05BAROPS_InsolvencyLaw_184to193

184

INSOLVENCY LAW (Act 1956, as amended)

I. INTRODUCTION •

Under Phil. law, bankruptcy is the same as insolvency.

•

Defn of Insolvency: relative condition of a debtor’s assets and liabilities that the assets, I fall made immediately available, would not be sufficient to pay the liabilities

A. Primary Purposes of Insolvency Law 1.

2.

equitable distribution of the properties of the debtor among the creditors to afford the individual debtor a fresh start in life

SUSPENSION OF PAYMENTS

INSOLVENCY PROCEEDINGS

Purpose: To suspend or delay payments of debts

Purpose: to compel presentment of all debts, whether due or not, and to secure a complete discharge from such debts

Amount of indebtedness is not affected, but only the time for paying them is postponed

Creditors receive less than what they are entitled to, or some creditors may not even receive anything

Debtor has sufficient property to cover his liabilities

Debtor’s assets are not sufficient to cover liabilities

VOLUNTARY INSOLVENCY

INVOLUNTARY INSOLVENCY

Debtor is the petitioner

3 or more creditors are the petitioner

Debtor may have only one creditor

Debtor must have at least 3 creditors

No reqts wrt creditors

Creditors must be Phil. residents whose credits accrued in the Phils, and none of them became a creditor by assignment within 30 days prior to the filing of the petition

No bond is required for the petition

A bond is required for insolvency proceedings

Order of adjudication may be granted ex parte

Order is granted only after a hearing

Debtor must not have committed an act of insolvency

Debtor must have committed an act of insolvency before the creditors can file the petition

Petition must be filed with the RTC where petitionerdebtor resided for 6 months prior to the filing

Length of residence of the debtor is immaterial

BUT NOTE: the Insolvency Law does not grant discharge to a corporate debtor

B. 2 Divisions of the Law 1.

2.

Suspension of Payments- debtor possesses sufficient property to cover all his debts, but foresees the impossibility of meeting them when they respectively fall due (Sec 2). Debtor asks for more time to convert some of his properties to cash to be able to pay his debts. Insolvency Proceedings – Debtor has no cash or property to pay all his debts. 2 Types: a.

Voluntary Insolvency: debtor files for insolvency

b.

Involuntary Insolvency: creditors file for debtor’s insolvency

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185 II. SOURCES

A. Spanish Code of Commerce

Mitsui vs HSBC (1917) Act No. 1956 deals with three principal subjects: suspension of payments, voluntary insolvency, and involuntary insolvency. That part of the Act referring to the first appears to have been taken from the Spanish Code of Commerce, as amended by the law of June 10, 1897. The Act, in so far as it relates to voluntary and involuntary insolvency, is essentially a bankruptcy law because it discharges the honest debtor.

B. Insolvency Act of California of 1895 (as to voluntary and involuntary insolvency)

SunLife vs Ingersoll (1921) Act No. 1956 is in great part a copy of the Insolvency Act of California, enacted in 1895, though it contains a few provisions from the American Bankruptcy Law of 1898. The California Insolvency Law of 1895 is precisely the provision which appears as section 32 of our Act, defining the property which passes as assets to the assignee in insolvency.

III. SUSPENSION OF PAYMENTS A. Nature The debtor who, possessing sufficient property to cover all his debts, foresees the impossibility of meeting them when they fall due, may petition that he be declared in the state of suspensiob of payments by the court of the province / city in which he has resided for the preceding 6 months. (Sec 2)

B. Who May File An individual person, sociedad or corporation (Sec 2)

Chung Ka Bio vs. IAC (1988) If petition for suspension of payments is filed with SEC by a corporate entity and an individual stockholder (who is a surety for the corporation), SEC has no jurisdiction over the individual petitioner.

