On Insolvency and Suspension of Payments*
Fe Eloisa C. GIoria**


         I thought I should really open my discussion this afternoon on what are the factors that have brought about the Asian financial crisis. This should really be a very appropriate take-off point to discuss the matter of suspen-sion of payments. However, I feel that I should not belabor such point as I believe the banking sector, more than any other sector has a firmer grasp of the currency problem we in Asia are presently experiencing, and the consequent economic difficulties this problem has spawned.

         Thus, given the current financial upheaval as a back drop, it is very timely to discuss some interesting issues that accompany the process towards corporate rehabilitation.

         With the limited time that we have, I have chosen the issues that I wish to take up with you:

    1. How do we reconcile Our insolvency laws?
    2. Are secured creditors placed in an unfair status under the present procedure?
    3. How are the cases faring in the SEC?

  2. ACT 1956 and PD 902-A

         There are two laws in our jurisdiction which contain provisions on suspension of payments. First is Act 1956 (Insolvency Law) as amended which took effect in 1909 and the second is PD 902-A (particularly Sec. 4 of PD 1758) which took effect in 1976 and reorganized the SEC and conferred upon it certain additional powers among which was the exclusive and original jurisdiction over corporate petitions for suspension of pay-ments.

         Considering that these two laws, insofar as petitions .f or suspension of payments are concerned, govern the same subject matter, it is pertinent to ask whether PD 902-A, being the subsequent law, superseded Act 1956 or was merely intended to complement the earlier law.

         Under the Insolvency Law, the critical issue is how the creditors are to be paid from the assets of the distressed creditor. The consent of the creditors, therefore, is viewed as necessary to the plan of payment. How-ever, in case of suspension of payments under PD 902-A, where the distressed company seeks the approval of a rehabilitation plan, suspension is allowed not as an end in itself but simply as a means to enable the company to focus all its energies and muster all its recoveries with the end in view of allowing the company to continue operating as a going concern without being unnecessarily hampered by creditors' suits. In this case, the approval thereof of a rehabilitation plan rests on the sole discretion of the Commission, which may be guided by the advice of the management committee on whether rehabilitation is a feasible option of the company.

         There are other critical differences between the two laws and these differences make them inconsistent with each other.

         However, it has been determined in several cases of the Supreme Court particularly in the case of Ching vs. Land Bank, that it is the SEC which has exclusive and original jurisdiction over petitions for suspension of payments of solvent corporations, partnerships or associations and even of insolvent corporations, partnerships or associations if the latter had previously been placed under the management of a rehabilitation receiver or management committee by the SEC. This contemplates the situation where a distressed corporation files a petition asking for the appointment of a receiver or a management committee and the latter subsequently determines that the distressed company is actually insolvent. In such a situation, the SEC continues to have jurisdiction over the case to the exclusion of the regular courts. However, if the distressed corporation, acknowledging in the first instance that it is already insolvent, seeks to secure a declaration of insolvency, jurisdiction is still vested with the regular courts under the Insolvency Law and not with the SEC.

         The obvious intent of PD 902-A is to repeal the provisions of the Insolvency Law which give the creditors in petitions for suspension the absolute privilege to decide on the fate of the distressed debtor-corporation, particularly if said petitions are coupled with a prayer for the creation/ap-pointment of a management committee. Since the government has adopted a policy of encouraging the public to invest in private corporations, the activities of these corporations have been imbued with public interest and, consequently, the Commission has been vested with sweeping powers in order to protect the public. By conferring upon the SEC the power to evaluate the feasibility of continuing the operations of a distressed company and order its rehabilitation or liquidation if warranted, the evident legislative policy now is for government to take a more active hand in determining the fate of distressed corporations rather than leaving everything in the hands of creditors who would, naturally be more interested in collecting their credits than allowing the distressed company to continue operating. It must be remembered that, in the event of liquidation, it is the stockholders of the corporation, which includes the general investing public, who would have the last preference in the distribution of corporate assets once the company goes into liquidation. Unfortunately, this is the sector which, although the ones who will be hardest hit in any liquidation, will have absolutely no say if the provisions of the Insolvency Law will be applied.

