[Note: It would be helpful in this section if, where it is relevant to the answer, the relevant sections or articles of the insolvency law were identified]

There are two principal laws available to a corporation seeking debt relief. These are, (1) the Insolvency Law and (2) Presidential Decree No. 902-A.

A. The Insolvency Law

The Insolvency Law deals with three principal subjects, namely, suspension of payments, voluntary insolvency, and involuntary insolvency. In accordance with the provisions of the Insolvency Law "every insolvent debtor may be permitted to suspend payments or be discharged from his debts and liabilities" (Sec. 1). Corporate debtors however are not given a discharge.

The venue for all proceedings under the Insolvency Law since its enactment in 1909 been vested exclusively in the regular courts. The economic turmoil in the philippine that began to brew in 1979 due to anomalies and irregularities which caused the collapse of many corporations, created the need for an agency that would be able to handle proceedings under the Insolvency Law with more efficiency and dispatch. At the same time, a rehabilitation procedure for corporations was needed. The logical agency to handle this was, it was felt, the SEC; and once it is given quasi-judicial powers, could probably act faster than the regular courts.

B. Presidential Decree No. 902-A ("PD 902-A")

Thus in 1981, a Presidential Decree was issued (PD No. 1758, amending P.D. 902-A), which vested in the SEC, the administrative agency charged with implementing the laws affecting corporations and partnerships, jurisdiction over petitions for suspension of payments. In addition, the SEC was vested with the power to appoint, upon petition or motu propio, a rehabilitation receiver, or a management committee, for partnerships, corporations and associations in distress, upon the appointment of which all actions for claims against the said partnerships, corporations or association would be suspended. The SEC was further granted authority to evaluate the feasibility of continuing operations and of restructuring and rehabilitating such entities. Jurisdiction over petitions for voluntary and involuntary insolvency is still lodged with the courts and has not been transferred to the SEC.

For the past two decades, corporations file their debt relief petitions with the SEC either by way of (1) a petition for suspension of payments where the debtor possesses sufficient assets to cover all its debts but foresees the impossibility of meeting them with a request for the appointment of a management committee or rehabilitation receiver, or (2) a petition for suspension of payments where the corporation has no sufficient assets to cover its liabilities accompanied with a request for the appointment of a management committee or rehabilitation receiver .

A petition for suspension of payments with a request for the appointment of a management committee or rehabilitation receiver where the corporation has no sufficient assets to cover its liabilities is a creation of PD 902-A and not the Insolvency Law. This type of action is normally resorted to and not a petition for voluntary insolvency if the corporation does not have sufficient liquid assets to pay for its debts. There are two basic reasons for this. The first is that the SEC is viewed as more debtor-friendly than the court and that faster relief can be obtained from SEC, as its rules of procedure and evidence are not as strict as those of the regular courts. A second and equally important factor is that upon appointment of the interim receiver/management committee, all actions for claims by creditors, whether secured or unsecured, against the corporate debtor are suspended. It should be noted though that upon the issuance of a provisional suspension order by the SEC on a petition for suspension of payments where the debtor possesses sufficient assets all actions for claims by creditors, whether secured or unsecured, against the corporate debtor are likewise suspended.

(a) What is the underlying philosophy of the insolvency law of this economy? (For example is it distributive, rehabilitative or penal?)

 

The Insolvency Law is both distributive and rehabilitative. In the case of In re: Estate of Mindanao Motor Line, Inc. [57 SCRA 103], the Supreme Court declared:

"......and the purpose of the filing of the petition was other than the purpose for which the Insolvency Law was enacted, which is to effect an equitable distribution of the bankrupt's properties among his creditors and to benefit the debtor by discharging him to start afresh with the property set apart for him as exempt."

Under the Insolvency Law, discharge is available to an individual insolvent, but not to a corporation. The provisions of the Insolvency Law on the classification and preference of credits, which has since been amended by the Civil Code and the Labor Code, provides a scheme for a fair distribution of the assets of the insolvent to its creditors.

The underlying philosophy of PD 902-A is rehabilitative and, as implemented by the SEC, considered as debtor-friendly as a prime concern of the SEC is the rehabilitation of the corporation.

(b) Are there elements of more than one philosophy present in the insolvency law of this economy?

 

Yes.

(c) Briefly describe the relevant elements, and if applicable, any penal sanctions available.

 

In the philippine, no person shall be imprisoned for debt (Sec. 20, Art, III, Constitution). The penal provisions of the Insolvency Law (Sec. 70 to 71) and the Revised Penal Code (Art. 314) punish the commission of fraud by the insolvent and not the non-payment of the debt. For a more detailed discussion of the acts punished under these laws, see answer in K2(a).

