TOWARD A MORE FORWARD-LOOKING INSOLVENCY SYSTEM

A paper submitted for the 9th Metrobank Foundation Professorial Chair

FRANCISCO ED. LIM, ESQ. Co-Managing Partner and Head,

Corporate and Special Projects Department ANGARA ABELLO CONCEPCION REGALA & CRUZ

22/F, ACCRALAW Tower 30th Street cor. 2nd Avenue

Bonifacio Global City Taguig, Metro Manila

Email: felim@accralaw.com Tels: (632) 830-8126/27

25 January 2013

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CONTENTS

I. Introduction A. Importance of having an effective Insolvency System

a. Keeping Viable Businesses Operating b. Providing a Prompt and Fair Method of Liquidating

Corporate Assets c. Insolvency System as a Criterion for Global Competitiveness

B. International Best Practices a. UNCITRAL Guide b. World Bank Principles c. ADB Insolvency Reform Guide

II. Philippine Insolvency Law under Republic Act No. 10142

A. Historical Background B. Salient Features C. Adoption of UNCITRAL Cross-Border Insolvency Model Law D. The Proposed FRIA Rules of Procedure

III. Additional Key Components for an Effective Insolvency System

A. Capacity Building for Insolvency Courts B. Insolvency Practitioners C. Appeal System D. Electronic Filings

IV. Conclusion

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I. INTRODUCTION

The Philippines is facing a rosy economic outlook. Amidst slowdowns and

financial crises abroad, it has recently been dubbed as ―an emerging Asian tiger,‖1 a ―star

performer‖ in Asia,2 and a ―truly remarkable hot spot[] in Asia” that can “become one of the

world's top economies by 2050.”3 Indeed, with the increasing investor confidence and the

proliferation of small and medium-scale local enterprises, the Philippines is a viable

competitor in the race to becoming a lead economy in South East Asia.

However, to win this race, it is crucial for the country to lay down its economic

fundamentals properly. One of the structural frameworks that need to be put in place is

a sound insolvency system. It is said that ―the manner in which a country addresses

insolvency is tied to other decisions: about support for entrepreneurial behavior as an

engine of growth, about the promotion of education as a contributor to the well-

educated workforce needed for the future, and about the extent to which safety nets are

provided by governments to assist those who are less fortunate, among others.‖4

The author profoundly thanks Attys. Jacqueline Ann C. Alegre, Catherine Anne L. Diño,

Johanna Aleria P. Lorenzo and Lancaster L. Uy of ACCRALAW for their invaluable assistance in preparing this paper.

1 Michael Lim Ubac, PH is rising Asian Tiger, PHIL. DAILY INQUIRER, November 11, 2012,

available at http://business.inquirer.net/92374/ph-is-rising-asian-tiger (last accessed January 16, 2013); JC Bello Ruiz, Emerging Asian Tiger, MANILA BULLETIN, November 10, 2012, available at http://www.mb.com.ph/articles/380883/emerging-asian-tiger (last accessed January 16, 2013).

2 See Karen Ward, The World in 2050 (HSBC Global Research: Global Economics, January 2012), available at http://www.hsbc.com.mx/1/PA_esf-ca-app-content/content/home/empresas/archivos/world_2050.pdf (last accessed January 16, 2013).

3 See The Philippines‟ rising economy to Star in 2050, Rebuilding for the Better Philippines, January 16, 2012, available at http://betterphils.blogspot.com/2012/01/philippines-rising-economy-to-star-in.html (last accessed January 16, 2013).

4 Report of the Standing Senate Committee on Banking, Trade and Commerce (Canada), Debtors and Creditors Sharing the Burden: A Review of the Bankruptcy and Insolvency Act and the Companies‟ Creditors Arrangement Act (November 2003), available at http://www.cfs-

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As the continuity of economic activity is vital to our developing country, the

country must prepare itself by paving the road to ensure the continuity of economic

stability. All businesses, regardless of size, may encounter financial difficulties at some

point. The fairly recent experiences of General Motors Corporation and Lehman

Brothers — two pillars of the United States economy — attest to this fact. As such, there

must be a good set of insolvency laws, rules and systems in place which businesses may

turn to in times of financial distress.

Indeed, as global integration increases, there is a tendency for risk-taking

behavior to rise, inasmuch as it contributes to success in a market-based economy.5

Therefore, the government needs to create mechanisms that would encourage such

profitable behavior and at the same time protect businesses and the public from the

possible negative repercussions of certain ventures.

A. KEEPING VIABLE BUSINESSES OPERATING

The primary objective of an insolvency system is to reallocate resources and

distribute liabilities. Its ultimate goals are to increase the competitiveness of industries,

promote investor confidence, and achieve economic growth.

It is imperative, therefore, that the law, rules and supporting systems put in place

by the government be able to keep viable businesses operating. This means avoiding

fcee.ca/html/english/campaigns/Senate_Cmte_Report_2003_11-a.pdf (last accessed January 16, 2013).

5 Ibid.

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premature liquidation of sustainable businesses.6 As aptly described by author Paul

L.C. Torremans, the insolvency procedure must be a ―measure of last resort.‖7 Thus:

“The insolvency procedure aims at liquidation, i.e., the removal of a financially unhealthy trader from the market to avoid damage to the system to other traders. As such, it is a measure of last resort. It was thought to be desirable to create a tool that could allow proactive intervention to complement the insolvency procedure. Such a tool should make it possible to provide assistance to traders that experience serious difficulties before they find themselves in a situation of insolvency, and before liquidation is the only way out. The aim of the procedure, is, therefore, to give the trader the opportunity and assistance that is needed to solve its problems, which should in turn allow the trader to return to a situation where it can function normally and unassisted in the economy once its financial health has been restored.”8

Let us examine some fairly recent experiences. First is the bankruptcy case faced

by United States automotive giant General Motors Corporation (now General Motors

Company) (―GM‖). In 2009, the world watched as GM adamantly maintained its

position that ―[r]estructuring the business out of court remains the best solution for

GM and its constituents.‖9 GM had a firm view that in-court restructuring would carry

with it tremendous costs and risks. It insisted that a bankruptcy filing could force

liquidation — considering the financing that GM would require as well as consumer

reluctance to buy vehicles from a bankrupt automaker. The automaker, which lost

nearly $31 billion in 2008, was given a deadline to complete concession talks with the

United Auto Workers and bondholders. This was part of a bid to convince the task force

assembled by United States President Barack Obama that it could be made viable with a

new round of government help.

6 Simeon Djankov, Bankruptcy Regimes during Financial Distress (Financial and Private

Sector Development, The World Bank Group, May 2009), available at http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Miscellaneous/tbd/bankruptcy-regimes-during-financial-distress.pdf (last accessed January 16, 2013).

7 Collier International Business Insolvency Guide 2, Insolvency Laws of Selected Nations, 15.01[3] (2005 ed.).

8 Ibid. (emphasis supplied). 9 Poornima Gupta, GM says still prefers out-of-court restructuring, REUTERS, March 6, 2009,

available at http://www.reuters.com/article/2009/03/06/us-gm-sb-idUSTRE5254XU20090306 (last accessed January 16, 2013).

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Despite its optimistic outlook, GM had no recourse but to file for bankruptcy in

the middle of 2009. The bankruptcy filing was the largest in the United States

manufacturing history. The decision to push GM into a fast-track bankruptcy and

provide $30 billion of additional taxpayer funds to restructure the automaker was

definitely a huge gamble for the Obama administration.10 Now, the re-organized

General Motors Company is sixty percent (60%) government-owned, i.e., by the United

States Treasury, ―with a $50 billion equity investment and $10 billion in debt and

perpetual preferred shares.‖11 Such equity was in exchange for more than $50 billion in

federal assistance extended to the old GM and its successor.12 This was a big issue for

many American taxpayers. However, the fact of the matter is that the successful

rehabilitation of GM saved one of the pillars of the United States economy. Moreover,

the United States Government is now slowly recovering its investments by selling some

of its shareholdings in GM.

