Credit Notes on Liquidation

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   1 LIQUIDATION IN INSOLVENCY A. GENERAL CONCEPTS Insolvency proceedings: the statutory procedures by which a debtor obtains financial relief and undergoes judicially supervised reorganization or liquidation of its assets for the benefit of creditors   -FRIA is the special law that governs insolvency proceedings 3 types: a. suspension of payments b. rehabilitation c. liquidation Liquidation:   A judicial insolvency proceeding   assets of an insolvent debtor are recovered and their value preserved and maximized for the purpose of converting the same into money and discharging (to the extent possible) all the claims v. the insolvent debtor   Insolvency proceeding in rem- binding v. whole world-All interested persons and all persons that have an interest in the matter are equally bound   diametrically opposed to Rehabilitation proceedings (both cannot be undertaken at the same time!) Rehabilitation:  FRIA, sec 4: The restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditor can recover by way of presented value of payment projected in the plan, more than if the debtor continues as a going concern than if it is immediately liquidated a. economic feasibility b. present value recovery if the conditions DO NOT CONCUR   proper course is liquidation LIQUIDATION MAY APPLY TO DEBTORS: 1. insolvent individual debtor  : natural person who is a resident and citizen of the Philippines that has become insolvent (balance sheet concept) 2. insolvent juridical debtor  : (balance sheet AND illiquidity concept) not defined in FRIA but by exclusion-   sole proprietorship duly registered with DTI   partnership duly registered with SEC   corporation duly organized and existing under Phil. Laws B. LIQUIDATION OF INSOLVENT INDIVIDUAL DEBTOR:  Voluntary and involuntary 1. voluntary liquidation of insolvent individual debtor:  judicial insolvency proceeding instituted by a debtor that is insolvent Insolvency : must be insolvent in the BALANCE SHEET CONCEPT  (assets of the individual debtor are insufficient to cover his liabilities vs. juridical   balance sheet and illiquidity) Must be concurrence of insolvency and value requirement! Balance sheet concept AND owing debts exceeding 500k Purpose:  individual debtor to seek a discharge from his debts and liabilities thus freeing the debtor of legal responsibility from certain specified obligations Value requirement:  more than 500k on the debts of the individual debtor (does not define debts- so maybe claims?) Act of insolvency : insolvent debtor files a petition for voluntary insolvency. He shall attach to his petition a: a. schedule of debts and liabilities and b. an inventory of assets. Liquidation order:  if court finds petition sufficient in form and substance will issue an Liquidation order within 5 working days 2. involuntary liquidation of insolvent individual debtor:  judicial insolvency proceeding instituted by a creditor or group of creditors against an insolvent debtor   a file a verified petition that alleges an act of insolvency and meets the value requirement   2 Value requirement:  any creditor or group of creditors with claims aggregating at least 500k ( without regard to the # of creditors  who file) Acts of insolvency:  must be alleged- sufficient to allege only one. Acts (generally):  establish the intent or purpose of the act was to delay liquidation or defraud creditors Ex:  about to depart/departed from Philippines, absent from Phil, conceals himself to avoid service of legal process or delay, conceals or removs property, assignment/gift/sale/conveyance or transfer of his estate/property Exception:  3 instances when intent or purpose irrelevant 1. debtor who is a merchant or tradesman  has generally defaulted in the payment of current obligations for a period of 30 days 2. debtor has failed for a period of 30 days, demand, after demand failed to pay money deposited with him or received by him in a fiduciary capacity   3. debtor shall be without sufficient property to satisfy an execution issued against him on a final  judgment for money SHOW CAUSE ORDER/INJUNCTION/DEFAULT Sec. 106: order to individual debtor to show cause 1. upon filing of the creditor’s petition  2. court shall issue an order requiring the indiv debtor to show cause why he should not be adjudged an insolvent   if GOOD CAUSE SHOWN   court may issue an INJUNCTION ORDER - forbidding the individual debtor from making payment on any of his debts and transferring property belonging to him 3. IF NO GOOD CAUSE SHOWN: issue Liquidation order (creditors ask for this)  4. However, nothing shall affect or impair the rights of the SECURED CREDITOR to enforce his lien in accordance with its terms ABSENT INDIVIDUAL DEBTOR Sec. 108: absent individual debtor (resides out of the Phil, departed, cannot be found, concealed, etc) 1. petitioning creditors submit affidavits requisite to procure an order of publication and 2. present bond double in amt of agg. Sum of claims 3. Court will issue an order   directing sheriff in province to take into custody property to satisfy demands of petitioning creditors and costs of proceedings 4. Sheriff will receive order, duty to take possession of property (not exempt!) 