AFTER the Philippine Airlines (PAL) filed for Chapter 11 bankruptcy in the United States (See, “PAL to mount more flights under continuity plan—exec” on B2.), a leader of the House of Representatives has said the Lower Chamber will review the Philippine bankruptcy law to ready the country for future crises.
House Committee on Ways and Means Chairman Joey Sarte Salceda, in a statement, said a review of Republic Act 10142 or the Financial Rehabilitation and Insolvency Act (Fria) is necessary in light of anticipated insolvencies post-Covid-19. PAL becomes one of the largest Filipino companies to file for a court-assisted rehabilitation program under the Chapter 11 proceedings in the US.
During a Chapter 11 proceeding, the court will help a business restructure its debts and obligations. In most cases the firm remains open and operating.
According to Salceda, a similar measure under Philippine law exists under Chapter 2 of the Fria; but “given the serial slowness of the country’s judicial process, the process might come too late.”
The lawmaker said “Super Chapter 2” amendment under Fria, with trigger mechanisms supervised by the Financial Stability Coordination Council (FSCC), would be a system ready for future crises.
“[It would be] something like a safety valve. You don’t want to have strategic companies like PAL closing down because the resulting economic scars could be permanent,” Salceda said. “It’s very hard to rebuild a major employer and economic machine that has been sold off for parts.”
He said his team is now studying the matter very closely and will file a measure as soon as possible.
“The problem with both the US and the Philippine bankruptcy laws, which are based on the American model, is that they are not prepared for mass insolvency situations such as Covid-19,” Salceda said.
“The [current bankruptcy law] is only prepared to deal with bankruptcies where the primary cause is mismanagement or the company’s private [and] individual circumstances. In the case of Covid-19, the problem is systemic,” the solon added. “Collaterals mandated under Philippine law could be valued at ‘fire sale’ prices during a crisis, making repayment much harder. The result is, instead of rehabilitation as an entire business, the businesses might just be sold off piece by piece. That is very bad for the economy’s long-term productive capacity.”
Under the Fria, a Philippines court will restructure the debt payments to allow for a longer period of repayment. Suspended payment bankruptcies are allowed when the debtor has the collateral to cover the debt but can’t meet payments by their due date, the debtor presents a restructuring payment plan that is both viable and agreeable to the lender, and creditors or lenders who hold 60 percent of more of the debt liability meet and jointly agree on the debtor’s proposed repayment plan.
‘Super Chapter 2’
SALCEDA said he wants something of a “Super Chapter 2” mechanism that he proposed under the Accelerated Recovery and Investments Stimulus for the Economy Act.
“We appoint a government-selected supervisor. You would usually keep management in place, and give more consideration to workers and less to creditors than in conventional bankruptcies. For strategic companies, you would inject money in return for shares, perhaps as convertibles, so that the Filipino taxpayers could get a piece of the upside upon recovery,” Salceda said.
“It probably should not be court-appointed. In the case of a crisis, it may be better to have it submitted to the Financial Stability Coordination Council who has more competence to deal with system-wide risks,” Salceda added.
Meanwhile, Salceda said the proposed Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery (Guide) Act also has components of that proposal. “But I hope the Senate releases that measure soon. But it’s best if we institutionalize this system-wide bankruptcy system in our FRIA Law so that companies can make better use of it,” he said.
“The problem with FRIA is that the consequences could be dire—in your credit line, your reputation—because the process is individualized. The law makes bankruptcy look like your personal fault, when in the case of Covid-19, no one could have anticipated this crisis,” Salceda added.