Erlene M.

Compra
Legal Research
Room EH309
EVOLUTION OF PHILIPPINE BANKRUPTCY LAW & SIGNIFICANCE IN THE ECONOMY

I.

INTRODUCTION
Our first insolvency law, Act No. 1956 (Insolvency Law), was
enacted on May 20, 1909. As with most legislation of that time, the
Insolvency Law traces origin to American laws and the Spanish Code of
Commerce. Specifically, it was derived from the Insolvency Act of
California (1895), with a few provisions taken from the American
Bankruptcy Law of 1898. Under the Insolvency Law, jurisdiction over
suspension of payments and insolvency was vested in the Courts of First
Instance (now the Regional Trial Courts).

II.

CONTENT
a. How the Global or Asian Financial turmoil affects Bankruptcy Law
On September 15, 2008 the global investment bank Lehman
Brothers filed for bankruptcy protection, sending shock waves across the
international financial system. This was soon followed by other
bankruptcies, bailouts and takeovers of financial institutions in the US and
Europe. Like many other emerging markets, the Philippine economy
slowed down considerably in 2008.
The global financial crisis spurred bankruptcy reforms around the
world including in the Philippines. Also, the Asian financial crisis forced
various Southeast Asian countries to reengineer their bankruptcy law
regimes. Thailand and Indonesia, for instance, recently established
specialized bankruptcy courts and updated their laws on insolvency and
rehabilitation.
The government repealed the century-old law and passed a new one
in July 18, 2010 which is the Republic Act No. 10142, otherwise known as
the Financial Rehabilitation Act (FRIA).
The FRIA adopts best practices for an effective insolvency law culled
from the UNCITRAL Guidelines and World Bank Principles, and the ADB
Insolvency Reform Guide, among others.
Prior to the enactment of the FRIA, rules and procedures on
suspension of payments, corporate rehabilitation, insolvency and
liquidation were scattered and embodied in different laws and Supreme
Court issuances.
The FRIA effectively repealed the provisions found in the Insolvency
Law, PD 902-A, as amended, the Interim Rules, and the Rules of Procedure
on Corporate Rehabilitation. In addition, the FRIA codified the procedures

and requirements for court-supervised, pre-negotiated and out-of-court

rehabilitation and liquidation proceedings to enable businesses to
continue operating and creditors to recover their investments faster and
more efficiently.
b. Court Jurisdiction for Debt Relief Cases
1. Securities and Exchange Commission (SEC)
In 1981, when Presidential Decree No. 1799 amended Section 6 of
Presidential Decree No. 902-A (PD 902-A), otherwise known as the SEC
Reorganization Act which was promulgated by then President
Ferdinand Marcos on March 11, 1976. PD 902-A, as amended, gave the
SEC jurisdiction over suspension of payments cases filed by
corporations, partnerships or associations.
But while the SEC was attempting to reform its bankruptcy hearing
unit, lawmakers in the Philippine Congress were becoming increasingly
concerned that the SECs bankruptcy functions were hampering its
ability to regulate the securities markets effectively.
2. Regional Trial Courts (RTCs)
On 8 August 2000, Republic Act No. 8799, otherwise known as the
Securities Regulation Code, came into effect. It reverted jurisdiction
over rehabilitation cases from the SEC to the courts of general
jurisdiction or the appropriate Regional Trial Courts.
The Philippine Supreme Court, which oversees the administration of
the regional trial courts in the Philippines, had to react quickly to this
development. To facilitate training and specialization of judges to hear
these cases, it designated courts in Manila and several other larger
Philippine cities as special commercial courts12 and began efforts to
provide these judges with a crash course in legal principles regarding
the laws of bankruptcy and corporations.13
It also created a
committee of jurists and practitioners to establish procedural rules
pertaining to suspension of payments, rehabilitation, constitution of
management committees, and dissolution and liquidation of
corporations
c. The Impact of the Interim Rules on Philippine Bankruptcy Practice
On December 15, 2000, the Supreme Courts Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules) became effective.
The Interim Rules laid down the guidelines for filing a petition for
rehabilitation, either by the debtor or the creditor(s), and outlined the
powers and functions of the rehabilitation receiver, among others.
Although intended as a temporary measure, the Interim Rules will
have long lasting effect on the way Philippine companies are rehabilitated.
The Rules lay to rest the controversy over the application of the
procedures under the Insolvency Law to rehabilitation cases. Although the