In Canada, the successful rehabilitation of its domestic airline carrier, Air

Canada, was attributed to the evolving role of the so-called court-appointed ―Monitor‖

in restructurings under the Companies‟ Creditors Arrangement Act (CCAA).13 Throughout

the process of restructuring, the Monitor enjoyed a wide flexibility under the CCAA,

such that he was able to adapt his role to facilitate the needs of a particular

restructuring (taking into account the size and complexity of the case).14 In addition, the

10 Kevin Krolicki and John Crawley, GM Files for Bankruptcy, Chrysler Sale Cleared, REUTERS,

June 1, 2009, available at http://www.reuters.com/article/2009/06/01/us-gm-idUSN3044658620090601 (last accessed January 16, 2013).

11 Kevin Krolicki and David Bailey, GM exits bankruptcy, REUTERS, July 10, 2009, available at http://www.reuters.com/article/2009/07/10/us-gm-idUSTRE5690JO20090710 (last accessed January 16, 2013).

12 Ibid. 13 Michael A. Fitch and Sheryl E. Seigel, Recent Trends in Canadian Restructuring Cases

(Fasken Martineau), available at http://www.fasken.com/files/Publication/1d527800-25c7-4057-a817-c4bcb4cedf46/Presentation/PublicationAttachment/5f3014c0-17ed-4d9b-8d21-a28df13e04ba/RECENT_CASES_IN_CDN_RESTRUCTURING_CASES.PDF (last accessed January 16, 2013).

14 Ibid.

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Superior Court Judge played a crucial role in holding the parties to imposed deadlines

and mitigating the tense battle between labor and management officials.15

In Asia, Daewoo Motor Corporation (―Daewoo Motor‖), which used to be part of

the conglomerate, Daewoo Group (dismantled by the Korean Government in 1999), was

declared bankrupt after its laborers rejected a restructuring plan that involved layoffs

and pay cuts, and after it defaulted on $78 million in commercial papers for two (2)

straight days.16 The restructuring plan was actually the offshoot of the Daewoo Group

bail-out that was earlier orchestrated by a number of South Korean banks, including the

government-run Korea Development Bank.17 About a month after the declaration of

bankruptcy, a civil court in South Korea granted Daewoo Motor’s application for

receivership. As a result, the company avoided immediate liquidation. Its creditors

agreed to offer 728 billion won ($1.16 billion) of new loans to help restore operations

and implement a reform plan that would foster talks of merger/acquisition with GM.18

Daewoo Motor’s operations had since been gradually returning to normal. In

April 2002, GM signed a final agreement with its business partners and Daewoo

Motor’s creditors to form a joint venture to purchase the major passenger car

manufacturing operations of the company. Then in September 2002, a new restructuring

15 Keith McArthur and Brent Jang, How Air Canada got back on a new flight path, THE GLOBE

AND MAIL, August 28, 2004, available at http://www.avcanada.ca/forums2/viewtopic.php?f=31&t=3147 (last accessed January 16, 2013).

16 See Daewoo Motor Declared Bankrupt, ABC NEWS, November 8, 2000, available at http://abcnews.go.com/Business/story?id=89083&page=1 (last accessed January 16, 2013). See also Jonathan Watts and Nicholas Bannister, Daewoo Motor plunges into bankruptcy, THE GUARDIAN, November 9, 2000, available at www.guardian.co.uk/business/2000/nov/09/2 (last accessed January 16, 2013).

17 Samuel Len, Daewoo Motor in Bankruptcy After Creditors Balk, THE NEW YORK TIMES, November 9, 2000, available at http://www.nytimes.com/2000/11/09/business/daewoo-motor-in-bankruptcy-after-creditors-balk.html (last accessed January 16, 2013).

18 Bloomberg, Daewoo Motor goes into court receivership, December 1, 2000, available at http://news.drive.com.au/drive/motor-news/daewoo-motor-goes-into-court-receivership-20100823-13h8e.html (last accessed January 16, 2013).

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plan was made and tentatively/conditionally approved by the court, such that

―Daewoo Motor [was required to] repay 12% of debt owed to financial company

creditors with cash over the next nine years, and repay 80.1% of the debt owed to those

creditors using securities in trust, including preferred shares of GM-Daewoo. Daewoo

Motor will also pay 16.3% of debt owed to its affiliated suppliers, including Korea

Delphi Automotive System Corp., with cash over the next nine years. It will convert

45% of the debt owed to these affiliated suppliers into equity. GM-Daewoo will assume

21.4% of Daewoo Motor’s debt to the affiliated suppliers.‖19

The approval of the new plan became final after majority of the company’s

creditors agreed to swap seventy seven percent (77%) of Daewoo Motor’s debt

amounting to 19 trillion won ($15.5 billion) for stock in the GM joint venture.20

About four (4) years after the restructuring, ―Daewoo Motor [has become] a

bright spot for GM.‖ GM-Daewoo’s car sales steadily increased and the joint venture

rehired most of the 1,600 workers laid off by the old Daewoo Motor.21

It bears noting that the South Korean court played a key role in facilitating the

rehabilitation. It paved a way for the creditors to agree on a restructuring plan that

made the company attractive for GM to acquire.

19 Jeongjin Lim, Daewoo Restructuring Plan Wins Backing From Court, THE WALL STREET

JOURNAL, September 15, 2002, available at http://online.wsj.com/article/0,,SB1032113943767343075-search,00.html (last accessed January 16, 2013).

20 Daewoo restructuring plan cleared, CNN.COM, September 30, 2002, available at http://archives.cnn.com/2002/BUSINESS/asia/09/30/korea.daewoo/ (last accessed January 16, 2013).

21 Choe Sang-Hun, Daewoo Motor Becomes a Bright Spot for G.M., THE NEW YORK TIMES, May 30, 2006, available at http://www.nytimes.com/2006/05/30/business/30daewoo.html (last accessed January 16, 2013).

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The cases of GM, Air Canada and Daewoo Motor impress upon us the

importance of an insolvency system which gives distressed corporations flexibility and

sufficient room to select a rehabilitation proceeding that best addresses their financial

problems.

In contrast, the Philippine experience has not been encouraging, at least in the

1980s, when there were no detailed rules governing rehabilitation of debtor companies.

For example, we have the case of the Philippine Blooming Mills (―PBM‖), a large steel

company founded in 1952 that filed for suspension of payments in the 1980s with the

Securities and Exchange Commission (―SEC‖) to save its business. Then, there is the

case of the Stanford Microsystems, Inc. (―Stanford‖), once the largest and oldest

contract semiconductor manufacturer in the Philippines. Like PBM, Stanford filed a

petition for suspension of payments in 1985 with the SEC, in an effort to rehabilitate its

business.22

Sadly, neither PBM nor Stanford successfully emerged from rehabilitation. Their

liquidation ultimately resulted in dire consequences to their creditors, employees and

owners that could have been prevented had there been a sound insolvency system in

place at the time.

B. PROVIDING A PROMPT AND FAIR METHOD IN LIQUIDATING CORPORATE ASSETS

An effective insolvency regime should not be in favor of the financially

distressed company only. There are numerous stakeholders whose interests must

likewise be accommodated. These include: the creditors who may be secured to varying

degrees (including tax agencies and other government creditors), employees,

22 Chua v. NLRC, G.R. Nos. 89971-75, 17 October 1990, 190 SCRA 558.

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guarantors of debt, suppliers of goods and services, and the owners of the insolvent

debtor.

Balancing the interests of all stakeholders is highly important in liquidation

proceedings. It cannot be denied that while we may want to preserve all viable

companies, liquidation may be inevitable for some distressed entities. In fact, there are

instances where it is the stakeholders themselves who want to liquidate the assets of the

corporation to provide a orderly closure to their business, as what happened in the PBM

case when it became clear that PBM could no longer be rehabilitated.23

C. SOUND INSOLVENCY SYSTEM AS A MEASURE OF GLOBAL COMPETITIVENESS

In these modern times, a country’s insolvency system is one of the indicators

used by international institutions in benchmarking economies to determine the

competitiveness of its investment climate.

