
Powers of Management
Committee
118
Creditors’ Committee
120
Determination of Claims
122
Treatment of Secured
Creditors
123
Lack of Adequate Protection
124
Lack of Adequate Protection
125
Remedy of Creditor that Lacks Adequate
Protection
126
Remedy of Creditor that Lacks Adequate
Protection
130
Contents of a Rehabilitation
Plan
131
Contents of a Rehabilitation
Plan
133
Action on the Petition
Petition
Commencement Order
Initial Hearing
Receiver to
Review/Revise/ If there are disputes, refer
within 90 days Modify/Replace to ADR
Rehabilitation Plan
134
Action on the Petition
Petition
Commencement Order
Initial Hearing
Rejected Approved
Liquidation Implementation
Hearing of
objections
Cramdown
135
Despite rejection, court can
still approve if:
1. Rehabilitation Plan complies with all the requirements of
FRIA
2. rehabilitation receiver recommends the confirmation
3. shareholders, owners or partners of the juridical debtor lose
at least their controlling interest as a result of the
Rehabilitation Plan
4. Rehabilitation Plan would likely provide the objecting class
of creditors with compensation which has a net present
value greater than that which they would have received if
the debtor were under liquidation
136
When to deny remedy of rehabilitation
(Wonder Book vs. PBCOM (G.R. No. 187316 Jan 16, 2012
137
Sole Grounds for Objection to
a Plan
138
Hearing on the Objections
139
Confirmation of Rehab Plan
Issued if
no objections are filed within the relevant period
Even with objections, they lack merit or basis has been
cured
Court may confirm Rehab plan notwithstanding
unresolved disputes over claims if the
Rehabilitation Plan has made adequate provisions
for paying such claims.
140
Termination of Proceedings
Successful implementation
Failure of rehabilitation
Dismissal of the petition by the court
debtor fails to submit a Rehabilitation Plan
Even with rehab plan, there is no substantial
likelihood that the debtor can be rehabilitated
within a reasonable period commission of fraud in
securing the approval of the Rehabilitation Plan or
its amendment
Analogous circumstances.
141
Termination of Proceedings: Failure to
complete rehab proceeding within 1 year
Commencement Order
Initial Hearing
Approval
Implementation
Failure Successful
Liquidation Restored
143
Effects of Confirmation of Rehab
Plan
144
Effects of Confirmation of
Rehab Plan
145
Rehabilitation Plan
shall refer to a plan by which the financial well-
being and viability of an insolvent debtor can be
restored using various means including, but not
limited to, debt forgiveness, debt rescheduling,
reorganization or quasi-reorganization, dacion
en pago, debt-equity conversion and sale of the
business (or parts of it) as a going concern, or
setting-up of new business entity as prescribed
in Section 62 hereof, or other similar
arrangements as may be approved by the court
or creditors.
“CRAMDOWN”
a restructuring of debt that creditors are
required to accept as part of a bankruptcy.
legal authority for courts to impose a
restructuring of debt in a bankruptcy despite
objections from creditors.
the involuntary imposition by a court of a
reorganization plan over the objection of some
classes of creditors
Pacific Wide V Puerto Azul (Nov. 25,
2009)
the rehabilitation plan is contested on the ground that the
same is unreasonable and results in the impairment of the
obligations of contract. PWRDC contests the following
stipulations in PALIs rehabilitation plan:
fifty percent (50%) reduction of the principal obligation;
condonation of the accrued and substantial interests and
penalty charges;
repayment over a period of ten years, with minimal
interest of two percent (2%) for the first five years and
five percent (5%) for the next five years until fully paid,
and only upon availability of cash flow for debt service.
Pacific Wide V Puerto Azul (Nov. 25,
2009)
We find nothing onerous in the terms of PALIs
rehabilitation plan. The Interim Rules on
Corporate Rehabilitation provides for means of
execution of the rehabilitation plan, which may
include, among others, the conversion of the
debts or any portion thereof to equity,
restructuring of the debts, dacion en pago, or
sale of assets or of the controlling interest.
The restructuring of the debts of PALI is part
and parcel of its rehabilitation
Pacific Wide V Puerto Azul (Nov. 25,
2009): The cramdown order
The court may approve a rehabilitation plan even
over the opposition of creditors holding a majority of
the total liabilities of the debtor if, in its judgment,
the rehabilitation of the debtor is feasible and the
opposition of the creditors is manifestly
unreasonable.
The rehabilitation plan, once approved, is binding
upon the debtor and all persons who may be
affected by it, including the creditors, whether or
not such persons have participated in the
proceedings or have opposed the plan or whether or
not their claims have been scheduled.
Pacific Wide V Puerto Azul (Nov. 25,
2009)
We also find no merit in PWRDCs contention that there is a
violation of the impairment clause. Section 10, Article III of the
Constitution mandates that no law impairing the obligations of
contract shall be passed. This case does not involve a law or an
executive issuance declaring the modification of the contract
among debtor PALI, its creditors and its accommodation
mortgagors. Thus, the non-impairment clause may not be
invoked.
Even assuming that the same may be invoked, the non-
impairment clause must yield to the police power of the State.
Property rights and contractual rights are not absolute. The
constitutional guaranty of non-impairment of obligations is
limited by the exercise of the police power of the State for the
common good of the general public.
Successful rehabilitation of a distressed corporation will benefit
its debtors, creditors, employees, and the economy in general.
Express Investments v. BayanTel
(December 5, 2012)
Rehabilitation is an attempt to conserve and
administer the assets of an insolvent corporation
in the hope of its eventual return from financial
stress to solvency. It contemplates the
continuance of corporate life and activities in an
effort to restore and reinstate the corporation to
its former position of successful operation and
liquidity.
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.
Express Investments v. BayanTel
(December 5, 2012)
“[t]he creditors of Bayantel,
whether secured or unsecured,
should be treated equally and on
the same footing or pari passu
until the rehabilitation proceedings
is terminated
What is “pari passu”?
The principle of “equality in equity”
•Equal per class?
•Equal regardless of class?
•Pro-rata per class?
•Pro-rata for all?
Express Investments v. BayanTel
(December 5, 2012)
In legal parlance, pari passu is used especially of
creditors who, in marshaling assets, are entitled to
receive out of the same fund without any
precedence over each other
the stipulation in the Assignment Agreement to the
effect that respondent Bayantel shall pay petitioners
in full and ahead of other creditors out of its cash
flow during rehabilitation directly impinges on the
provision of the approved Rehabilitation Plan that
“[t]he creditors of Bayantel, whether secured or
unsecured, should be treated equally and on the
same footing or pari passu until the rehabilitation
proceedings is terminated…”
Rehabilitation plan
Once appoved or confirmed:
158
Proper Mode of Appeal
159
Liquidation vs.
Corporate Rehabilitation
Hong Germany,
Kong Canada
Netherlands,
and and the
Sweden, Belgium and
Singa United Italy Most
Switzerland Luxembourg
pore States
Most 1 2 3 4 5 6 7 8 9 10 Pro-
Debtor
Pro- Australia, Japan, Austria, Greece, France
Korea, New Portugal,
Creditor England,
Zealand,
Denmark,
Spain, and
and and South
Norway, Africa most Latin
Ireland
and America
Scotland countries