Law revising century-old insolvency rules enacted

Congress passed into law last Tuesday the Financial Rehabilitation and Insolvency Act (FRIA), which will provide for the rehabilitation or liquidation of financially distressed companies and individuals to replace the more than century-old Insolvency Law of 1909 or Act No. 1956.

The bill was first filed with the House of Representatives of the 11th Congress nearly 10 years ago on July 20, 2000.

Philippine Stock Exchange (PSE) president Francis Lim lauded the legislative support for FRIA.

“We are enormously grateful to Congress led by Sen. Edgardo Angara and Rep. Juan Edgardo “Sonny” Angara, Ramon “Red” Durano VI, Exequiel Javier, Jaime Lopez and Roman Romulo for helping pass this breakthrough legislation after almost a decade in the legislative mill. Congress’ approval of the bill is a significant leap forward in our goal to recover value for shareholders of listed firms that may have gone underwater because our vintage 1909 insolvency law was simply obsolete,” Lim said.

Among the significant features of the bill are:

* Court-supervised rehabilitation — this remedy is available if the debtor is able to get more than 50 percent but less than 67 percent creditor approval for its rehabilitation plan, with more than 50 percent of each class of creditors (secured and unsecured creditors) agreeing to the plan. The court is given a maximum period of one year to approve or reject a rehabilitation plan. This will prevent situations like the Uniwide rehabilitation where the dismissal of the petition takes place only after a significant number of years;

* Pre-packaged or pre-negotiated rehabilitation — this remedy is available if the debtor gets at least 67 percent but less than 85 percent creditor approval for its rehabilitation or restructuring plan, with more than 50 percent of each class of creditors agreeing to the plan. The court is given only 120 days to approve or reject the rehabilitation plan on very limited grounds. This will enable companies to avail of pre-packaged rehabilitation like what Japan Airlines is availing of;

* Out-of-court or informal rehabilitation — this applies when the debtor secures at least 85 percent creditor approval, with at least 67 percent of secured creditors and 75 percent of unsecured creditors agreeing to the plan. The rehabilitation or restructuring plan is binding on all creditors by operation of law. There is no need to go to court, except to seek assistance to enforce the plan or restructuring agreement;

* Debt forgiveness or the amount by which the debt is reduced will not be subject to any tax on the part of either the creditor or the debtor. During the limited period of rehabilitation proceedings, the financially distressed debtor will not be subject to any tax to help it get back on its feet;

* If the debtor can no longer be rehabilitated, the debtor goes into liquidation for an orderly settlement of debts and liabilities.

Lim added the law will not be limited to corporations since partnerships and natural persons doing business as sole proprietorships can also avail of rehabilitation.

Individuals who suffer from liquidity problems can petition for suspension of payments or if their assets are less than their liabilities, they can ask for a discharge from their debts for a new lease on life, he said.

The House version of the FRIA was authored in the 14th Congress by Representatives Angara, Lopez, Amelita Villarosa, Durano, Edgardo Nonato Joson and Romulo. Sen. Angara meanwhile authored the Senate version in this Congress. –Daily Tribune