Almost all business literature has given much focus on tips and techniques on how to drive business to exponential growth and financial success. Some business magazines and books have featured success stories about new entrepreneurs making headway with a year-on-year dramatic surge of financial performance, generating big sales and transforming into giant conglomerates. But only seldom or not at all has been said about businesses in distress or on the brink of bankruptcy and how to come to their succor for survival or recovery and keep them in the game. For promising but losing entrepreneurs, their failures may be swept under the rug of silence or simply considered as a piece of business experience or lesson for future consumption in case of venturing anew.
Fortunately, the law ensures that entrepreneurs during crises like the Covid-19 pandemic for example are safeguarded. The “Financial Rehabilitation and Insolvency Act (FRIA) of 2010”, is a revolutionary legislation providing for the rehabilitation or liquidation of financially distressed enterprises and individuals. Under this law, debtors or even creditors, in some instances, may avail of the following remedies:
Rehabilitation:
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” (Par. (gg) Sec. 4).
Rehabilitation proceedings may either be (a) court-supervised [ (i) voluntarily- initiated by the debtor; (ii) involuntarily- initiated by the creditor and; (iii) pre-negotiated rehabilitation], or (b) Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans on the condition that the “the debtor must agree to it, and approved by creditors representing at least sixty-seven percent (67%) of the secured obligations or if unsecured at least seventy-five percent (75%) of obligations and if both secured and unsecured, at least eighty-five percent (85%) of the total liabilities.”
“The purpose of rehabilitation proceedings is precisely to enable the company to gain a new lease on life and thereby allow creditors to be paid their claims from its earnings.” The Supreme Court in one case observes that “the rationale in corporate rehabilitation is to resuscitate businesses in financial distress.” Rehabilitation is a second chance for businesses.
However, if the enterprise cannot maintain its assets anymore to continue the business operation, it can opt for liquidation.
Liquidation:
The instance where corporations stop operating to preserve their assets to sell them and the claims of creditors are satisfied from the assets of the insolvent enterprises. (Viva Shipping Lines vs. Keppel Philippines Mining, Inc. et. al., G.R. No. 177382, February 17, 2016).
Liquidation under the FRIA could either be voluntary (initiated by the debtor) or involuntary (initiated by the creditors).
For Voluntary Liquidation, the debtor must submit to the court; a schedule of the debtor’s debts and liabilities, including a list of creditors with their addresses, amounts of claims and collaterals, or securities, if any; an inventory of all its assets including receivables and claims against third parties; and the names of at least three (3) nominees to the position of liquidator (Sec. 90).
Involuntary Liquidation is a remedy of at least three (3) creditors with aggregate claims of at least One million or 25% of the subscribed capital stock or partner’s contributions of the debtor, whichever is higher, may apply and seek the liquidation of an insolvent debtor showing. (Sec. 91).
Both liquidation and rehabilitation are not only available to corporations, partnerships, and associations but are also available to individuals or natural persons.
Furthermore, the suspension of payments is also an available remedy. It is when debtors still possess sufficient property to cover all their debts but have reasonably anticipated the impossibility of paying them when they respectively fall due. To avail this, the debtor must provide the court with (a) a schedule of debts and liabilities; (b) an inventory of assets; and (c) a proposed agreement with his creditors. (Sec. 94). The purpose of a suspension of payments is to suspend or stop the payment of debts for the debtor to convert some of its properties to cash and pay the creditors.
Rehabilitation Reciever:
A person or persons, natural or juridical appointed as such by the court under FRIA which shall be entrusted with powers and duties (Par. (hh), Sec. 4).
Deemed as an officer of the court with the principal duty of preserving and maximizing the value of the assets of the debtor during the rehabilitation proceedings, determining the viability of the rehabilitation of the debtor, preparing and recommending a Rehabilitation Plan to the court, and implementing the approved Rehabilitation Plan.
The rehabilitation receiver and his direct employees or independent contractors shall be entitled to compensation for reasonable fees and expenses from the debtor according to the terms approved by the court after notice and hearing. Before such hearing, the rehabilitation receiver and his direct employees shall be entitled to reasonable compensation based on quantum merit. Such costs shall be considered administrative expenses (Sec. 33).
Corporations in financial distress and financial managers who are specializing in corporate rehabilitation are mutually cooperating for mutual and greater benefits. For a corporation in distress, it is to its advantage if its business is resurrected to its new life due to the effective management of a receiver. For the receiver, it is a lucrative professional undertaking with a touch of social responsibility.
The enactment of laws for corporate rehabilitation and insolvency is a step directed not only for the distressed corporation but also for financial managers who have chosen a new path of receivership career.
