Photo from Unsplash | Sean Pollock
This article is provided for general informational purposes only and does not create, nor shall it be construed as creating, a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. For advice on specific legal concerns, you are encouraged to engage the services of a qualified lawyer. You may also directly consult Alburo Alburo and Associates Law Offices for proper guidance tailored to your situation.
The views and information presented herein are based on the laws, rules, and jurisprudence prevailing at the time of writing. They do not take into account subsequent legal developments and should not be relied upon as a substitute for professional legal advice.
AT A GLANCE:
Section 4(gg) of the Republic Act No. 10142 refers rehabilitation to the restoration of the debtor a condition of a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments project in the plan, more if the debtor continues as a going concern than if it is immediately liquidated.
It is the policy of the State to encourage debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve and adjust competing claims and property rights.
To address this concern, Republic Act No. 10142, otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, was enacted to govern the rehabilitation or liquidation of financially distressed enterprises and individuals.
Corporate rehabilitation is one of the statutory remedies available to financially distressed businesses. Rather than leaving creditors unprotected, the law provides an orderly and equitable procedure for addressing competing claims while allowing a court-supervised process to restore the viability of the corporation. As explained by the Supreme Court in BDO v. International Copra Export Corporation, et al., G.R. Nos. 218485-86 and 218493-97, April 28, 2021, corporate rehabilitation allows a court-supervised process to rejuvenate a corporation.
What is Court-Supervised Rehabilitation?
Court-supervised rehabilitation is a rehabilitation proceeding commenced by filing a petition before the proper court by:
- The debtor; or
- Creditors
Section 4(gg) of the Republic Act No. 10142 defines rehabilitation as:
(gg) Rehabilitation shall refer to the restoration of the debtor a condition of a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments project in the plan, more if the debtor continues as a going concern than if it is immediately liquidated.
Who May File the Petition?
Under A.M. No. 12-12-11-SC or the Financial Rehabilitation Rules of Procedure (20213), August 27, 2013, a petition for court-supervised rehabilitation may be filed by:
1. Voluntary Proceedings
Section 1, Rule 2 of A.M. No. 12-12-11-SC provides that when approved by:
(a) the owner, in case of a sole proprietorship;
(b) a majority of the partners, in case of a partnership; or
(c) a majority vote of the board of directors or trustees and authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or at least two-thirds (2/3) of the members in a non-stock corporation, in case of a corporation;
an insolvent debtor may initiate voluntary proceedings under this Rule by filing a petition for rehabilitation with the court based on the grounds hereinafter specifically provided.
A group of debtors may file a petition for rehabilitation under this Rule when (1) one or more of its members foresee the impossibility of meeting debts when they respectively fall due, and (2) the financial distress would likely adversely affect the financial condition and/or operations of the other members of the group or the participation of the other members of the group is essential under the terms and conditions of the proposed Rehabilitation Plan. (
2. Involuntary Proceedings
Section 5, Rule 2, A.M. No. 12-12-11-SC lists the grounds to initiate involuntary proceedings may be initiated against the debtor by filing a petition with the court if:
(A) there is no genuine issue of fact or law on the claim/s of the petitioner/s, and that the due and demandable payments thereon have not been made for at least sixty (60) days; or
(B) the debtor has failed generally to meet its liabilities as they fall due; or
(C) at least one creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor that will prevent the debtor from paying its debts as they become due or will render it insolvent.
Commencement Order
Under Section 16 of Republic Act No. 10142, rehabilitation proceedings shall commence upon the issuance of the Commencement Order.
Effects of the Commencement Order
Unless otherwise provided for in this Act, the court’s issuance of a Commencement Order shall, in addition to the effects of a Stay or Suspension Order described in Section 16 hereof:
(a) vest the rehabilitation with all the powers and functions provided for this Act, such as the right to review and obtain records to which the debtor’s management and directors have access, including bank accounts or whatever nature of the debtor subject to the approval by the court of the performance bond filed by the rehabilitation receiver;
(b) prohibit or otherwise serve as the legal basis rendering null and void the results of any extrajudicial activity or process to seize property, sell encumbered property, or otherwise attempt to collection or enforce a claim against the debtor after commencement date unless otherwise allowed in this Act, subject to the provisions of Section 50 hereof;
(c) serve as the legal basis for rendering null and void any setoff after the commencement date of any debt owed to the debtor by any of the debtor’s creditors;
(d) serve as the legal basis for rendering null and void the perfection of any lien against the debtor’s property after the commencement date; and
(e) consolidate the resolution of all legal proceedings by and against the debtor to the court Provided. However, That the court may allow the continuation of cases on other courts where the debtor had initiated the suit.
Attempts to seek legal of other resource against the debtor outside these proceedings shall be sufficient to support a finding of indirect contempt of court.
Stay or Suspension Order
The Stay or Suspension Order issued under Section 16 of Republic Act No. 10142 shall:
(1) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor;
(2) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor;
(3) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and
(4) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein.
Related article:
Click here to subscribe to our newsletter
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 09175772207/ 09778050020.
All rights reserved.