Pre Week Fria

Rocille S. Aquino-Tambasacan Senior Assistant City Prosecutor of Manila, Trial Prosecutor, RTC 5 Law Professor - San Sebastian College-Recoletos and Polytechnic University of the Philippines Bar Reviewer – Academicus Review Center, Recoletos Law Review Center, Albano Review Center, Villasis Review Center Author: Handbook in in Insurance Insurance Law Negotiable Instruments Instruments in a Nutshell “Disneyfication” vis-à-vis Copyright: Original Stories Lost – Volume 795 SCRA

What is the purpose behind rehabilitation? Rest Restor orat atio ion n is the the cent centrral idea idea behi behind nd the the reme remedy dy of corpo orporrat ate e rehabilitation. To "restore" means "to bring back to or put back into a form former er or orig origin inal al stat state." e." Corp Corpor orat ate e reha rehabi bilit litat atio ion n cont contem empl plat ates es 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 being to enable the company to gain a new lease on life and allow its creditors to be paid their claims out of its earnings. BPI BPI Fami Family ly Savi Saving ngss Bank Bank vs vs.. St. St. Mi Micha chael el Medic Medical al Cent Center er,, March 25, 2015, J. Perlas-Bernabe

What is a corporate rehabilitation case? It is a spec specia iall proc procee eedi ding ng in rem wher wherei ein n the the peti petiti tion oner er seek seekss to establish the status of a party or a particular fact, i.e., the inability of  the corporate debtor to pay its debts when they fall due. It is summary and non-adversarial in nature. Its end goal is to secure the approval of  a rehab ehabil ilit itat atio ion n plan plan to facil acilit itat ate e the the succ succes essf sful ul recov ecover ery y of the the corporate debtor. It does not seek relief from an injury caused by another another party party..   Gold Golden en Cane Cane Furn Furnit itur ure e Manuf anufac actturin uring g Corp Corp.. vs. Steelpro Phils., Inc., April 4, 2016, J. Brion

Who can ask for rehab? Debt Debtor or (nat (natur ural al or juri juridi diccal) al) does does NOT NOT incl includ ude e bank banks, s, insu insurrance ance companies, pre-need companies, and national and local government agencies but government financial institutions other than banks and GOCC are covered, unless their specific charter provides otherwise. (Sec. 5)   (2014 Bar)

Can an insolvent corporation qualify for rehabilitation? Yes. Under Under RA 10142, 10142, rehabili rehabilita tatio tion n proce proceedin edings gs cover coverss a corpor corporat ate e debtor debtor.. The latter latter is defined defined as a corpor corporati ation on orga organiz nized ed and existing existing unde underr Phil Philip ippi pine ne law laws tha that has has bec become ome inso insolv lven entt - the the fina financ ncia iall condition condition of a debtor that is generally generally unable to pay its or his liabilities liabilities as they fall due in the ordinary course of business or has liabilities that are are grea greater ter than its or his assets. assets. The content contention ion that rehabi rehabilit litati ation on becomes inappropriate because of the perceived insolvency of Basic Polyprinters was incorrect. PBCom vs. Basic Polyprinters Polyprinters,, October 20, 2014, J. Bersamin

Who has jurisdiction rehab rehabili ilita tatio tion n ca cases ses? ?

over

corporate

This originally fell within the jurisdiction of the Securities and Exchange Commission but with the enactment of the Securities Regulation Code in 2000, this jurisdiction was transferred to the Regional Trial Courts. Golden Cane Furniture Manufacturing Corp. vs. Steelpro Phils., Inc.,  April 4, 2016, J. Brion

What is the significance of a material financial commitment in rehabilitation? It is significant in gauging the resolve, determination, earnestness and good good faith aith of the the distr distress essed ed corp corpor orat atio ion n in fina financ ncin ing g the the propo proposed sed rehab ehabil ilit itat atio ion n plan plan.. This This commi ommitm tmen entt may may incl includ ude e the the volu volunt ntar ary y under underta taki king ngss of the the stoc stockho khold lder erss or the would would-be -be inve invest stor orss of the the debtor-corporation indicating their readiness, willingness and ability to contribute funds or property to guarantee the continued successful operation of the debtor corporation during the period of rehabilitation. BPI Family Savings Bank vs. St. Michael Medical Center, March 25, 2015, J. Perlas-Bernabe

Steps in a Court-Supervised Rehab A.

