1 Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans As A Cost-Efficient Alternative to Debtor-Initiated Court-Supervised Proceedings in Rehabilitation Joseph Anthony P. Lopez Karla Regina D. Valera-Chua The novel COVID-19 virus pandemic has led to several debilitating effects in the whole world. It is not only impacting the health system, but it is undeniably taking a huge toll on the economy as well. Due to the pandemic, Community Quarantine over the capital, Metro Manila, and other urban areas in the Philippines has been imposed resulting in severe disruption of economic activities. According to the National Economic and Development Authority, the Philippine economy lost an estimated P1.1 trillion in the agriculture, industry and services sectors during the first 45 days of the Community Quarantine. Many business establishments are grappling with the restrictions in place and some have barely enough to cope. The Philippine Department of Labor and Employment has also estimated that about 10 million workers will lose their jobs this year due to downsizing. On the other hand, less fortunate businesses feel that they are left with no other option but to close shop due to severe losses and cutbacks. Recently, numerous business in the tourism and food industry have announced closures. However, apart from closure, another cost-efficient option exists as these establishments may likewise consider filing for rehabilitation through an out-of-court or informal restructuring/workout agreement or rehabilitation plan (OCRA). To this end, the law applicable to rehabilitation in the Philippines is Republic Act No. 10142 or the “Financial Rehabilitation and Insolvency Act of 2010” (FRIA). The essential framework of the FRIA is summed up in its declaration of policy, which is “to encourage debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve and adjust competing claims and property rights” [Section 2, Chapter I of the FRIA]. In the past, Act No. 1956, or the old Rehabilitation Law, provided that in order to engage in rehabilitation, it was necessary to seek judicial intervention before such proceedings may ensue, regardless if this was voluntary or involuntary on the part of the business. Fortunately, the FRIA introduced innovations and enhancements to insolvency proceedings, particularly, the concept of an OCRA, which minimizes the need for judicial intervention. Under the present circumstances, and given the need for cost-efficient and immediate relief, resorting to an OCRA may be a viable option instead of going through lengthy court-supervised rehabilitation proceedings. Definition and Requirements An OCRA, as the name suggests, is an agreement between the debtor (the rehabilitating business) and a certain number of creditors which does not need any court approval, unless the parties themselves seek court assistance for its execution and implementation [Section 89, Chapter IV of the FRIA]. Under Section 84, Chapter IV of the FRIA, the minimum requirements for an OCRA are the following: (1) the debtor must agree to the OCRA; (2) it must be approved by creditors representing at least 67% of the secured obligations of the debtor; (3) it must be approved by creditors representing at 2 least 75% of the unsecured obligations of the debtor; and (4) it must be approved by creditors holding at least 85% of the total secured and unsecured debts. Standstill Agreement What makes this remedy unique is the chance available to the debtor to bind all his creditors to a Standstill Agreement, which prohibits any action to claim against the assets of the debtor (the rehabilitating business) during an agreed limited time while the OCRA is being negotiated. In order for the Standstill Agreement to become effective and enforceable, it is necessary that the following requirements are met: (a) the approval of the Standstill Agreement by creditors representing more 50% of the total secure and unsecured liabilities; (b) notice of the Standstill Agreement is published in a newspaper of general circulation in the Philippines once a week for 2 consecutive weeks; and (c) the standstill period shall not exceed one hundred twenty (120) days from the date of effectivity [Section 85, Chapter IV of the FRIA]. The notice of the Standstill Agreement shall substantially contain the following minimum requirements: (1) the identity of the debtor, its principal business or activity/ies, and its principal place of business; (2) the total amount of the liabilities of the debtor, classified into secured and unsecured debts; (3) the name of the contact person for the debtor together with contact details such as existing office address, phone numbers, and e-mail addresses; (4) an invitation of all creditors of the debtor to participate in the negotiations for an OCRA and that such creditor may communicate such willingness to the contact person of the debtor so named therein; (5) a statement that creditors representing more than 50% of the total liabilities of the debtor have agreed to observe a Standstill Period which shall not exceed 120 days from its date of effectivity; (6) that the terms and conditions agreed upon by the parties shall be strictly observed during the Standstill Period; (7) a statement that the standstill period shall be effective after publication of the notice once a week for 2 consecutive weeks in a newspaper of general circulation in the Philippines; and (8) a statement that the OCRA shall be binding on the debtor and all affected persons, including the creditors, whether