For example, the World Economic Forum (―WEF‖), an independent international

organization, comes out with a yearly report measuring the competitiveness of

countries around the world. It measures, among others, the degree to which collateral

and bankruptcy laws protect lenders’ and borrowers’ rights. The measurement is made

23 See Chung Ka Bio v. Intermediate Appellate Court, G.R. No. 71837, 26 July 1988, 163

SCRA 534.

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under the Legal Rights Index for Pillar 8 on Financial Market Development, one of the

twelve (12) pillars for measuring the competitiveness of economies worldwide.

While the Philippines improved by ten (10) notches overall in the 2012-2013

Global Competitiveness Report of the WEF, relative to its rank for 2011-2012, it still

fares quite poorly with a score/value of 4 on a 0-10 (best) scale under the Legal Rights

Index. The Philippines’ score is the same as those of Lebanon, Iran and Sri Lanka. This

score is much lower than the scores of other Asian countries like Singapore, Hong Kong

and Malaysia, all of which obtained a perfect score of 10.

The International Finance Corporation (―IFC‖), an international financial

institution that offers investment, advisory, and asset management services to

encourage private sector development in developing countries, also prepares an annual

report called ―Ease of Doing Business Index.‖ This report ranks economies according to

their capacity to foster a suitable investment climate. Relevantly, an economy’s

insolvency system is one of the factors24 included in determining the ranking of an

economy.

The latest report released in June 2012 ranks the Philippines 165 out of the 185

economies included in the index on the topic of insolvency. The Philippines then ranks

138 out of the 185 countries, as an economy recommended for ease in doing business

with.25

24 Other factors include: (1) Starting a business; (2) Employing workers; (3) Registering

property; (4) Getting credit; (5) Protecting investors; (6) Paying taxes; (7) Trading across borders; and (8) Enforcing contracts.

25 International Financing Corporation, Doing Business, Economy Rankings as of June 2012 available at http://doingbusiness.org/rankings (last accessed January 16, 2013).

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Another measurement worth noting is the so-called ―Index of Economic

Freedom,‖ which is monitored by the Heritage Foundation in partnership with the Wall

Street Journal. This index considers ten (10) economic freedoms grouped into four (4)

broad categories, to wit:

1. Rule of Law (property rights, freedom from corruption);

2. Limited Government (fiscal freedom, government spending);

3. Regulatory Efficiency (business freedom, labor freedom, monetary freedom);

and,

4. Open Markets (trade freedom, investment freedom, financial freedom).

The score for business freedom is based on factors such as starting a business,

obtaining a license, and closing a business. Efficient and effective insolvency systems

and respect for creditors’ rights are, therefore, important to business freedom, to the

extent that ―[r]igid and onerous bankruptcy procedures [could be] distortionary,

providing a disincentive for entrepreneurs to start businesses in the first place.‖26

Under the 2013 Index of Economic Freedom Report, the Philippines suffered a

decline in business freedom, which is primarily attributed to the fact that business start-

up process remains time-consuming. The report does not state whether changes were

noted as regards the other factors of business freedom.

26 Ambassador Terry Miller and Anthony B. Kim, Defining Economic Freedom, in TERRY

MILLER, KIM R. HOLMES, AND EDWIN J. FEULNER (EDS.), INDEX OF ECONOMIC FREEDOM: PROMOTING ECONOMIC OPPORTUNITY AND PROSPERITY (2013), available at http://www.heritage.org/index/book/chapter-7 (last accessed January 16, 2013).

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It must be stressed that the ten-notch increase in the country’s ranking and the

increase in the economic freedom score are due to the notable improvements in

investment freedom and freedom from corruption.27

Undeniably, an insolvency system plays a vital role in a modern market

economy. A strong insolvency system contributes to the efficient use of resources and

hence, fosters economic growth. The system also helps underpin investors’ confidence

and financial stability.

In fact, the Forum on Asian Insolvency Reform (―FAIR‖)28 has been set up by the

Organization of Economic Co-operation and Development, the Asia-Pacific Economic

Co-operation Forum and the Asian Development Bank, with assistance from the

governments of Japan and Australia. FAIR regularly gathers key policy makers,

members of the judiciary, academics, insolvency practitioners and other private sector

participants to discuss insolvency-related matters, in recognition of the vital role that an

insolvency system plays in an economy.

Thus, an insolvency system is relevant, not only to cater to the needs of the

stakeholders of a company, but also to make an economy financially viable and globally

competitive. It is, thus, my humble submission that the time is ripe to pave the road to

ensure that our insolvency system is effective and responsive.

27 See Ronnel W. Domingo, PH up 10 notches in „economic freedom‟ list, PHILIPPINE DAILY

INQUIRER, January 14, 2013, available at http://business.inquirer.net/102443/ph-up-10-notches-in-economic-freedom-list (last accessed January 16, 2013).

28 Organization of Economic Co-operation and Development (OECD) Website at http://www.oecd.org/corporate/corporateaffairs/corporategovernanceprinciples/insolvencyinasia-forumonasianinsolvencyreformfair.htm (last accessed January 16, 2013).

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While there is no perfect model or framework that a country can simply adopt,

there are guidelines and principles that have emerged, primarily motivated by the

recent economic and financial crisis.

Among these guidelines are: (1) the United Nations Commission on International

Trade Law (―UNCITRAL‖) Legislative Guide on Insolvency Law (―UNCITRAL

Guide‖);29 (2) the Principles for Effective Creditor Rights and Insolvency Systems

formulated by the World Bank (―World Bank Principles‖);30 and the principles and

guidelines submitted under a technical project of the Asian Development Bank under

RETA No. 5975: Promoting Regional Cooperation in the Development of Insolvency

(―ADB Insolvency Reform Guide‖ ).

These standards and/or practices are aimed at improving both the efficiency and

outcome of insolvency proceedings.

a. UNCITRAL Guide

The UNCITRAL Guide explains how designing an effective and efficient

insolvency law involves a consideration of a common set of issues relating to the

substantive and procedural legal framework and the institutional framework required

for its implementation. Thus, UNCITRAL recommends that an insolvency system must

have the following key objectives:

(i) provide certainty in the market to promote economic stability and growth;

29 United Nations Commission on International Trade Law, Legislative Guide on Insolvency

Law (2005) [UNCITRAL Guide], available at http://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf (last accessed January 16, 2013).

30 The World Bank, Principles for Effective Creditor Rights and Insolvency Systems (Revised Draft –December 21, 2005) [World Bank Principles], available at http://www.worldbank.org/ifa/FINAL-ICRPrinciples-March2009.pdf (last accessed January 16, 2013).

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(ii) maximize value of assets;

(iii) strike a balance between liquidation and reorganization;

(iv) ensure equitable treatment of similarly situated creditors;

(v) provide for timely, efficient and impartial resolution of insolvency;

(vi) preserve the insolvency estate to allow equitable distribution to creditors;

(vii) ensure a transparent and predictable insolvency law that contains

incentives for gathering and dispensing information; and,

(viii) recognize existing creditors rights and establish clear rules for ranking of

priority claims.31

b. World Bank Principles

The World Bank Principles, in turn, recommend the following objectives:

(i) integrate with a country’s broader legal and commercial systems;

(ii) maximize the value of a firm’s assets and recoveries by creditors;

(iii) provide for both efficient liquidation of nonviable businesses and those

where liquidation is likely to produce a greater return to creditors, and

reorganization of viable businesses;

(iv) strike a careful balance between liquidation and reorganization, allowing

for easy conversion of proceedings from one to another;

(v) provide for equitable treatment of similarly situated creditors, including

similarly situated foreign and domestic creditors;

(vi) provide for timely, efficient and impartial resolution of insolvencies;

(vii) prevent the improper use of the insolvency system;

(viii) prevent the premature dismemberment of a debtor’s assets by individual

creditors seeking quick judgments;

31 UNCITRAL Guide, supra.

15

(ix) provide a transparent procedure that contains, and consistently applies,

clear risk allocation rules and incentives for gathering and dispensing

information;

(x) recognize existing creditor rights and respect the priority of claims with a

predictable and established process; and

(xi) establish a framework for cross-border insolvencies, with recognition of

foreign proceedings.32

The foregoing guides, principles and assessments, however, do not provide

concrete rules or actions to be set in place. In order to determine other laws, rules or

systems to implement, we must look into, study and consider the experiences and

trends implemented by other countries, and determine if such laws, rules or systems,

would work for our country.

c. ADB Insolvency Reform Guide

Since the ASIAN financial crisis in 1997, the Asian Development Bank (―ADB‖)

was extensively involved in helping ASEAN countries reform their insolvency systems.