         However, this situation has been corrected in PD 902-A. A manage-ment committee appointed by the Commission will normally consist of members-representatives of the creditors, the distressed company, and the public (through the SEC representative). Thus, any rehabilitation plan approved by the management committee and submitted for final approval to the Commission will have already taken into account the divergent views of these various sectors which are all represented in the committee. Thus, when the plan is submitted before the SEC, the Commission will already be reasonably certain that the plan has already been referred by the members of the Management Committee to their respective members and that the latter have passed upon the plan as presented to them. Thus, while technically the approval of the plan depends upon the sole discretion of the Commission, the fact that the members of the MANCOM had referred the plan to their respective constituents before finally voting to approve and submit the same to the SEC is a reasonable assurance that the most contentious issues of the plan have already been extensively discussed, debated and settled even before the final plan is submitted for approval. Consequently, the final plan submitted to the SEC will, in reality, have already obtained the implicit approval of most if not of all the parties concerned. However, in any event, whether the creditors overwhelmingly support or just as overwhelmingly opposed the plan, the final approval or disapproval of the plan rest upon the discretion of the Commission, and not solely upon the vote of the creditors, after taking into consideration the divergent interests of the parties involved.


         At first glance, it would seem that suspension of debt payments by a defaulting corporation is detrimental to the interest of secured creditors. It prevents them from foreclosing the collaterals given on the credits con-tracted for. This is clear from the fact that the once an Order suspending payment is issued by the SEC, all actions for claims against the corporation are suspended and no payment by the debtor firm can be allowed except those needed for its day-to-day operations like payment of utilities, supplies and other administrative expenses. Even judicial procedures are stopped at whatever stage they may be. The secured creditor is denied his right to enforce or pursue his lien over properties given to him as collaterals. This apparent helplessness has been raised by creditor banks questioning the authority of the SEC to suspend debt payment.

         The case of Cu Unjieng y Hijos vs. Mitchell (58 Phils. 476) was the state of the law on suspension of claims when PD 1758 was issued on January 2,1981 and when Phil. Blooming Mills Co., Inc. (PBM) sought the jurisdic-tion of the SEC in an attempt to rehabilitate itself under the said decree. SEC acted on PBM's application and appointed rehabilitation receiver representing both secured and non-secured creditors and directed that 'all actions for claims x x x pending before any court or tribunal are hereby suspended in whatever stage they may be, until further orders from this Commission."

         The matter was brought to the Supreme Court by one of the affected creditors on certiorari and prohibition. The case took several complexities that in the end it failed to make a clear ruling on the effect of an Order by SEC on secured creditors. This notwithstanding, it has been accepted that from the clear language of PD 1758, the suspension of claims of all kinds of creditors of a distressed corporation is the rule rather than the exception. The PBM case seem to have underscored the suspension should be as effective as the law has intended it to be so, that the intention to rehabilitate cannot be waylaid by the highhanded tactics of the creditors.

         Sec. 4 of the PD clearly gives to the SEC the power to have full control of all the proceedings not only after the appointment of the rehabilitation receiver but also following the institution of the rehabilitation proceedings.

         There are objections against such suspension: More frequently given is the impairment of the obligation of contracts and the impairment of vested rights.

         They were addressed by the Supreme Court in a number of cases.

         In the case of O'Brien vs. del Rosario (49 Phil. 657), one of the earliest cases on suspension, the objections were addressed as such:

         "x x x. If in a foreclosure suit, where the dependant dies before the rendition of the decree, all proceedings must b~ stayed until an administration of his estate is appointed and substitution made, why does not the same legal principle apply to an insolvent estate where the title to the estate of the insolvent relates back and becomes vested in the assignee when elected as of the date of the filing of the insolvency petition?"

