REMEDIES FOR INSOLVENCY IN THE PHILIPPINES

Due to the outbreak of COVID-19 worldwide, and the imposition of the Enhanced Community Quarantine and Stringent
Social Distancing Measures over the entire island of Luzon, there has been a severe disruption of economic activities.
Many establishments have been prevented to physically operate and had to resort to finding means to handle their business
activities remotely. Entrepreneurs and businessmen across different industries have reported significant losses and cut
backs, which have resulted to a widespread and looming fear of bankruptcy.

In the event that this economic disruption will put juridical entities in a state of insolvency, below is a summary of the
remedies available under Philippine laws to address the same.

Under the Philippine laws, an entity is considered insolvent if it is generally unable to pay its liabilities as they fall due in
the ordinary course of business or has liabilities that are greater than its assets[1]
For insolvent entities, the law offers two main reliefs: (1) Rehabilitation and (2) Liquidation. Both remedies are made
available to ensure or maintain certainty and predictability in commercial affairs, preserve and maximize the value of the
assets of debtors, recognize creditor rights and respect priority of claims and ensure equitable treatment of creditors who
are similarly situated.[2]
For individual insolvent debtors, the law offers an additional relief of Suspension of Payments.[3]
REHABILITATION
Rehabilitation aims to restore the debtor to a state of solvency or to its former healthy financial condition through the
adaptation of a Rehabilitation Plan showing that the continued operations is economically feasible and its creditors can
recover more if the debtor continues as a going concern instead of it being immediately liquidated.[4]
There are three main kinds of Rehabilitation Proceedings: (1) Court-Supervised, (2) Pre-Negotiated, and (3) Out-of-Court
or Informal Rehabilitation Proceedings. The main difference between these different types is the level of involvement of
the courts over the rehabilitation proceedings.
Court-Supervised Rehabilitation
These proceedings are coursed through the regular courts, i.e., the Regional Trial Courts, (“Court/s”) and is initiated by
filing of a Petition for Rehabilitation (“Petition”). The Petition must be accompanied by a Rehabilitation Plan that lays
down a plan in order to bring back the entity to a state of solvency or to its former healthy financial condition. If the Court
finds the Petition to be meritorious, it shall issue a Commencement Order,[5] which includes the appointment of a
Rehabilitation Receiver, among others.
The Petition can be initiated or filed by either the debtor or its creditor/s:

 If filed by Debtor (Voluntary Proceedings)

o Debtor must acquire a majority vote of the board of directors and further authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock.[6]
o Creditors can file their verified notices of claims with the Courts at least five (5) days before the initial
hearing date, without which they will be barred from participating in the rehabilitation proceedings.[7]
o Creditors can also file and serve on the debtor a verified comment or opposition to the Petition no later than
fifteen (15) days before the initial hearing.[8]
 If filed by Creditor or a Group of Creditors (Involuntary Proceedings)
o The aggregate amount of their claim must be, whichever is higher of: (1) at least One Million Pesos (Php
1,000,000); or (2) at least 25% of the subscribed capital stock or partners’ contributions.[9]
Benefits for the Debtor:
1. Actions to enforce claims against the debtor may be suspended or prohibited.[10]
2. Waiver of taxes and fees, including penalties, interest and charges, to the government.[11]
3. Measures[12] that allow the debtor to maintain its assets instead of being liquidated.[13]
4. All proceedings against the debtor may be consolidated with the Court[14] making it easier for the debtor to answer
all claims.
5. Any compromises of amounts or rescheduling of payments by the debtor shall be binding on creditors regardless of
whether the Rehabilitation Plan is implemented.[15]
6. It gives the debtor a chance to re-engage the market, hopefully with more vigor and enlightened services, having
learned from a painful experience.[16]
Benefits for the Creditor/s:
1. Measures[17] that preserve the assets of the debtor and directs the same towards efforts to rehabilitate the debtor.
 2. Consolidation of all proceedings against the debtor[18] prevents a scenario of several courts issuing various writs
over the same assets.[19]
3. Creditors are to be paid equitably.[20]
4. The Court shall not impair the security or lien of secured creditors.[21]
5. Secured creditors are given more defined leverage.[22]
6. Assured creditors’ participation.[23]
7. More protection to the creditors to equitably and fairly address their concerns.[24]
8. Allows for present value recovery for creditors.[25]
Pre-Negotiated Rehabilitation
The proceeding involves the confirmation of the Court of a Rehabilitation Plan that was already pre-negotiated by the
debtor and its creditors. A Petition may be filed by the debtor or jointly with its creditors.

