Philippine Economic Downturn Drives Need For Insolvency Strategies.

Updated: Mar 22

By Andrew Kemp











Although there is light at the end of the tunnel for the Philippine economy, the short-term outlook is still troubled and requires companies to plan for worst-case scenarios


The number of Philippine businesses in distress jumped last year as a result of the COVID-19 pandemic, which triggered long-running quarantine measures that depressed economic activity.


The central government ordered Luzon, the country’s largest and most populous island, into lockdown in mid-March and, while restrictions have been eased in some areas, Metro-Manilla remains under general community quarantine (GCQ). As December came to a close, Philippine President Rodrigo Duterte extended the GCQ until the end of January.


The end result has been three successive quarters of economic contraction, with the pace of the decline in recent months unnerving market watchers. While progress towards a vaccine is gaining momentum, with some medical professionals suggesting the worst of the pandemic could be in the rearview mirror by late 2021, the international business community still faces an uphill battle over the next 6-12 months at the very least.


Until a vaccine is widely available, the Philippine government will likely continue relying on social quarantine measures to limit the spread of the virus. This means that businesses must not only be vigilant in terms of their corporate health but would do well to begin preparing contingency plans.


Financial fallout


The Philippine economy contracted by 11.5% in the third quarter after shrinking 16.9% in April-June and by 0.7% in January-March. While a third-quarter decline had been widely anticipated, the pace of contraction startled the market given government moves to ease restrictions in recent months.


The Asia Development Bank (ADB) has projected that Philippine GDP will shrink by -7.3% in 2020, before rebounding to 6.5% next year. While the ADB’s 2021 forecast is in line with government expectations of 6.5-7.5% growth in 2021, doubts have begun to emerge about the strength of the Philippine’s economic bounce back.


International financial institution ING, for example, has warned of a worrisome trend in “consumption, capital formation and government spending” that is unlikely to change course quickly. The group has warned that the Philippine economy is unlikely to reach the pre-pandemic growth average of 6% next year.



"Despite the government’s easing of lockdown restrictions there are many sectors – including the tourism, construction, property and retail industries – that have been badly hit. Until we can return to a business as usual scenario, companies need to think strategically about their liquidity".

Isaiah O. Asuncion III, partner at full-service Philippine law firm Divina Law


This is a troubling outlook for the country’s business sector, after an already challenging year. The World Bank (WB) surveyed more than 74,000 businesses in mid-July, following up on an earlier survey conducted in April, and found that 15% of companies had shut up shop permanently. While temporary closures declined from 77%, they still stood at around 40% of those surveyed.


Isaiah O. Asuncion III, a partner at full-service Philippine law firm Divina Law, said many businesses had downsized their operations as government stimulus measures alone were not enough to ride out the financial storm.


The full effects of the Bayanihan to Recover as One Act (Bayanihan 2), which came into on September 15, as well as the government’s relaxation of movement restrictions are still to be felt by the wider community.


Asuncion said: “Despite the government’s easing of lockdown restrictions there are many sectors – including the tourism, construction, property and retail industries – that have been badly hit. Until we can return to a business as usual scenario, companies need to think strategically about their liquidity.”


He added: “Some of our clients have downsized their operations to around 50% of their previous level. It’s a smart play, but it’s still a temporary solution and what they need to see is a rebound on the economic front.”


Red flags rising


Given the constrained operating environment companies need to audit their corporate health in order to identify potential red flags early.


Signs of distress include market share loss, slowing or plateauing sales, as well as weaker margins. Unaddressed, these early indicators can escalate, eventually leading to job cuts and working capital constraints. The worse-case scenario is for a company to fall into insolvency, limiting both their access to new debt and their ability to create new revenue streams, and can prompt the partial or fuel liquidation of assets.


The Philippines has a number of laws and regulations regarding debtor rehabilitation or liquidation, but the Financial Rehabilitation and Insolvency Act (FRIA) of 2010 is considered the most comprehensive framework.


