SC tightens rules on rehabilitation receivers

On Oct. 22, 2013, the Financial Rehabilitation Rules of Procedure went into effect.

The FR rules were approved by the Supreme Court on Aug. 27, 2013, to implement the provisions on rehabilitation contained in RA 10142, or “The Financial Rehabilitation and Insolvency Act of 2010” (FRIA).

The FR rules introduce drastic changes to the old rules on rehabilitation, one of which relates to rehabilitation receivers.

A rehabilitation receiver is a person who assists the court in formulating and implementing the rehabilitation plan of a financially distressed debtor undergoing rehabilitation. While appointed at the instance of the debtor and/or creditors, a rehabilitation receiver is, first and foremost, an officer of the court.

Unlike the old rules where only a natural person could be a rehabilitation receiver, both the FRIA and FR rules expressly provide that a juridical person (like an accounting firm, law firm, and other professional partnerships or even a corporate entity) may serve as a rehabilitation receiver. However, a rehabilitation receiver which is a juridical entity must designate, as its representative, a natural person who must possess all the qualifications and none of the disqualifications provided for rehabilitation receivers. Furthermore, a juridical entity and the representative are solidarily liable for all the obligations and responsibilities of a rehabilitation receiver.

Conflict of interest

No person may be appointed as a rehabilitation receiver if he has a conflict of interest.

The rehabilitation receiver is deemed to have a conflict of interest if he is so situated as to be materially influenced in the exercise of his judgment for or against any party to the proceedings.

These are some examples of conflict of interest on the part of the rehabilitation receiver: (a) he is a creditor, owner, partner or stockholder of the debtor; (b) he is engaged in a line of business which competes with the debtor; (c) he is or was, within five years from the filing of the petition, a director, officer, owner, partner, or employee or the auditor or accountant of the debtor; (d) he is or was, within two years from the filing of the petition, an underwriter of the outstanding securities of the debtor; or, (e) he is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owner/s of a sole proprietorship-debtor, partners of a partnership-debtor, or to any stockholder, director, officer, employee, or underwriter of the corporation-debtor.

A key change introduced by the FR rules is that no person may be engaged by the rehabilitation receiver as part of his team if he has conflict of interest. In fact, the FR rules expressly provide that a conflict of interest of an individual employed or contracted by the rehabilitation receiver shall be deemed to be a conflict of interest of the rehabilitation receiver.

Disclosure of conflict of interest

Another key change introduced by the FR rules is that conflict of interest shall be disclosed to the court and the creditors at all times throughout the proceedings.

The FR rules require that disclosure of any conflict of interest  be made: (a) by the nominees for the position of rehabilitation receiver before their names are submitted for appointment; (b) by the rehabilitation receiver and its designated representative in case of juridical person, within 15 days from the appointment as rehabilitation receiver; and (c) by the rehabilitation receiver and its designated representative in case of juridical person, within 10 days from the time the rehabilitation receiver and/or its designated representative learns of any fact giving rise to conflict of interest  while the rehabilitation proceedings are pending.

The rule on disclosure also applies to persons who assist the rehabilitation receiver as professionals, experts or employees.

These persons shall file their disclosure within 10 days from the date they are contracted or are employed by the rehabilitation receiver.

Compensation

Like the 2008 rules, the FRIA and FR rules allow a rehabilitation receiver and the latter’s direct employees and independent contractors to charge reasonable fees and expenses.

Such fees and expenses are considered administrative expenses. This means that the debtor is obligated to pay them, notwithstanding the issuance of the commencement order which, among others, suspends payment of all claims against the debtor.

Unlike the 2008 rules, however, the FRIA and FR rules expressly require that such fees and expenses must be approved by the court after notice and hearing.

Before such hearing, the rehabilitation receiver is entitled to reasonable compensation based on quantum meruit.

Like the old rules, the FR rules do not contain a table of fees for the rehabilitation receiver. But unlike the old rules, they expressly provide factors that should be considered by the court in determining the amount of reasonable compensation. The factors include the following: (1) size of the debtor under rehabilitation; (2) time to be spent on such services; (3) credentials, experience, skills and reputation of the receiver, his direct employees or independent contractors; (4) benefits accruing to the debtor; (5) complexity, importance, urgency, and nature of the problems, issues, or tasks addressed; and (6) customary compensation charged by comparably skilled practitioners in other rehabilitation cases.

Also, unlike the old rules, the FR rules expressly provide that if any substantial or material change in the circumstances intervenes affecting the compensation fixed, the court may, upon motion of the debtor, rehabilitation receiver, or the creditors, order a review or revision of the compensation set by the court.

Disclosure of all forms of compensation

Not only is court approval necessary for the rehabilitation receiver’s fee, but more importantly, the FR rules expressly require the rehabilitation receiver and his team to disclose in writing, at the earliest opportunity, to the court, with notice to all the parties, all forms of arrangements or agreements in the handling of the receivership.

Notably, the disclosure shall cover “all forms of arrangements or agreements” such as but not limited to, “commissions, fees, fee-sharing arrangements, and payments in kind.”

Failure to comply with this duty shall be a ground for removal from office of the person concerned and forfeiture of the rehabilitation receiver’s bond.

The new rules are intended to minimize abuses (perceived or real) and to promote transparency on the part of rehabilitation receiver. If it is any consolation at all to rehabilitation receivers, most of the new requirements apply to members of the management committee and their teams as well.

(The author is a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW) and a law professor in the Ateneo Law School. The views expressed in this column are solely his and should in no way be attributed to ACCRALAW or the Ateneo Law School. He may be contacted at [email protected].)