Material financial commitments, seriously speaking
In my Oct. 15, 2015 column, I discussed a fairly recent trend where our Supreme Court is now trying to strike the right balance in rehabilitation law.
It is trying to do it by enforcing provisions of the Financial Rehabilitation and Insolvency Act (FRIA) and the Financial Rehabilitation Rules of Procedure (FR Rules) requiring that a petition for rehabilitation must include material financial commitments to support the rehabilitation of the debtor.
The FRIA and FR Rules do not define what a material financial commitment is. For this reason, practitioners and even our courts of law have taken the requirement lightly as though it were a mere formality that does not have any substantive importance.
But that cavalier attitude toward material financial commitment should end with recent pronouncements of the Supreme Court on the matter.
What is material financial requirement in the first place?
The FRIA and FR Rules do not define the phrase. However, in at least two fairly recent cases, the Supreme Court stated that it may include the voluntary undertakings of the stockholders or the would-be investors of the debtor-corporation indicating their readiness, willingness and ability to contribute funds or property to guarantee the continued successful operation of the debtor corporation during the period of rehabilitation. (BPI Family Savings Bank Inc. vs. St. Michael Medical Center Inc., G.R. No. 205469, March 25, 2015]; Philippine Bank of Communications v. Basic Polyprinters and Packaging Corporation, G.R. No. 187581, Oct. 20, 2014)
The lack of material financial commitment was one of the three reasons the Supreme Court struck down a rehabilitation plan submitted for a financially distressed company in the BPI Family Savings Bank case cited above.
In that case, the company argued that there were pending negotiations for a group of investors to pump in new money to help in its rehabilitation.
The Supreme Court ruled that mere pendency of negotiations with investors was not material financial commitment that was required by our rehabilitation law.
According to the High Court, “nothing short of legally binding investment commitment/s from third parties is required to qualify as a material financial commitment.”
The BPI Family Savings Bank case was not the first time that Supreme Court struck down a rehabilitation plan for lack of the required material financial commitment. The same fate was met by the debtor in the Basic Polyprinters case because, according to the Court, there was “no commitment in relation to the infusion of fresh capital by its stakeholders.”
In fact, the BPI Family Savings Bank cited Basic Polyprinters which found, among others, that “the negotiations … did not partake of a voluntary undertaking because no actual financial commitments had been made thereon.”
In fact, in Basic Polyprinters, the Supreme Court went on to analyze each and every component of the so-called material commitments spelled out in the rehabilitation plan.
The Court concluded that they “were insufficient for the purpose” either because the source of the funding “was doubtful,” “was insufficient to cover at least half of the shareholders’ deficit,” or “a mere reclassification of the liability entry and had no effect on the shareholders’ deficit.”
So what is the morale of the story?
First, “[i]t is imperative for a distressed corporation seeking rehabilitation to present “material financial commitments.”
In the words of the Supreme Court, this “is critical in determining its resolve, determination, earnestness and good faith in financing its proposed rehabilitation plan.” (BPI Family Savings Bank and Wonder Books, supra.)
More importantly, the financial commitments must be “firm assurances that could convince creditors, future investors and the general public of its financial and operational viability.” (Wonder Books, supra.) In fact, nothing short of legally binding investment commitment/s from third parties is required to qualify as a material financial commitment.” (BPI Family Savings Bank, supra.)
Last but not the least, the financial commitment must be material, otherwise they will be struck down for being insufficient as what happened in the Basic Polyprinters case. For example, it cannot take the form of a “dacion en pago involving an asset mortgaged to the petitioner itself in favor of another creditor.” Neither can it be additional “working capital to be sourced from the insurance claim” that “appeared to be doubtful” because it “had already been written-off” by an affiliate of the petitioning debtor. It cannot also be conversion of “payables to officers and stockholders as trade payables” because such conversion” was a “mere re-classification of the liability entry and had no effect on the shareholders’ deficit.
For a financial commitment to be considered material as required by both the FRIA and FR Rules, it must be significant enough as to meaningfully support the rehabilitation of the financially distressed debtor.
As ruled in the foregoing cases, it must be such as to demonstrate “sincere commitment” to “fund the implementation of its rehabilitation plan.” It cannot be a mere artifice to let the creditors finance rehabilitation by a “delay in the payment of their claims or a considerable reduction in the amounts thereof.”
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(The author is a law professor in the Ateneo Law School and a senior partner of ACCRALAW. All views in this column are exclusively his and may not be attributed to the institutions he is presently connected with. He may be contacted through [email protected])
