by: Atty. Gregorio B. Austral, CPA
Available options if you can’t pay your debts
Debtors who are financially distressed may avail of the remedies provided under the Financial Rehabilitation and Insolvency Act (FRIA). Under the FRIA, not all debtors are qualified to seek relief from the law. Business owners who are contemplating on filing a petition in court under this law must first check if he is covered by FRIA.
The debtors covered by the law include DTI-registered sole proprietorship, SEC-registered partnership, corporation duly organized and existing under Philippine laws including government-owned and controlled corporations (GOCCs) and non-bank government financial institutions (GFIs), and insolvent individual debtors as defined by FRIA. Debtors not covered by the law and therefore cannot seek relief under this law are banks and quasi-banks that are potentially or actually subject to conservatorship, receivership or liquidation proceedings under the New Central Bank Act, insurance companies, pre-need companies, and national and local government agencies or units.
GOCCs and non-bank GFIs are covered by FRIA, unless their specific charter provides otherwise. Although banks, financial institutions, insurance companies and pre-need companies are not covered, the manner of liquidation of these companies is determined by relevant legislation and that the FRIA shall apply in a suppletory manner. This means that the primary basis for the liquidation of these companies shall be determined first on the laws primarily governing these entities. If there is no procedure in the laws governing these entities, then the procedure in the FRIA applies.
Creditors may also avail of the remedies under the FRIA. In a situation where a debtor company has several creditors and its assets are insufficient to satisfy its debts, it can be expected that the company may encounter troubles in honoring its obligations. Defaults in the payment or servicing of debts may trigger some creditors to foreclose the collaterals used to secure the debts, thus, leaving the unsecured creditors at the end of the queue of creditors who are demanding to collect from the company. Foreclosures may cause the operations to be paralyzed, thus, leaving the unsecured creditors with nothing to satisfy their claims.
Any creditor or group of creditors with a claim of, or the aggregate of whose claims is, at least One Million Pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the subscribed capital stock or partners’ contributions, whichever is higher, may initiate involuntary proceedings against the debtor by filing a petition for rehabilitation with the court if: (a) there is no genuine issue of fact on law on the claim/s of the petitioner/s, and that the due and demandable payments thereon have not been made for at least sixty (60) days or that the debtor has failed generally to meet its liabilities as they fall due; or (b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor that will prevent the debtor from paying its debts as they become due or will render it insolvent. (Sec. 13, R.A. 10142)
Under the FRIA, suspension of payment proceeding may be used by covered debtors to prevent a hemorrhage of his financial resources. Note however that this proceeding is available to individual debtors only. Partnerships, corporations, and other business entities cannot avail of this remedy.
An individual debtor who (a) possessing sufficient property to cover all his debts, (b) but foreseeing the impossibility of meeting them when they respectively fall due, may file a verified petition to be declared in the state of suspension of payments by the court of the province/city in which he has resided for six (6) months prior to the filing of his petition, attaching thereto: (1) a schedule of debts and liabilities; (2) inventory of assets; and (3) proposed agreement with creditors.
Within five (5) working days from the filing, and if the court finds the petition sufficient in form and substance, it shall issue and order calling for a creditors’ meeting, directing the order’s publication in a newspaper of general circulation, and forbidding the individual debtor so long as the suspension proceedings are pending from (1) selling, transferring, encumbering or disposing in any manner of his property; and (2) making any payment outside of the necessary or legitimate expenses of his business or industry.
Upon motion filed by the individual debtor, the court may issue an order suspending any pending execution against the individual debtor. However, properties held as security by secured creditors shall not be the subject of such suspension order. (To be continued)