In 2002, it undertook a regional technical project (RETA No. 5975: Promoting

Regional Cooperation in the Development of Insolvency), which involved four ASEAN

countries (i.e., Indonesia, Korea, Philippines and Thailand) with the following as its

main focus areas: (1) the development of sound insolvency frameworks for handling

cross-border insolvencies; (2) regional cooperation, especially in formal and informal

32 World Bank Principles, supra.

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workouts and restructurings; and, (3) the intersection of laws relating to secured

transactions and insolvency.33

In its Final Report (―ADB Insolvency Reform Guide‖),34 the ADB suggests

several principles that should be taken into account in improving insolvency systems.

On cross-border insolvency, for example, the ADB Insolvency Reform Guide

suggests the following factors to be considered:

(i) formalities for commencement in cases of recognition of foreign

insolvency proceedings;

(ii) procedures covering both inbound and outbound proceedings;

(iii) accommodation of different types of insolvency processes;

(iv) nomination of different courts;

(v) access to relevant courts;

(vi) necessary evidence; and,

(vii) effect of recognition of a foreign insolvency proceeding.35

Insofar as informal workouts are concerned, the recommendations contained in

the ADB Insolvency Reform Guide include the following:

33 See Asian Development Bank Website (About RETA 5975) at

http://www2.adb.org/Law/Insolvency/RETA-5975.asp (last accessed January 16, 2013).

34 Asian Development Bank, Promoting Regional Cooperation in the Development of Insolvency Law Reforms (2008) [ADB Final Report], available at http://www2.adb.org/Documents/Reports/Insolvency-Law-Final-Report/final-report.pdf (last accessed January 16, 2013).

35 Ibid.

17

(i) All finance creditors (other than those whose exposure is negligible)

should be eligible to participate in an informal workout process;

(ii) A restructure should be based on a business plan that addresses

operational as well as financial issues. A business plan should contain

forecasts, prepared on documented and reasonable assumptions as to

future events, which evince that the business of the debtor corporation can

generate sufficient cash flow and profit to meet its obligations existing

after the restructure;

(iii) Where a debtor is found to be in financial difficulties, all relevant creditors

should be prepared to cooperate with each other and to allow a sufficient

(though limited) time (―Standstill Period‖) for information about the

debtor to be obtained and evaluated and for proposals for resolving the

debtor’s financial difficulties to be formulated and assessed, unless such a

course of action is inappropriate in a particular case. The length of a

Standstill Period should be limited to the time that is reasonably required

to fulfill the above objectives;

(iv) During the Standstill Period, all relevant creditors should agree to refrain

from taking any steps to enforce their claims or (otherwise than by

disposal of their debt to a third party) to reduce their exposure to the

debtor provided that during the Standstill Period their position relative to

other creditors and each other will not be prejudiced;

(v) During the Standstill Period, the debtor should not take any action that

might adversely affect the prospective return to relevant creditors (either

collectively or individually) as compared with the position at the

commencement of the Standstill Period;

(vi) The interests of relevant creditors are best served by coordinating their

response to a debtor in financial difficulty. Such coordination will be

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facilitated by the selection of one or more representative coordination

committees and by the appointment of professional advisers to assist such

committees, where appropriate, and the relevant creditors participating in

the process as a whole;

(vii) Creditors participating in an informal workout should ensure that they

take an active role by appointing an experienced and competent

representative. The representative should ensure that appropriate levels of

management within the creditor organization are informed of the progress

of the workout at all important stages, and that the prospective and likely

outcome of the workout is expected to be acceptable to the decision-

makers within the creditor organization;

(viii) The debtor should meet all reasonable costs of creditors while it is

considering restructuring proposals. This would include the costs of

professional advisers, and any costs necessarily incurred by the

coordinating committee; and,

(ix) If additional funding is provided during the Standstill Period or under

any rescue or restructuring proposals, the repayment of such additional

funding should, as far as practicable, be accorded priority status as

compared to other indebtedness or claims of relevant creditors.36

On the intersection of secured transactions and insolvency, the ADB Insolvency

Reform Guide includes the following proposals:

(i) Clear rules regarding the creation of a secured property interest would

benefit an insolvency representative because it would assist in

determining whether a secured property interest had been validly created;

36 ADB Final Report, supra.

19

(ii) An insolvency law should provide for the participation of a secured

creditor in an insolvency case, particularly in a case of reorganization,

enabling a secured creditor to participate in any decision-making process

and, for that purpose, establishing a class of secured creditors, regulating

their participation and the circumstances under which a secured creditor

may be bound to a reorganization plan;

(iii) If an insolvency law provides that a secured creditor may be bound by a

plan of reorganization, the law should provide conditions to ensure that

the economic value of the secured creditor’s rights are not impaired and

permit a secured creditor to object to being bound, unless such conditions

are met; and

(iv) An insolvency law should limit any claims of privilege or priority as they

may affect secured creditors. Any such claims to which the proceeds of

secured property are subject should be stated in a transparent and

predictable way.

II. PHILIPPINE INSOLVENCY LAW UNDER THE FRIA

A. Historical Background

Our first insolvency law, Act No. 1956 (―Insolvency Law‖), was enacted on 20

May 1909. As with most legislation of that time, the Insolvency Law traces origin to

American laws. Specifically, it was derived from the Insolvency Act of California (1895),

20

with a few provisions taken from the American Bankruptcy Law of 1898.37 Under the

Insolvency Law, jurisdiction over suspension of payments and insolvency was vested in

the Courts of First Instance (now the Regional Trial Courts).

This changed in 1981, when Presidential Decree No. 1799 amended Section 6 of

Presidential Decree No. 902-A (―PD 902-A‖), otherwise known as the SEC

Reorganization Act which was promulgated by then President Ferdinand Marcos on 11

March 1976. PD 902-A, as amended, gave the SEC jurisdiction over suspension of

payments cases filed by corporations, partnerships or associations.

For the first time in our legal history, P.D. 902-A, as amended, introduced the

remedy of rehabilitation. The SEC was vested with the power to create and appoint a

management committee or rehabilitation receiver ―when there is imminent danger of

dissipation, loss, wastage or destruction of assets or other properties or paralization of

business operations of such corporations or entities which may be prejudicial to the

interest of minority stockholders, parties-litigants or the general public.‖38

On 8 August 2000, Republic Act No. 8799, otherwise known as the Securities

Regulation Code, came into effect. It reverted jurisdiction over rehabilitation cases from

the SEC to the courts of general jurisdiction or the appropriate Regional Trial Courts.39

On December 15 of the same year, the Supreme Court’s Interim Rules of Procedure on

Corporate Rehabilitation (―Interim Rules‖)40 became effective.

37 See Sun Life Assurance Co. of Canada v. Ingersoll, G.R. No. 16475, 8 November 1921, 42

Phil. 331 and Mitsui Bussan Kaisha (Ltd.) v. Hongkong & Shanghai Banking Corporation, G.R. No. 11079, 12 January 1917, 36 Phil. 27.

