Judicial relief for distressed businesses

With revenues going south due to low demand for airplane travel because of the COVID-19 pandemic and billions of dollars in debts to service, Philippine Airlines (PAL) is reportedly considering filing for bankruptcy court protection in the United States.

That action, dubbed the Chapter 11 action, if granted, would allow PAL to defer the payment of its financial obligations to its US creditors and restrain the filing of foreclosure proceedings against its assets while it takes the proper steps to regain its financial health.

There are two reasons behind PAL’s possible application for relief from a US court: first, the bulk of its debts were sourced from US financial institutions and so a US court can exercise jurisdiction over them; and second, US courts are more experienced in handling such actions.

Since bankruptcy cases are run of the mill in the US, the rules on their resolution are already well-established and can be easily referred to by the courts.

The situation that PAL found itself in is also being felt by hundreds of businesses in the country whose operations were adversely affected by the quarantine measures and business regulations imposed by the government to contain the spread of the virus.

The course of action reportedly being contemplated by PAL—bankruptcy protection—to enable it to meet the pandemic challenge is also available in Philippine courts.

Republic Act No. 10142, or the Financial Rehabilitation and Insolvency Act of 2010, provides the mechanism by which debtors and their creditors can “collectively and realistically resolve and adjust competing claims and property rights.”

In substance, the law provides judicial relief to financially distressed or insolvent businesses to enable them to rehabilitate, maintain their operation and, hopefully, be able to pay their debts.

The court-supervised rehabilitation can be initiated either by the insolvent company itself (voluntarily) or by its creditors (involuntarily).

Based on court records, voluntary rehabilitation seems to be the preferred course of action by financially distressed businesses in the Philippines.

Aside from the relative ease in filing it, it gives the petitioner the ample opportunity to actively participate in the rehabilitation.

The petition shall state, among others, (a) the facts of and the cause of the insolvency or inability to pay the obligations as they become due; (b) a list of the creditors and the amounts of their claims; and (c) a rehabilitation plan.

That plan should contain the names of at least three nominees to the position of rehabilitation receiver.

If the court finds the petition meritorious, it shall issue a commencement order that shall include, among others, the appointment of a rehabilitation receiver who may or may not be among the petitioner’s nominees.

The same order shall suspend all actions in court or other venues for the enforcement of claims, judgments, attachment or similar actions against the petitioner.

And to be fair to the creditors, the petitioner is prohibited from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business.

After the court disposes off the preliminary issues, the rehabilitation plan is set for hearing and the affected parties shall be given the opportunity to comment on the terms and conditions of the rehabilitation plan.

By and large, our courts have been liberal in the handling of rehabilitation cases.

They have been guided by the principle that it would be in the best interest of the parties, in particular, the creditors, to give financially distressed businesses the opportunity to regain their footing with the least obstruction from third parties.

But in the unlikely event the rehabilitation plan does not accomplish its objective, then it’s only fair and just the remaining assets be proportionally distributed among the creditors. INQ

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