Resuscitate not liquidate

Two years ago, the World Bank gave the Philippines the notorious reputation of having the worst creditor protection system in the region.

According to the World Bank survey, the Philippines ranked poorest compared to other Southeast Asian countries like Hong Kong, Singapore, Malaysia and even Indonesia. The survey pointed out that existing laws tend to favor irresponsible borrowers, and thus leave creditor banks holding the empty bag.

Too often, debtors find it too easy to get restraining orders against foreclosures. In the event that creditors are finally allowed to recover foreclosed assets, they find themselves at the end of the queue, sometimes tragically with nothing substantial to collect.

Sometimes, creditors and distressed businesses initially find some out-of-court compromise arrangement and agree to restructure the loans. Usually, this would involve debtors letting go of assets – those in non-core activities – to the mortgage holder. On some occasions, the bank or mortgage holder would reluctantly agree.

Oftentimes, these informal compromise agreements run into multitude of problems as it runs its course. Along the way, one of the parties, normally the debtor, would try to find ways to wiggle out or stretch further the arrangement to his advantage. Finally, as the compromise arrangement gets bogged down, creditors often have no option but to be dragged into expensive and time-consuming litigation. Definitely not the best solution.

Antiquated laws stymie rehabilitation

The Securities and Exchange Commission (SEC) – which used to have the responsibility of assisting and overseeing the recovery of distressed firms – previously was a strong force, often ruling in favor of preserving distressed businesses even when the situation had gone beyond repair.

A month after the 1999 World Bank report came out, Republic Act 8799 or the Securities Regulation Code transferred the quasi-judicial jurisdiction of the SEC to the regional trial courts.

While everyone initially thought the transfer would be for the better, trial courts soon realized that they were faced with a bigger problem – the archaic Insolvency Law.

The almost century-old Insolvency Law, enacted in 1909, has one major drawback: when a beleaguered borrower decides to resort to legal action to restrain the lender from restructuring, the only option is foreclosure.

In other countries, while the debtor has the right to appeal to the courts, the lender is not prejudiced from assuming full control of the distressed company and all its assets, and from appointing a receiver and manager to immediately assume control of the property.

Thus in the Philippines, lender banks are humbled into the role of being a pawnshop. Sometimes, even worse, as in the case of the National Steel Corp. (NSC), creditors are reduced to waiting and watching almost forever while the pawned assets continue deteriorating.

(Recently, both the creditors and debtors of the NSC reportedly agreed to a debt restructuring after years of unproductive waiting. The agreement, hopefully, will pave the way for the rehabilitation of the steel firm.)

Reforming bankruptcy laws

A proposed Corporate Recovery Act is currently pending legislation. It seeks to modernize and clarify rules on the rehabilitation and insolvency of financially distressed companies. It attempts to establish a magna carta for debtors and creditors as both parties engage in formal debt relief proceedings.

Although still in its early stages, the bill deserves the attention of the widest sector possible. Any financially distressed company must consider the interests of its many stakeholders: creditors, stockholders, employees, contractors, suppliers, and even the Philippine economy.

The existing 92-year-old Insolvency Law badly needs to be updated to handle 21st century conflicts such as bankruptcy and rehabilitation. The current law talks only about payment suspension and insolvency, with the payment suspension provision largely lifted from the Spanish Code of Commerce, and the insolvency stipulation from the 1895 Insolvency Act of California and the 1898 American Bankruptcy Law.

More importantly, the corporate recovery bill must recognize the importance of resolving conflicts at the quickest time possible. Definitely there is no point in getting embroiled in the litigious process of suits and counter-suits that ultimately demean the chances of turning around beleaguered businesses.

It would also be timely for the proposed insolvency act to draw from international best practices on bankruptcy proceedings while at the same time addressing the current concerns of a globalizing world so that we can truly have a relevant piece of law.

In cases where liquidation is inevitable, creditors must be given adequate protection. After all, creditors – both secured and unsecured parties – lend because they trust in laws that will ensure a reasonable return to their investment.

Paving way for sustained growth

By and large, the corporate recovery bill is intended to pave the way for the future health of business and growth of economy. As such, it is an important match to the special asset vehicle bill that seeks to liberate non-performing assets caught in the inadequacies of a bankruptcy law.

Corporate recovery is not a campaign of the Philippines alone. Many companies in other parts of the region left with debts and insolvencies have been similarly affected. Their countries too are currently focusing efforts to battle the effect of the Asian contagion by addressing their own bankruptcy laws.

In the final analysis, saving a company from bankruptcy is everybody's concern, more so if the debtor is one whose indebtedness results from unfortunate circumstances beyond his control. Under these circumstances, the law should provide the basis for debtor relief rather than liquidation of assets. Without, of course, impairing creditor rights.

The new laws need to be passed soonest. They may not be perfect, but they would pave the way for debtors and creditors – negotiating in good faith – to turn around the business, and promote and preserve the interest of the various stakeholders particularly those of the employees and their families.

Definitely the better route rather than fattening the wallets of unscrupulous highly paid legal luminaries who would rather litigate than rehabilitate.

IPPs and PPA on IBC-13

Today, we complete our discussions about independent power producers (IPPs) and the unpopular purchase power adjustment (PPA) over the IBC-13 News segment "Isyung Kalakalan at iba pa." Next week we start discussing about the "curse of credit cards." Be sure to watch it at 5 p.m. or 10:30 p.m., Monday to Friday.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. If you wish to view the previous columns or telecasts of "Isyung Kalakalan at iba pa," you may visit my website at http://bizlinks.linkedge.biz.