The Financial Rehabilitation and Insolvency Act of 2010 (FRIA) became law on 18 July 2010. The FRIA repeals the Philippines’ century-old Insolvency Law (Act No. 1956) and provides the current legislative framework for insolvency and rehabilitation of financially-distressed entities. The proceedings under the FRIA will be conducted in a summary and non-adversarial manner with a view towards efficient rehabilitation or liquidation of debtors. The definition of the term “debtor”, for purposes of the FRIA, excludes banks, insurance companies, pre-need companies and national and local government agencies or units.
Rehabilitation
The FRIA establishes the procedures and requirements for court-supervised, pre-negotiated or out-of-court/informal rehabilitation proceedings.
Court-supervised rehabilitation may be initiated by the debtor or by any creditor (or group of creditors) with an aggregate claim of at least PhP1 million (approximately US$22,222 at the exchange rate of US$1 = PhP45) or at least 25% of the subscribed capital stock or partners’ contributions, whichever is higher, by filing a petition for rehabilitation with the court. The court will then issue a commencement order:
- appointing a rehabilitation receiver;
- summarizing the requirements and deadlines for creditors to establish their claims against the debtor;
- prohibiting suppliers of goods or services from withholding supply for as long as the debtor makes prompt payments;
- prohibiting the debtor from making any payment of its outstanding liabilities;
- issuing a stay or suspension order suspending all actions in and out of court, for the enforcement of claims, judgments, attachments or other provisional remedies against the debtor.
Pre-negotiated rehabilitation may be initiated by the debtor on its own, or jointly with any of its creditors, by filing a petition for approval of a pre-negotiated rehabilitation with the court. The rehabilitation plan must be endorsed or approved by creditors holding at least 2/3 of the total liabilities of the debtor, including creditors holding more than 50% of the total secured claims and creditors holding more than 50% of the total unsecured claims. The court will then issue an order:
- directing the appointment of a rehabilitation receiver, if provided for in the rehabilitation plan;
- ordering creditors and other interested parties to file their comments to the petition; and
- issuing a stay or suspension order.
The court is given a maximum period of 120 days from the date of filing of the petition within which to approve the rehabilitation plan. If the court fails to act within the said period, the rehabilitation plan will be deemed approved.
The FRIA likewise recognizes out-of-court and informal agreements and rehabilitation, subject to compliance with minimum requirements, namely, the approval by the debtor and 85% of the total creditors, of which at least 67% must represent secured creditors and 75% unsecured creditors.
Liquidation
Liquidation may be initiated by an insolvent debtor or by 3 or more creditors with an aggregate claim of at least PhP1 million (US$22,222) or at least 25% of the subscribed capital stock or partners’ contributions, whichever is higher, by filing a petition for liquidation with the court. Pending proceedings for court-supervised or pre-negotiated rehabilitation may also be converted into liquidation proceedings upon motion of the debtor or creditor(s). Upon completion of liquidation proceedings, the court will issue an order directing the Philippine Securities and Exchange Commission to remove the debtor from the registry of legal entities.
Waiver of Taxes
The FRIA affords tax exemptions on indebtedness reduced or forgiven pursuant to rehabilitation or liquidation proceedings. All taxes and fees due to the national government or local government units will be considered waived upon the issuance of the court order commencing the rehabilitation proceedings, until its approval or dismissal.
Cross-Border Insolvency
The FRIA also acknowledges cross-border insolvency proceedings. Thus, upon petition, the court may issue necessary relief arising from insolvency or rehabilitation proceedings in a foreign jurisdiction involving a foreign entity with assets in the Philippines.
The FRIA will take effect within 15 days from publication. To date, the FRIA has not yet been published.