5. Within 3 days (may be extended for good cause)-Prepare a complete inventory of the property take 6. Return inventory to the court as soon as completed 7. Sheriff shall prepare a schedule of the names and residence of the creditors, the amount due each (from the books of the debtors, or other papers of debtor of the debtor as may come to his possession 8. File the schedule or list of creditors and inventory with the clerk INTERIM MEASURES     109 AND 110: taking of property under custody and sale. Creditors must give bonds. Sheriff holds the property taken in custody for the benefit of creditors and shall abide by the results of the liquidation proceedings CUSTODY OF PROPERTY: SALE Sec. 109: Property to be taken by court/appeal bonds 1. in all cases where property is to be taken into custody by the sheriff- it will be held by him for benefit of all creditors (must post bonds to procure order for custody of property and effects) 2. final hearing   if insolvent? Bonds void   if not insolvent? Proceedings dismissed nad debtor entitled to damages not to exceed amt covered by bond C. LIQUIDAITON OF INSOLVENT JURIDICAL DEBTORS 1. voluntary liquidation of insolvent juridical debtors  judicial insolvency proceedings instituted by juridical debtor that is insolvent insolvent:  (compare to individual- balance sheet concept) either a. balance sheet concept  (assets are insufficient to cover liabilities) OR b. illiquidity or equity concept/ is illiquid  (possesses sufficient property to cover all its debts but forseeing the impossibility of meeting them when they respectively fall due) Purpose: seeking dissolution of its juridical existence   Value requirement?  None for voluntary liquidation Condition:  rehabilitation is not economically feasible OR does not result in better present value recovery for creditors   3 How? 1. file a verified petition liquidation with the court:   contain schedule of debtor’s assets and liabilities including a list of creditors with their addresses, amounts of claims and collaterals or securities if any, inventory of assets including receivables and claims v 3P, names of at least 3 nominees for liquidator 2. during pendency of court supervised or pre-neg rehab proceedings     may initiate liquidation proceeding by filing a verified motion to convert rehab to liquidation (state seeking immediate dissolution and termination of corporate existence)   if sufficient, court issues LIQUIDATION ORDER 2. involuntary liquidation of insolvent juridical debtors:  judicial insolvency proceeding instituted by a creditor or group of creditors  Who? Requirement of # of creditors AND claims (vs. individual-just value of claims not #)   3 or more creditors AND   with an aggregate of claims of at least 1M or at least 25% of the subscribed capital stock or partner’s contributions of the debtor (whichever is higher) What?  Allege ACTS OF INSOLVENCY a. due and demandable payments on claims of creditors- there being no genuine issue of factor law on the claims, not paid for at least 180 days, no substantial likelihood that the debtor may be rehabilitated OR b. debtor failed generally to meet its liabilities as they fall due and no substantial likelihood that the debtor may be rehabilitated How? a. file a petition for liquidation  of the debtor with the court alleging the acts of insolvency b. or during the pendency of court-supervised or pre-negotiated rehabilitation   file a verified motion that shall contain the same acts of insolvency and state that they are seeking the immediate liquidation of the debtor c. if PETITION or MOTION sufficient   court will issue an Order directing publication  in a newspaper of gen. circulation and   direct all creditors (non petitioners) and debtors  to file their comments   after last comments filed   court determines the petition/motion meritorious   issue Liquidation order   D. PROVISIONS COMMON TO LIQUIDATION OF INDIVIDUAL AND JURIDICAL DEBTORS   Who are debtors? insolvent individual debtor  : natural person who is a resident and citizen of the Philippines that has become insolvent (balance sheet concept) insolvent juridical debtor  : (balance sheet AND illiquidity concept) not defined in FRIA but by exclusion-   sole proprietorship duly registered with DTI   partnership duly registered with SEC   corporation duly organized and existing under Phil. Laws 1. LIQUIDATION ORDER:  Contains a declaration of insolvency  (or adjudication of insolvency)  that is the trigger event  that results in the application of legal provisions that require the status of insolvency. Date it is issued = date of liquidation Sec. 112: shall 1. declare debtor insolvent (vs. commencement order of rehabilitation) 2. order liquidation of debtor (if juridical debtor = declare as dissolved) 3. order sheriff to take possession and control of all property (except those exempt) 4. order publication of the petition or motion in a newspaper of gen. circulation once a week for 2 consecutive weeks 5. direct payment of any claims and conveyance of any property