Something’s in store in the law for MSMEs

If a micro, small or medium enterprise (MSME) runs into a financial problem, is there a mechanism that it can use to get back on its feet?

The question is important because MSMEs play an important role in our economy.  Based on the 2014 data of the Philippine Statistics Authority, MSMEs accounted for 99.6 percent of total registered enterprises, employing millions of Filipinos.

In the  words of former Sen. Edgardo J. Angara, MSMEs are “the real backbone of our economy” that  “have greater direct impact on Filipinos’ lives than do big players, providing opportunities to those who could not have started businesses otherwise.” A report from the Asian Development Bank, on the other hand, said they are the “driving force behind a resilient national economy.”

There are two basic laws, the Magna Carta for Micro, Small and Medium Enterprises and  Go Negosyo Act, which were both envisioned to strengthen the legal framework for MSMEs.  But lacking from these two laws is a mechanism that would address the poor financial condition that MSMEs may find themselves in.

Rehabilitation

Not known to everybody, however, is that Republic Act No. 10142, otherwise known as the Financial Rehabilitation and Insolvency  Act of 2009 (FRIA), applies as well to MSMEs.

The FRIA addresses the needs of an insolvent debtor.  It prescribes three basic remedies: rehabilitation, suspension of payments for individual debtors and liquidation in insolvency.

Our Supreme Court has already adopted procedural rules to implement the FRIA. The first is the Financial Rehabilitation Rules of Procedure (FR Rules), adopted in 2013, that implement FRIA’s provisions on rehabilitation. The second is the Financial Liquidation and Suspension of Payments Rules of Procedure (FLSP) that implement the provisions of the FRIA on suspension of payments and liquidation in insolvency.

Insolvency

Rehabilitation is a mechanism to restore an  insolvent debtor to a condition of successful operation and solvency.

There are three modes. The first mode is court-supervised rehabilitation that requires the approval  of creditors representing more than 50 percent  of the debtor’s total liabilities. It also requires the approval of a rehabilitation plan by the court, which is mandated to act upon it for a maximum period of one year from the filing of the petition.

The second mode of rehabilitation is pre-negotiated rehabilitation, whereby the insolvent debtor is able to get the approval of its creditors representing at least 67 percent of its total liabilities. The court is given a maximum of 120 days to act on it, otherwise the plan will be deemed approved.

Last resort

The third mode is out-of-court rehabilitation or restructuring, which covers a situation where the insolvent debtor is able to get the approval of its creditors representing at  least  85 percent  of its liabilities and the plan is binding on all creditors without need of court approval.

Suspension of payments is a mechanism that enables individual debtors to temporarily suspend payments of debts and restructure the same.

Liquidation in insolvency is a remedy of last resort envisioned to pay off the debtor’s liabilities in an orderly fashion in case it is no longer feasible to rehabilitate its business.

Rehabilitation proceedings  are not limited to large corporations and partnerships. They are available as well to MSMEs and individual debtors doing business as single proprietorships.

In fact, the FRIA’s principal author, former Senator Angara,  suggested the inclusion of these businesses in the coverage of the bill before it was submitted for the plenary consideration of Congress. Angara made this suggestion because of the important role that MSMEs have been playing in the economy.

So there you go, business owners of MSMEs. Like large corporations, you have something to use in the remote event that your business encounters financial problems.