The Petition must be supported by an affidavit showing the written approval or endorsement of by creditors holding at least
two-thirds (2/3) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of
the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured
claims of the debtor.[26]
Benefits for the Debtor:
1. Measures that allow the debtor to maintain its assets instead of being liquidated.[27]
2. All proceedings against the debtor may be consolidated with the Court.[28]
3. A shorter timeline.[29]
4. No need to call creditors for the approval of the Rehabilitation Plan as such is already pre-approved.
Benefits for the Creditor/s:
1. Consolidation of all proceedings against the debtor prevents a scenario of several courts issuing various writs over
the same assets.
2. Commencement Order is lifted earlier.[30]
3. Objecting creditors’ rights are protected.[31]
4. The proceeding is significantly shorter compared to a Court-Supervised Rehabilitation.[32]
Out-of-Court or Informal Rehabilitation Agreements (“OCRA”)
This remedy does not involve the use of court processes. The requirements for OCRAs are as follows:[33]
1. The debtor must agree to the OCRA;
2. Approval by creditors representing at least sixty-seven (67%) of the secured obligations of the debtor;
3. Approval by the creditors representing at least seventy-five (75%) of the unsecured obligations of the debtor; and
4. Approval by creditors holding at least eighty-five (85%) of the total liabilities, secured and unsecured, of the debtor.
Benefits for the Debtor:
1. The Rehabilitation Plan does not need the appointment of a Rehabilitation Receiver –negotiations will be conducted
by the parties independently.
2. A standstill period may be agreed upon,[34] which protects debtor from actions of its creditors.
Benefits for the Creditor/s:
1. Confirmation from the Court is not needed, only requires the publication of the notice.[35]
2. The requirements of creditor approval for the Rehabilitation Plan can be made more stringent.
All Rehabilitation Plans approved under the three kinds of Rehabilitation Proceedings shall legally bind the debtor and all
persons who may be affected thereby, including the creditors, whether or not such persons have participated in the
proceedings.

Since the first two kinds of Rehabilitation Proceedings generally involve the Courts, it may normally take longer, maybe
several months or even years, most especially if contested, to complete compared to the third kind. These timelines should
be taken into consideration given the immediate or otherwise need for relief.

Under certain scenarios provided under the law,[36] Rehabilitation Proceedings may be converted into Liquidation
Proceedings.
LIQUIDATION
The goal of a Liquidation Proceeding is to wind up the affairs of the entity and distribute its assets among its creditors. It
involves either the filing of a Petition for Liquidation or the failure or conversion of a Rehabilitation Proceeding into a
Liquidation Proceeding.
  If filed by the Debtor (Voluntary Liquidation)
o Debtor must show certificates attesting that resolutions for the filing of the Petition for Liquidation was
approved by at least a majority of the members of the board of directors present and stockholders holding at
least two-thirds (2/3) of the outstanding capital stock of the stock corporation.[37]
 If filed by the creditors (Involuntary Liquidation)
o Applicants must be made up of three (3) or more creditors whose aggregate claims are: (1) at least One
Million Pesos (Php 1,000,000.00); or (2) At least twenty-five percent (25%) of the subscribed capital stock.
[38]
In both cases, if the Court finds the Petition for Liquidation meritorious, the Court will issue a Liquidation Order which
determines the point when the debtor is deemed dissolved and its corporate or juridical existence is terminated.[39]
Since Liquidation Proceedings also involve the regular courts, it may take a months or years to obtain a Liquidation Order
from the Court, most especially if contested.

Benefits for the Debtor:

1. May allow termination of debtor’s contracts.[40]
2. Prohibits separate actions for the collection of an unsecured claims.[41]
3. Disallows foreclosure proceedings[42] to protect the debtor’s assets prior to distribution.
Benefits for the Creditor/s:
1. May attribute direct liability to directors or officers of the debtor.[43]
2. The right of secured creditors to enforce its liens are not affected by the Liquidation Order.[44]
3. More protection to the creditors as the State steps in to equitably distribute the debtor’s limited resources[45] while
its losses are re-allocated.[46]
4. It prevents further devaluation of the business assets.
INSOLVENCY COSTS/LIABILITIES:
Preference of Credits and Payments
The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable
contract or law, unless he waives his right.[47] Thus, there is preference accorded to secured creditors, but they must file a
manifestation that reflect their desire to maintain their rights under the security or lien.[48]
In the settlement of the assets of an insolvent debtor, the priority of claims depend on the type of property used to satisfy
the debt, as follows:

 If personal or movable property is involved – the preference shall follow Article 2241 of the Civil Code.
 If real or immovable property is involved – the preference shall follow Article 2242 of the Civil Code.
 If none of the foregoing claims apply to personal or real properties – the preference shall follow Article 2244 of
the Civil Code as amended by Article 100 of the Labor Code[49].
If there is still an excess after satisfying the claims or liens under Article 2244 – all other common credits shall be
satisfied pro rata.[50]