or not they will participate in the negotiations, if approved by all of the following: (a) the debtor; (b) the creditors representing at least 67% of the secured obligations of the debtor; (c) the creditors representing at least 75% of the unsecured obligations of the debtor; and (d) the creditors holding at least 85% of the total liabilities, secured and unsecured, of the debtor [Section 2, Rule 4 of the FRIA Rules of Procedure (FRIA IRR)]. The standstill period shall expire upon either: (1) the lapse of 120 days from the date of the standstill agreement; (2) the effectivity of the OCRA, or (3) the termination of the negotiations for the OCRA as declared by creditors representing more than 50% of the total liabilities of the debtor, whichever comes first [Section 2, Rule 4 of the FRIA IRR]. The OCRA Once an OCRA is finalized and completed, the notice of the OCRA shall be published once a week for at least 3 consecutive weeks in a newspaper of general circulation [Section 86, Chapter IV of the FRIA]. The notice must state the following: (a) the salient provisions of the OCRA; (b) that the OCRA is available for inspection or reproduction in the offices of the debtor at the expense of the requesting party; (c) the number of secured creditors who approved the OCRA, indicating how much they represent, which should be at least 67%; (d) the number of unsecured creditors who approved the OCRA, indicating how much they represent, which should be at least 75%; (e) the total number of creditors, secured or unsecured, who approved the OCRA, indicating how much they represent, which should be at least eighty-five percent 3 (85%); (f) that upon its effectivity, the OCRA and its provisions shall be binding upon the debtor and all affected persons, including the creditors, whether or not they participated in the proceedings or opposed the plan or whether or not their claims have been scheduled; (g) that payments shall be made to the creditors in accordance with the provisions of the OCRA; and (h) the manner and other requirements for the amendment or modification of the OCRA [Section 4, Rule 4 of the FRIA IRR]. The OCRA shall take effect upon the lapse of fifteen (15) days from the date of the last publication of its notice [Section 85, Chapter IV of the FRIA]. Court Intervention While this type of rehabilitation is named “out-of-court”, the debtor or the creditors may actually still seek court intervention in case they encounter roadblocks to a successful rehabilitation. In the event that the debtor or the creditors encounter difficulty executing or implementing a Standstill Agreement or an OCRA, any of them may file an application for court assistance with the Regional Trial Court having jurisdiction over the place in which the insolvent debtor resides or has its principal place of business [Section 9, Rule 4, FRIA IRR]. The court may issue a writ of execution to enforce the terms of the standstill agreement or the OCRA and provide other forms of additional assistance as may be necessary to implement them, including the award of damages [Section 10, Rule 4, FRIA IRR]. The debtor or any creditor may also file a petition to annul the Standstill Agreement or the OCRA based on the ground of non-compliance with the requirements for the same. Vitiation of consent due to fraud, intimidation or violence may also be raised as a ground to annul the Standstill Agreement or the OCRA if committed against such number of creditors required for the approval of the Standstill agreement or OCRA [Section 11, Rule 4, FRIA IRR]. Benefits There are apparent advantages in utilizing an OCRA for rehabilitation. First, unless the debtor seeks assistance for the implementation of an OCRA from the court, the remedy does not involve court processes, thus, the cost is minimal. The debtor does not have to worry about filing fees that must be paid for court-supervised rehabilitation proceedings (which is a percentage of the total amount of claims of the creditors) and other fees and expensesto be paid to the Rehabilitation Receiver and the persons contracted to assist the Receiver. Second, an OCRA will take considerably less time to finalize and implement, compared to the regular court proceeding for rehabilitation. Court-supervised rehabilitation proceedings would entail substantial time and effort, and the petition for rehabilitation, as well as any rehabilitation plan, will be under strict scrutiny by the court before it can be granted. In a court-supervised and debtor-initiated rehabilitation proceeding, the petition for rehabilitation must contain: (1) a schedule of debtor’s debts and liabilities; (2) an inventory of all assets of the debtors, including receivables and claims against third parties; (3) a rehabilitation plan; and (4) the names of 3 nominees to the position of Rehabilitation Receiver. If the court finds the petition to be sufficient in form and substance, it shall issue a Commencement Order, which, among others, directs the publication of the Commencement Order in a newspaper of general circulation in the Philippines once a week for at least 2 consecutive weeks, with the first publication to be made within 7 days from the time of its issuance, directs the service by personal delivery of a copy of the petition to each creditor, appoints 4 a Rehabilitation Receiver and sets the case for initial hearing, which shall not be more than 40 days from the date of filing of the petition for the purpose of determining whether there is substantial likelihood for the debtor to be