38 Pres. Decree No. 902-A, as amended by Pres. Decree No. 1799, Sec. 6. 39 Rep. Act No. 8799 (2000), Sec. 5.2. 40 A.M. No. 00-8-10-SC, 21 November 2000.

21

The Interim Rules laid down the guidelines for filing a petition for rehabilitation,

either by the debtor or the creditor(s), and outlined the powers and functions of the

rehabilitation receiver, among others.

On 16 January 2009, or more than eight (8) years after its promulgation, the

Supreme Court amended the Interim Rules.41

The Insolvency Law, however, continued to remain in force and effect. It was

only on 18 July 2010 that this century-old law was replaced by Republic Act No. 10142,

otherwise known as the Financial Rehabilitation Act (―FRIA‖).

The FRIA adopts best practices for an effective insolvency law culled from the

UNCITRAL Guidelines and World Bank Principles, and the ADB Insolvency Reform

Guide, among others. It has the following basic principle:

―Section 2. Declaration of Policy. - 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. In furtherance thereof, the State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The rehabilitation or liquidation shall be made with a view to ensure or maintain certainty and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to facilitate a speedy and orderly liquidation of these debtor’s assets and the settlement of their obligations.‖42

Prior to the enactment of the FRIA, rules and procedures on suspension of

payments, corporate rehabilitation, insolvency and liquidation were scattered and

embodied in different laws and Supreme Court issuances.

41 A.M. No. 00-8-10-SC, 2 December 2008. 42 Rep. Act No. 10142 (2010) [FRIA], Sec. 2.

22

The FRIA effectively repealed the provisions found in the Insolvency Law, PD

902-A, as amended, the Interim Rules, and the Rules of Procedure on Corporate

Rehabilitation. In addition, the FRIA codified the procedures and requirements for

court-supervised, pre-negotiated and out-of-court rehabilitation and liquidation

proceedings to enable businesses to continue operating and creditors to recover their

investments faster and more efficiently.

B. SALIENT FEATURES

The FRIA is not merely a collaboration and codification of existing laws and

issuances on insolvency. It introduced several innovations and has a forward-looking

structure to put our country’s insolvency law at par with international standards. The

following are some of its salient features:

1. Broadened Definition of Insolvency – Under the FRIA, insolvency

does not only refer to a situation where the debtor’s liabilities are greater than its

assets (a concept under the Insolvency Law). Consistent with modern day trend,

insolvency now includes a state of inability to pay liabilities as they fall due in

the ordinary course of business.43

2. Broadened Definition of Debtor – Consistent with the pro-

business stance of the FRIA, individuals who conduct business under a single

proprietorship, which is duly registered with the Department of Trade and

Industry, may now petition for rehabilitation.44

43 FRIA, Sec. 4(p). 44 FRIA, Sec. 4(k).

23

3. Global Filing – Recognizing the emergence of business

conglomerates, the FRIA allows the filing of a petition by a group of debtors45

which is defined as: ―(1) corporations that are financially related to one another

as parent corporations, subsidiaries or affiliates; (2) partnerships that are by the

same person to the extent of owned more than fifty percent (50%); and (3) single

proprietorships that are owned by the same person.‖46

4. Commencement Date – The FRIA introduces the concept of a

Commencement Date and specifies in detail its consequences. It occurs upon the

issuance of a Commencement Order by the court and retroacts to the filing of the

petition.

The Commencement Order serves as legal basis for: (a) exception or

waiver of all taxes and fees including penalties, interests and charges;47 (b)

rendering null and void the results of any extrajudicial activity or process to

seize property, sell encumbered property, or otherwise attempt to collection or

enforce a claim against the debtor after the Commencement Date;48 (c) rendering

null and void any set-off after the Commencement Date of any debt owed to the

debtor by any of the debtor’s creditors;49 (d) rendering null and void the

perfection of any lien against the debtor's property after the Commencement

Date;50 (e) rendering null and void any sale, payment, transfer or conveyance of

the debtor's unencumbered property or any encumbering thereof by the debtor

or its agents or representatives which are not in the ordinary course of the

45 FRIA, Sec. 12. 46 FRIA, Sec. 4(n). 47 FRIA, Secs. 19, 71. 48 FRIA, Sec. 17(b). 49 FRIA, Sec. 17(c). 50 FRIA, Sec. 17(d).

24

business of the debtor;51 (f) declaring claims of separation pay for months

worked prior to the Commencement Date as pre-commencement claim;52 (g)

reckoning the 90-day period to confirm existing contracts;53 and, (h) declaring

null and void transactions, occurring prior to Commencement Date, entered into

by the debtor or involving its funds or assets, which were executed with intent to

defraud the creditor/s or which constitute undue preference of creditors.54

5. Exchange Debt for Equity – The FRIA recognizes that banks are

usually the big creditors of businesses. To enable them to help rehabilitate their

debtors, the FRIA allows banks to acquire and hold an equity interest or

investment in a debtor or its subsidiaries when conveyed to such bank in

satisfaction of debts pursuant to a rehabilitation or liquidation plan,

notwithstanding any provision of law to the contrary.55

6. Pre-Negotiated Rehabilitation – Consistent with its objective to

provide a quick resolution of an insolvency situation, the FRIA expressly allows

pre-negotiated rehabilitation plan.

The plan must be endorsed or approved by creditors holding at least two-

thirds (2/3) of the total liabilities of the debtors, including secured creditors

holding more than fifty percent (50%) of the total secured claims and unsecured

51 FRIA, Sec. 52. 52 FRIA, Sec. 56. 53 FRIA, Sec. 57 54 FRIA, Sec. 58. 55 FRIA, Sec. 11.

25

creditors holding more than fifty percent (50%) of the total unsecured claims of

the debtor.56

The approval of a pre-negotiated rehabilitation plan will have the same

legal effect as the confirmation of a court-supervised rehabilitation plan.57

7. Out-of-Court Rehabilitation – To accommodate preference for

informal workouts and protect the debtor and its creditors from the tyranny of

the minority, the FRIA introduces a key innovation by formally adopting out-of-

court rehabilitation as part of our legal system.

This remedy may be availed of where the debtor/s, and creditors

representing at least 85% of the debtor's total liabilities (composed of at least 67%

of the debtor’s secured obligations and 75% of the debtor’s unsecured

obligations), agree on a restructuring or rehabilitation plan.58 This is essentially

an out-of-court proceeding, but the FRIA expressly allows the insolvent debtor

and/or creditor to seek court assistance for the execution or implementation of

their rehabilitation plan.59

8. Exemption from Taxes – In furtherance of its policy objectives, the

FRIA grants certain relief from the imposition of all taxes and fees including

penalties, interests and charges due the national government or local

government units upon issuance of the Commencement Order.60

56 FRIA, Sec. 76. 57 FRIA, Sec. 82. 58 FRIA, Secs. 83-84. 59 FRIA, Sec. 89. 60 FRIA, Sec. 19.

26

In addition, the FRIA provides that the amount of any indebtedness or

obligation, reduced or forgiven in connection with a rehabilitation plan’s

approval, shall not be subject to any tax.61

9. Additional Exceptions to Stay or Suspension Order – To help put

an end to never-ending disputes on the coverage of the stay or suspension order,

the FRIA enumerates the exceptions to its suspensive effect. For example, the

order does not apply to cases pending in the Supreme Court and specialized

bodies62 and some financial market-related transactions (i.e., clearing of checks,

settlement of securities in the stock market, etc.).63

10. Post-commencement Loans and Obligations – To encourage third

parties to extend financial and other forms of assistance to the distressed debtor,

the FRIA allows the debtor, with the approval of the court and upon the

recommendation of the rehabilitation receiver, to enter into credit arrangements

or incur other obligations as may be essential for its rehabilitation.64

The payment of these post-commencement loans and obligations is

considered an administrative expense,65 which means that they can be paid by

the debtor notwithstanding the stay or suspension order.