Init Initia iati tion on proc procee eedi ding ngss 1. Voluntary 2. Involuntary B. Action on the petition petition 1. Issuanc Issuance e of a comme commence ncemen mentt order; order; appoin appointme tment nt of receiver 2. Initia Initiall hearin hearing; g; notice notice of claim claim of credi creditor torss 3. Governance

Steps in a Court-Supervised Rehab 4.

Use, Preser Preserva vation tion and Dispos Disposal al of Assets Assets and Treatm reatment ent of Assets and Claims after Commencement Date

5.

Avoida oidanc nce e Proc Procee eedi ding ngss

6.

Treat reatme ment nt of Secur Secured ed Credi Credito tors rs

7.

Admini Administ stra ratio tion n of Proce Proceedi edings ngs;; treat treatmen mentt and appro approval val of the rehab plan

8.

Termin erminat atio ion; n; succ success ess/f /fail ailur ure e

Voluntary vs. involuntary involuntary Voluntary - owner in case of a sole proprietorship, or by a majority of  the partners in case of a partnership, or, in case of a corporation, by a majority vote of the BOD + 2/3 of the OCS, or in case of nonstock, by the vote of at least 2/3 of the members  (2014 Bar)  (2014  Bar)

Voluntary vs. involuntary involuntary Involuntary - creditor with a claim of P1M or at least 25% of the subscribed capital stock or partners' contributions, whichever is higher, by filing a petition if: (a) there there is no no genui genuine ne issue issue of of fact fact or law on the claim, claim, and that that the the due and demandable payments have not been made for at least 60 days or that the debtor has failed generally to meet its liabilities as they fall due; or (b) (b) a credi credito torr, other other than than the petit petitio ione nerr, has initi initiat ated ed fore forecl closu osure re proc proceed eedin ings gs agai agains nstt the the debt debtor or that that will will prev preven entt the the debt debtor or from from paying its debts as they become due or will render it insolvent.

Issuance of Commencement Order as well as a Stay or Suspension Order Stay or Suspension Order: (1) suspend suspend all actions actions or proce proceedin edings, gs, in court court or otherwis otherwise, e, for for the the enforcement of claims against the debtor; (2) (2) susp suspen end d all all acti action onss to enf enforce orce any any judg judgme ment nt,, at atta tach chme men nt or other provisional remedies against the debtor;

Issuance of Commencement Order as well as a Stay or Suspension Order (3) (3) prohi prohibi bitt the debt debtor or from from selli selling, ng, encu encumb mber ering ing,, tran transf sferr erring ing or disposing in any manner any of its properties except in the ordinary course of business; and (4) (4) prohi prohibi bitt the deb debto torr from from maki making ng any any pay payme ment nt of its its liab liabili ilitie tiess outstanding as of the commencement date except as may be provided herein.

Effects of the Commencement Order In addition to the effects of a Stay or Suspension Order: (a) vest vest the rehabi rehabilit litati ation on receiv receiver er with with all the power powerss and and functio functions ns incl includ udin ing g the the righ rightt to revie eview w and and obt obtain ain all all recor ecords ds to whic which h the the debto debtor' r'ss mana manage geme ment nt have have acce access, ss, inclu includi ding ng bank bank acco accoun unts ts of the debtor, subject to the approval by the court of the performance bond filed by the receiver; (b) serve serve as as the the legal legal basis basis for for rend renderin ering g null null and void void the the result resultss of  any any extr extraju ajudi dici cial al acti activi vity ty to seiz seize or sell sell encu encumb mber ered ed prop propert erty y, or attempt to enforce a claim against the debtor after the commencement date;

Effects of the Commencement Order (c) (c) serv serve e as the the legal legal basi basiss for for rend render erin ing g null null and and void void any any set-o set-off  ff  after the commencement date of any debt owed to the debtor by any of the creditors; (d) serve serve as as the the legal legal basis basis for for render rendering ing null null and and void void the the perfe perfecti ction on of any lien against the debtor's property after the commencement date; and (e) consoli consolidat date e the the resolu resolutio tion n of of all all legal legal procee proceedin dings gs by and again against st the debtor to the court but the court may allow the continuation of  cases in other courts where the debtor had initiated the suit.

