By Atty. Gregorio B. Austral, CPA
Financially distressed? The FRIA may have some answers
The lockdown has brought untold miseries not just to ordinary people but also to several businesses with small or inadequate capitalization to absorb losses arising from temporary closures, lack of demand, and inability to cut down costs and expenses.
The announcement made by Marco Polo Hotel in Davao City to end operations by June 15, though painful as it may seem, can be considered as a good strategy to preserve whatever remaining assets the company has at the time of closure. Rather than continue bleeding, the company’s decision to close shop and pay its workers may be the only feasible alternative left. Just this week, patrons of Victoria Court may have lost a place in ‘heaven’ when one of its owners decided to closed shop.
Not all businesses are endowed with resources enough to wind up its operations without legal hitches. Prior to the pandemic, many companies financed their operations with a high debt-to-equity ratio, which means that their capital is sourced out more from borrowings than from the owners’ investment. With revenue going down or becoming nil, debt servicing poses an excessively big challenge for companies which have no sufficient cash buffer. Thus, defaults are expected.
Even though the moratorium on debt and rental payments is mandated by the Bayanihan to Heal as One Act, the future is still bleak especially now that recession is here. The end to this public health emergency is not yet in sight as the world still continues to suffer from the perils of COVID-19. The remedy provided by the Bayanihan law may not offer sufficient protection for distressed debtors since it is simply a temporary relief vis-à-vis the long-term effects of the pandemic.
Distressed debtors can consider the Financial Rehabilitation and Insolvency Act (FRIA) as a possible source of relief. The FRIA encourages debtors and their creditors to collectively and realistically resolve and adjust competing claims and property rights; ensures a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors in order to ensure/maintain certainty and predictability in commercial affairs, preserve and maximize the value of debtors’ assets, recognize creditor rights, and respect priority of claims, and ensure equitable treatment of creditors similarly situated; and facilitates speedy and orderly liquidation of debtors’ assets, and settlement of obligations, when rehabilitation is no longer feasible.
Based on the law’s declared policy, rehabilitation is preferred over liquidation. The rationale for this is to effect a feasible and viable rehabilitation by preserving a floundering business as a going concern, because the assets of a business are often more valuable when so maintained than they would be when liquidated.
The proceedings covered by FRIA include: (a) suspension of payments proceedings for individual debtors; (b) court-supervised corporate rehabilitation; (c) pre-negotiated rehabilitation; (d) out-of-court rehabilitation or informal restructuring agreements; (e) liquidation of insolvent juridical debtors; (f) insolvency of individual debtors; and (g) cross-border proceedings.
FRIA proceedings have been characterized as “in rem” , which means that jurisdiction over all persons affected by the proceedings shall be considered as acquired upon publication of the notice of the commencement of the proceedings in any newspaper of general circulation in the Philippines pursuant to the FR Rules. Rehabilitation proceedings are summary and non-adversarial in nature. Unlike in adversarial proceedings, the court in rehabilitation proceedings appoints a receiver to study the best means to revive the debtor and to ensure that the value of the debtor’s property is reasonable maintained pending determination of whether or not the debtor should be rehabilitated. (To be continued)