Traders Royal Bank vs. CA (1989) SEC can only take custody and control of the assets of the corporation. Individual petitioner is merely a nominal party. His properties are not included in the rehabilitation receivership appointed by the SEC for the corporation. Hence, his creditors can file suits against him even during the rehabilitation receivership.

PAL vs Spouses Kurangking (2002) A “claim” is said to be “a right to payment, whether or not It is reduced to judgment, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, legal or equitable, and secured or unsecured.” In Finasia Investments this Court has defined the word “claim,” contemplated in Section 6(c) of P.D. 902-A, as referring to debts or demands of a pecuniary nature and the assertion of a right to have money paid as well. The claim of private respondents against PAL is a money claim for the missing luggages, a financial demand, that the law requires to be suspended pending the rehabilitation proceedings. The justification is to enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the ‘rescue’ of the debtor company

Chas Realty vs Talavera (2003) Rule 4, Section 2(k) of the Interim Rules on Corporate Rehabilitation provides that (a), the filing of the petition has been duly authorized and (b), the directors and stockholders have irrevocably consented to, in accordance with existing laws, all actions or matters necessary and desirable to rehabilitate the debtor

if any extraordinary corporate actions are to be done, the petitioner would be bound get the approval of a majority of the directors and the affirmative votes of stockholders representing at least 2/3 of the outstanding capital stock. Where no such extraordinary corporate acts are contemplated, the approval of stockholders would only be by a majority.

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186 Persons having claims for personal labor, maintenance, expenses of the last illness and funeral of wife or child of debtor, incurred during the 60 days preceding the filing of the petition

The rehabilitation plan submitted by petitioner merely consists of a repayment or re-structuring scheme. This would not require a vote of approval by the stockholders representing at least 2/3 of the outstanding capital stock

• MWSS vs Daway (2004) Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily liable with the debtor. 4.

The participating banks’ obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtor’s assets. These are the same characteristics of a surety or solidary obligor. Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case.

On the other hand they may also refrain from attending or voting at such meeting, in which case they shall not be bound by the agreements determined at such. (Sec 9)

Action by the creditors upon the debtor’s proposition. Approval must be by the majority, meaning : •

2/3 of the creditors voting upon the position.

•

Claims represented by the majority must amount to at least 3/5 of the total liabilities of the debtor.

C. Where to file: 1. Individuals:

If decision is negative / no decision :

RTC of the province where he has residence within 6 months previous to the filing of the case, if debtor is a natural person. Governing law: Insolvency Law

•

Proceeding shall be terminated

•

Parties may enforce their rights (Sec 11)

If decision is favorable: 2. Partnerships and corporations:

•

Transferred from SEC to RTC by the Securities Regulation Code Governing Law: PD 902-A

Any creditor who attended the meeting and protested against the vote may object (Sec 11) on the following grounds : o

Defects in the call for the meeting or in the deliberations, which prejudiced creditor’s rights

D. Procedure for Individual Debtors: 1.

Debtor files petition in court

o

2.

Court orders meeting of creditors and publication (Ratio: Suspension of payments is a proceeding in rem, so publication is needed to acquire jurisdiction)

Fraudulent connivance between one or more creditors and debtor to vote in favor of the proposed agreement

o

Fraudulent connivance of claims to obtain a majority (Sec 12)

3.

Meeting of creditors included in the schedule of creditors filed by the debtor. Creditors representing at least 3/5 of the liabilities must be present.(Sec 8)

The ff creditors may also join the meeting:

The court shall conduct a hearing. If the objection is meritorious, the proceedings will be terminated.

If decision has been declared valid / no opposition or objection: •

Court shall order that carried out (sec 11)

agreement

be

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187 •

If the debtor fails wholly/in part to perform the agreement, all the rights which the creditors had shall revest in them. The debtor may be made subject to bankruptcy and insolvency proceedings. (Sec 13).

