Liquidation issues

The preneed industry suffered a black eye last week when the Insurance Commission (IC) ordered Prudential Life Plans Inc. (PPI) to be placed under receivership.

Two years ago, when PPI was having some difficulties meeting its obligations to its planholders, the IC appointed a conservator to manage its affairs with the view of putting it back on its feet.

Several preneed companies submitted proposals to rehabilitate the 34-year-old company. Unfortunately, the IC did not find their plans satisfactory enough to protect the interests of PPI’s 300,000 or so planholders.

To aggravate matters, the company’s stockholders have virtually thrown in the towel. They neither showed interest in putting additional capital nor presented a viable financing plan to keep the company afloat.

With no white knight in sight willing to bail out the company from its P11-billion deficit, the IC had no choice, following the mandate of the Pre-Need Code (Republic Act 9829), but to appoint a receiver for it.

A law office has been asked to take charge of the company’s trust fund and gather and administer all its assets for the benefit of planholders and creditors. It was given 10 days from acceptance of the appointment to submit a receivership program for the company.

Insolvency

Learning from past experience on delays in receivership arrangements, the Pre-Need Code requires the IC to determine, within 30 days from the receiver’s appointment, whether or not a financially strapped preneed company can be reorganized or placed in a condition where it can resume its business without jeopardizing the interests of its principal stakeholders.

If the IC finds that the company is insolvent, it is obliged to order its immediate liquidation, indicate the manner of liquidation and implement a liquidation plan for that purpose.

To avoid any ambiguity in the interpretation of the lawmakers’ intent on this matter, the law defines insolvency as “the financial condition of a preneed company that is generally unable to pay its liabilities as they fall due in the ordinary course of business or that has liabilities that are greater than its assets.”

The use of the word “generally” is significant. The inability of the company to pay its obligations has to be taken in its totality, or company-wide, not on a preneed plan-to-preneed plan basis.

The fact that the trust fund specifically set aside to pay, for example, maturing pension plans is sufficient while the trust funds for the educational and memorial plans are gravely inadequate to pay for them as they fall due shall not bar a finding that the company is on the verge of insolvency or already insolvent.

Given that condition, it’s only a matter of time before the financial hemorrhage affects the remaining viable plans and the company as a whole.

Responsibility

From the looks of it, the prospects of PPI escaping liquidation are nil.

The preneed industry still has to fully recover from the adverse effects—in terms of public trust and confidence—of the unceremonious collapse of the then leading preneed company, College Assurance Plan, in 2005.

Several preneed companies suffered a similar fate in the succeeding months. Like CAP, however, they were able to dodge their obligations to the planholders by filing for rehabilitation with the regular courts.

Upon the companies’ petition, the courts prohibited the affected planholders and creditors from demanding payment of their claims or credits until further notice.

To date, symptomatic of the slow pace of justice in our country, those cases are still pending. While some 600,000 planholders have been left holding the proverbial empty bag, the owners of the defaulting preneed companies have (merrily) moved on with their lives.

If, knock on wood, the liquidation of PPI becomes inevitable, the IC has broad authority to name a liquidator and set the parameters for the orderly disposition of the company’s remaining assets.

At the top of the liquidator’s responsibility is seeing to it that the trust funds are distributed exclusively to the planholders in proportion to the termination values of their respective preneed plans.

Meaning, the trust funds are off limits to any claims that creditors or other third parties may make on the assets of the company.

Executory

To further underscore the importance of protecting the interests of planholders, the law provides that the liquidator should convert the company’s assets into cash or “sell, assign or otherwise dispose of the same to the planholders, creditors and other parties” in order to settle its liabilities.

Thus, receipt by the planholders of their proportional share in the trust funds does not bar them from standing ahead of the line to partake of whatever money may have been generated by the liquidator from the sale or disposition of the company’s assets.

In a sharp departure from past practices on the treatment of decisions of regulatory agencies, the law states that the actions of the IC on liquidation shall be final and executory and can be set aside by a court “only if there is convincing proof that the action is plainly arbitrary and made in bad faith.” Neither can a court issue a restraining order or injunction to stop the IC from enforcing a liquidation order except for the same reasons earlier mentioned.

In both instances, if the company concerned would like to take issue with the liquidation order, it has the burden of proof to show that it is capricious or devoid of any legal basis.

In the same token, the message to the courts is clear: Do not interfere in the IC’s appreciation of the financial condition of a preneed company unless there is clear and convincing proof to the contrary.

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