Congress OK’s corporate recovery bill

Lawmakers approved on Wednesday an overhaul of the century-old law governing the rehabilitation or liquidation of cash-strapped firms, in one of their few legislative accomplishments before ending sessions ahead of the elections. The Financial Rehabilitation and Insolvency Act now requires courts to approve or reject corporate rehabilitation proposals within a year and gives firms more options on how to get out of financial trouble. Moreover, sole proprietorships may now avail themselves of rehabilitation just like corporations and partnerships. The new law, which was approved by the Senate on the night of Feb. 2, replaces the Insolvency Law of 1909. The House of Representatives passed it on third reading last Monday. Both versions are identical, removing the need for a bicameral committee and sending the bill straight to the President. Debtors may opt for a court-supervised rehabilitation if they are able get more than 50% to 67% creditor approval. Courts are given a maximum period of one year to approve or reject a rehabilitation plan. Alternately, firms and their creditors may negotiate and then secure court approval as long as more than 67% to 85% of creditors consent. The court is given only 120 days to approve or reject the plan. If a debtor secures more than 85% creditor approval, all parties may go for out-of-court or informal rehabilitation. If creditors opt to forgive debts, the reduction in debt is not subject to tax on the part of either the creditor or the debtor. The last option is to liquidate the firm due to insolvency. In the rules and procedures of corporate rehabilitation revised by the Supreme Court in 2008, options include only creditor-initiated rehabilitation, pre-negotiated rehabilitation, and the debtor-initiated rehabilitation, as well as liquidation. Rehabilitation proceedings allow firms to obtain a court order stopping creditors from enforcing their claims, and provides for an orderly settlement of debts. "In the end, it will be good for business because there is limited period for the creditors and debtors," said Aurora Rep. Juan Edgardo M. Angara, the bill’s sponsor, in an interview. The Philippine Stock Exchange, which welcomed the bill’s passage, said: "Congress’ approval of the bill is a significant leap forward in our goal to recover value for shareholders of listed firms that may have gone underwater because our vintage 1909 Insolvency Law was simply obsolete." "This will prevent situations like the Uniwide Group rehabilitation where the dismissal of the petition takes place only after a significant number of years," the PSE said. Mr. Angara concurred, saying: "We have cases taking five to 10 years." "Our banks and other lenders will be incentivized to lend at cheaper rates knowing in advance that their rights as creditors are protected and that there is a modern law that will facilitate an orderly and speedy debt resolution system," he said in a statement. In another statement, outgoing PSE chief Francis Ed. Lim noted that "Investors are reluctant to invest in financially distressed companies because there is no adequate protection for the money that they put in to help rehabilitate the company." "Individuals who suffer from liquidity problems can petition for suspension of payments or if their assets are less than their liabilities, they can ask for a discharge from their debts for a new lease on life." Mr. Angara said implementing rules will be crafted after the bill is signed by the President. -- NJCM, BusinessWorld