CESAR L. VILLANUEVA

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FORUM FOR ASIAN INSOLVENCY REFORMS DAY 2
THURSDAY, 8 FEBRUARY 2001 HOTEL PUTRI BALI, NUSA
DUA, BALI INDONESIA
THE PHILIPPINE EXPERIENCE SPECIALIZED COURT
SYSTEM FOR INSOLVENCY PROCEEDINGS
BY
CESAR L. VILLANUEVA
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STRUCTURE OF PRESENTATION
I. PHILIPPINE MILIEU ON INSOLVENCY PROCEEDINGS
II. PHILIPPINE HISTORICAL DEVELOPMENTS ON
SPECIALIZED COURTS
III. CONCLUSIONS/RECOMMENDATIONS
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I. PHILIPPINE INSOLVENCY MILIEU
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
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I. PHILIPPINE MILIEU (Contd)
CONSTITUTIONAL 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
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I. PHILIPPINE MILIEU (Contd)
CIVIL 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
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I. PHILIPPINE MILIEU (Contd)
HIERARCHICAL 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
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II. HISTORICAL DEVELOPMENT
What Are the Initial Assessments of the
Insolvency Courts in the Philippines?
What Aspects Have Worked Well and What Aspects
Require Further Improvements?
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A. AMERICAN TRANSPLANT 1909 to 1980
PHILIPPINE INSOLVENCY LAW (1909)
- Still the Basic Substantive Law TODAY
- COVERAGE (a) SUSPESION OF PAYMENTS
(b) INSOLVENCY PROCEEDINGS
- Voluntary
- Involuntary
- Does not recognize corporate rehabilitation
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FEATURES OF INSOLVENCY LAW
1. Provides for orderly payment of unsecured
creditors
2. Proceedings do not include/bind secured
creditors
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
5. Requires consent of creditors to any plan or
schedule of re-payment/composition
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PROCEEDINGS COVERED BY LAW
1. 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
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2. 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
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COURT SYSTEM EMPLOYED
REGIONAL TRIAL COURTS (RTC)
- Courts of General Jurisdiction
- Presided by judges steeped in Civil Law
tradition
- Case loads substantially consisted of civil
and criminal cases
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PHILIPPINE INSOLVENCY LAW
EFFECTIVENESS OF THE LAW
- Has had very limited applications
- Financially distressed debtors (individuals,
partnerships and corporations) have not much
availed of it
REASONS FOR LAWs INEFFECTIVENESS
1. Does not provide for effective remedy for
financially distressed debtors
2. Automatic stay does not cover secured
creditors
3. No discharge for corporate debtor
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REASONS FOR LAWS INEFFECTIVESS
4. Heavy case load on other types of cases, with
no competent insolvency skill by judges and lack
of support mechanism
5. Greater motivation to use of extra-legal means
to obtain relief or to insulate properties
- Lack of clear fraud laws and absence of
fraud enforcement tradition
- Inefficient court system
6. Asian culture giving importance to face
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B. MARTIAL LAW INITIATIVE 1981 to 2000
PRES. DECREE 902-A
1. SEC as Quasi-Judicial Body to hear
(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
2. RTC retained jurisdiction over
- Individual debtors
- Insolvency over corporate debtors
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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
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FEATURES OF CORPORATE REHABILITATION UNDER DECREE
1. Constitution of SEC as the Specialized Courts
to handle corporate rehabilitation cases
2. Rehabilitation limited only to partnerships
and corporations
3. Automatic stay/proceedings covered all
secured and unsecured creditors
4. Lack of substantive provisions on rights of
stakeholders
5. Much power/discretion given to SEC,
Management Committee/Rehabilitation Receiver
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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
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ABUSES 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
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POSITIVE DEVELOPMENTS
1. 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
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C. RECENT DEVELOPMENTS YEAR 2000
SECURITIES REGULATION CODE
1. Securities Law and NOT Insolvency law
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
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PROBLEMS WITH PRESENT SET-UP
- RTC, being courts of general jurisdiction,
would be ineffective
- Judges Civil-Law oriented
No expertise in corporate/commercial
No expertise in insolvency
- Heavy case-loads lead to inefficient delivery
system for insolvency regime
- RTC have no common-law jurisdiction, and
cannot fashion equitable solutions
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SUPREME COURT RULES ON CORPORATE RECOVERY
- Proceedings/automatic stay cover both secured
and unsecured creditors
- Proceedings treated as in rem
- Designated particular branch/sala of RTC in
region to handle rehabilitation cases
- Provide specific periods for suspension
order, meetings of creditors and proceedings
- Provide for dismissal of petition when no
decision within 180 days
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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
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III. CONCLUSIONS
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
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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
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3. MAJOR CHALLENGES IN INTRODUCING SPECIALIZED
COURT SYSTEM FOR INSOLVENCY PROCEEDINGS
1. State-commitment to enact a comprehensive
Bankruptcy Code
2. Upgrading commercial/corporate law systems in
the given jurisdiction
3. Hefty financial costs in setting-up
specialized court system, and hiring/ training of
competent hearing officers
4. Developing community acceptance/re-orientatio
n of social values consistent with modern
bankruptcy regime
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END