due to the debtor to the LIQUIDATOR 6. prohibit payments to the debtor and transfer of any property to the debtor 7. direct all creditors to file their claims with the LIQUIDATOR 8. authorize payment of admin expenses 9. state that the debtors who are not petitioners may submit their nominees for position of liquidator 10. set the case for the hearing for the election and appointment of the liquidator (date not less than 30 days nor more than 45 days from date of last publication) Effects of liquidation order: [vs. commencement order = preservative] 1. juridical debtor deemed dissolved,  corporate or juridical existence terminated + individual debtor discharged 2. legal title to and control of all assets (but not exempt) vested on liquidator upon appointment 3. all contracts terminated and/or breached (unless declared otherwise) 4. no separate action for collection of unsecured claim allowed 5. no forclosure proceeding for a period of 180 days!   4 2. LIQUIDATOR a. general concepts LIQUIDATOR:  Sec. 4w- Liquidator shall refer to the natural person or juridical entity appointed as such by the court and entrusted with such powers and duties as set forth in the Act. He is appointed by a. election of creditors: creditors who have filed their claims and not barred by statute of limitations (secured creditor will not be allowed to vote unless he waives his security or fixes the value of the property subject of the lien with the liquidator and is admitted for the balance of his claim) b. by appointment of the court: creditors don't attend, fail/refused to elect/liquidator fails to qualify- rehabilitation receiver may also be appointed! Files oath an Bond (Sec. 117) Qualifications (Sec. 118) Compensation (Sec. 120) reasonable Discharge of liquidator (Sec. 122)- notify all creditors, apply to court for settlement of account and discharge, final accounting and proof of notice, hearing, disacharge b. powers/duties/responsibilities Sec. 119: liquidator deemed officer of the court, duty of maximizing the value and recovering the assets of the debtor with the end of liquidating them and discharging to the extent possible all the claims against the debtor 1. within 30 days from assumption of office prepare a PRELIMINARY REGISTRY OF CLAIMS  of secured and unsecured creditors   inspection by public/publication   all claims proven before paid 2. if there are disputed claims  will resolve them and submit finding to court for final approval 3. within 3 months from assumption of office, prepare a LIQUIDATION PLAN  and submit to the court 4. sell the unencumbered assets  of the debtor and convert the same to money  5. implement the liquidation plan  as approved by the court 6. reporting requirements: quarterly reports, reports as required, final report 3. CLAIMS: all claims and demands of whatever nature or character against the debtor or its property   a. determination of claims:     Liquidation order will direct all creditors to file their claims with the liquidator   Registry of claims   Right of set-off   Opposition or challenge to claims (undisputed and disputed claims) b. treatment of claims 1. secured creditor claims: a. Upon the issuance of the Liquidation order a secured creditor is subject to the TEMPORARY STAY of forclosure proceedings for 180 days b. Liquidation plan shall ensure that the concurrence and preference of credits are observed (unless preferred creditor waives right) c. Secured creditor options (during proceedings) 1. waive its security or lien, prove its claim and share in the distribution of the assets of the debtors (will be admitted as an unsecured creditor) 2. maintain its rights under the security or lien a. value of property may be fixed in a manner agreed upon by creditor and liquidator b. liquidator may sell the property and satisfy the creditor’s entire claim from the proceeds  c. secured creditor may enforce the lien or forclose the property d. unsecured creditor claims: no separate action for collection of an unsecured lcaim shall be allowed. Pending actions will be transferred to liquidator. 4. TREATMENT OF CONTRACTS 1. termination or breach of contracts:  Sec. 113 General rule:  all contracts of debtor shall be deemed terminated or breached Exception:  unless the liquidator within 90 days from the date of his assumption in office, declares otherwise and the contracting party agrees 2. avoidance proceedings: permits certain transactions to be rescinded or nullified and an asset transferred pursuant to the transaction or its value to be recovered for the benefit of the creditors  WHAT WILL BE RESCINDED OR NULLFIIED? 1. entered into by the debtor or involves debtor’ s assets 2. prior to issuance of liquidation or prior to commencement date of the rehab proceeding (if converted to liquidation) and are 3. executed in fraud of creditors or constitutes an undue preference of creditors 4. Generally: all fraudulent conveyances or transfers  of property made by debtor with little or no consideration made for purpose of hindering or delaying creditors or putting funds or assets beyond reach of crediotrs and
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