Exceptions to the Stay or Suspension Order (a) to cases cases alre alread ady y pend pendin ing g appe appeal al in in the the SC as of of com comme menc ncem emen entt date but any final and executory judgment arising from such appeal shall be referred referred to the court for appropriate appropriate action; (b) subject subject to the discre discretio tion n of of the the court, court, to cases cases pending pending or filed filed at a specialized court or quasi-judicial agency which is capable of resolving the claim more mo re quickly, quickly, fairly and efficiently than the court but any final and executory judgment of such court or agency shall be referred to the court and shall be treated as a non-disputed claim;   (2014 Bar)

Exceptions to the Stay or Suspension Order (c) to the enfor enforcem cement ent of claims claims again against st sureti sureties es and third third party party or acco accomm mmod odat atio ion n mort mortg gagor agorss as well well as issu issuer erss of LoC, LoC, unle unless ss the the property subject is necessary for the rehabilitation rehabilitation of the debtor; de btor; (d) to any form orm of action of customers ers of a securities ies market participant to recover or claim moneys and securities entrusted to the latter in the ordinary course of business as well as any action of such securities market participant or appropriate regulatory agency or selfregulatory organization organization to pay or settle such claims;

Exceptions to the Stay or Suspension Order (e) (e) to the the acti action onss of a lice licens nsed ed brok broker er or deal dealer er to to sell sell pled pledge ged d secu securi riti ties es of a debt debtor or pur pursuan suantt to a secu securi riti ties es pled pledg ge or mar margin gin agreement for the settlement of securities transactions; (f) the clearing clearing and settlem settlement ent of financ financial ial trans transact action ionss through through the facil acilit itie iess of a clea cleari ring ng agen agency cy duly duly auth author oriz ized ed by the the appr approp opri riat ate e regulatory agency like the BSP and the SEC as well as any actions of  such agencies to reimburse themselves for any transactions settled for the debtor; and (g) (g) any any crimi rimina nall acti action on agai agains nstt the the indi indivi vidu dual al debt debtor or or owne ownerr, partner, director or officer of a debtor shall not be affected by any proceeding commenced under this Act.

Standstill period Period agreed upon by the debtor and its creditors to enable them to negotiate and enter into an out-of-court or informal restructuring/workout restructuring/workout agreement or rehabilitation plan

Effect ffect 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.

No Diminution of Secured Creditor Rights The issuance of the Commencement Commencement Order and the Suspension or Stay Stay Order shall not 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. The court may allow a secured creditor to enforce his security or lien, or foreclose upon property of the debtor securing its claim, IF the said prop propert erty y is not not nece necessa ssary ry for the the reha rehabi bilit litat atio ion n of the the debt debtor or.. The The secured creditor shall be admitted to the rehabilitation proceedings only for the balance of his claim.

Factors to determine likelihood of rehab (a) The proposed proposed Rehab Plan submitted submitted complies complies with the minimum minimum contents prescribed; (b) There There is sufficien sufficientt monitoring monitoring by the rehabilit rehabilitation ation receiver receiver of the debtor's business for the protection of creditors; (c) The debtor debtor has met with its creditor creditorss to reach reach a consensus consensus on the proposed Rehab Plan;

