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Point of Law

Francisco Ed. Lim

Liquidation in insolvency

Francisco Ed. Lim

July 07, 2016

Liquidation in insolvency
Not known to all lawyers, the Supreme Court (SC) promulgated the Financial Liquidation and Suspension of Payments Rules of Procedure for Insolvent Debtors (“FLSP Rules” ) on April 21, 2015.
 
The FLSP Rules is the second of two sets of rules of procedure promulgated by the SC to implement the Financial Rehabilitation and Insolvency Act (“FRIA”). The first set was the Financial Rehabilitation Rules of Procedure (FR Rules), which became effective on October 22, 2013.
 
Similar to the FR Rules, the FLSP Rules, which became effective on July 27, 2015, was designed to provide a timely, fair, transparent, effective and efficient liquidation of the assets and liabilities of an insolvent debtor.
 
What is liquidation?
In Pacific Banking Corp. Employees Organization v. Court of Appeals (312 Phil. 578, 592-593), the high court said a trial court would declare a company bankrupt in order that its creditors could begin filing claims in the settlement of the corporation’s debts and obligations.
 
It is similar to the settlement of estate of deceased persons. In the case of bankruptcy, there is a determination of all the assets and the consequent payment of all the debts and liabilities of the company or estate in question.
 
Scope of application
The FLSP Rules applies to liquidation in times of insolvency. It governs petitions for the liquidation of insolvent juridical and individual debtors. It also governs petitions for the suspension of payments of insolvent individual debtors.
 
The FLSP Rules applies to proceedings that started as a rehabilitation proceeding but was later converted by a rehabilitation court into a liquidation proceeding pursuant to the FRIA and FR Rules.
 
The FLSP Rules also remedies deficiencies in the liquidation of entities expressly excluded from the coverage of the FRIA. Examples of these entities are banks, pre-need companies and insurance companies.
 
Nature of proceedings
A liquidation proceeding under the FLSP Rules is summary and non-adversarial in nature. It is, however, an “in rem” proceeding where jurisdiction over the whole case is acquired by the court through publication of the liquidation order. The publication serves as a notice: (1) to those persons who may be affected by the liquidation to participate in the proceedings; and (2) that the liquidation plan, once approved by the court, is binding on them.
 
Where to file petition
The petition for liquidation in insolvency should be filed in the regional trial courts. Specifically, when the debtor’s principal office is stated to be in Metro Manila, the petition should be filed in the city or municipality where its head office is located (Gonzales vs. GJH Land, Inc., G.R. No. 202664, November 20, 2015).
 
A liquidation case should be assigned or raffled to the trial court designated as a special commercial court by the SC. Where the case is assigned or raffled to the wrong court, it must be re-assigned or re-raffled to the proper court.  Where there is no special commercial court in the place where the debtor holds its principal office, it must be assigned to the nearest special commercial court.
 
State of insolvency
For the FLSP to apply, the key requirement is insolvency. Insolvency does not only contemplate a situation where the debtor’s assets are less than its liabilities. A debtor is also considered insolvent, for purposes of the FRIA and FLSP Rules, if it  is generally unable to pay its liabilities as they fall due in the ordinary course of business.
 
Modes of liquidation
The FLSP recognizes the following types of insolvency proceedings: (a) voluntary (debtor-initiated) liquidation of insolvent juridical debtors; (b) involuntary (creditor-initiated) liquidation of insolvent juridical debtors; (c) voluntary liquidation of insolvent individual debtor; and d) involuntary liquidation of insolvent individual debtors.
 
Basic procedure
The basic procedures in a liquidation proceeding are as follows: (1) filing of a petition for liquidation; (2) issuance of a liquidation order by the court; (3) appointment of the liquidator; (4) submission of the registry of claims; (5) preparation and approval of the liquidation plan; (6) settlement of the debtor’s debts and liabilities; (7) report of the liquidator; and (8) termination of the proceeding.
 
Liquidation order
Within 10 working days from the filing of the petition, the court is mandated to issue a liquidation order if it finds the petition sufficient in form and substance.
 
This order has the following effects: (1) the juridical debtor is deemed dissolved and its corporate or juridical existence is terminated; (2) legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed vested in the liquidator or, pending his election or appointment, with the court; (3) all contracts of the debtor are deemed terminated and/or breached, unless the liquidator, within 90 days from the time he takes his oath of office, declares otherwise and the counter-party agrees; (4) no separate action for the collection of an unsecured claim shall be allowed; (5) actions already pending will be transferred to the liquidator for him to accept and settle or contest; (6) if the liquidator contests or disputes the claim, the court shall allow, hear, and resolve such contest; and (7) no foreclosure proceeding shall be allowed for a period of 180 days from the date of the order.
 
(To be continued)