SEC had been reluctant to apply the Insolvency Law to cases before it, this
was a controversial policy that had yet to be affirmed by the Supreme
Court.
With the establishment of an alternative set of rules for
rehabilitation, few if any companies are likely to file petitions for
suspension of payments under the Insolvency Law, as the latter provides
procedures that are far less debtor-friendly. By permanently altering
contracts in accordance with a plan, the Rules provide the debtor with a
genuine fresh start free from claims other than those defined in the
rehabilitation plan.
d. Significance and impact of Bankruptcy Law in the Philippine Economy
The evolution of the Bankruptcy law in response to the pressing
needs of the country to cushion present and future crisis has been
important for the lawmakers. The establishment of (FRIA) which laid down
procedures and requirements for court-supervised, pre-negotiated and
out-of-court reorganization and liquidation proceedings has been a
significant contributor that may enable viable businesses to continue
operating and creditors to recover their investments faster and at a lower
cost than in the past. That may in time lead to a higher recovery rate.
As reported in the International Scene in February 1999, the
Philippines has lagged behind its neighbors in reforming its bankruptcy
law regime after the 1997 Asian Crisis.
Many companies were facing financial difficulties, and it quickly
became clear that the bankruptcy system was ill equipped to help them
recover. Because it lacked well-defined reorganization provisions, creditors
favored liquidation, hoping to recover at least part of their investments.
This has prompt the government to revisit the century-old insolvency law
and repealed it.
e. Future Directions for Philippine Bankruptcy Law
The Interim Rules were written with the notion that they would
serve as a stopgap measure until new legislation takes the place of the
Insolvency Law. One such bill, the Corporate Recovery Act (House Bill No.
11867) was filed in Congress soon after the Securities Regulation Code
transferred jurisdiction over debt relief cases to the regional trial courts.
The Corporate Recovery Act, which establishes a comprehensive
framework for rehabilitation and, when applicable, liquidation of financially
distressed corporations, is currently under review by various public and
private sector groups. Although the Congressional elections in the first
half of 2001 make passage of the Corporate Recovery Act extremely
unlikely in the current session, the measure is likely to be taken up again
when Congress reconvenes in July.
In the meantime, the regional trial courts that have been slated to
hear petitions for corporate rehabilitation have a challenge before them in
addressing the concerns of critics of the decision to transfer these cases

out of the SEC. Although not perfect, the Interim Rules give the courts a
chance to prove these critics wrong.
III.

PURPOSE OF THE STUDY

a. The aim of the study is to know how well equipped the Philippine
Bankruptcy System in helping the business sector to recover in times
of crisis especially as it affects the entire economy.

IV.

CONCLUSION
The enactment of the Philippine Bankruptcy Law presently known
as FRIA has proved to be a major reform promoting a stronger regulatory
protections for the economy. With the effect of having lower bankruptcy
costs, it pushed efficient business entities in continuous existence while
simultaneously encouraging the formation of new businesses and
promoting healthy competition in the economy.
A good insolvency system not only encourages firms to take risks
and innovate but also in keeping viable businesses operating and
preserves the health of the entire economy. The Philippine lawmakers
should continue to provide effective and efficient set of legal reforms as
the economy is continually changing motivated by several factors
especially economic or financial crisis.
Any gaps in the system that were implemented must be duly
assessed to better formulate new policies filling those gaps. With the fastpaced evolution of the global economy, the Philippine insolvency regimes
must adopt and keep abreast with international standards and policies in
order to avoid being outdated and lag behind other countries.