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The rehabilitation alternative

SMEs are qualified for a scheme that enables a still-solvent company facing financial distress to avail of immediate legal relief
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Running a business may not always be as rosy as expected. Profits can plummet, making it difficult for owners to keep cash flows above water. When this happens, austerity measures such as cost-cutting and downsizing are often employed. But when the bleak financial condition persists and the owners believe that things can still improve if only they were give some relief from their financial burdens, then such an ailing company can turn to a unique Philippine law to give it that much-needed respite.

On November 21, 2000, the Supreme Court of the Philippines approved the Interim Rules of Procedure on Corporate Rehabilitation (the “Rules on Rehabilitation”) in an en banc resolution, A.M. No. 00-8-10-SC. These rules were the result of the recommendations of the Committee on SEC Cases, which sought to codify and harmonize existing jurisprudence on corporate rehabilitation in the Philippines.

Florencio B. Orendain, chairman of FBO Management Network Inc., was a member of that committee and took part in its deliberations. In sum, he says, the main purpose of the rules is to enable a still-solvent company facing financial distress to avail of immediate legal relief.

He says that the situation contemplated under the rules is of a company that needs temporary refuge from its creditors to give it time to nurse its finances back to profitability and financial health. The important elements that must be present when a company seeks rehabilitation are the following:

• The company anticipates that within three months, it would not be able to pay its debts when they fall due.
• The company is solvent; that is, its assets exceed its liabilities.
• A rehabilitation plan has to be submitted to the court, which then goes over the company’s detailed plans for recovery and the manner of paying its debts.
• The company remains committed to continue its operations.

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BASICS OF REHABILITATION

One vital and somewhat controversial part of rehabilitation is the issuance by the court of a “stay order” that would require, among others, the appointment of a rehabilitation receiver, and more importantly, putting a stop to the enforcement of all money and other claims against the distressed company. Under the Rules on Rehabilitation, the stay order is issued within five days from the date a petition for rehabilitation is filed, assuming that the various documents required for filing are complete in both form and substance.

The said order provides immediate relief because it does not make a distinction between secured and unsecured debts. This means that even if the distressed company’s assets are mortgaged, the company can be temporarily excused from making payments. In essence, the stay order would mandate the continued operation of the distressed company while at the same time requiring it to pay its debts in accordance with its rehabilitation plan. The order remains valid until the termination of the proceedings, which can take from a few months to several years, depending on the complexity of the issues involved.

Orendain explains that one big difference between a petition for rehabilitation and an ordinary civil case is that the process is reversed when it comes to the submission of evidence. The reason for this is that the nature of an action for rehabilitation requires a swift decision. Thus, in rehabilitation cases, the petition should be accompanied by complete evidentiary facts, unlike in ordinary cases where the evidence is usually presented only during court hearings.

DOCUMENTS NEEDED

The documents that must be presented to the court in a rehabilitation case include the following:

• Audited financial statements
• Interim financial statements
• Schedule of debts and liabilities with a detailed list of creditors
• Inventory of all the assets of the debtor with specifics, such as book value, cost, location, etc.
• Rehabilitation plan
• Schedule of payments and asset disposition for the past three months
• Schedule of cash flow
• Statement of possible claims
• Affidavit of general financial condition
• List of three nominees for receiver
• Certification in the required form

With the filing of the petition, the power to resolve the company’s financial issues now rests with the court, assisted by the rehabilitation receiver. According to Marilou O. Adea, a veteran court-appointed rehabilitation receiver, a receiver does not necessarily take over the management of the company but mostly acts as a representative of the court. The receiver, though, may recommend to the court such actions to address issues pertaining to the implementation of the rehabilitation plan. Adea says that in some cases she herself has handled, she even made recommendations on the modification of the rehabilitation plans themselves.

“The rehabilitation plan determines if a financially distressed company can still be reformed under better conditions,” says Orendain. Such a plan, if approved by the court, could bring relief to the company through reduced loan interest rates or extended terms of payment—measures that may be enough to enable the company to meet its financial commitments.

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MAPPING OUT A STRATEGY

But Orendain notes that the Rules on Rehabilitation, as approved, are unique in that most of the suggestions on how to reorganize the distressed company would come from the company itself, although subject to court approval. “It is the only law that talks about equalizing weight towards the debtor,” he says.

In other countries, rehabilitation is part of insolvency and bankruptcy proceedings, where the right of creditors to determine the direction of an indebted company is paramount. In such cases, the consent of the majority of creditors is required for most actions of the debtor as to its plans for recovery or payment of debts.

While the Rules on Rehabilitation have been in place for quite some time now, it is still not commonly used by small and medium scale enterprises. Although this remedy has been available to them, Orendain observes, it is his experience that few business owners and entrepreneurs would readily accept the fact that their company is in trouble.

He says that one of the cultural traits of Filipinos is to feel extremely embarrassed by the idea of showing or acknowledging any sign of financial difficulty to others, particularly by the required publication in newspapers of one’s petition for rehabilitation. Thus, most distressed companies in the Philippines would rather rely on the good graces of creditors to give them more time to comply with debt payments, which, more often than not, is usually granted.

Nevertheless, Adea advises company owners to watch out for the following warning signs of financial trouble that may compel them to apply for rehabilitation:

• Profits are down or non-existent, or major losses have been incurred
• Cash is insufficient to pay commitments
• Payments to creditors or suppliers are seriously delayed

If a business owner suspects that his venture is about to face some rough waters, he or she could engage professional consultants like FBO Management Network Inc. to provide the following services related to corporate rehabilitation:

• Evaluate a company’s financial condition
• Conduct and determine the feasibility of rehabilitation
• If the company is solvent and rehabilitation is feasible, prepare the financial plans and concepts on how to rehabilitate the company
• Assist in the preparation of a rehabilitation plan for submission to the court

Whether a company engages a professional or seeks to avail of the rehabilitation process on its own, Orendain says that “thinking out of the box” may be the solution. “Rehabilitation plans require a broad knowledge of the industry and markets as well as solutions drawn from a wealth of experience,” he explains. “More than that, a good rehabilitation plan should result from thinking out of the box, because, more often than not, it is thinking inside that box that caused the company’s problems.”

Sources:

FLORENCIO B. ORENDAIN
Chairman
FBO Management Network, Inc.
Telephones: (632) 899-1020, (632) 899-1481
Email: fboman@fboman.com

MARILOU O. ADEA
Rehabilitation Receiver
Telephones: (632) 807-0092, (632) 807-0321
Email: marilou_adea@hotmail.com

Supreme Court En Banc Resolution A.M. No. 00-8-10-SC
Re: Interim Rules of Procedure on Corporate Rehabilitation
Issued on November 21, 2000

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