11. Personal Liability of Directors and Officers – In line with trends

on good corporate governance, the FRIA imposes personal liability on directors

61 FRIA, Sec. 71. 62 FRIA, Sec. 18 (a) and (b). 63 FRIA, Sec. 18(f). 64 FRIA, Sec. 55. 65 See FRIA, Sec. 4(a)(4).

27

and officers if they are found to have willfully disposed or caused the disposal of

any property in fraud of creditors or in a manner grossly disadvantageous to the

debtor, or have concealed or approved the concealment from the creditors of, or

embezzles or misappropriates, any property of the debtor.66

12. Juridical Person as Rehabilitation Receiver – A juridical person

may now serve as a rehabilitation receiver. It must, however, designate a natural

person who possesses all the qualifications and none of the disqualifications of a

rehabilitation receiver as its representative.67

13. Creditors’ Committee – To facilitate the rehabilitation of the

debtor, the FRIA expressly authorizes the creditors belonging to a class to

formally organize themselves into a committee. The creditors may, as a group,

form one committee composed of: (a) secured creditors; (b) unsecured creditors;

(c) trade creditors and suppliers; and, (d) employees of the debtor.68

14. Confirmation of Contracts – The FRIA requires the debtor, with

the consent of the rehabilitation receiver, to notify each contractual counter-party

whether it is confirming a particular contract. Contractual obligations of the

debtor arising or performed during this period, and afterwards (for confirmed

contracts), shall be considered as administrative expenses. Contracts not

confirmed within the required deadline shall be considered terminated.69

66 FRIA, Sec. 10. 67 FRIA, Sec. 28. 68 FRIA, Secs. 42-43. 69 FRIA, Sec. 57.

28

15. Protection of Secured Creditors’ Interest – Consistent with

international best practices, the issuance of a commencement order or a

suspension or stay order does not diminish or impair the security or lien of a

secured creditor, or the value of his/its lien or security, except that his right to

enforce it is suspended during the term of a stay order.

If the property secured is not necessary for the rehabilitation of the

debtor, however, the secured creditor is allowed to enforce his security or lien, or

foreclose upon the property of the debtor securing his/its claim under certain

conditions.70

16. Conversion into Liquidation – In a court-supervised rehabilitation,

a rehabilitation plan must be approved by the court not later than one (1) year

from the filing of a petition. If no rehabilitation plan is approved within such

period, the court may, on its own or upon motion of a party, order the

conversion of the rehabilitation proceeding into liquidation.71

17. Faster Voluntary Liquidation – In cases of voluntary liquidation,

the FRIA mandates the issuance of a liquidation order within five (5) working

days if the court finds the petition sufficient in form and substance.72 In addition,

the FRIA, in contrast to the old Insolvency Law, no longer requires the posting of

a bond with at least two (2) sureties.

C. UNCITRAL CROSS-BORDER INSOLVENCY MODEL LAW

70 FRIA, Sec. 60. 71 FRIA, Sec. 72. 72 FRIA, Sec. 104.

29

In order to better prepare for globalization of businesses, the FRIA formally

adopted the Model Law on Cross-Border Insolvency of the United Nations Commission

on International Trade Law (―Model Law‖). The Model Law is aimed at improving

cooperation of courts and administrators in international insolvency proceedings, with

the ―goal of maximizing the value of the debtor’s worldwide assets, protecting the

rights of the debtors and creditors and furthering the just administration of the

proceedings.‖73

Notably, in the Association of Southeast Asian Nations (ASEAN), the Philippines

is first to recognize and adopt the Model Law in its insolvency system.

The Model Law reflects cross-border insolvency practices which are

characteristic of modern and efficient insolvency systems. The Model Law, however,

respects different national procedural laws and does not impose a substantive

unification of insolvency laws. Instead, the Model Law offers solutions which help in

modest, but significant, ways.74 These include:

1. Providing foreign representatives the right to access courts of the

enacting State. This, in turn, provides relief or a temporary ―breathing space‖ to

foreign representatives and allows the court to determine coordination among

various jurisdictions or grant such other relief warranted for optimal disposition

of the insolvency proceeding;

73 The World Bank, Principles and Guidelines for Effective Insolvency and Creditor Rights

Systems (April 2001), available at http://www.worldbank.org/ifa/ipg_eng.pdf (last accessed January 16, 2013).

74 United Nations Commission On International Trade Law (UNCITRAL), UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment, [UNCITRAL Model Law] available at http://www.uncitral.org/pdf/english/texts/insolven/insolvency-e.pdf (last accessed January 16, 2013).

30

2. Determining when a foreign insolvency proceeding should be

accorded recognition and the consequences of the same;

3. Providing a transparent regime in furtherance of the right of

foreign creditors to commence or participate in an insolvency proceeding in the

enacting State;

4. Permitting courts in the enacting State to cooperate effectively with

other courts and representatives, in a foreign insolvency proceeding;

5. Authorizing courts in the enacting State and other persons

administering insolvency proceedings therein to seek assistance abroad;

6. Establishing rules for coordination in cases where an insolvency

proceeding in the enacting State proceeds concurrently with an insolvency

proceeding in another State; and,

7. Establishing rules for coordination of the relief granted in the

enacted State, in cases where two or more insolvency proceedings involving the

same debtor take place in multiple States.

The Model Law may be applied to a number of cross-border insolvency

situations, including the following: (a) inward-bound requests for recognition of a

foreign proceeding; (b) outward-bound requests from a court or administrator in the

enacting State for recognition of an insolvency proceeding commenced under the laws

of the enacting State; (c) coordination of concurrent proceedings in two or more States;

31

and, (d) participation of foreign creditors in insolvency proceedings taking place in the

enacting State.75

The salient features of the Model Law are the following:

1. Cross-border Cooperation – There is a widespread limitation on

cooperation and coordination among judges from different jurisdictions in cases

of cross-border insolvency. This limitation is derived from uncertainty in, or lack

of a legislative framework regarding, the scope of legislative authority to pursue

cooperation with foreign courts.

The Model Law expressly empowers courts to extend cooperation in the

areas covered by the Model Law.76 This includes authorizing cooperation

between a court in the enacting State and a foreign representative, and between a

person administering the insolvency proceeding in the enacting State and a

foreign court or representative.77

2. Coordination of Concurrent Proceedings – The Model Law deals

with coordination between a local proceeding and a foreign proceeding

concerning the same debtor78 and facilitates coordination between two or more

foreign proceedings involving the same debtor.79

The objective is to foster coordinated decisions that would best achieve the

objectives of both proceedings (e.g., maximizing the value of the debtor’s assets

75 UNCITRAL Model Law, Art. 1. 76 See UNCITRAL Model Law, Arts. 25-27. 77 UNCITRAL Model Law, Art. 26. 78 UNCITRAL Model Law, Art. 29. 79 UNCITRAL Model Law, Art. 30.

32

and determining the most advantageous restructuring of the enterprise). In order

to achieve satisfactory coordination and adapt relief to changing circumstances,

the Model Law directs the court, in all situations covered by the Model Law

(including those that limit the effects of foreign proceedings in the face of local

proceedings), to cooperate with foreign courts and representatives to the

maximum extent possible.80

3. Foreign Assistance for Insolvency Proceeding Taking Place in the

Enacting State – The Model Law authorizes courts of the enacting State to seek

assistance from other jurisdictions on behalf of an insolvency proceeding taking

place therein.81 Without such legislative authorization, courts are deterred from

seeking such assistance abroad. This, in turn, creates potential obstacles to a

coordinated international response in case of cross-border insolvency.

4. Foreign Representative’s Access to Courts of the Enacting State –

An important objective of the Model Law is to provide foreign representatives

expeditious and direct access to courts of the enacting State. The Model Law

avoids the need to rely on cumbersome and time-consuming letters rogatory or

other diplomatic or consular communications. Thus, it facilitates a coordinated

approach to cross-border insolvency and makes fast action possible.

