FORUM FOR ASIAN INSOLVENCY REFORMS
DAY 2: THURSDAY, 8 FEBRUARY 2001
HOTEL PUTRI BALI, NUSA DUA, BALI INDONESIA
THE PHILIPPINE EXPERIENCE:
SPECIALIZED COURT SYSTEM FOR
INSOLVENCY PROCEEDINGS
BY
CESAR L. VILLANUEVA
STRUCTURE OF PRESENTATION
I. PHILIPPINE MILIEU ON INSOLVENCY
PROCEEDINGS
II. PHILIPPINE HISTORICAL DEVELOPMENTS
ON SPECIALIZED COURTS
III. CONCLUSIONS/RECOMMENDATIONS
I. PHILIPPINE INSOLVENCY MILIEU
RECOGNITION OF CONCERNS OF
LOCAL/ FOREIGN INVESTORS
(a) EXISTENCE, CLARITY AND CONSISTENT
APPLICATION OF INSOLVENCY LAWS
(b) REASONABLENESS OF SUBSTANTIVE
CONTENTS PROTECTING CONTRACTUAL
RIGHTS
(c) EFFECTIVENESS AND COMPETENCE OF
JUDICIAL OR QUASI-JUDICIAL AGENCIES
ENFORCING INSOLVENCY RULES
I. PHILIPPINE MILIEU (Cont’d)
CONSTITUTIONAL SETTING
(a) Protection of Property/Contractual Rights
under the “Due Process” Clause
(b) Sanctity of Contracts under the “Nonimpairment” Clause
(c) Advocacy of the “Free-Enterprise System”
vis-à-vis the “Social Function” of property
I. PHILIPPINE MILIEU (Cont’d)
CIVIL CODE PROVISIONS
(a) Freedom to contract and stipulate terms
and conditions
(b) Binding effects of contracts on both
parties (Mutuality of contracts)
(c) Contract rights over property binding on
the world as rights in rem
- STRONG CIVIL LAW TRADITION IN
PHILIPPINE JUDICIAL SYSTEM
I. PHILIPPINE MILIEU (Cont’d)
HIERARCHICAL RULES ON CLAIMS
(a) Priority of CREDITORS over EQUITY- HOLDERS
to the business enterprise and its assets
(b) Sub-hierarchical rule: Priority of SECURED
CLAIMS over NON-SECURED CLAIMS over
specific properties of debtor
- PHILIPPINE LEGAL SYSTEM IS PROPERTYRIGHTS RATHER THAN BUSINESSENTERPRISE ORIENTED
II. HISTORICAL DEVELOPMENT
What Are the Initial Assessments
of the Insolvency Courts in the
Philippines?
What Aspects Have Worked Well
and What Aspects Require Further
Improvements?
A. AMERICAN TRANSPLANT – 1909 to 1980
PHILIPPINE INSOLVENCY LAW (1909)
- Still the Basic Substantive Law TODAY
- COVERAGE: (a) SUSPESION OF PAYMENTS
(b) INSOLVENCY PROCEEDINGS
- Voluntary
- Involuntary
- Does not recognize corporate “rehabilitation”
FEATURES OF INSOLVENCY LAW
1. Provides for orderly payment of unsecured
creditors
2. Proceedings do not include/bind secured
creditors
3. Inherent policy against modification of
contractual and security/lien rights
4. Limits automatic stay/suspension order, and
provides for exacting periods so as not to
compromise contractual rights
5. Requires consent of creditors to any plan or
schedule of re-payment/composition
PROCEEDINGS COVERED BY LAW
1. SUSPENSION OF PAYMENTS
- Spanish in origin
- Debtor - Possesses sufficient property to
cover all debts
- Foresees impossibility of meeting
debts as they fall due
- Suspends enforcement/payments of debts, while
debtor works-out repayment scheme with
unsecured creditors
- Suspension cannot exceed 3 months
- Suspension/Proceedings do not cover secured
creditors
2. INSOLVENCY PROCEEDINGS
- Debtor: Liabilities exceed Assets
- Allows Voluntary and Involuntary Insolvency
- Objectives: 1. Not to amend property/
contractual rights
2. Orderly means to satisfy claims
against the debtors
3. “Discharge” for the insolvent
individual debtors
COURT SYSTEM EMPLOYED
REGIONAL TRIAL COURTS (RTC)
- Courts of General Jurisdiction
- Presided by judges steeped in Civil Law
tradition
- Case loads substantially consisted of civil and
criminal cases
PHILIPPINE INSOLVENCY LAW
EFFECTIVENESS OF THE LAW:
- Has had very limited applications
- Financially distressed debtors (individuals,
partnerships and corporations) have not
much availed of it
REASONS FOR LAW’s INEFFECTIVENESS
1. Does not provide for effective remedy for
financially distressed debtors
2. Automatic stay does not cover secured creditors
3. No discharge for corporate debtor
REASONS FOR LAW’S INEFFECTIVESS:
4. Heavy case load on other types of cases, with
no competent insolvency skill by judges and
lack of support mechanism
5. Greater motivation to use of extra-legal means
to obtain relief or to insulate properties:
- Lack of clear fraud laws and absence of
fraud enforcement tradition
- Inefficient court system
6. Asian culture giving importance to “face”
B. MARTIAL LAW INITIATIVE – 1981 to 2000
PRES. DECREE 902-A:
1. SEC as Quasi-Judicial Body to hear:
(a) Suspension of Payments where the
corporation has difficulties paying debts,
placed under management committee
(b) Rehabilitation proceedings, when
corporation placed under management
committee or a rehabilitation receiver
2. RTC retained jurisdiction over:
- Individual debtors
- Insolvency over corporate debtors
RECOGNITION OF CORPORATE
REHABILITATION PROCESS
- Rehabilitation is “a continuance of corporate life
and activities in an effort to restore and reinstate
the corporation to its former position of
successful operation and solvency.”