III. VOLUNTARY INSOLVENCY PROCEEDINGS

E. Effect of Filing Petition

Procedure for Individual debtors, Partnerships, and Corporations

1. On execution pending against debtor

A. Filing of petition by debtor

If any execution be pending against the debtor, it shall be suspended before the sale of the property is made thereunder

•

Debtor must owe at least P1,000.

•

Petition must be filed in the RTC where he resided 6 months prior to the filing

PROVIDED the debtor makes a request to the court before which the proceeding for suspension of payments is pending (Sec 6) 2.

On execution against property specially mortgaged

The execution against property especially mortgaged is exempted from the provisions of this section (see above) (Sec 6)

3. On action to collect sum of money still to be filed against debtor No creditor other than those mentioned in Sec 91 shall institute proceedings to collect his claim from the moment that suspension of payments is applied for and while the proceedings are pending. (Sec 6)

4. Debtor may not dispose of his property, except in the ordinary course of the business in which he is engaged

5.

Debtor cannot make any payments outside of the necessary or legitimate expenses of this business (Sec 3)

Persons having claims for personal labor, maintenance, expenses of last illness and funeral of wife/children of the debtor incurred 60 days prior to the petition and persons having legal or contractual mortgages 1

o

Important: RTC has jurisdiction over proceedings for voluntary and involuntary insolvency of corporations (Ching vs. Land Bank, 201 SCRA 190, 1991)

•

Attach the ff: schedule of debts and creditors, inventory of all his properties not exempt from attachment or execution

•

If a corporation, must have written assent of majority of the board

•

The filing of such petition shall be an act of insolvency (Sec 14)

B. If the petition is in order, Court shall issue an Order of Adjudication (ie. that the debtor is declared insolvent) The order must be published. (Ratio: This is a proceeding in rem). All creditors must also be notified. Effects of order 1.

All assets of debtor placed in sheriff’s custody until a receiver or assignee is assigned

2.

Payment to debtor of any debt or delivery of any property due to him is forbidden. He also cannot transfer or convey any of his property

3.

All civil proceedings vs the insolvent are stayed, except those pertaining to foreclosure of secured liens.

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188 C. Meeting of creditors for election of an Assignee in Insolvency D. Conveyance of debtor’s property to assignee in insolvency

7.

Must allege at least 1 act of insolvency a.

E. Liquidation of assets and payment of debts F. Composition, if agreed upon G. Discharge of the debtor, except in case of composition •

Not applicable to corporations

H. Objection to discharge of debtor, if any

b.

personal •

Debtor is about to depart in fraud of creditors

•

He remains absent fraud of creditors

•

Conceals himself to avoid legal processes

in

judicial •

Debtor property attachment

IV.

•

He has suffered judgment to be attached for 3 days

INVOLUNTARY INSOLVENCY

•

He has judgment

•

He has suffered judgment to be attached to give preference to certain creditors

I. Appeal in certain cases

Procedure for Individual Debtors, Partnerships, and Corporations: A. Filing of petition by 3 or more resident creditors (can be natural or juridical persons)

c.

concealing to avoid

confessed

preference •

Debtor transferred property to creditors to defraud others

•

He has made transfers to hinder or delay creditors

•

He has made transfers in contemplation of insolvency

1.

Their credits must be worth at least 1,000

2.

Credits must have accrued in the Phils

3.

Petition must be filed in the RTC where

4.

debtor has residence

5.

Must be verified petitioner

1

•

As merchant defaulted payments for 30 days

6.

Petition must be accompanied by a bond, approved by the court, with at least 2 sureties

•

He has failed to deliver money received as fiduciary within 30 days

•

Execution issued against him is returned unsatisfied

•

by

d. at

least

Date of Cleavage: date when the petition is filed, from which we count forward or backward, in determining effects under the Insolvency Law. Count 30 days backward from date of cleavage. A creditor by assignment made within 30 days prior to the filing of the petition cannot file the petition.

merchant

B. After the petition is filed, the court shall issue an order of adjudication, which shall retroact to date of filing of petition. Effects of order

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189 1.

