What to do when you can no longer pay your debts and your business is losing badly?

What can you do if you are unable to pay your creditors? Do you just need time and some breathing room to catch up with your obligations? Or, you simply just don’t have anything anymore to pay your creditors?

The Financial Rehabilitation and Insolvency Act of 2010, or FRIA gives financially distressed individuals and businesses a number of ways to somehow ease their financial problems.

Q: What remedies are available to financially distressed individuals & businesses under the FRIA?

Under the FRIA, if you are considered insolvent, you may file a case in court and apply for: 

• • • • • • Suspension of payments;
          • Corporate rehabilitation; or
          • Declare Bankruptcy and apply for Voluntary liquidation; 

Q: Who is considered an insolvent?

You are insolvent when you have more liabilities or debts than you have assets. You are also considered insolvent if, although you have enough assets, you are unable to pay liabilities as they fall due, for instance, because you don’t have enough cash on hand. 

Q: What is suspension of payments? What are the legal effects of suspension of payments?

Suspension of Payments is a remedy whereby the court effectively suspends the enforcement of claims against you while allowing you to work out an agreement with your creditors on how and when you can pay them. This might be the right remedy in cases where you find it impossible to meet your debts as they fall due, even though you have enough property to eventually cover all of your debts. 

Q: What happens when you apply for Suspension of Payments?

Once you apply for Suspension of Payments, the court will call a meeting of your creditors and direct them to produce proof of their claims. While this is ongoing, you cannot sell, transfer, encumber, or dispose of your assets. You are also prohibited from making payments that are not considered as ordinary and legitimate expenses of the business. The Court will order the suspension payments until the proposed agreement is either accepted or denied. If no agreement is reached, the suspension will lapse after three months. Yet, as long as the proceedings are pending, your creditors cannot sue you, subject to some exceptions. 

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Q: What is Corporate Rehabilitation?

Corporate Rehabilitation is a procedure for financially distressed corporations whose objective is to restore your corporation to a condition of successful operation and solvency if it can be shown that continuing your operations rather than completely shutting it down makes more business sense. Simply put, your creditors must have a better chance of collecting if your business is kept alive rather than if your assets are sold in liquidation. 

Q: What happens in Corporate Rehabilitation?

While Corporate Rehabilitation is ongoing, the enforcement of claims against the debtor is generally suspended and all legal proceedings against the debtor are consolidated. The claims may not be enforced against the debtor’s properties, which are prohibited from being seized or sold. Meanwhile, national and local taxes are waived until the approval of the rehabilitation plan.

Q: What is a rehabilitation plan?

A rehabilitation plan is a comprehensive step by step plan that the financially distressed corporation submits to the court for approval, detailing the specific procedures, financial projections, and timelines that the corporation will follow to regain a position of solvency and viability. A Court approved rehabilitation plan becomes binding upon the debtor and all persons who may be affected by it, even if they did not participate or had opposed the rehabilitation plan. 

Q: How long will the Corporate Rehabilitation go on?

Unlike in suspension of payments, there is no definite time frame for Corporate Rehab. The proceedings will be sustained as long as there is a substantial likelihood of successful rehabilitation. On the other hand, the court will terminate the Corporate Rehab if you do not have a material financial commitment to make the Corporate Rehabilitation plan work. 

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Q: What can I do if my assets are no longer sufficient to cover my liabilities, and I see no reasonable hope that my business will be able to recover? 

It may be time to bite the bullet and give up your business. In this case, you may declare bankruptcy and apply to the courts for voluntary liquidation. Once the court approves the application, you will be declared as insolvent and a receiver – liquidator will be appointed. He will collect and collate all of your assets, liquidate and distribute the same to your creditors and other claimants.

As with Corporate Rehabilitation, liquidation can be involuntary, where the action to declare you insolvent is initiated by your creditors. This remedy is available to creditors in specific instances that include, among others, the situation where there is a threat that you will conceal your assets or attempt to purposely evade or defraud them.

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