Factors to determine likelihood of rehab (d) The rehab habilitation receiver submit bmitss a report stating that the assumptions and the financial goals stated in the Rehabilitation Plan are realistic, feasible and reasonable; or, if not, there is a substantial likelihood for the debtor to be successfully rehabilitated because: (1) there there are sufficient sufficient assets assets with which to rehabilit rehabilitate ate the debtor; (2) there there is sufficient sufficient cash flow to maintain maintain the operation operationss of the debtor; (3) (3) the the debt debtor or's 's owne ownerrs, part partne nerrs, stock tockho hold lder ers, s, dire direct ctor orss and and officers have have been acting in good faith and with due diligence; (4) the petiti petition on is not a sham sham filing filing intende intended d only only to delay delay the enforcement enforcement of the rights of the creditors; and (5) the debtor debtor would would likely likely be able to pursue pursue a viable Rehab Rehab Plan;

Factors to determine likelihood of rehab (e) The petition, petition, the Rehabilit Rehabilitation ation Plan and the att attachmen achments ts do not contain any materially false or misleading statement; statement; (f) If the the pet petit itio ione nerr is the debto debtorr, that that the the debt debtor or has has met met with with its its creditors representing 3/4 of its total obligations and made a good faith effort to reach a consensus on the proposed Rehabilitation Plan; if the petitioner is a creditor, that the petitioner has met with the debtor and made made a good good faith aith effort ort to reach each a conse onsens nsus us on the the prop propos osed ed Rehabilitation Plan; and (g) The debtor debtor has not committe committed d acts of misreprese misrepresenta ntation tion or in fraud of its creditors.

What is “cram down” doctrine?

It means that courts have the power to approve a rehabilitation plan over over the the obje objecction tion of cred credit itor orss and and even even when when such such prop propos osed ed rehabilitation plan involves the impairment of contractual obligations. Victorino-Aquino vs. Pacific Plans, December 10, 2014, J. Peralta

Rescission or Nullity of commen commenceme cement nt Transact ransactions ions

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Any transaction occurring prior to commencement date entered into by the debtor or involving its funds may be rescinded or declared null and void on the ground that the same was executed with intent to defraud a cred credit itor or or whic which h cons consti titu tutte undu undue e pref prefer eren ence ce of cred credit itor ors. s. A disputable presumption arises if the transaction: (a) prov provide idess unrea unreason sonab ably ly inade inadequ quat ate e consid consider erat atio ion n to the debt debtor or and is executed within 90 days prior to the commencement date; (b) (b) invo involv lves es an acc accele elerrat ated ed paym paymen entt of a claim claim to to a credi credito torr with within in 90 days prior to the commencement date;

Rescission or Nullity of commen commenceme cement nt Transact ransactions ions

Certain

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(c) provides security executed within 90 days prior to the commencement date; (d) invol involves ves credit creditor ors, s, wher where e a cred credit itor or obt obtain ained ed mor more e than than its its pro pro rata share in the assets of the debtor, executed at a time when the debtor was insolvent; or (e) is int intende ended d to to def defeat, eat, dela delay y or or hinde hinderr the the abili ability ty of the the cred credito itors rs to collect claims where the effect of the transaction is to put assets of  the debtor beyond the reach of creditors.

Pre-Negotiated Rehab An insolvent debtor, by itself or jointly with any of its creditors, may file a veri verifi fied ed peti petiti tion on with with the the court ourt for the the appr approv oval al of a prepre-ne nego goti tiat ated ed Reha Rehabi bilit litat atio ion n Plan Plan whic which h has has been been endo endorrsed sed or appr approv oved ed by cred credit itor orss holding at least 2/3 of the total liabilities of the debtor, including secured creditors holding more than 50% of the total secured claims of the debtor and unsecu unsecure red d credit creditor orss holdin holding g more more than than 50% of the total total unsecu unsecure red d claims of the debtor. debtor. The petition shall include: (a) a schedu schedule le of the debtor debtor's 's debts debts and liabil liabilitie ities; s; (b) an inven invento tory ry of the debto debtor's r's assets assets;; (c) the pre-nego pre-negotiat tiated ed Rehabilit Rehabilitatio ation n Plan, including including the names of at least least 3 qualified nominees for rehabilitation rehabilitation receiver; and (d) a summ summary ary of dispute disputed d clai claims ms again against st the debto debtorr and and a repo report rt on the provisioning of funds to account for appropriate payments