All assets of debtor placed in sheriff’s custody until a receiver or assignee is assigned

2.

Payment to debtor of any debt or delivery of any property due to him is forbidden. He also cannot transfer or convey any of his property

3.

majority of the claims, and must be confirmed by the court

•

1.

All civil proceedings vs the insolvent are stayed, except those pertaining to foreclosure of secured liens.

The order must be published. Court shall also order debtor to show cause why he should not be declared insolvent

Effects of Composition: Insolvency Proceedings are dismissed

2.

All debts are discharged

L. Discharge of the debtor, except in case of composition • Discharge not applicable to corporations M. Objection to discharge of debtor, if any

C. Summons to the debtor

N. Appeal to Supreme Court

D. Answer or motion to dismiss filed by debtor

V.

E. Hearing of petition

SPECIFIC PROVISIONS

F. Order of adjudication declaring debtor insolvent G. Publication and service of order of court

A. Assignee

H. Meeting of creditors to elect an assignee in insolvency

• Elected by majority of creditors who hold majority of the claims. The creditor must have filed his verified claim 2 days before the election.

I. Conveyance of debtor’s property to assignee in insolvency J. Liquidation of assets and payment of debts K. Composition, if agreed upon by debtors and creditors •

•

Composition: debtor offers to pay his creditors a certain percentage of their claims in consideration of his release from liability Requisites 1.

Offer must be made after filing of Schedule of Debtor’s property and the list of his creditors

2.

Offer must be accepted in writing by a majority of the creditors representing a majority of the claims which have been allowed

3.

Offer must be made only after the insolvent deposits the consideration to be paid to the creditors

4.

Offer must be accepted by majority of creditors holding

• Assignee converts the debtor’s property to cash and declares dividends to equitably distribute the property to the creditors • Assignee may be substituted as the plaintiff in cases previously brought by debtor. Ratio: Causes of action also pass to the assignee. EXCEPT: Purely personal action • The ff properties shall not pass to the assignee: a.

After acquired property (acquired subsequent to the filing of the petition), except its fruits and income Examples of after-acquired property: donations, inheritance, provided he is a debtor in good faith who will later petition for a discharge

b.

Non-leviable assets such as insurance policy without any cash surrender value

c.

Expectancy to inherit

d.

Right of action in personal injury cases which pertain exclusively to the debtor

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190 e.

Property held in trust by debtor or merely leased by debtor

f.

Property exempt from execution

• Only the assignee can set aside fraudulent preferences (Board of Liquidators vs. Floro, 110 Phil 482, 1960) • Assignee can ask for examination of persons suspected of having concealed, embezzled, or disposed of any property of the debtor. Liability shall be double the value of the property. • Assignee must render an accounting • Assignee is allowed necessary expenses and commissions (for the first P1k – 7%; for above P1k but not exceeding P10k – 4%). If there are 2/more assignees, the court shall order an equitable division.

B. Remedies of Secured Creditors • The ff are secured claims: real estate mortgage, chattel mortgage and pledge • Secured creditors have 3 remedies: a.

Rely on the security. If he does, he cannot take part in the insolvency proceedings

b.

Evaluate the security. If there is a part of the loan not secured, he can ask for this balance from the court

c.

File a contingent claim in the insolvency proceedings in case the proceeds from the security is not enough to cover the loan • This 3rd remedy is not available to chattel mortgages of movables sold under installments under Art 1484 of the Civil Code, and to pledges.

C. Consequences of Attachments, Judgments, etc • Attachment levied upon within 30 days prior to the filing of the petition may be set aside • Judgments on cases filed and decided within 30 days prior to the filing may be set aside • Judgments on cases filed outside the 30 day period but decided within the 30 day period prior to the filing because the debtor confessed judgment or was declared in default will be set aside.

