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Corporate Securities Info New law on insolvency By Raul J.

Palabrica Philippine Daily Inquirer

WHILE MOST businessmen?s attention was drawn to the early days of the new administration, Republic Act 10142, or the Financial Rehabilitation and Insolvency Act (FRIA), quietly lapsed into law on July 18, 2010. Enacted by the last Congress before it adjourned for the May 10 polls, neither then President Gloria Macapagal Arroyo nor President Aquino found time to sign it into law. By constitutional fiat, a bill approved by Congress automatically becomes a law if it is not vetoed by the President within 30 days from receipt of its official copy. The FRIA amends the country?s 101-year old insolvency law, Act 1956, which was enacted in 1909 while we were under American rule. Reflecting the strong influence of business on American society at that time, the old law leaned toward financially troubled companies at the expense of creditors. It gave stricken companies three ways to get out of the mess: suspension of payments, voluntary insolvency and involuntary insolvency. Rehabilitation was not considered a viable option. In 1976, Presidential Decree 902-A added rehabilitation to the list, but this remedy was hardly used because its procedural rules were inadequate and cumbersome. Debtors The overriding policy of the FRIA is to encourage debtors and their creditors ?to collectively and realistically resolve and adjust competing claims and property rights.? In a nutshell, the FRIA wants to give debtors who are unable to meet their credit obligations, in the absence of bad faith or negligence, a breathing spell by way of suspension of payments and adoption of remedial measures that can help them put their house in order again. A successful rehabilitation will be mutually beneficial to debtors and creditors. In case the effort fails, the government will step in to see to it that the debtors? remaining assets are properly liquidated and equitably distributed to the creditors. The remedies provided for in the FRIA may be availed of by insolvent individual debtors, sole proprietorships registered with the Department of Trade and Industry, and partnerships and corporations registered with the Securities and Exchange Commission. The insolvency that can trigger the proceedings is defined as ?the financial condition of a debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets.? Procedures

The law makes available three modes of rehabilitation: court-supervised rehabilitation, prenegotiated rehabilitation, and out of court or informal restructuring agreements or rehabilitation plans. Court-supervised rehabilitation may be voluntary or involuntary. In voluntary proceedings, the debtor, at its initiative, files a petition in court and states, among others, the fact of and cause of its insolvency, its schedule of liabilities, and the proposed rehabilitation plan. In involuntary proceedings, the petition is filed by any creditor or a group of creditors with a claim of at least P1,000,000 or 25 percent of the debtor?s subscribed capital stock or partners? contribution, whichever is higher. This action is allowed if there is no dispute about the validity of the creditors? claims, or it is clear that the debtor has failed to pay its debts as they fell due. And even if any of these situations is not present, the petition may still be filed in case a creditor, other than the petitioner, has started foreclosure proceedings against the debtor that could result to its eventual insolvency. In this proceeding, the creditors have to submit a rehabilitation plan and the names of at least three nominees who can act as rehabilitation receivers. Pre-negotiation In pre-negotiated rehabilitation, the petition is filed by the debtor itself, or jointly with any of the creditors, for the approval of a pre-negotiated rehabilitation plan. The plan has to be approved by creditors holding at least two-thirds of the debtor?s total liabilities, including secured creditors holding more than 50 percent of the secured claims and unsecured creditors holding more than 50 percent of the unsecured claims. The petition should also bear the names of at least three qualified nominees for rehabilitation receiver. In out of court or informal restructuring agreements, the debtor and a specific number of creditors work out among themselves a rehabilitation plan that would bind the rest of the creditors. It is essential that the plan is approved by creditors representing at least 67 percent of secured obligations, 75 percent of unsecured obligations, and at least 85 percent of total liabilities, both secured and unsecured. While the terms and conditions of the rehabilitation plan are being negotiated, the parties can ask the court to issue a ?standstill? order against other parties not included in the negotiation to stop them from taking any action that may delay or abort the discussion. Once approved, the informal rehabilitation plan will bind all the affected parties. More about FRIA?s other relevant provisions next week.