(a) In which judicial category is insolvency law classified in the legal system of this economy? (For example civil, commercial or administrative.)

 

The insolvency law may be classified to be a part of the civil and commercial laws of the philippine. Under Art. 2237 of the Civil Code, "insolvency shall be governed by special laws insofar as they are not inconsistent with this Code." The special law is Act No. 1956, as amended, also known as the Insolvency Law.

PD 902-A may be classified more as falling under administrative law as it is considered as the enabling law for the exercise of SEC's jurisdiction over debt relief actions.

 

(b) Which Courts, tribunals or administrative bodies in this economy are competent to exercise jurisdiction in insolvency matters?

 

The regular courts have original and exclusive jurisdiction over all petitions for voluntary and involuntary insolvency.

The SEC has exclusive and original jurisdiction over: (1) petitions for suspension of payments where the debtor possesses sufficient assets to cover all its debts but foresees the impossibility of meeting them, which may or may not be accompanied with a request for the appointment of a management committee or rehabilitation receiver; and (2) petitions for suspension of payments where the corporation has no sufficient assets but accompanied with a request for the appointment of a management committee or rehabilitation receiver. However, if the SEC finds that the debtor is insolvent and can no longer be rehabilitated, the SEC can order the dissolution of the debtor and the distribution of its assets in accordance with the provisions of the Civil Code.

 

(c) Are any limitations placed on the jurisdiction of any of these bodies?

 

The Supreme Court has declared that the jurisdiction of the SEC should be construed in strictissimi juris and that the SEC has original and exclusive jurisdiction only over petitions to be declared in a state of suspension of payments. [Ching vs. Land Bank of the philippine, 201 SCRA 190 (1991)] In practice however, distressed corporations turn more often to the SEC for debt relief and the SEC acquires jurisdiction over these petitions when these corporations seek a receiver or a management committee. Thus, in recent years, all filing for debt relief by corporations are with the SEC and not with the regular courts.

(a) What types of insolvency procedure are available in the legal system of this economy for the administration of corporate debtors in financial difficulty? (For example bankruptcy, liquidation (winding up), receivership, restructuring or other forms of administration.)

 

Three types of actions are available under the Insolvency Law and these are: (1) suspension of payment where the debtor possesses sufficient property to cover all his debts; (2) voluntary insolvency; and (3) involuntary insolvency.

Under PD 902-A, a corporate debtor may file a petition for suspension of payments with a request for the appointment of a management committee or rehabilitation receiver where the corporation has no sufficient liquid assets to cover its liabilities.

 

(b) Briefly describe the main features of each type of insolvency procedure for corporate debtors: including, for example the manner in which each procedure is initiated and administered, and the aims of each procedure.

 

(A) Suspension of Payments

A suspension of payments suspends or delays the payment of debts the amount of which is not affected although a postponement is declared. The basis is the probability of the debtor's inability to meet his obligations when they respectively fall due, despite the fact that he has sufficient assets to cover all his liabilities. Under the Insolvency Law, the steps in the suspension of payments are: (1) Filing of the petition by the debtor (Sec. 2); (2) Issuance by the court of an order calling a meeting of creditors (Sec. 3); (3) Publication of the order and service of summons (Sec. 4); (4) Meeting of creditors for the consideration of the debtor's proposition (Ibid); (5) Approval by majority of the creditors of the debtor's proposition where it is necessary that (a) two-thirds of the creditors voting unite upon the same proposition and (b) the claims represented by said majority vote amount to at least three-fifths of the total liabilities of the debtor mentioned in the petition; (6) Objections, if any, to the decision which must be made within ten (10) days following the meeting (Sec. 11); and (7) Issuance of order by the court directing that the agreement be carried out in case the decision is declared valid, or, when no objection to said decision has been presented (Ibid); (8) If the decision of the meeting be negative, the proceeding shall be terminated and the creditors shall at liberty to enforce the rights which may correspond to them .