D. Properties excluded from Estate • Paraphernal property of the wife of the debtor • Property held on lease, administration or deposit • Merchandise held on commission, for forwarding or on consignment and price from sales on consignment • Bills of exchange sent to the debtor for remittance to others • Money in possession remittance to others

of

debtor

for

• Merchandise bought on credit if no delivery has been made • Goods wrongfully taken by debtor

E. Insolvency Proceedings on Partnerships •

Individual creditors must prove their claims against such general partners, or else the general partners may be declared discharged

•

Partnership property will be preferred to pay partnership debts, and property of individual partners will be preferred to pay individual debts.

•

Excess property of individual partners will be used to pay partnership debts.

F. Insolvency Proceedings are quasi in rem. Ratio: Claims are completely extinguished by discharge of the debtor.

G. Discharge •

Judicial clearance of an insolvent debtor from all claims

•

Debtor who has been declared insolvent must still obtain a discharge after 3 months, but not more than 1 year.

•

Debtor must not commit any of the acts of insolvency o

Debtor submitted affidavit

a

false

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191 o

He concealed part of his estate or effects

•

not in ordinary business

o

Debtor was guilty of fraud or neglect in care of his property

•

under confession of judgment

•

not for valuable consideration

o

Debtor procured an attachment or execution on his property during the one month period prior to the insolvency proceedings

o

Debtor destroyed or falsified important papers and documents

o

Debtor fraudulently gave certain creditors preferences

o

Debtor failed to disclose that certain claims which had been proven were false or fraudulent

o

course

of

I. If debtor dies before Order of Adjudication is issued, insolvency proceedings must be dismissed. Remedy: File a claim in the testate or intestate proceedings. If debtor dies after the Order of Adjudication is issued, proceedings will continue.

J. DATE OF CLEAVAGE: Importance •

Creditor by assignment of credit made within 30 days from date of cleavage shall be disqualified as petitioning creditor

Being a merchant, debtor failed to keep proper books of account

•

Attachment levied upon within 30 days before the date of cleavage may be set aside by the assignee

o

Debtor influenced the action of any creditor by pecuniary means

•

Judgments on cases filed and decided within 30 days prior to the date of cleavage may be set aside by the assignee

o

In contemplation of insolvency, debtor made fraudulent conveyances of or encumbrances upon his properties

•

Judgments on cases filed before 30 days from the date of cleavage but decided within 30 days because of confession of judgment or declaration of default may be set aside by action of assignee.

o

Debtor had been convicted of any of the penal provisions of the Insolvency Law

•

Properties acquired after date of cleavage, after discharge of debtor in good faith shall not be liable for debts incurred prior to date of cleavage

o

In case of involuntary insolvency, debtor had already availed of the benefits of the Insolvency Law within the 6- year period preceding his application for discharge

•

Fraudulent preferences made within 30 days prior to date of cleavage may be set aside in an action brought by assignee

K. For Banks / Quasi-Banks (Secs 29-33, RA 7653) 1. Conservatorship

H. Fraudulent Preferences If debtor transferred property to any person to give him preference, and such transfer took place within 30 days period from the date of cleavage, such transfer may be set aside by proper court action by the assignee. •

Presumed Fraudulent Transfer

• Should the Monetary Board find that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors, the Board may appoint a conservator who may take charge of the assets, liabilities, and the management thereof. • This shall not exceed 1 year

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192 • The Board shall terminate the conservatorship when : • institution can continue to operate on its own • the continuance in business of the institution would involve probable loss to its depositors or creditors 2. Receivership The Board may summarily designate the Philippine Deposit Insurance Corporation as receiver of a bank/quasi bank when such: a. is unable to pay its liabilities in the ordinary course of business: Provided, this is not due to extraordinary demands induced by financial panic;

•

M. For Property Registration (Secs 83-84, PD 1529) •

When proceedings in bankruptcy or insolvency are instituted against a debtor who owns registered land, the officer serving the notice of such on the debtor shall file a copy the Register of Deeds in the province or city where the land lies.

