BUSINESS CLOSURE IS NOT AN OPTION!

This article was originally published on June 1, 2022 and has been updated to reflect recent legal developments.

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of a lawyer or you may directly contact and consult Alburo Alburo and Associates Law Offices to address your specific legal concerns, if there is any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

AT A GLANCE:

Republic Act No. 10142 or the Financial Rehabilitation and Insolvency Act (FRIA) of 2010 provides for mechanisms that allow financially distressed debtors to restructure and rehabilitate instead of closing or liquidating their business.

Managing a business, which serves as a primary source of livelihood, can be challenging, especially during times of financial difficulty. When insolvency threatens operations, business owners are confronted with a critical decision: close the business to avoid further losses or explore legal mechanisms that may allow recovery and continuation.

The law provides an answer.

Republic Act No. 10142 or the Financial Rehabilitation and Insolvency Act (FRIA) of 2010 provides for mechanisms that allow financially distressed debtors to restructure and rehabilitate instead of closing or liquidating their business.

Rehabilitation as an Option.

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. (Section 2, Chapter 1, Republic Act No. 10142)

Rehabilitation refers to the restoration of the debtor to 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 projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated. (Section 4(gg), Chapter I, Republic Act No. 10142)

The Supreme Court explained in Metropolitan Bank & Trust Co. v. G & P Builders, Inc., G.R. No. 189509, November 23, 2015 that rehabilitation proceedings allow the financially stressed company to gain a new lease on life and allow creditors to be paid their claims from its earnings.

Rehabilitation is a means to temper the effect of a business downturn experienced for whatever reason. In the process, it gives entrepreneurs a second chance. Not only is it a humane and equitable relief, it encourages efficiency and maximizes welfare in the economy (Viva Shipping Lines, Inc. v. Keppel Philippines Mining, Inc., G.R. No. 177382, February 17, 2016)

In China Banking Corp. v. St. Francis Square Realty Corp., G.R. Nos. 232600-04, July 27, 2022, the Supreme Court held that a rehabilitation plan aims to restore the financial well-being and viability of an insolvent debtor 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 or other similar arrangements as may be approved by the court or creditors.

Suspension of Payments (for Individual Debtors)

An individual debtor who, possessing sufficient property to cover all his debts but foreseeing the impossibility of meeting them when they respectively fall due, may file a verified petition that he be declared in the state of suspension of payments by the court of the province or city in which he has resided for six (6) months prior to the filing of his petition. He shall attach to his petition, as a minimum: (a) a schedule of debts and liabilities; (b) an inventory of assets; and (c) a proposed agreement with his creditors. (Section 94, Chapter VI, Republic Act No. 10142)

Upon motion filed by the individual debtor, the court may issue an order suspending any pending execution against the individual debtor: Provided, that properties held as security by secured creditors shall not be the subject of such suspension order. The suspension order shall lapse when three (3) months shall have passed without the proposed agreement being accepted by the creditors or as soon as such agreement is denied. (Section 96, Chapter VI, Republic Act No. 10142)

No creditor shall sue or institute proceedings to collect his claim from the debtor from the time of the filing of the petition for suspension of payments and for as long as proceedings remain pending except:

those creditors having claims for personal labor, maintenance, expense of last illness and funeral of the wife or children of the debtor incurred in the sixty (60) days immediately prior to the filing of the petition; and
secured creditors. (Section 96, Chapter VI, Republic Act No. 10142)

If granted by the Court, suspension of payments allows an insolvent individual business owner to delay payments while reorganizing finances instead of closing the business.

Financial Rehabilitation Proceedings

Republic Act No. 10142 and A.M. No. 12-12-11 SC provide several modes of rehabilitation:

Court-Supervised Rehabilitation (for Individuals or Corporations)

Corporate rehabilitation allows a court-supervised process to rejuvenate a corporation. It provides a corporation’s owners a sound chance to re-engage the market, hopefully with more vigor and enlightened services, having learned from a painful experience. (Viva Shipping Lines, Inc. v. Keppel Philippines Mining, Inc., G.R. No. 177382, February 17, 2016)

a) Voluntary Proceedings – May be petitioned by an insolvent debtor or a group of debtors when approved by the following:

SECTION 1. Whom May Petition. — When approved by:

) the owner, in case of a sole proprietorship;
) a majority of the partners, in case of a partnership; or
) 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. (Section 12, Rule 2(A)(1), A.M. No. 12-12-11-SC)

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. (Section 1, Rule 2(A)(1), A.M. No. 12-12-11-SC)

b) Involuntary Proceedings – Any creditor or group of creditors with a claim of, or the aggregate of whose claims is at least One Million Pesos (P1,000,000.00) or at least twenty-five percent (25%) of the subscribed capital stock or partners’ contributions, whichever is higher, may initiate involuntary proceedings under this Rule by filing a petition for rehabilitation of a debtor with the court and on the grounds hereinafter specifically provided. (Section 4, Rule 2(2), A.M. No. 12-12-11-SC)

Pre-Negotiated Rehabilitation

An insolvent debtor, by itself or jointly with any of its creditors, may file a verified petition with the court for the approval of a Pre-Negotiated Rehabilitation Plan. (Section 1, Rule3, A.M. No. 12-12-11-SC)

It is done by filing a verified petition with the court for the approval of a pre-negotiated Rehabilitation Plan which has been endorsed or approved by creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor. (Section 76, Republic Act No.10142)

Out-of-Court Rehabilitation or Informal Agreement or Rehabilitation Plan

An out-of-court or informal restructuring agreement or Rehabilitation Plan that meets the minimum requirements prescribed in this chapter is hereby recognized as consistent with the objectives of this Act. (Section 83, Republic Act No.10142)

Minimum Requirements: For an out-of-court or informal restructuring/workout agreement or Rehabilitation Plan to qualify under this chapter, it must meet the following minimum requirements:

The debtor must agree to the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan;
It must be approved by creditors representing at least sixty-seven (67%) of the secured obligations of the debtor;
It must be approved by creditors representing at least seventy-five percent (75%) of the unsecured obligations of the debtor; and
It must be approved by creditors holding at least eighty-five percent (85%) of the total liabilities, secured and unsecured, of the debtor. (Section 84, Republic Act No.10142)

In sum, the FRIA of 2012 provides distressed business owners with structured legal remedies designed to preserve viable enterprises, protect creditors’ interests, and promote economic stability. Closure is not the only option; the law provides a path toward recovery.

Related Articles: What is the cram-down effect in rehabilitation?

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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.