The SEC does not follow the procedure laid out in the Insolvency Law but its own policy pronouncements and guidelines in hearing and adjudicating debt relief cases. The present SEC Chairman was quoted to have declared recently that the rules and procedure for debt relief cases are determined and promulgated not by law but by what the SEC determines it to be. Pursuant to the Policy on the Procedure for Petitions for Suspension of Payments and Appointment of Management Committee or Rehabilitation Receiver in the SEC dated 7 October 1997 promulgated by the SEC, the procedure for suspension of payments where the debtor has sufficient assets are the following: (1) Filing of the petition; (2) the Hearing Panel (which is composed of an Associate Commissioner and two Hearing Officers, one of whom shall be a Certified Public Accountant-Lawyer) issues a provisional suspension order effective for a period of thirty days from issuance thereof; (3) The creditors shall be required to comment to the petition within twenty days from receipt of a copy of the petition; and (4) The order granting the petition, if warranted, shall be issued, otherwise the petition shall be denied and the suspension order lifted. The supporting documents to be attached to the petition shall be as follows:

a) An audited financial statement of the petitioner at the end of its last fiscal year;

b) Interim financial statements as of the end of the month prior to the filing of he petition;

c) List of petitioner's creditors indicating the name and address of each creditor; the amount of the claim, including the principal and interest due as of the date of filing; nature of the claim is admitted, contingent, unliquidated or disputed;

d) List of petitioner's equity security holders showing the name of the security holder and the kind of interest registered in the name of each holder.

e) List of petitioner's assets stating the specific nature book value, market value, location of property, copies of TCT, OCT, CTC or CCT (if real property) or copies of certificate of ownership in case of personal property.

f) Debt repayment schedule which shall indicate the period of suspension sought which in no case shall not exceed six (6) months, extendible to such period or may be warranted under the prevailing circumstances as determined by the Commission; the manner of payment for secured and unsecured creditors; and expected source of payments or the proposed agreement indicating the duration of the proposed rehabilitation plan, the petitioner intends to present to his creditors for approval.

g) Certification of the Bureau of Internal Revenue as to the petitioner's tax liability (this certification may be submitted after the issuance of the initial Order but prior to the resolution of the petition; or this requirement may be so stated in the petition itself which is verified. Its non-production shall be a ground for the dismissal of the petition)

The most common debt relief action filed with the SEC in recent years is that of suspension of payments, with the debtor having sufficient assets, and coupled with a prayer for the approval of the rehabilitation plan.

(B) Voluntary Insolvency

The following steps constitute the proceedings for voluntary insolvency [N.B.: All reference to Sections are to the Insolvency Law]: (1) Filing of the petition by the debtor praying for the declaration of insolvency (Sec.14); (2) Issuance of an order of adjudication declaring the petitioner insolvent (Sec. 18); (3) Publication and service of the order (Sec. 19); (4) Meeting of the creditors to elect the assignee in insolvency (Sec. 30); (5) Conveyance of the debtor's property by the clerk of court to the assignee (Sec.32); (6) Liquidation of the debtor's assets and payment of his debts (Sec. 33); (7) Composition, if agreed upon (Sec. 63).

(C) Involuntary Insolvency

The following steps constitute the proceedings for involuntary insolvency [N.B.: All references to Sections are to the Insolvency Law]: (1) Filing of the petition by three or more creditors (Sec. 20); (2) Issuance of order requiring the debtor to show cause why he should not be adjudged insolvent (Sec. 21); (3) Service of order to show cause (Sec. 22); (4) Filing of answer or motion to dismiss (Sec. 23); (5) Hearing of the case (Sec. 24); (6) Issuance of order or decision adjudging debtor insolvent (Ibid.); (7) Publication and service of order (Sec.7); (8) Meeting of creditors for election of an assignee in insolvency (Sec. 30); (9) Conveyance of debtor's property by clerk of court to the assignee (Sec. 32); (10) Liquidation of assets and payments of debts (Sec. 33); (11) Composition, if agreed upon (Sec. 63).

(C) Petition for Suspension of Payments with the Appointment of a Management Committee or Rehabilitation Receiver

Pursuant to the Policy on the Procedure for Petitions for Suspension of Payments and Appointment of Management Committee or Rehabilitation Receiver in the SEC dated 7 October 1997, the procedure for this type of action are as follows: (1) Filing of the petition; (2) The Hearing Panel may motu proprio appoint an interim receiver, if warranted, for a period of thirty days in which event a provisional suspension order for thirty days from issuance thereof against all actions for claims against the corporation shall ensue as a matter of course; (3) The creditors shall be required to comment within twenty days from receipt of a copy of the petition; and (4) The Order granting the Petition, if warranted, shall be issued, otherwise the petition shall be denied and the suspension order lifted. Documents required to be attached to the Petition shall be the same as those in a petition for suspension for payments.

(c) Identify the relevant legislation governing each type of insolvency procedure available for corporate debtors.

 

The relevant legislation governing each type of insolvency procedure available for corporate debtors are the following:

(1) Suspension of Payments - PD 902-A and the rules, regulations and policy pronouncements of the SEC. Other provisions of the Insolvency are also applicable.