The law provides three remedies for insolvent parties, including the suspension of payments, financial rehabilitation and liquidation. Given that suspension of payments is only available to individuals, however, if companies want to avoid liquidation then they must pursue one of the three rehabilitation paths offered under FRIA.


Path to solvency


Financial rehabilitation is feasible as long as a debtor’s continuing operation can be shown to be an economically viable prospect. If this is demonstrated the company can seek a pre-negotiated rehabilitation, court-supervised rehabilitation, or out-of-court or informal restructuring agreement or rehabilitation plan (OCRA).


Pre-negotiated and court-supervised voluntary rehabilitations follow roughly the same trajectory, requiring a court to approve a rehabilitation plan. Court-supervised involuntary rehabilitations are somewhat different, involving a creditor or group of creditors filing a petition with the court.


The OCRA option involves a debtor convincing its creditors, who hold at least 85% of its total liabilities, of the merits of its rehabilitation plan. If this is then be posted in a national newspaper for three consecutive weeks it holds the same legal merit as court processes.


The goal of the rehabilitation process is to return a company to a viable standard of operation, but can lead to liquidation if the court deems it necessary. Asuncion noted that creditors, especially the unsecured creditors, have become increasingly adversarial in their pursuit of repayment and noted that the situation was only likely to worsen in the face of continued economic uncertainty.



“We have represented and continue to represent creditors and debtors. Some cases reached all the way up to the Supreme Court and became landmark decisions. We’re seeing instances where creditors are seizing on incorrectly filed petitions to push for liquidations and/or to cause the outright dismissal of the rehabilitation cases to ensure immediate collection of debt.”

Isaiah O. Asuncion III, partner at full-service Philippine law firm Divina Law


Difficult road ahead


While the Supreme Court has stipulated that rehabilitation is supposed to be a collaborative process, Asuncion said the current economic climate had heightened creditor concerned over securing outstanding claims. He said: “Creditors have always proactively pursued repayment, but now they have begun actively trying to force debtors into liquidation.”

He added that the current economic downturn had raised the stakes for both sides and that companies are concerned that they might run into financial trouble in the near future needed to start developing a clear strategy for rehabilitation in the here and now.


Asuncion said: “When a debtor files a petition for rehabilitation, they must ensure that it is fully complaint with the pertinent rules and meets every expectation of the court. We have represented and continue to represent creditors and debtors. Some cases reached all the way up to the Supreme Court and became landmark decisions. We’re seeing instances where creditors are seizing on incorrectly filed petitions to push for liquidations and/or to cause the outright dismissal of the rehabilitation cases to ensure immediate collection of debt.”


He added: “the situation will only get worse as the pandemic drags on and companies need to be prepared to face this reality.”


This article was written by Andrew Kemp for Conventus Law in association with Divina Law.


DivinaLaw is a leading full-service law firm in the Philippines. It was established in 2006 by Atty. Nilo T. Divina. The firm started with five lawyers coming from different areas of legal practice. From the beginning, it has particularly distinguished itself in a full range of corporate legal practice, particularly corporate take-over, mergers and acquisitions, corporate rehabilitation. Advocating and practicing dynamic lawyering—being prompt, proactive, and results-oriented—DivinaLaw quickly grew to become one of the largest law firms in the Philippines, with 70 lawyers in its roster and counting.



Isaiah O. Asuncion III

Partner


Practice Areas


Litigation

  • Intra-Corporate Disputes

  • Corporate Rehabilitation and Liquidation

  • Contractual Disputes

  • Debt and Asset Recovery

  • Family Law

  • Torts and Damages

  • Adoption, Guardianship, and other special proceedings

  • Criminal Prosecution and Defense


Professional Background


  • Faculty Member, University of Santo Tomas Faculty of Civil Law

  • Former Solicitor, Office of the Solicitor General


Educational Background


  • Bachelor of Laws (Dean’s Lister), University of Santo Tomas Faculty of Civil Law

  • Bachelor of Arts in Legal Management (Cum Laude), University of Santo Tomas



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