CESAR L. VILLANUEVA

THE PHILIPPINE EXPERIENCE:

SPECIALIZED COURT SYSTEM FOR

INSOLVENCY PROCEEDINGS

FORUM FOR ASIAN INSOLVENCY REFORMSDAY 2: THURSDAY, 8 FEBRUARY 2001

HOTEL PUTRI BALI, NUSA DUA, BALI INDONESIA

BY

STRUCTURE OF PRESENTATION

I. PHILIPPINE MILIEU ON INSOLVENCY PROCEEDINGS

II. PHILIPPINE HISTORICAL DEVELOPMENTS ON SPECIALIZED COURTS

III. CONCLUSIONS/RECOMMENDATIONS

I. PHILIPPINE INSOLVENCY MILIEU

I. PHILIPPINE INSOLVENCY MILIEU

RECOGNITION OF CONCERNS OF LOCAL/ FOREIGN INVESTORS

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) I. PHILIPPINE MILIEU (Cont’d)

CONSTITUTIONAL SETTINGCONSTITUTIONAL SETTING

(a) Protection of Property/Contractual Rights under the “Due Process” Clause

(b) Sanctity of Contracts under the “Non-impairment” Clause

(c) Advocacy of the “Free-Enterprise System” vis-à-vis the “Social Function” of property

I. PHILIPPINE MILIEU (Cont’d) I. PHILIPPINE MILIEU (Cont’d)

CIVIL CODE PROVISIONSCIVIL 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) I. PHILIPPINE MILIEU (Cont’d)

HIERARCHICAL RULES ON CLAIMSHIERARCHICAL 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 PROPERTY-RIGHTS RATHER THAN BUSINESS- ENTERPRISE ORIENTED

II. HISTORICAL DEVELOPMENT

II. HISTORICAL DEVELOPMENT

What Are the Initial Assessments of the Insolvency Courts in the Philippines?

What Are the Initial Assessments of the Insolvency Courts in the Philippines?

What Aspects Have Worked Well and What Aspects Require Further Improvements?

What Aspects Have Worked Well and What Aspects Require Further Improvements?

A. AMERICAN TRANSPLANT – 1909 to 1980 A. AMERICAN TRANSPLANT – 1909 to 1980

PHILIPPINE INSOLVENCY LAW (1909)PHILIPPINE INSOLVENCY LAW (1909)

- COVERAGE: (a) SUSPESION OF PAYMENTS

- Still the Basic Substantive Law TODAY

- Does not recognize corporate “rehabilitation”

(b) INSOLVENCY PROCEEDINGS

- Voluntary

- Involuntary

FEATURES OF INSOLVENCY LAW FEATURES OF INSOLVENCY LAW

1. Provides for orderly payment of unsecured creditors

5. Requires consent of creditors to any plan or schedule of re-payment/composition

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

2. Proceedings do not include/bind secured creditors

PROCEEDINGS COVERED BY LAW PROCEEDINGS COVERED BY LAW

1. SUSPENSION OF PAYMENTS1. 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 PROCEEDINGS2. 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

- Courts of General Jurisdiction

REGIONAL TRIAL COURTS (RTC)

- Presided by judges steeped in Civil Law tradition

- Case loads substantially consisted of civil and criminal cases

PHILIPPINE INSOLVENCY LAWPHILIPPINE INSOLVENCY LAW

- Has had very limited applications

EFFECTIVENESS OF THE LAW:

1. Does not provide for effective remedy for financially distressed debtors

REASONS FOR LAW’s INEFFECTIVENESS

2. Automatic stay does not cover secured creditors

- Financially distressed debtors (individuals, partnerships and corporations) have not much availed of it

3. No discharge for corporate debtor

6. Asian culture giving importance to “face”

REASONS FOR LAW’S INEFFECTIVESS:

5. Greater motivation to use of extra-legal means to obtain relief or to insulate properties:

4. Heavy case load on other types of cases, with no competent insolvency skill by judges and lack of support mechanism

- Lack of clear fraud laws and absence of fraud enforcement tradition

- Inefficient court system

B. MARTIAL LAW INITIATIVE – 1981 to 2000 B. MARTIAL LAW INITIATIVE – 1981 to 2000

PRES. DECREE 902-A:PRES. DECREE 902-A: 1. SEC as Quasi-Judicial Body to hear:

2. RTC retained jurisdiction over:

- Individual debtors

- Insolvency over corporate debtors

(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

RECOGNITION OF CORPORATE REHABILITATION PROCESS

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

FEATURES OF CORPORATE REHABILITATION UNDER DECREE 1. Constitution of SEC as the Specialized Courts to handle corporate rehabilitation cases

3. Automatic stay/proceedings covered all secured and unsecured creditors

2. Rehabilitation limited only to partnerships and corporations

4. Lack of substantive provisions on rights of stakeholders

5. Much power/discretion given to SEC, Management Committee/Rehabilitation Receiver

“SURGE” IN CORPORATE REHABILITATION“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 REGIMEABUSES 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 DEVELOPMENTSPOSITIVE DEVELOPMENTS1. 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

C. RECENT DEVELOPMENTS: YEAR 2000

SECURITIES REGULATION CODESECURITIES REGULATION CODE

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

1. Securities Law and NOT Insolvency law

PROBLEMS WITH PRESENT SET-UPPROBLEMS WITH PRESENT SET-UP

- RTC, being courts of general jurisdiction, would be ineffective:

- Judges: Civil-Law oriented

- Heavy case-loads lead to inefficient delivery system for insolvency regime

- RTC have no common-law jurisdiction, and cannot “fashion” equitable solutions

No expertise in corporate/commercial

No expertise in insolvency

SUPREME COURT RULES ON CORPORATE RECOVERY:

SUPREME COURT RULES ON CORPORATE RECOVERY:

- Proceedings/automatic stay cover both secured and unsecured creditors

- Proceedings treated as in rem

- Provide specific periods for suspension order, meetings of creditors and proceedings

- Provide for dismissal of petition when no decision within 180 days

- Designated particular branch/sala of RTC in region to handle rehabilitation cases

FLAWS OF SET-UP: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 III. CONCLUSIONS

1. COMPREHENSIVE BANKRUPTCY CODE MUST EXIST IN THE REGIME

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

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

3. MAJOR CHALLENGES IN INTRODUCING SPECIALIZED COURT SYSTEM FOR INSOLVENCY PROCEEDINGS

1. State-commitment to enact a comprehensive Bankruptcy Code

3. Hefty financial costs in setting-up specialized court system, and hiring/ training of competent hearing officers

2. Upgrading commercial/corporate law systems in the given jurisdiction

4. Developing community acceptance/re-orientation of social values consistent with modern bankruptcy regime

END