Out-of-Court or Informal Restructuring Agr Agreeme eemen nts and and Rehab ehabil ilit ita ation tion Plan Planss (OCR (OCRA) A) (a ) The debtor must agree to the out-of-court or informal restructuring/workout restructuring/workout agreement or Rehabilitation Plan; (b) It must be approved approved by creditor creditorss representi representing ng at least least 67% of the secured obligations of the debtor; (c) It must be approved approved by creditor creditorss representi representing ng at least least 75% of the unsecured obligations of the debtor; and (d) It must must be be appr approve oved d by by cred credit itor orss holdi holding ng at least least 85% 85% of the total total liabilities, secured and unsecured, of the debtor. debtor.

Involuntary Liquidation Three (3) or more creditors the aggregate of whose claims is at least either P1M or at least 25% of the subscribed capital stock or partner's contributions of the debtor, whichever is higher, may apply for and seek seek the the liqu liquid idat ation ion of an insol insolve vent nt debt debtor or by fili filing ng a peti petiti tion on for liquidation. The petition shall show that: (a) there there is no no genui genuine ne issue issue of of fact fact or law on the claim, claim, and that that the the due and demandable payments thereon have not been made for at least 180 days or that the debtor has failed generally to meet its liabilities as they fall due; and

Involuntary Liquidation (b) there is no sub substantial likeli elihood ood that the debt ebtor may be rehabilitated. At any time during the pendency of or after a rehabilitation courtsuperv supervis ised ed or pre-n pre-neg egot otia iate ted d reha rehabi bili lita tatio tion n proc proceed eedin ings gs,, the the said said creditors may also initiate liquidation proceedings by filing a motion in the same court where the rehabilitation proceedings are pending to convert the rehabilitation proceedings into liquidation proceedings.

Insolvency of Individual Debtors A. Suspension of payments payments - possessing sufficient property to cover cover all his debts but foreseeing the impossibility of meeting them when they respectively fall due B. Voluntary liquidation - debtor whose properties are are not sufficient to cover his liabilities, and owing debts exceeding P500K C. Involunt Involuntary ary liquidatio liquidation n

Involuntary liquidation Any Any cred credit itor or or grou group p of cred credit itor orss with with a clai claim m of, of, or with with clai claims ms aggre aggreg gat atin ing, g, P500 P500K K may may file file a veri verifie fied d petit petition ion for for liquid liquidat atio ion. n. The The following shall be considered acts of insolvency: (a) That such person is about to depart or has departed from the Philippines, with intent to defraud his creditors; (b) That being absent from the Philippines, with intent to defraud his creditors, creditors, he remains absent; (c) That he conceals himself to avoid avoid the service of legal process process for the purpose of defrauding his creditors;

Involuntary liquidation (d) That he conceals, or is removing, any of his property to avoid its being attached or taken on legal process; (e) That he has suffered his property to remain under attachment for 3 days for the purpose of defrauding his creditors; (f) (f) That That he has has conf confess essed ed judgme judgment nt in favor avor of any any cred credit itor or for the the purpose of defrauding any creditor; creditor; (g) That he has willfully suffered judgment to be taken against him by default for the purpose of defrauding his creditors;

Involuntary liquidation (h) That he has procured his property to be taken on legal process with intent to give preference to creditors and thereby hinder or delay the liquidation or defraud his creditors; (i) That he has made any any assignment, gift, sale, conveyance conveyance of his property; (j) That he has, in contemplation contemplation of insolvency, insolvency, made any payment, gift, grant, sale, conveyance or transfer of his estate, property, rights or credits;

Involuntary liquidation (k) (k) That That bein being g a mer merchan chantt or trad trades esma man, n, he has has def default aulted ed in the the payment of his current obligations for a period of 30 days; (l) That for for a period of 30 days, days, he has failed failed to pay pay any any moneys deposited with him or received by him in a fiduciary capacity; and (m)That an execution having been issued against him on final judgment for mone money y, he shal shalll have have been been found ound to be with withou outt suff suffic icie ien nt property subject to execution to satisfy the judgment.

Good luck!