         In 1989, the Supreme Court ruled that suspension of payments or actions for claims ordered by SEC applies only to unsecured creditors and not to creditors holding a mortgage, pledge or any lien on the property. However, in the subsequent cases of Alemars, Pilipinas Bank, RCBG and BPI, the Supreme Court has settled and put the issue to rest when it ruled that "whenever a distressed corporation asked SEC for rehabilitation and suspension of payments, preferred creditors may no longer assert such preference, but shall stand on equal footing with other creditors. Foreclo-sure shall be disallowed so as not to prejudice other creditors or cause discrimination among them.

         In so deciding, the Supreme Court underscored the rationale behind the decree that empowers the SEC to suspend payment - which is to effect a feasible and viable rehabilitation of the distressed company. The Supreme Court observed that this cannot be done if one creditor is preferred over the others. It must be emphasized that the suspension, of payment is only temporary. It is resorted to as a means of affording the management committee or rehabilitation receiver the opportunity to carve out a viable rehabilitation plan free from judicial or extrajudicial interference that might unduly hinder the rescue of the distressed company.

         For how can a company suffering from liquidity problems be rehabili-tated if in the meanwhile its major assets like land and machineries are foreclosed by its creditor banks? We do recognized however, that there may be creditor-banks whose exposures in distressed companies are very substantial vis--vis their loan portfolio such that they are also required to collect their non-performing loans and liquify their assets. But, as stated earlier, the suspension is only temporary. If the rehabilitation of the company should prove to be not feasible, then the Commission can dismiss its petition or order its liquidation. In such a case, the banks can proceed to go after the collaterals of their loans. The difficulty that we have encountered when banks insist in collecting on their collaterals made us coordinate with the BAP to request its members to look at foreclosure and other legal remedies only as a final option. That creditor-banks should be willing to assist distressed companies get back to normal operation. Such assistance normally take the form of debt restructuring, condonation of certain interest charges and penalties and even conversion of debt into equity.

         Being members of one community, the fall of one company diminishes the rest of us, and its downfall bring with it the employees who will lose their jobs, government which will be denied of taxes and allied industries that will be affected thereby. And of course, the banks themselves who would lose valued clients and even business partners as some clients may have played a role in the success of these banks.


         At this point, it may be well to state the principle behind a rehabilitation applied for by a corporation:

    The principle of rehabilitation

         A corporation seeking rehabilitation looks to a process where its assets will be conserved and administered with the hope that it may eventually be able to get back to its feet and return to solvency. It contemplates of the continuation of corporate life and activities so that it may be able to regain its former condition of successful operations and financial stability.

         The distressed corporation must be able to restructure its finances so that all its creditors can be paid, not necessarily in full but under an acceptable repayment schedule. It is therefore required that the application for suspension or rehabilitation must be accompanied by a re-payment schedule and a rehabilitation plan which if adopted will govern the rights of its creditors with respect to it and its properties.

         The management committee or rehabilitation receiver has the first opportunity to evaluate the affairs and properties of the distressed corpo-ration in relation to its liabilities. The management committee informs the SEC of the true status of the distressed corporation and recommends the kind of re-structuring and turning around activities that may have to be undertaken by the corporation. The management committee may endorse the rehabilitation or if this is not possible the liquidation of the corporation. The SEC is the final authority on whether the plan as recommended is feasible or not.

         We have docketed more than 40 suspension of payments cases since February last year.

         Our records show that the hardest hit industries are real estate and manufacturing industries, with 14 corporations from each industry filing petitions. Second in rank is marketing and trading industry followed by the construction industry.

         The common causes cited by applicants in their petitions include "debt servicing", "high-interest rates, unfavorable market conditions due to the regional crisis" and "policy changes of government lending institutions brought about by the present crisis."

         While most of the causes or reasons given allude to the regional currency crises, the SEC has not discounted the possibility that some petitioning corporations' inability to meet its obligation is because of mis-management and are only taking advantage of the refuge given to solvent corporations under the decree. This prompted the SEC to provide in its policy memorandum on the procedure for these cases, that the hearing panel for these cases secure from the petitioning corporation certain documents in order for the panel to fully appreciate the financial condition of the distressed corporation. Due largely to the stringent procedure and compliance, fourteen (14) cases have already been dismissed due to failure to comply with the procedure, while five (5) have already been withdrawn. To date there are thirty (30) cases still pending with the Commission.


