Smooth bankruptcy proceedings

The stars seem to be aligning on Philippine Airlines’ (PAL) efforts to keep flying despite the troubles the COVID-19 pandemic continues to bring to bear on the air travel industry.

The Chapter 11 petition that PAL filed recently in a bankruptcy court in New York City is going smoothly.

In a Chapter 11 filing, a financially-strapped company asks the court to issue an order restraining its creditors from demanding the prompt payment of their loans or the seizure of its assets if it defaults on those payments.

Corollary to that motion, the company submits to the court a reorganization plan or its intended course of action to return to profitability and be able to service the financial obligations that would be held in abeyance.

According to reports, the New York bankruptcy court has acted favorably on PAL’s request to, among others, have access to the initial $20 million loan from a $505-million debtor-in-possession (DIP) financing arrangement and to continue regular operation.

In standard bankruptcy actions, the existing lenders are usually averse to the company incurring additional loans because it may aggravate its already strained financial condition.

But if a DIP arrangement could facilitate financial recovery and the company has a good track record in meeting its financial obligations in the past, the court may allow it over the objections of the lenders.

In PAL’s case, the DIP lenders would be led by its owner, business tycoon Lucio Tan.

Upon its exit from rehabilitation, PAL said the DIP loan would be converted to equity or long-term debt.

That DIP loan may, in effect, be looked at as stockholders’ advances that are meant to give the airline a financial breather during these troubled times.

The court’s action is good news for PAL’s employees, its suppliers of goods and services and other parties that do business with it in other areas. It would be business as usual for the country’s flag carrier.

The speed with which the US court acted on PAL’s petition does not come as a surprise. Bankruptcy law has been part of the US legal system since the 1800s and so the rules and regulation on its application, including court procedures, are firmly in place.

Depending on the relief being sought, there is already a template on what should be spelled out in a bankruptcy petition, i.e., the facts and figures on the company’s financial condition, the amounts and maturity periods of the financial obligations, the consent (or disagreement) of the creditors, and the terms of the reorganization or rehabilitation plan.

Bankruptcy, financial recovery or liquidation related cases are heard by US courts specifically organized to resolve them. With this setup, the parties are assured that the presiding judges are up to the job in deciding on legal and factual issues.

A review of bankruptcy cases in the United States shows that the courts, by and large, are guided by the principle that if a company’s financial problems are not attributable to the fault or negligence of its management, and that based on its financials it is capable of regaining financial health, then it should be given be given the opportunity to rehabilitate itself.

This new lease in life is, however, subject to the condition that it scrupulously implements its recovery plan which, depending on its terms, would be supervised by the court or a court appointed rehabilitation manager.

Bankruptcy law practice is quite lucrative in the United States. So much so that there are lawyers who handle only bankruptcy or related cases, and big law offices have lawyers who specialize in that field.

Not so in the Philippines. Although Republic Act No. 10142, or the Financial Rehabilitation and Insolvency Act, has been in effect since 2010, which is the equivalent of the US Bankruptcy Code, that field of law does not attract extensive practice.

Rehabilitation cases in the country are far and in between. Some of the companies that could avail of that remedy probably think it is better to close shop than go through a process that, on account of the existing judicial system, would take years to accomplish. INQ

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