rehabilitated. The Commencement Order likewise includes a Stay or Suspension Order, which essentially suspends all actions and proceedings in courts or otherwise to enforce claims, judgments, attachments or other provisional remedies against the debtor, subject to certain exceptions and prohibits the debtor from selling, encumbering, transferring or disposing in any manner any of its properties and from making any payment of its liabilities outstanding as of the commencement date, subject to certain exceptions [Section 16, Chapter II(B) of the FRIA]. It is only during the initial hearing wherein the creditors are allowed to comment on the petition and the rehabilitation plan and to submit the same to the court and to the Rehabilitation Receiver within a period of 20 days. The court shall also direct the rehabilitation receiver to evaluate the financial condition of the debtor and to prepare and submit the report to the court within 40 days from the initial hearing [Section 22, Chapter II(B) of the FRIA]. Within 10 days from receipt of the rehabilitation receiver, the court may either: (a) give due course to the petition; (b) dismiss the petition; or convert the proceedings into one for liquidation [Section 25, Chapter II(B) of the FRIA]. If the petition is given due course, the court shall direct the rehabilitation receiver to review, revise and/or recommend action on the rehabilitation plan and submit the same or a new one to the court within a period of 90 days [Section 26, Chapter II(B) of the FRIA]. The rehabilitation receiver is likewise required to establish a preliminary registry of claims within 20 days from his assumption into office which may be challenged by the debtor, creditor, stakeholders and other interested parties. The Rehabilitation Receiver must then give notice and convene the creditors for purposes of voting on the approval of the rehabilitation plan, which must be approved by all classes of creditors or more than 50% of each class. Once approved, the rehabilitation plan is then submitted to the court and the creditors have 20 days from receipt of notice to file an objection the rehabilitation plan, which must be set for hearing. It is only after all these steps have been taken that the court may confirm the rehabilitation plan. However, there may be instances that the court may not approve the plan even upon completion of these steps if the proceedings exceed the maximum period of 1 year from the date of the filing of the petition to confirm the rehabilitation plan. In this case, the court may, upon motion or at its own instance, convert the proceedings into one for liquidation of the debtor [Section 72, Chapter II(I) of the FRIA]. The court proceedings may be further derailed by oppositions or appeals filed by the creditors and postponement of hearings due to unforeseen circumstances. On the other hand, as previously discussed, an OCRA only necessitates the agreement of the debtor, required creditor approvals and publication of its notice for a certain period of time. Subsequently, after 15 days from the last publication, the OCRA already becomes effective. Even the amendment or modification of an OCRA is less burdensome as it merely requires that it be made in accordance with the terms of the OCRA itself and with due notice on all creditors. Simply stated, the debtor and the creditors may determine and assent to the procedure for amending the agreement. Third, some of the favorable provisions in court-supervised rehabilitation proceedings are likewise applicable or have their counterparts in the provisions for the OCRA. 5 For instance, the Standstill Agreement may include provisions identical with or similar to the legal effects of a commencement order in a court-supervised rehabilitation proceeding, which includes the exemption of the debtor from liabilities for taxes and fees, including penalties, interests and charges thereof due to the national government or local government units [Section 5(q), Rule 1 and Section 9, Rule 2 of the FRIA IRR]. Another example is that the effects of confirmation of the rehabilitation plan in a courtsupervised rehabilitation, where the rehabilitation plan will be binding on the debtor and all persons affected by it whether or not such persons participated or opposed the OCRA or whether their claims have been scheduled or not, has similar application to an OCRA. [Section 85, Chapter IV of the FRIA] Moreover, any compromises on amounts or rescheduling of timing of payments by the debtor provided in the OCRA shall be binding on all creditors, regardless of whether or not the OCRA is successfully implemented. In closing, an OCRA is certainly a novel concept in rehabilitation. While there are indeed benefits to a resort to OCRA, it is not foolproof as it may not be successful in all cases involving insolvency. However, if the debtor is confident that it can secure necessary approvals from its creditors for the agreement and the same can be published immediately, the OCRA becomes a viable and worthy alternative to court-supervised rehabilitation, especially in current times where speed and cost-efficiency are necessary for the survival of certain businesses. For any questions or legal concerns relating to out-of-court rehabilitation or informal restructuring agreements, you may contact: JOSEPH ANTHONY P. LOPEZ Partner [email protected] KARLA REGINA D. VALERA-CHUA Senior Associate [email protected] This article is intended for informational purposes only and should not be construed as legal advice.