(2) Voluntary Insolvency - primarily covered by Sections fourteen (14) to nineteen (19) of the Insolvency Law. Other provisions of the Insolvency Law are also applicable, particularly those on the appointment, powers & duties of the assignee.

(3) Involuntary Insolvency - primarily covered by Section twenty (20) to twenty-eight (28) of the Insolvency Law. Other provisions of the Insolvency are also applicable, particularly those on the appointment, powers & duties of the assignee.

(4) Petition for Suspension of Payments with the Appointment of a Management Committee or Rehabilitation Receiver - Sections 6(c) and 6 (d) of PD 902-A.

(a) Is it usual or customary in respect of a corporate debtor which is insolvent to attempt to negotiate an informal administration before formal insolvency procedures are commenced?

 

Yes. It is usual or customary in respect of a corporate debtor which is insolvent to attempt to negotiate an informal administration before formal insolvency procedures are commenced

(b) In relation to each type of insolvency procedure available in the legal system of this economy, who may commence the procedure? (For example the corporate debtor, secured creditors, unsecured creditors, directors, shareholders, the State.)

 

The following insolvency procedures may be commenced by:

(1) for Suspension of Payments: by the debtor (Sec. 2, Insolvency Law).

(2) for Voluntary Insolvency: by the debtor (Sec. 14, Ibid.).

(3) for Involuntary Insolvency - by three or more creditors, residents of the philippine, whose credits or demands accrued in the philippine, and the amount of which credits or demands are in the aggregate not less than one thousand pesos: provided, that none of said creditors has become a creditor by assignment, however made, within thirty (30) days prior to the filing of the petition. (Sec. 20, Ibid.).]

(4) for Suspension of Payments (without sufficient assets) accompanied by a prayer for the creation/appointment of a management committee and/or rehabilitation receiver - debtor, creditors, shareholders (Sec. 6, PD 902-A). The SEC may, however, motu proprio undertake the management of corporations not supervised or regulated by other government agencies in appropriate cases where there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties of paralyzation of business operation of such corporations which may be prejudicial to the interest of minority stockholders, parties-litigants or the general public (supra).

(c) On what basis may each type of insolvency procedure be commenced, or what requirements must be satisfied before the procedure may be commenced? (For example non-payment of debts; balance sheet/cash flow insolvency; trading losses; resolution by directors to enter insolvency procedure.)

 

The following insolvency procedures may be commenced by:

(1) Suspension of Payments - under the Insolvency Law, (i.e., which is not practiced by the SEC), this is commenced by the filing of a petition, which shall annex a schedule of the corporation's assets and liabilities, and the proposed agreement it requests of its creditors. For cases filed with the SEC, these are commenced upon the filing of a petition. See division under I3(b)(A) for the attachments to the Petition required by the SEC.

(2) Voluntary Insolvency - commenced by the filing of a duly authorized officer of the corporation of a petition which shall be accompanied by a verified schedule and inventory. Liabilities must exceed P1,000. The officer of the corporation must be duly authorized by the vote of the board of directors, at a meeting specially called for that purpose, or by the assent in writing of a majority of the directors, as the case may be.(Sec. 56, Insolvency Law)

(3) Involuntary Insolvency - commenced by the filing of a petition by three or more qualified creditors. The petition must allege that the debtor is guilty of at least one of the following acts of insolvency:

(a) That such person is about to depart or has departed from the philippine, with intent to defraud his creditors; (b) that being absent from the philippine, with intent to defraud his creditors, he remains absent; (c) that he conceals himself to avoid the service of legal process for the purpose of hindering or delaying or defrauding his creditors; (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 or legal process for three days for the purpose of hindering or delaying or defrauding his creditors; (f) that he has confessed or offered to allow judgment in favor of any creditor or claimant for the purpose of hindering or delaying or defrauding any creditor or claimant; (g) that he has willfully suffered judgment to be taken against him by default for the purpose of hindering or delaying or defrauding his creditors; (h) that he has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors and thereby hinder, delay or defraud any one of his creditors; (i) that he has made any assignment, gift, sale, conveyance, or transfer of his estate, property, rights, or credits with intent to delay, defraud, or hinder his creditors; (j) that he has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance, or transfer of his estate, property, rights, or credits; (k) that being a merchant or tradesman he has generally defaulted in the payment of his current obligations for a period of thirty days; (l) that for a period of thirty days he has failed after demand, to pay 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 money, he shall have been found to be without sufficient property subject to execution to satisfy the judgment. (Sec. 20, Insolvency Law)

(4) Suspension of Payments (without sufficient assets) accompanied by a prayer for the creation/appointment of a management committee and/or rehabilitation receiver - commenced by the filing of a petition with the SEC.