•

When such proceeding is vacated by judgment, a certified copy of the judgment or order may be registered.

b. has insufficient realizable assets, to meet its liabilities; or c. cannot continue in business without involving probable losses to its depositors or creditors; or

VI. PROVISIONS COMMON TO BOTH VOLUNTARY AND INVOLUNTARY INSOLVENCIES

d. has willfully violated a cease and desist order under Section 37, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; If the receiver determines that the institution cannot be rehabilitated, he shall convert the assets to money and dispose of these to creditors in accordance with Civil Code provisions.

L. For insurance companies (Secs 247251, Insurance Code) •

•

If an insurance company is in unsound condition, or its available cash assets, in the case of a domestic mutual company, or its security deposits, in the case of a foreign company, is impaired or deficient, or that the margin of solvency required is deficient, the Commissioner is authorized to suspend or revoke all certificates of authority granted to such If the Commissioner finds that such company is in a state of continuing inability or unwillingness to maintain a condition of solvency or liquidity, he may appoint a conservator to take charge the assets, liabilities, and the management.

If the company is insolvent, the Commissioner shall order the company to cease and desist from transacting business and shall designate a receiver to immediately take charge of its assets and liabilities.

A. Procedure if debtor defaults / found insolvent 1.

Debtor to file schedule of debts and liabilities and inventory of property (Sec 24)

2.

If the debtor: • resides outside RP • cannot be found • conceals himself • is a foreign corporation with no managing agent/ cashier/ secretary in the RP The creditors shall be entitled to a court order directing the sheriff to take custody of a sufficient amount of property. The creditors must submit : •

affidavits

•

a bond in double the amount of their claims (Sec 26)

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193 3.

Election of assignee; conveyance ; conversion of property ; commissions (see previous section)

4.

All debts due and payable from the debtor at the time of the adjudication, and all debts existing but not payable until a future time, may be proved against the estate of the debtor (Sec 53 et seq)

5.

Discharge of debt (see previous section)

B. Fraudulent Preferences and Transfers See previous section

C. Dividends in Insolvency

D. Concurrence and Preference of Credits De Barreto vs Villanueva (1962) The full application of Art 2249 and 2242 demands that there must first some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of a decedent's estate under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import. This explains the rule of Article 2243 of the new Civil Code that — The claims or credits enumerated in the two preceding articles1 shall be considered as mortgages or pledges of real or personal property or liens within the purview of legal provision governing insolvency . . . ..

of other claims. Logically, it becomes material only when the properties and assets of the debtor are insufficient to pay his debts; for if the debtor is amply able to pay, how can the necessity exist to determine which of his creditors shall be paid first?

JL Bernardo Construction vs CA (2000) The contractor's lien is granted under the third paragraph of Article 2242 which provides that the claims of contractors engaged in the construction, reconstruction or repair of buildings or other works shall be preferred with respect to the specific building or other immovable property constructed. However, Article 2242 only finds application when there is a concurrence of credits, i.e. when the same specific property of the debtor is subjected to the claims of several creditors and the value of such property of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of preference will arise. Due process will dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings. This is made explicit by Article 2243 which states that the claims and liens enumerated in articles 2241 and 2242 shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. The action filed by petitioners in the trial court does not partake of the nature of an insolvency proceeding. It is basically for specific performance and damages. Sources: Commercial Law Review (Catindig/de Vera) BarOps Reviewer 2005

and the rule is further clarified in the Report of the Code Commission, as follows: The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled by this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the Involvency Law. DBP vs Secretary of Labor (1989) The preferential right accorded to employees and workers under Article 110 may be invoked only during bankruptcy or judicial liquidation proceedings against the employer. A preference of credit bestows upon the preferred creditor an advantage of having his credit satisfied first ahead

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