- Rehabilitation of a corporation “benefits its
employees, creditors, stockholders and, in a
larger sense, the general public.”
- PD 902-A was essentially:
- Charter of SEC
- Not a Bankruptcy statute
FEATURES OF CORPORATE
REHABILITATION UNDER DECREE
1. Constitution of SEC as the Specialized Courts to
handle corporate rehabilitation cases
2. Rehabilitation limited only to partnerships and
corporations
3. Automatic stay/proceedings covered all secured
and unsecured creditors
4. Lack of substantive provisions on rights of
stakeholders
5. Much power/discretion given to SEC, Management
Committee/Rehabilitation Receiver
“SURGE” IN CORPORATE REHABILITATION
1. Automatic stay, covering both secured and
unsecured creditors, provided complete
“insulation” to corporate debtor
2. “Efficiency” of obtaining “relief” from an
administrative body with less-case load,
and “sympathetic” to corporate ventures
3. “Ambiguity” and “Discretion” to the SEC,
allowed “imaginative” remedy-approach to
the corporate debtor and unsecured creditors
ABUSES UNDER SEC REGIME
- Abuse of SEC discretion to ram-down
desired results, either for debtor or
unsecured creditors
- Exposed SEC officers to corruption
- Resort to the non-time-bound automatic
stay and rehabilitation process to
“blackmail” secured creditors
- Lack of clear provisions under the Decree
necessitated resort to abuse of appellate
process to clarify issues and doctrines
POSITIVE DEVELOPMENTS
1. Constitution of Specialized Administrative
Agency, with “expertise” and “institutional”
thrust on corporate rehabilitation
2. Development of body of rules and doctrines
on corporate insolvency and rehabilitation
3. Structure of Management Committee/
Rehabilitation Receivers evolved:
- Pool of professional managers
- Auxiliary support
adept at rehabilitation and insolvency matters
C. RECENT DEVELOPMENTS: YEAR 2000
SECURITIES REGULATION CODE
1. Securities Law and NOT Insolvency law
2. Transferred Quasi-Judicial Powers of SEC to
the Regular Trial Courts (RTC)
3. Does not Contain Provisions relating to
corporate rehabilitation
4. All proceedings for suspension of payment,
insolvency and rehabilitation, both individual
and corporate, united in RTC jurisdiction
PROBLEMS WITH PRESENT SET-UP
- RTC, being courts of general jurisdiction,
would be ineffective:
- Judges: Civil-Law oriented
No expertise in corporate/commercial
No expertise in insolvency
- Heavy case-loads lead to inefficient delivery
system for insolvency regime
- RTC have no common-law jurisdiction, and
cannot “fashion” equitable solutions
SUPREME COURT RULES ON
CORPORATE RECOVERY:
- Proceedings/automatic stay cover both
secured and unsecured creditors
- Proceedings treated as in rem
- Designated particular branch/sala of RTC in
region to handle rehabilitation cases
- Provide specific periods for suspension order,
meetings of creditors and proceedings
- Provide for dismissal of petition when no
decision within 180 days
FLAWS OF SET-UP:
1. Constitutional challenges to SC Rules which
adversely affect property/security rights, being
beyond power of Supreme Court
2. Designation of particular RTC branch in a region
does not allow concentration on corporate/
insolvency matters to develop expertise
3. Lack of Substantive Law on Corporate
Rehabilitation undermines reliance on the system,
and promotes appeals for doctrinal rulings
III. CONCLUSIONS
1. COMPREHENSIVE BANKRUPTCY CODE
MUST EXIST IN THE REGIME
- To allow all stakeholders to rely upon a
central set of rules for insolvency matters
- To prevent delays through appellate
queries on important issues relating to
jurisdiction, powers and voting rights
- To encourage the growth of a professional
pool of managers and auxiliary support
for the insolvency system
2. INSTITIONALIZING SPECIALIZED COURT
SYSTEM FOR INSOLVENCY PROCEEDINGS
- Encourages systematic and well-focused
development/evolvement of procedural and
substantive components of insolvency regime
- Encourages stakeholders in a corporate
setting to more properly evaluate the
various alternatives available
- Promotes development of efficient support
system and pool of managers competent
in insolvency matters
3. MAJOR CHALLENGES IN INTRODUCING
SPECIALIZED COURT SYSTEM FOR
INSOLVENCY PROCEEDINGS
1. State-commitment to enact a
comprehensive Bankruptcy Code
2. Upgrading commercial/corporate law
systems in the given jurisdiction
3. Hefty financial costs in setting-up
specialized court system, and hiring/
training of competent hearing officers
4. Developing community acceptance/reorientation of social values consistent
with modern bankruptcy regime
END