Published 25 May 2020, The Daily Tribune
In the previous article, I surveyed the options for business in distress under various labor laws. Businesses may likewise consider remedies under the Financial Rehabilitation and Insolvency Act or FRIA, under Republic Act 10142. I have discussed these measures in detail in my articles published on 6, 8 and 11 June 2018. Let us revisit these remedies in the context of providing business owners with options available to them during this pandemic.
Contextually, FRIA provides a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors in order to preserve and maximize the value of the assets of these debtors, recognize creditor rights, and ensure equitable treatment of creditors to the end that the business under distress may be aided in its rehabilitation. When rehabilitation is not feasible, a speedy and orderly liquidation of these debtor’s assets and the settlement of their obligations are mandated for the benefit of all stakeholders.
Specifically, the remedies that the insolvent business owner may pursue under FRIA are the following:
State of suspension of payments
Where the individual debtor has sufficient assets to cover all of his debts but not the capacity to meet the payment of his obligations when they fall due, he may file a verified petition to be declared in the state of suspension of payments and ask the court for an order suspending any pending execution against the individual debtor except properties held as security by secured creditors. The court will issue an order calling for a meeting of all creditors named in the schedule of debts and liabilities to discuss a proposed agreement for the payment of the debts, which must be approved by at least 2/3 of the creditors and the claims represented by those in favor must amount to at least 3/5 of the debtor’s total liabilities.
Rehabilitation is a viable option where the goal is to restore the debtor to a condition of successful operation and solvency. It must be shown that the debtor’s continuance of operation is economically feasible and its creditors can recover more by way of the present value of payments projected in the plan, if the debtor continues as a going concern, than if it is immediately liquidated.
Stating the fact of and the cause of the debtor’s insolvency or inability to pay its obligations as they become due, an insolvent debtor may initiate voluntary proceedings for rehabilitation and submit a rehabilitation plan. The goal is to ensure the administration and success of the rehabilitation plan, which indicates how the insolvent debtor will be rehabilitated 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 a new business entity or other similar arrangements as may be necessary to restore the financial well-being and visibility of the insolvent debtor.
Extrajudicial activity or process to seize property, sell encumbered property, or other attempts to collect on or enforce a claim against the debtor after the issuance of the commencement order shall be prohibited and declared void. All legal proceedings against the debtor shall be consolidated with the court.
The rehabilitation proceedings may be terminated either by a declaration of a successful implementation of the rehabilitation plan or a failure of rehabilitation. If the termination of proceedings is due to failure of rehabilitation or dismissal of the petition for reasons other than technical grounds, the proceedings shall be immediately converted to liquidation.
An out-of-court or informal restructuring agreement or a rehabilitation plan that meets the minimum requirements prescribed under FRIA may likewise be considered. It must be approved by creditors representing at least 67 percent of the secured obligations of the debtor; 75 percent of the unsecured obligations of the debtor; and, by creditors holding at least 85 percent of the total liabilities, secured and unsecured, of the debtor. A restructuring/workout agreement or rehabilitation plan that is approved pursuant to the foregoing shall have the same legal effect as confirmation of a rehabilitation plan under court-supervised rehabilitation upon publication once a week for at least three consecutive weeks in a newspaper of general circulation in the Philippines. (To be continued…)
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