Corporate Rehabilitation Proceedings in the Philippines

A practical, everything-you-need explainer. Philippine law context. This is general information, not legal advice.

1) What “rehabilitation” means (and when to use it)

Rehabilitation is a court-protected process that aims to restore a financially distressed but viable corporation to successful operation. It is preferred over liquidation when the going-concern value exceeds break-up value and there’s a realistic path to meet obligations on restructured terms.

Core policy goals:

Maximize value for all stakeholders (creditors, employees, suppliers, communities).
Keep viable firms alive; liquidate only when rehabilitation is plainly unfeasible.
Treat similarly situated creditors fairly while allowing tools (e.g., debt haircuts, maturity extensions, debt-to-equity swaps) that ordinary contract law would not permit.

Who’s covered: Private corporations and partnerships other than banks, quasi-banks, insurance and pre-need companies (these have separate special regimes). Government-owned or -controlled corporations (GOCCs) depend on their charters.

2) Three pathways under Philippine law

Court-Supervised Rehabilitation (CSR) A verified petition triggers a Commencement Order (stay/moratorium), appointment of a Rehabilitation Receiver, and a structured vote/confirmation process for a Rehabilitation Plan.
Pre-Negotiated Rehabilitation (PNR) The debtor files a petition attaching a plan already approved by a supermajority of its creditors. The court issues a stay and fast-tracks confirmation unless valid objections defeat the plan.
Out-of-Court or Informal Restructuring/Workout (OCRA) A contractual standstill and restructuring agreed by requisite creditor supermajorities becomes binding on dissenters if statutory thresholds and due-process steps (notice, disclosure, fairness) are met. Courts generally respect such agreements and will not enjoin them absent clear statutory grounds.

(Exact voting/supermajority percentages are set by statute and rules; confirm the current figures when drafting.)

3) Jurisdiction, venue, and parties

Court: Regional Trial Courts designated as Special Commercial Courts (SCCs).
Venue: Where the debtor’s principal office is located as stated in its most recent SEC records (not merely where it actually operates).
Standing to file: The debtor, creditors, SEC/BSP/IC (for entities under their watch, where applicable), or a group of creditors meeting statutory thresholds.

4) Filing the case: contents of a solid petition

A. For CSR (debtor-filed)

Verified allegations of general financial condition and viability.
Schedules: assets (with liens), liabilities (secured/unsecured, trade, related parties), contracts and leases, off-balance-sheet exposures.
Financials: recent audited FS, interim FS, cash-flow projections, going-concern analysis.
Corporate info: directors/officers/owners (beneficial ownership), affiliates/subsidiaries, intercompany balances.
Draft Rehabilitation Plan or a proposal framework and independent valuation/liquidation analysis (best-interests test).
Receiver nomination (optional).
Certification against forum shopping and on completeness/accuracy.

B. For PNR

The approved plan (showing creditor votes by class/value), disclosure statement, and evidence of fairness and feasibility.

5) Commencement Order: what it does—immediately

Once the petition is sufficient in form and substance, the SCC issues a Commencement Order. It typically:

Stays/suspends:
- All actions or proceedings to enforce claims against the debtor, including foreclosures, executions, and attempts to enforce security interests.
- Set-offs/compensation of pre-commencement claims against post-commencement obligations (subject to narrow exceptions).
Protects assets: prohibits transfers outside the ordinary course (unless authorized), freezes perfection of new liens (save for authorized post-commencement financing).
Appoints a Rehabilitation Receiver (or confirms the nominee).
Sets a timeline: initial hearing, deadlines for filing claims, comments, and plan voting.
Orders publication/notice to creditors and stakeholders.

Important limits/exceptions: Criminal actions proceed; regulatory/police-power measures are generally unaffected; the stay does not automatically extend to non-debtor guarantors/sureties unless the court finds compelling grounds. Certain financial market netting arrangements and close-out rights enjoy statutory safe harbors.

6) Roles during rehabilitation

A. Debtor-in-Possession (DIP)

Ordinarily remains in control of operations, subject to the Receiver’s oversight and court orders.
Must preserve value, keep books current, and report regularly.

B. Rehabilitation Receiver

Independent, with evident integrity, expertise, and independence.
Verifies claims, evaluates viability, monitors business, recommends management changes if needed, mediates disputes, and submits or refines the Plan.
Can seek management committee appointment or direct takeover if mismanagement, fraud, or asset dissipation threatens stakeholders.

C. Creditors (by classes)

Commonly secured, unsecured, and sometimes subordinated/insider classes.
Enjoy notice, voting rights, and the ability to object and propose treatments.

7) Post-Commencement Financing (PCF) and priorities

PCF (a.k.a. DIP financing) may be authorized and given super-priority as an administrative expense.
With court approval and adequate protection for existing lienholders, PCF may prime prior security interests to keep the company alive (e.g., inventory/receivables revolver).
Administrative expenses (including necessary trade credit after commencement) rank ahead of most pre-commencement claims.