(d) How is each type of insolvency procedure commenced? (For example by application to the Court, by administrative act, by written notice to the business organization.)

 

See discussion in I4(c) above.

(e) What is the usual time period between the commencement of formal insolvency proceedings and the declaration or imposition of a formal administration on the corporate debtor?

 

The usual time period between the commencement of formal insolvency proceedings and the declaration or imposition of a formal administration on the corporate debtor is usually as follows:

1. Suspension of Payments - the hearing panel of the SEC normally issues a provisional suspension order fifteen to thirty days from the filing of the petition.

2. Voluntary Insolvency - no data available as no such petition has been filed by a corporation in recent years.

3. Involuntary Insolvency - no data available as no such petition has been filed by a corporation in recent years.

4. Suspension of Payments accompanied by a prayer for the creation/appointment of a management committee and/or rehabilitation receiver - the hearing panel of the SEC normally issues a provisional suspension order fifteen to thirty days from the filing of the petition.

(f) How effective is the judicial or court system (or administrative system) in relation to the handling of formal insolvency proceedings?

 

The regular courts are hardly used for insolvency proceedings as corporations prefer to seek debt relief from the SEC.

There have been a lot of criticisms about the way the SEC has been handling debt relief cases filed before it. These criticisms range from allegations of corruption, to long delays in the procedure and to being lenient to debtors to the prejudice of the creditors.

(a) In relation to each type of insolvency procedure available in the legal system of this economy, what is the effect on the corporate debtor, its constituent parts and its business relationships of initiation of the relevant insolvency procedure?

 

(For example How does initiation of the insolvency procedure affect:

(i) the powers of management of the debtor:

1. Suspension of Payments

Under PD 902-A, the SEC may create and appoint a management committee or rehabilitation receiver to undertake the management of the corporation which shall have the power to take custody of, and control over, all the existing assets and property of such corporation. The management committee or rehabilitation receiver may overrule or revoke the actions of the previous management and board of directors of the corporation notwithstanding any provision of law, articles of incorporation or by-laws to the contrary.

2. Voluntary Insolvency

The corporation will continue to be managed by its directors and officers until the appointment of a receiver or an assignee.

3. Involuntary Insolvency

The petitioning creditors will most likely request the court that the present management be changed immediately upon the filing of the petition for the protection of the creditors' interest.

4. Suspension of Payments (without sufficient assets) accompanied by a prayer for the creation/appointment of a management committee and/or rehabilitation receiver

Same answer as 1

(ii) the interests of owners/shareholders of the debtor:

1. Suspension of Payments

The control of the corporation will now be with the interim receiver / management committee / rehabilitation receiver and the decision as to whether or not the corporation will be a continuing concern will be with them and, ultimately, the SEC. The shareholders however remain the owner of their shares in the debtor corporation.

2. Voluntary Insolvency and Involuntary Insolvency

The shareholders remain the owner of their shares in the debtor corporation.

4. Suspension of Payments (without sufficient assets) accompanied by a prayer for the creation/appointment of a management committee and/or rehabilitation receiver

It should be on a case to case basis considering the corporation does not possess sufficient assets to pay its obligations.

(iii) contracts to which the debtor is a party:

Generally, the contracts should still be performed unless the debtor's counter-parties realize that performance of the contract on their part will just expose them to the risk of being added to the list of unpaid creditors.

(iv) legal proceedings to which the organization is a party:

The rule before was that the filing of a petition for suspension of payments or for the appointment of a management committee resulted in the suspension of all actions for claims, whether secured or unsecured, against the corporation. The rule now is that it is only upon the appointment of an interim receiver or a management committee or a rehabilitation receiver by the SEC when action for claims are suspended. These actions are suspended for as long as the corporate debtor is under a management committee or a rehabilitation receiver and there is no directive to liquidate its assets.

The reason for the suspension of all claims is to place all creditors on an equal footing. During the rehabilitation proceedings, all corporate assets are held in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over another. This is unlike the Insolvency Act which gives secured creditors the option of enforcing their liens even pending the suspension of payments proceedings.

(v) remedies available to persons in contractual (non-debt) relationships with the debtor):

These proceedings may continue as only actions involving a claim are suspended.

(b) If another insolvency procedure has already been initiated in relation to the corporate debtor, how does the initiation of a second procedure affect the first?

 

The second proceeding will be heard with the first case.