Key Takeaway: The Importance of Compliance with the Financial Rehabilitation and Insolvency Act in Corporate Rehabilitation Proceedings

Banco de Oro Unibank, Inc. v. International Copra Export Corporation, et al., G.R. Nos. 218485-86, 218487-91, 218493-97, 218498-503, 218504-07, 218508-13, 218523-29, April 28, 2021

Imagine a business, once thriving, now struggling to meet its financial obligations due to unforeseen economic downturns. The owners file for rehabilitation, hoping to save the company and its employees. However, the process is fraught with legal complexities that could determine the company’s fate. This is the story of International Copra Export Corporation and its affiliates, whose journey through the Philippine legal system highlights the critical role of the Financial Rehabilitation and Insolvency Act (FRIA) in corporate recovery.

The case revolves around the application of FRIA, which was enacted to streamline the process of rehabilitating financially distressed companies. International Copra Export Corporation, along with its affiliates, sought to suspend payments and undergo rehabilitation. The central legal question was whether the absence of implementing rules for FRIA rendered it inapplicable to their case, and whether the court could approve their rehabilitation plan without creditor approval.

The legal landscape of corporate rehabilitation in the Philippines has evolved significantly. Initially governed by the Insolvency Law of 1909, the process was later influenced by Presidential Decree No. 1758 and the Securities Regulation Code. The enactment of FRIA in 2010 marked a pivotal shift, aiming to encourage debtors and creditors to resolve competing claims efficiently. Key provisions include the requirement for a rehabilitation receiver to convene creditors for voting on the proposed plan, as stated in Section 64 of FRIA:

“SECTION 64. Creditor Approval of Rehabilitation Plan. – The rehabilitation receiver shall notify the creditors and stakeholders that the Plan is ready for their examination. Within twenty (20) days from the said notification, the rehabilitation receiver shall convene the creditors, either as a whole or per class, for purposes of voting on the approval of the Plan.”

This provision underscores the importance of creditor participation in the rehabilitation process. For non-lawyers, rehabilitation is akin to a financial lifeline for a struggling business, allowing it to restructure debts and operations to regain solvency. However, it requires strict adherence to legal procedures to ensure fairness to all parties involved.

The journey of International Copra Export Corporation began in 2010 when it filed a petition for suspension of payments and rehabilitation. The Regional Trial Court (RTC) initially applied the 2008 Rules on Corporate Rehabilitation, despite FRIA’s effectivity. This decision led to a series of appeals and counter-appeals, culminating in the Supreme Court’s review.

The Supreme Court emphasized that FRIA’s provisions are enforceable even without implementing rules, stating:

“The mere absence of implementing rules cannot effectively invalidate provisions of law, where a reasonable construction that will support the law may be given.”

The Court found that the RTC had issued a Stay Order that effectively served as a commencement order, as required by FRIA. However, the critical issue was the lack of creditor voting on the rehabilitation plan, a mandatory step under FRIA. Despite this, the Supreme Court reinstated the RTC’s approval of the rehabilitation plan, citing the creditors’ prior opportunities to object and the feasibility of the plan as assessed by the rehabilitation court.

This ruling has significant implications for businesses seeking rehabilitation. It reaffirms that FRIA is the governing law for post-2010 petitions, and courts must ensure compliance with its provisions. Businesses must prepare comprehensive plans and engage with creditors transparently to increase the chances of successful rehabilitation.

Key Lessons:

• Ensure compliance with FRIA’s requirements, particularly the creditor voting process.
• Engage with creditors early and transparently to build support for the rehabilitation plan.
• Seek legal advice to navigate the complexities of rehabilitation proceedings effectively.

Frequently Asked Questions

What is corporate rehabilitation?
Corporate rehabilitation is a legal process that allows a financially distressed company to restructure its debts and operations to regain solvency, often under court supervision.

How does FRIA affect rehabilitation proceedings?
FRIA introduced a more structured approach to rehabilitation, requiring creditor participation in voting on the proposed plan and setting clear guidelines for the process.

Can a company file for rehabilitation without creditor approval?
While creditor approval is required under FRIA, courts may still approve a plan if certain conditions are met, such as the feasibility of the plan and the protection of creditor rights.

What happens if a company fails to comply with FRIA’s requirements?
Non-compliance can lead to the rejection of the rehabilitation plan, potentially resulting in liquidation if no viable alternative is presented.

How can a business prepare for a successful rehabilitation?
A business should develop a detailed rehabilitation plan, engage with creditors, and ensure compliance with all legal requirements under FRIA.

ASG Law specializes in corporate rehabilitation and insolvency. Contact us or email hello@asglawpartners.com to schedule a consultation.