8) The Rehabilitation Plan: what it must cover

A confirmable plan typically includes:

Business viability narrative: market, operations, cost fixes, governance reforms.
Restructuring mechanics:
- Maturity extensions, interest rate resets, grace periods;
- Debt-to-equity conversions (and resulting shareholder dilution);
- Dacion en pago/asset sales (with process safeguards);
- Securitization or ring-fencing of cash-generating assets;
- Contract rejections/assumptions (executory burdensome contracts can be rejected with court approval; assumed contracts must be cured and kept current);
- Capital infusion (new money) and treatment of intercompany balances;
- Tax and regulatory considerations (documentary stamp tax, capital gains/VAT on asset transfers, possible COD income considerations).
Claims classification & treatment with parity within each class and disclosure of any impairment.
Best-interests/liquidation analysis (each dissenting creditor should get at least what it would receive in a hypothetical liquidation).
Feasibility backed by conservative cash-flow projections, sensitivity cases, and defined milestones.
Governance & monitoring: covenants, information rights, permitted liens, plan administrator/receiver oversight.
Exit conditions and triggers for conversion to liquidation if targets are missed.

9) Voting, confirmation, and cram-down

Creditors vote by class on the Plan.
If statutory supermajorities accept (overall and by class), the court confirms unless a valid objection (e.g., lack of feasibility, unfair discrimination) is proven.
Even without unanimous class acceptance, the court may cram down the Plan if fair and equitable and non-discriminatory (e.g., senior creditors are paid ahead of juniors; no class receives more than full value before seniors are satisfied).
Upon confirmation, the Plan becomes binding on all, including dissenters and those who did not vote after due notice.

(Always verify the current voting thresholds before circulating ballots or counting votes.)

10) Effects of the stay on creditors and counterparties

Secured creditors: foreclosure and enforcement are paused; they receive adequate protection via replacement liens, cash payments, or other relief if the collateral’s value is declining.
Unsecured creditors: litigation and collection halt; they file proofs of claim and await plan treatment.
Landlords, utilities, and critical suppliers: the court can authorize critical-vendor payments and compel continued supply on cash-current terms to preserve the going concern.
Set-off and netting: limited post-commencement; close-out netting for qualifying financial contracts is protected.
Ipso facto clauses (termination for insolvency): generally disfavored, subject to specific statutory carve-outs.

11) Evidence and valuation: what persuades the court

12–24 month cash-flow forecast with transparent assumptions and downside cases.
Independent valuation (income approach + market multiples) and a liquidation value benchmark.
Operations plan with credible cost take-outs, asset dispositions, and capex discipline.
Creditor impact tables (by class) and sensitivity matrices (e.g., FX rates, interest, demand shocks).
Governance upgrades: experienced CFO, internal controls, related-party firewalls.

12) Timelines and duration

While exact dates are set in the rules and the court’s own scheduling orders, expect:

Early phase (0–60 days): stay in place, claim filings, receiver verification, business triage, draft plan circulation.
Middle (2–8 months): negotiations, revisions, valuation challenges, voting mechanics, interim relief (PCF, asset sales).
Confirmation window: the SCC aims to confirm or convert/dismiss within prescribed periods to avoid value erosion.
Plan implementation: monitored until substantial consummation, after which the case may be closed though covenants continue.

13) Management displacement: when the court takes the keys

The SCC can install a Management Committee or authorize the Receiver to take over operations if there is:

Actual or imminent loss of, or danger to, the estate;
Fraud, gross mismanagement, or dissipation of assets;
Persistent defiance of court/receiver directives;
Need to stabilize operations and restore creditor confidence.

14) Intercompany and insider issues

Related-party claims are closely scrutinized and often subordinated if inequitable conduct is shown.
Transactions at undervalue or preferences within statutory look-back periods may be avoided (set aside) to rebalance creditor recoveries.
Debt-to-equity involving insiders requires full disclosure, fairness opinions where appropriate, and class-wide parity.

15) Common objections (and how plans survive them)

Not feasible: Bolster the model with third-party validation, committed PCF, and contingency levers (price increases, opex caps).
Unfair discrimination: Equalize treatment within classes; justify any differential with objective business reasons and proportional safeguards.
Violation of priorities: Respect secured status to the extent of collateral value; justify any priming with adequate protection.
Bad faith filing: Demonstrate genuine distress (imminent illiquidity or balance-sheet insolvency), realistic turnaround, and active negotiations pre-filing.

16) Conversion to liquidation or dismissal

A case may convert to liquidation (or be dismissed) when:

The debtor is no longer viable or has materially breached the plan;
Value is wasting and a prompt sale would maximize recoveries;
Fraud or concealment is uncovered;
Statutory deadlines or reporting obligations are ignored.

