Corporate rehabilitation, which is similar to Chapter 11 reorganization in the United States of America, is distinct and separate from insolvency. Rehabilitation is intended to enable a distressed corporation to gain a new lease on life, so to speak, and to continue its business as a going concern. On the other hand, insolvency is intended to close and liquidate an insolvent corporation (please note that insolvency is also available to individuals or natural persons, while rehabilitation is available only to corporations, partnerships and associations).

With the increased media coverage these past months regarding businesses undergoing corporate rehabilitation (e.g., College Assurance Plan [CAP] and Pacific Plans, Inc. [PPI]), even the general public has started asking questions regarding this legal option that is available to distressed corporations.

Governing laws/Jurisdiction. – Jurisdiction over petitions for corporate rehabilitation WAS vested in the Securities and Exchange Commission (SEC) under Presidential Decree (“P.D.”) No. 902-A, as amended by P.D. 1758 and P.D. 1799. While Republic Act No. 8799 transferred this jurisdiction to regular courts, P.D. 902-A remains to be the governing law on corporate rehabilitations. The Rules of Procedure on Corporate Rehabilitation (2008) superseded the Interim Rules of Procedure on Corporate Rehabilitation as the governing rule, with the Rules of Court applying suppletorily. The relevant differences between the old and new rules are discussed here.

Issuance of “Stay Order”. – If the court is convinced that the petition is sufficient in form and substance, it will issue a Stay Order, which shall include, among other things, the appointment of a Receiver and the suspension of ALL pending claims against the corporation under rehabilitation.

Thrust of rehabilation. – Rehabilitation contemplates 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.

The foregoing discussions constitute just the tip of the iceberg, so to speak. For instance, the treatment of creditors should be “pari passu” (which literally means “in equal step” or “in equal footing”), but this does not mean that some creditors cannot be paid ahead of the others especially when justified as set forth in the Rehabilitation Plan. For the layman, the Rehabilitation Plan is the grand plan (recommended by the Rehabilitation Receiver, with comments from the parties and approved by the court) on how the corporation is supposed to be rehabilitated.

The issue on the exact treatment of all types of creditors is merely one of the more complex matters involved in corporate rehabilitation. In another corporate rehabilitation I’ve handled, one of the issues that came up is the jurisdiction of Philippine courts over a foreign corporation/branch that is registered and doing business in the Philippines.

These matters will be discussed in the months to come. Updates on the existing petitions for rehabilitation, as well as the new ones which will surely arise, should serve as the springboard for further and more detailed discussions.