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FRIA and cross-border insolvency

The FRIA has expressly adopted the Model Law on Cross-Border Insolvency of the United Nations Center for International Trade and Development.

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Given the business setbacks posed by the pandemic, debtors are compelled to seek protective orders from courts in order to stay afloat. Apparently, the insolvency of a debtor can also cross international borders and are no longer confined within local jurisdiction, largely due to the varying situs of the debtors’ operations and the location of their assets and creditors.

How does the principle of international cooperation apply in cross-insolvency proceedings? With the uncertainty posed by a debtor’s filing of foreign insolvency proceedings, what steps can each party take to protect their interests?

These are some questions that pop into mind with the recent announcement of a major Philippine Airline company filing for Chapter 11 proceedings before the courts of New York, United States.

The answers vary greatly and largely depend on the appreciation of American laws. But from the point of view of Philippine law, it appears it would depend on whose perspective one takes. Cross-border insolvency’s legal effects vary greatly between the embattled debtor and the wary creditor.

At the outset, it seems a Chapter 11 proceeding does not have the effect of shutting down a debtor or suspend its operations. Rather, by seeking protective measures, the debtor is given an opportunity to reorganize its affairs especially its finances. The goal is to be able to pay back creditors ultimately. As likewise announced by the aforesaid airline company, a parallel filing under the applicable Philippine law, or Republic Act 10142, known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, is being considered.

The FRIA has expressly adopted the Model Law on Cross-Border Insolvency of the United Nations Center for International Trade and Development (Uncitral Model Law). Under the “cooperation” and “coordination” principles of the Model Law, both courts and insolvency representatives in different States must communicate and cooperate to the maximum extent possible, to ensure that the single debtor’s insolvency estate is administered fairly and efficiently, with a view to maximizing benefits to creditors.

While Philippine companies availing of foreign insolvency proceedings are obviously not the foreign entities envisioned by the FRIA when it talks about recognition of foreign insolvency proceedings, it would appear they are not excluded from the scope of FRIA. Rule 5 of the Supreme Court Financial Rehabilitation Rules of Procedure (FR Rules), particularly on Cross-Border Insolvency, which governs the procedure for petitions for recognition of foreign insolvency orders and/or proceedings as adopted by the more recent Supreme Court Financial Liquidation and Suspension of Payment (FLSP) Rules, apparently do not limit proceedings for recognition to only foreign entities. It appears the FR Rules on cross-border insolvency apply for as long as there is a foreign insolvency proceeding and a foreign representative is duly appointed to appear before the Philippine courts to pursue the recognition of such proceedings.

To initiate proceedings, the debtor must file with the proper Regional Trial Court a petition for recognition accompanied by a certified copy of the order commencing the foreign proceeding and appointing the foreign representative, or a certificate from the foreign court affirming the existence of the foreign proceedings.

Within three days from filing of the petition, the court shall issue a Notice of filing which must be published once in a newspaper of general circulation within five days, and any opposition should be filed within five days from publication. The court must decide the petition within 30 days from its filing.

Upon initiation of proceedings, the court may issue an interim relief order staying claims and foreclosures against the debtor on the property of the foreign entity located in the Philippines, requiring the surrender of its properties to the foreign representative; and other necessary relief.

However, creditors are not entirely helpless. They have the opportunity to file an opposition to the petition upon publication. Further, in granting any interim relief, the court shall consider, among others, the protection of creditors in the Philippines and the inconvenience in pursuing their claim in a foreign proceeding (Section 142, FRIA). Other factors are the just treatment of all creditors through resort to a unified insolvency or rehabilitation proceedings; whether other jurisdictions have given recognition to the foreign proceeding; and, reciprocity.

We have yet to see how either Philippine or foreign companies filing for foreign insolvency proceedings will have their petition or protective orders recognized by Philippine courts. The issue of cross-border insolvency, while provided for in the law, has not been scrutinized this extent since the passing of FRIA into law in 2010, hence an interesting turn of events awaits the curious legal mind, as well as the expectant debtors and creditors.

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