Conversion effects include dissolution steps, appointment of a Liquidator, and application of Civil Code preferences and liens to distributions.

17) Special topics

A. Labor claims

Wage and separation claims receive statutory preferences, but timing of cash flows is governed by the Plan and available unencumbered cash. Coordination with DOLE orders may be needed.

B. Taxes

Taxes continue to accrue unless the Plan or law provides relief; BIR claims are treated per statute.
Asset transfers may trigger documentary stamp and other taxes; plan drafting should optimize tax leakage consistent with law.
Cancellation of debt income (COD) may arise—consult tax specialists early.

C. Public utilities and regulators

Essential services (power, water, telco) are typically kept current; the court may authorize adequate assurance payments to avoid service cutoff.

D. Cross-border insolvency

Philippine courts may recognize foreign main or non-main proceedings and cooperate with foreign courts/officeholders in line with Model-Law principles: access, recognition, relief, and coordination. Recognition can import a local stay and enable local asset protection, subject to Philippine public policy.

18) Out-of-Court workouts (OCRA): practical playbook

Standstill agreement: typically 60–120 days; requires a contractually defined support threshold to bind participants.
Disclosure: full financials, independent business review (IBR), and term sheets circulated to all affected creditors.
Supermajority approvals (overall and by class) make the deal binding on dissenters if statutory conditions are met.
Cram-down fairness: dissenters must receive at least liquidation value and not be unfairly prejudiced.
Court interface: minimal—used mainly for recognition/enforcement if a holdout sues.

19) Pre-Negotiated Rehabilitation (PNR): how it accelerates relief

Build a plan with creditors before filing.
File the PNR petition with proof of statutory supermajority approval.
The court issues the stay and sets short calendars for objections.
Absent valid objections, the court confirms quickly; implementation starts sooner, reducing business disruption and fees.

20) Checklists

A. Debtor readiness (30–45 days pre-filing, if possible)

Cash 13-week forecast and liquidity bridge
Inventory of critical vendors and CIP/CapEx priorities
Draft Plan (treatment tables, covenants, milestones)
PCF term sheet and adequate-protection framework
Communications plan (employees, customers, regulators)
Data room: contracts, leases, title/lien binders, intercompany map

B. First 30 days after Commencement

Stabilize ops; payroll and critical suppliers current
Claims bar date notice; proof-of-claim templates
Interim orders: PCF, adequate protection, interim professional fees
Asset protection: insurance endorsements, lockbox controls
Stakeholder cadence: weekly cash variance reports; ops KPIs

C. Plan confirmation package

Final Plan and Disclosure Statement
Voting record by class (value and number)
Updated valuation and liquidation analyses
Feasibility evidence (signed finance docs, LOIs for asset sales)
Proposed confirmation order with findings (fair & equitable; no unfair discrimination; best-interests test met)

21) Practical tips and pitfalls

File where you must (principal office on SEC record); wrong venue invites delay.
Do the math early: know liquidation outcomes; don’t over-promise recoveries.
Avoid insider optics: disclose everything; seek fairness opinions for insider deals.
Protect collateral value: inspections, maintenance, and insurance prevent adequate-protection fights.
Mind timelines: rehabilitation is a race against cash burn.
Draft for durability: include clear default triggers, cure periods, and remedies to avoid post-confirmation litigation.
Coordinate with tax and labor authorities early** to avoid surprises.

22) What success looks like

Liquidity runway secured; negative cash spiral arrested.
Plan confirmed with sustainable leverage and covenants.
Operations normalized (supplier terms, customer retention).
Governance upgraded; transparency embedded.
Case closed after substantial consummation; monitoring continues under ordinary corporate oversight.

23) Quick glossary

Commencement Order: Court order that starts the case and imposes the stay.
Stay/Moratorium: Legal freeze on enforcement actions while the case proceeds.
Rehabilitation Receiver: Independent officer supervising the process.
PCF (Post-Commencement Financing): Court-authorized new money with priority.
Best-Interests Test: No dissenting creditor should receive less than in liquidation.
Cram-down: Court approval over dissenting classes if fairness and feasibility tests are met.
Management Committee: Court-installed body that replaces management when necessary.

Bottom line

Philippine corporate rehabilitation is a powerful but disciplined tool: it buys time (the stay), injects oversight (the Receiver), and enables binding capital structure fixes through a court-approved Plan. Use CSR when you need full judicial shelter, PNR to accelerate a creditor-backed plan, and OCRA when a largely consensual workout can be locked in without a full court case.

If you tell me your role (debtor CFO, secured lender, trade creditor, or turnaround counsel), I can draft a one-page action plan tailored to your position—checklist, first-week motions/defenses, and plan leverage points.