         By virtue of our mandate, we are called upon to evaluate every application for suspension of payments and issue orders granting or reject-ing such petitions. We are aware of the serious responsibility reposed on our shoulders - and, because of that awareness, we study and evaluate each debt relief request with extreme circumspection, with due regard for all claimants and participants and with larger concern of our economic life as a community and as a nation.

         Some of the issues that confront us in our task include:

    - How fast should we act on the petitions?
    - Can we make quick judgments on whether to issue a Suspension Order or not?
    - Is the application justifiable?
    - How competent are the receivers to be appointed? Is their integ-rity unquestionable? Are there possible conflicts of interests involved?
         Incidentally, corporate rehabilitation has been raised as a serious concern by the World Bank as a means to speed up recovery especially of the Southeast Asian countries gravely hit by the currency turmoil. It has designed a capacity-building assistance program to these countries, includ-ing the Philippines, whereby world and local experts will be commissioned to draft wles that will effectively implement or supplement existing debt relief laws. The program also includes training of our staff involved in suspension of debt payment cases. Likewise, the International Monetary Fund has come up with proposed strategies to facilitate corporate debt structuring, concerned especially with the number of suspension of payment cases now pending with the SEC, the duration of the interim period that payments are suspended and particularly, the ruling that secured or preferred creditors are placed in the same status as unsecured creditors wherein they can no longer assert their preference and foreclosures are not allowed, albeit temporarily.

         I am aware that there are many equally important and interesting issues that attend corporate rehabilitation and they should be discussed.

         For example, the case of PAL maybe a good subject of a case study. While I am not at liberty to discuss issues of the case that may affect its subjudice nature, we can as a matter of academic discussion delve into some of these issues. For example, PAL filed its petition for suspension for payments sometime in June this year, but did not include a rehabilitation plan although it filed a listing of its assets and liabilities totaling P9OB and P85B, respectively. In lieu thereof, it attached the general parameters of its rehabilitation strategy like the downsizing of its staff and its operations. This is why we have to create an interim rehabilitation receiver to come up with a rehabilitation plan. However, before such plan can be drafted, several critical developments occurred, including the voting down by the Labor Sector of the compromise formula offered by PAL management. This triggered off the decision of management to cease operations. In the meantime, there were a lot of speculations on the fate of PAL after it stopped operations. In order to put an end to this and to remove the uncertainty hanging around and in the public interest, SEC formed a management committee to look into the actual status of PAL and to recommend to the Commission within 30 days whether PAL should be rehabilitated or liquida-ted. This we have to do because not knowing whether PAL is still solvent or has become insolvent after it has filed its petition last June, the Commis-sion cannot make a final determination on what to do with its pending petition with us. However, before the Management Committee could organ-ize itself, a new development arose- the PAL management and union leaders coming up finally with a compromise agreement after a marathon overnight meeting brokered by President Estrada himself. This came even as government has contracted Cathay Pacific to service the major routes of PAL with its first flight to Cebu taking off yesterday morning with President Estrada on board.

         Like the PAL case, a petition for suspension of payments can become complicated with some side issues cropping up every now and then.

         Now that we are working on our permanent rules governing corporate rehabilitation, we encourage you to bring forth for discussion relevant issues on the subject. We have likewise taken upon ourselves to work on possible amendments of the Insolvency Law which to our mind should be reviewed and revised. We therefore would look forward to your participation once we will be ready even only with our drafts. We look forward to a shared effort with you to be able to come up with more responsive, meaningful and equitable provisions of laws and rules that will finally govern suspension of payments and corporate recovery.

         I know we have made initial steps with the Banking Sector but I hope this occasion this afternoon will re-strengthen our shared efforts. There should be more discussions - even informal ones to quickly resolve issues that would hinder efficient and expeditious resolutions of problems besetting corporations faced with financial embarrassments.


* Address delivered in the General Membership Meeting of the Bar Administration Institute of the Philippines held September 29, 1998 at the Mandarin Oriental Hotel.