5. Recognition of Foreign Proceedings – The Model Law establishes

the criteria in determining whether a foreign proceeding should be recognized.82

80 See UNCITRAL Model Law, Arts. 25-30. 81 UNCITRAL Model Law, Art. 25. 82 See UNCITRAL Model Law, Arts. 15-17.

33

It provides that, in appropriate cases, the court may grant interim relief pending

a decision on recognition.83

D. THE PROPOSED FRIA RULES

In accordance with its constitutionally-vested rule-making power, the Supreme

Court is in the process of formulating the implementing rules and regulations of

procedure (―IRR‖) of the FRIA. The IRR for rehabilitation proceedings under the FRIA

has been drafted by the Sub-Committee on Commercial Courts. The draft rules have

been circulated to various stakeholders for their comments.

Some of the key issues to be clarified under the IRR (for rehabilitation

proceedings) are the following:

1. The majority vote requirement for court-supervised

rehabilitation under Section 12 of the FRIA. The issue is whether the majority

vote requirement should be liberally construed and simply defined as more than

50% of the stockholders representing the outstanding capital stock,

notwithstanding any higher majority vote requirement imposed in the debtor’s

articles of incorporation and/or by-laws.

2. The consolidation of all legal proceedings upon the issuance of a

Commencement Order as provided under Section 17 (e) of the FRIA. The

question is whether a decision or order rendered by a judicial body, despite the

issuance of a Commencement Order, should at least be voidable in nature or may

be a subject of an annulment proceeding.

83 UNCITRAL Model Law, Art. 19.

34

3. The time period for deciding a court-supervised rehabilitation

case. The FRIA gives a maximum period of one year. The issue is whether the

Supreme Court may be authorized under the IRR to give an extension for

compelling reasons.

4. Treatment of Employee’ Claims. Under Section 56 of the FRIA,

compensation of employees required to carry on the business shall be considered

administrative expense. In cases where the employer does not want to reinstate

the employee pending appeal and opts for payroll reinstatement, the issue is

whether such payroll reinstatement can be considered as administrative expense.

5. Out-of-Court Rehabilitation Agreements. The issue is whether

there can be an authorized splitting of cause of action, i.e., a case in the Regional

Trial Court to annul the out-of-court rehabilitation agreement under its general

jurisdiction and a case for prohibitory injunction under Section 88 of the FRIA, to

enjoin the implementation of the agreement.

Once the IRR for rehabilitation proceedings are approved, the IRR for liquidation

proceedings will be drafted and thereafter, promulgated in due course.

III. ADDITIONAL KEY COMPONENTS FOR AN EFFECTIVE INSOLVENCY SYSTEM FOUND IN DEVELOPING COUNTRIES

The passage of the FRIA is considered a major reform to our economy’s financial

system. Nevertheless, we still need to provide a complementary set of rules and support

systems to ensure its effectivity and efficiency.

35

As previously mentioned, the Supreme Court is in the process of drafting the IRR

of the FRIA. Aside from well-established rules, however, developed and/or developing

countries have put in place the following in their insolvency frameworks:

A. Capacity Building for Insolvency Courts

i. Special Commercial Courts

An efficient judicial system is founded on rules that confer jurisdiction upon

courts and vest them with authority to act on insolvency proceedings. Jurisdiction is the

authority to hear and determine a cause or the right to act in a case.84 Considering that

rehabilitation proceedings, insolvency issues and the task of implementing its

governing law, such as the FRIA, involve highly crucial and technical matters, most

jurisdictions have assigned and created ―specialized‖ courts.

In Belgium, its legislature created a body called the ―judicial composition‖ under

the Federal Act of 17 July 1997. The objective was to spot traders in difficulty at an early

stage and before their problems became so serious that the procedure would not be able

to save them from insolvency. Inside the commercial courts, there were special

chambers that were assigned to collect data on traders in difficulty. These chambers

were composed of three judges who determine whether a trader meets the criteria for a

judicial composition. The main source of information consisted of data that traders were

obliged to file with the registry of the commercial court on a regular basis. The special

chambers were also required to conduct its examinations in a discreet way so as not to

84 FERIA & NOCHE, I CIVIL PROCEDURE ANNOTATED 130 (2001).

36

disturb normal commercial life. In fact, only the debtor and the public prosecutor were

given the right to consult the file.85

This ―specialized‖ court in Belgium, however, was considered too evasive and

created a negative stigma in the names of the distressed traders. Thus, Belgium later

(i.e., on 31 January 2009) passed the Law on the Continuity of Enterprises, which

fundamentally changed the rules on judicial composition. At present, the two main

objectives which govern Belgium’s new Restructuring Law are: (i) promoting out-of-

court or confidential restructurings, so that the debtor can avoid the negative stigma

attached to any public insolvency proceeding; and, (ii) providing flexible solutions to

allow companies in distress to reorganize their activities.86

In the United States, Congress passed the Bankruptcy Code which, among

others: (1) created a bankruptcy court, the constituent members of which are

bankruptcy judges appointed by the judges of various courts of appeals for a term of

fourteen (14) years; (2) granted jurisdiction over bankruptcy cases and litigation, which

arises in those cases to the district courts in the first instance; and, (3) reallocated the

insolvency responsibility by enabling a district court handling bankruptcy litigation to

refer them to the bankruptcy court.87

However, in the Philippines, while Congress initially considered the creation of

specialized courts, budgetary constraints prevented this idea to materialize. Moreover,

85 Collier International Business Insolvency Guide 2, Insolvency Laws of Selected Nations

15.05[1] (2005 ed.). 86 See Thierry Bosly and Muriel Alhadeff, The New Belgian Insolvency Law, White & Case,

January 31, 2009, available at http://www.whitecase.com/alert_new_belgian_insolvency_law_01312009 (last accessed January 16, 2013).

87 Collier International Business Insolvency Guide 2, Insolvency Laws of Selected Nations 2.02 [3], (Release No. 15, September 2012).

37

considering that there are only few insolvency cases filed every year, Congress found it

best to leave the designation of specialized commercial courts from the ranks of our

Regional Trial Courts to the Supreme Court.

At present, there are special commercial courts which handle intra-corporate,

rehabilitation and intellectual property cases under A.M. No. 03-03-03-SC.

ii. Training Programs

Sufficient training programs and a medium must be in place to ensure the

competency, efficiency and independence of these specialized courts.

In the United States, bankruptcy judges as well as all federal judges and

magistrates, receive formal judicial training from the Federal Judicial Center in

Washington D.C. The Center provides research, training and continuing education

programs necessary to increase the skills of the judges. The Center runs orientation

training for all new federal judges, providing an in-depth introduction to the federal

court system and to substantive and procedural areas pertinent to the areas of law in

which the judges deal. The Center also provides continuing legal education programs,

offering each judge an update in relevant areas of statutory and case law, as well as case

management. There is also specialized training in specific subject areas, such as

financial accounting, which is very important to the development of bankruptcy judges

skills.88

88 See Timothy B. De Sieno and Rupal Shah Palanki, The United States‟ Specialized

Bankruptcy Courts (Forum for Asian Insolvency Reform, Insolvency Reform in Asia: An Assessment of the Recent Developments and the Role of the Judiciary, Bali, Indonesia, February 7-8, 2001), available at http://siteresources.worldbank.org/GILD/Resources/DiSieno.pdf (last accessed January 16, 2013).

38

In the Philippines, the Philippine Judicial Academy (―PHILJA‖), which was

created by the Supreme Court pursuant to Administrative Order No. 35-96 on 12 March

1996, was institutionalized as the ―training school for justices, judges, court personnel,

lawyers and aspirants to judicial posts.‖89

PHILJA plays a vital role in ensuring judicial competence and efficiency through

continuing judicial education.

The training of our commercial law judges has been pursued earnestly by the

Supreme Court through PHILJA. PHILJA recently completed a training module on

rehabilitation and liquidation proceedings in insolvency. This module included the

following: (1) recent trends and developments in light of the enactment of the FRIA; (2)

introduction of significant changes and basic legal concepts and reasoning, including an

introduction to primary and secondary source materials relating to the FRIA; (3)

discussions on specific roles and tasks; and, (4) accounting issues.

