Covid-19, Financial Hardship, and the Law – Options for Businesses and Individuals During These Challenging Times
The Covid-19 Pandemic has brought untold difficulty to businesses – big and small alike – and individuals. Unprecedented in recent memory in scope and severity, people find themselves struggling with tight cashflow, less foot traffic, and regulations that limit acts previously taken for granted.
Not known to many, there is a 10-year old law that was designed specifically to help those in dire financial situations, to allow both creditors and debtors address their interests in a pragmatic and realistic way- the Financial Recovery and Insolvency Act or Republic Act 10142, better known as “FRIA”. The law applies in varying degrees to sole proprietorships, partnerships, corporations (collectively referred to as “Business”), and even individuals, but banks, insurance, and pre-need companies are not included.
Broadly stated, FRIA covers rehabilitation and liquidation. Rehabilitation is the process of bringing a Business back to a healthy position, while liquidation occurs when the battle to recover is lost, and one’s assets are liquidated in order to settle debts.
The rehabilitation of a Business may generally be done in 3 ways: Court-Supervised (where the court takes an active role, and can be voluntary or involuntary), Pre-Negotiated (still through a court but the plan has already been agreed on under FRIA rules), or Out-of-Court/Informal (where the debtor and creditors, meeting limits set by FRIA, have all agreed amongst themselves on how a Business can be recovered). As with all competing claims, a mutually acceptable agreement is always welcome, making the last option (out-of-court rehabilitation) the most attractive in terms of costs, ease, and practicality. In these situations, all parties still believe in the viability of the Business and all intend to save it.
For an individual, rehabilitation is in the form of a suspension of payments, where one has enough property to cover debts, but could not meet them as they fall due. A suspension of payments scheme allows a person to agree with creditors on a plan to settle the debts over time, in a manner that is acceptable to all parties.
A suspension of payments is not an escape from debt, but is a break from the pressure of meeting upcoming obligations, and is availed of through a petition filed in court. This suffices for many, as the extended periods help prevent cash drain and complete ruin for a person.
The idea of rehabilitation is simple- one would rather be paid than get nothing, even if payment happens after original periods agreed upon or in an amount less than what was planned.
When all efforts at rehabilitation fall short, liquidation occurs. Liquidation can either be voluntary or involuntary. Voluntary liquidation is initiated by the debtor, an admission of inability to recover and conceding to the thought that, outside the sale of assets, one cannot settle obligations. Involuntary liquidation is initiated by creditors, asking the court to compel the debtor to liquidate assets, if any, to recover the debt or at least part of it. Certain assets of persons are exempted from liquidation, as the FRIA was never meant to and should not be a weapon for inhumane debt recovery.
The Covid-19 pandemic brought a striking realm of reality to what were generally academic discussions on rehabilitation and insolvency. During these tough times, the FRIA is a refuge for struggling businesses and persons, but is at the same time a useful tool for those with claims. The hope is that, in the end, everyone gets the most out of a situation that no one really wants to be in to begin with.
(The foregoing should not be construed as legal advice, and does not replace seeking the assistance of counsel when so desired. It is a general and simplified discussion of law, and is not intended to create any lawyer-client relationship.)
Not known to many, there is a 10-year old law that was designed specifically to help those in dire financial situations, to allow both creditors and debtors address their interests in a pragmatic and realistic way- the Financial Recovery and Insolvency Act or Republic Act 10142, better known as “FRIA”. The law applies in varying degrees to sole proprietorships, partnerships, corporations (collectively referred to as “Business”), and even individuals, but banks, insurance, and pre-need companies are not included.
Broadly stated, FRIA covers rehabilitation and liquidation. Rehabilitation is the process of bringing a Business back to a healthy position, while liquidation occurs when the battle to recover is lost, and one’s assets are liquidated in order to settle debts.
The rehabilitation of a Business may generally be done in 3 ways: Court-Supervised (where the court takes an active role, and can be voluntary or involuntary), Pre-Negotiated (still through a court but the plan has already been agreed on under FRIA rules), or Out-of-Court/Informal (where the debtor and creditors, meeting limits set by FRIA, have all agreed amongst themselves on how a Business can be recovered). As with all competing claims, a mutually acceptable agreement is always welcome, making the last option (out-of-court rehabilitation) the most attractive in terms of costs, ease, and practicality. In these situations, all parties still believe in the viability of the Business and all intend to save it.
For an individual, rehabilitation is in the form of a suspension of payments, where one has enough property to cover debts, but could not meet them as they fall due. A suspension of payments scheme allows a person to agree with creditors on a plan to settle the debts over time, in a manner that is acceptable to all parties.
A suspension of payments is not an escape from debt, but is a break from the pressure of meeting upcoming obligations, and is availed of through a petition filed in court. This suffices for many, as the extended periods help prevent cash drain and complete ruin for a person.
The idea of rehabilitation is simple- one would rather be paid than get nothing, even if payment happens after original periods agreed upon or in an amount less than what was planned.
When all efforts at rehabilitation fall short, liquidation occurs. Liquidation can either be voluntary or involuntary. Voluntary liquidation is initiated by the debtor, an admission of inability to recover and conceding to the thought that, outside the sale of assets, one cannot settle obligations. Involuntary liquidation is initiated by creditors, asking the court to compel the debtor to liquidate assets, if any, to recover the debt or at least part of it. Certain assets of persons are exempted from liquidation, as the FRIA was never meant to and should not be a weapon for inhumane debt recovery.
The Covid-19 pandemic brought a striking realm of reality to what were generally academic discussions on rehabilitation and insolvency. During these tough times, the FRIA is a refuge for struggling businesses and persons, but is at the same time a useful tool for those with claims. The hope is that, in the end, everyone gets the most out of a situation that no one really wants to be in to begin with.
(The foregoing should not be construed as legal advice, and does not replace seeking the assistance of counsel when so desired. It is a general and simplified discussion of law, and is not intended to create any lawyer-client relationship.)
Atty. Paul Cornelius T. Castillo
Atty. Paul Cornelius T. Castillo is a partner of the Dumlao and Castillo Law Offices, and has been in active legal practice for more than a decade. His primary areas of focus are dispute resolution, corporate, labor, and family laws.
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