Tough call in bankruptcy cases

It did not come as a surprise that Philippine Airlines (PAL) incurred a lot of expenses in exiting the Chapter 11 bankruptcy case it filed in a US court.

According to an Inquirer Business report, PAL paid almost $3 million (roughly P150 million) to the US lawyers and consultancy firms that helped it come up with a rehabilitation program that quickly earned the court’s approval.

It is standard practice in most US law firms to compute their fees based on the number of hours and minutes they spend in handling a case. Sometimes, they charge a “success fee” if they are able to secure a favorable ruling for their client.

In conjunction with the US filing, PAL also engaged the services of four local law offices whose fees were not disclosed.

Although the principal elements of the case were heard in the US court, these law firms were needed to provide legal advice to the US lawyers on certain laws in the Philippines that apply to PAL in regard to its plea for financial relief.

In addition, the Filipino lawyers had to file a counterpart bankruptcy case in the Philippines because PAL has several creditors in the country who have claims for unpaid products and services.

Note that the US courts are picky when it comes to the submission of “opinion of counsel” (or advice on certain legal issues) by non-US based lawyers on cases before them.

That privilege is usually reserved for local law offices that are listed in the Martindale-Hubbell Law Directory (an internationally recognized source of information about lawyers in different parts of the world) or other similar law registers, or are the correspondent lawyers in the Philippines of reputable US law offices.

Until the Financial Rehabilitation and Insolvency Act of 2010 (Republic Act No. 10142) became effective, recovery from bankruptcy or business failure through the judicial system was a hit-and-miss affair.

This time, there are established systems and procedures in dealing with businesses that experience financial problems that, if afforded relief by way of, for example, suspension of payments or restructuring of credit obligations, can be nursed back to financial health.

But like any legal proceeding, that remedial measure comes with a financial price.

Whether initiated by the company or made at the instance of its creditors, a petition for rehabilitation requires the engagement of the services of lawyers and accountants who have to convince the court of the merits of the plea for relief.

Although this proceeding is meant to be done expeditiously, it is not uncommon, based on past experiences, for the court to take months, if not years, to decide on the petition.

Will a petition for rehabilitation be worth the time, expense and effort it will entail?

That is the first question that has to be answered by any company in financial trouble that wants to keep its creditors at bay while it is taking the proper steps to put its business on even keel again.

Bear in mind that there is no guarantee the court will grant the petition.

Its decision will depend on, among others, the state of the business (Is it still viable or capable of being turned around?), the willingness of the creditors to agree to debt restructuring or accept a haircut in their loans, or the merits of the rehabilitation plan submitted by the company.

In case the court is not convinced of the merits of the petition, it may dismiss it and, following the guidelines in the law, order an organized and equitable liquidation of the remaining assets of the company.

Bottom line, any company that avails of the rehabilitation process takes the chance that its efforts and expenses may or may not pay off or accomplish its intended objective.

If the company decides to throw in the towel rather than seek relief from the courts, then it would be every creditor for itself in going after whatever remaining assets the company still has to satisfy any unpaid debts.

Going back to PAL, it helps that it has a white knight in Lucio Tan and a corps of consultants who know their way around in bankruptcy cases in the United States.

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