It is highly recommended that there be a continuing capacity building program

for our special commercial court judges on insolvency matters, which should include:

(1) best practices and techniques in handling rehabilitation and liquidation cases; (2)

updates on rules, procedures and jurisprudence; (3) studies on local and foreign

insolvency cases; (4) exposure trips to enable our judges to actually observe foreign

insolvency proceedings and interact with foreign bankruptcy judges; (5) introduction to

procedures of international insolvency proceedings in light of the cross-border

insolvency provisions in the FRIA; (6) dealing with rehabilitation receivers and

89 Rep. Act No. 8557 (1998), Sec. 3.

39

liquidators; (7) financial and other technical issues such as fixing the compensation of

rehabilitation receivers and liquidators; and, (8) guidelines in dealing with ethical

disputes that may arise during the proceedings.

iii. Specialized Court Personnel

Capacity building for our insolvency courts may include tapping specialized

personnel to assist them.

In Germany, for example, there is a specialized court officer called a

―Rechtspfleger” who replaces the judge in a limited area of legal activity.90 The

Rechtspfleger is a very important officer in insolvency proceedings. After the

proceedings have been opened by the judge, they are from then on presided by the

Rechtspfleger. This means that the Rechtspfleger represents the court in the post-opening

stage. The judge is no longer involved. Theoretically, the judge may decide to retain

control of the proceedings. The judges, however, rarely do so because they have little or

no experience with the post-opening stage.

Unlike a judge, a Rechtspfleger does not have to attend law school and obtain a

Juris Doctor degree. Instead, he has to go through a legal education program especially

designed for the Rechtspfleger profession. The German states run internal colleges for

that program. Generally, the colleges will only admit students who have the revocable

status of a civil servant of the state running the college. The program takes three (3)

years to complete. It is made up of both on and off the job training. In some German

states, the program includes twelve (12) months of studies at the college, followed by

thirteen (13) months practical training at an Amtsgericht (County Court) and in the office

90 See http://www.insolvencycourts.org/ICE/ICEGermanBasics.html (last accessed

January 16, 2013).

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of a civil law notary, followed by another nine (9) months of studies at the college and

concluded by two (2) months of practical training with the office of the public

prosecutor. At the end of the program, the students have to take the Rechtspfleger exam.

Each student who passes the exam is awarded the degree of Diplomrechtspfleger. The

Rechtspfleger decides independently, just like a judge. The Rechtspfleger‟s responsibilities

include, among others, the following: (a) supervision of legal guardians; (b) rulings on

applications for entry in the commercial register; (c) registration of mortgages and

similar rights in the registry of deeds; (d) judicial sales of realty; and, (e) execution of

civil and criminal judgments.

In the United States, there is an officer known as a Certified Bankruptcy

Assistant (―CBA‖). CBAs are required to attend a Certified Bankruptcy Assistant

Program wherein they are provided with a general background in bankruptcy law and

enhanced writing skills for professional bankruptcy assistants. Successful completion of

the program allows the CBA to have an enhanced knowledge-base and qualifications

for private or public employment in the bankruptcy field.

B. Capacity building for insolvency practitioners

Bankruptcy law has developed into a very unique, sophisticated and technical

area of expertise, and there is an increasing demand for legal ability and proficiency

especially from those who practice in this field. For example, rehabilitation receivers

and liquidators may be required to periodically attend primer courses on good

insolvency practices. The topics offered may include, among others, current

developments and trends on insolvency proceedings, compliance mechanisms and

relevant periods, and ethical and professional responsibility, including duty of

confidentiality.

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The organization of associations for insolvency practitioners has been done in

other countries to help professionalize the ranks of insolvency practitioners. In fact,

there is a worldwide federation, known as the International Association of

Restructuring, Insolvency & Bankruptcy Professionals (―INSOL‖), composed of national

associations of accountants and lawyers who specialize in turnaround and insolvency.

Currently, there are over forty-three (43) Member Associations with over 9,000

professionals participating as members.

INSOL also has ancillary groups that represent the judiciary, regulators, lenders

and academics. These groups play an invaluable role within INSOL and provide

valuable fora for discussions of mutual problems.

Members of INSOL have ready access to various conferences, seminars,

publications and activities that would facilitate the exchange of information and ideas,

encourage greater international cooperation and communication amongst insolvency

professionals. By becoming a member of, or partnering with, these international

associations, we will be equipped with vital knowledge and experience to guide our

country in developing internationally-accepted legislation and best practices.

In Australia, the Insolvency Practitioner Association of Australia (―IPAA‖) has,

within the past twenty to thirty years, promulgated a scale of hourly rates for

insolvency practitioners. Liquidators are required to be registered.91 Administrators and

liquidators in Australia are required to make a statement of independence in the form

of a declaration of relevant relationships they have or have had with the company, its

associates, any former liquidators or administrators or any charge holder in the

91 Collier International Business Insolvency Guide 2, Insolvency Laws of Selected Nations

14.04[4][v][A] (2005 ed.).

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preceding twenty-four (24) months.92 The Australian Securities and Investment

Commission may investigate a liquidator’s conduct if he or she has not faithfully

performed his or her duties.93

C. “Electronic Filing” system

Delay in the proceedings is commonly caused by the difficulty in determining the

reckoning date for the running of the period for compliance with the court’s orders and

processes. Our present Rules of Court provide that the period to file a responsive

pleading starts from receipt of the order/pleading. Thus, in order to delay the

proceedings, most parties serve and file their pleadings through registered mail.

To solve this problem, the court may require the parties to file and serve their

pleadings/motions electronically. In fact, the United States has created a system where

parties and courts may electronically file and serve their pleadings/motions/order.

This system is called the Electronic Bankruptcy Noticing (―EBN‖).94 Under the EBN,

lawyers, parties and the courts can upload their pleadings and filings, and once

uploaded, the same would be accessible by interested persons online. The use of the

EBN is free and voluntary, in that the parties must consent to be subject to the electronic

filing and notification system.

By having an electronic filing (―e-filing‖) database, parties will no longer have an

avenue to prolong the proceedings of the case. Moreover, an e-filing system will be

92 Ibid. at 14.04[5][d]. 93 Ibid. at 14.04[5][f][iv]. See also Report 287: ASIC regulation of registered liquidators: January

to December 2011 (Australian Securities & Investments Commission, May 2012), available at http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rep287-published-22-May-2012.pdf/$file/rep287-published-22-May-2012.pdf (last accessed January 16, 2013).

94 See Electronic Bankruptcy Noticing at http://ebn.uscourts.gov/ (last accessed January 16, 2013).

43

good for our environment, as this would reduce the need to print out copies to be

furnished all parties of the case.

D. Establishing an expeditious and specialized Appeal System

There is also a need to establish a fast track appeal system made up of an

insolvency law panel of appellate court judges. This would bring expertise to the

appellate level. While appeals cause delay in the disposition of a case, there must still be

a mechanism that would allow a timely and proficient review of the orders, resolutions

and decisions of the lower courts. This may only be attained if the composition of the

reviewing body is properly trained, experienced and knowledgeable in insolvency

proceedings.

IV. CONCLUSION

The legislative reform of the country’s insolvency system, through the enactment

of the FRIA, is a major step towards economic and financial reform. The FRIA has a

forward-looking structure by adopting international best practices on insolvency.

Foremost is the adoption of pre-negotiated rehabilitation, out-of-court rehabilitation or

restructuring agreements, and cross-border insolvency as component parts of the law.

With the enactment of the FRIA, we have paved the road to a more effective and

responsive insolvency system. Nevertheless, there are several support systems that still

need to be developed to realize this objective. As discussed above, these include

capacity building for our special commercial courts handling insolvency cases and

insolvency practitioners, providing for electronic filings and creating a fast track appeal

system similar to those existing in developed nations.

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With the foregoing in mind, let us now move forward and take a step towards a

developed and stable financial economy.

*****