Several remedies are available to financially distressed individuals or corporations. Individuals may apply for the suspension of payments or liquidation, while corporations may seek: (a) corporate rehabilitation (or restructuring), which may be either (i) court-supervised rehabilitation, (ii) pre-negotiated rehabilitation or (iii) an out-of-court restructuring agreement; or (b) liquidation. 

Corporate rehabilitation is available to debtors that may be restored to a condition of successful operation and solvency. A court-supervised rehabilitation occurs when a rehabilitation court is appointed to resolve the matter of rehabilitation. In a pre-negotiated rehabilitation, the insolvent debtor, by itself or jointly with any of its creditors, petitions the court for the approval of a pre-negotiated rehabilitation plan that has been endorsed or approved by a certain number of creditors as required under the law.¹ In an out-of-court restructuring agreement, there is a rehabilitation plan, but it does not need court approval to be effective. 

Lenders should file their claims with the rehabilitation court at least five days before the initial hearing date. During the pendency of rehabilitation proceedings, secured lenders retain their rights to the security but actions in connection with their claims, including the enforcement against the security, are stayed until the court orders otherwise or until the rehabilitation proceedings are terminated. The rehabilitation receiver will call a meeting with the debtor and all classes of creditors to discuss the rehabilitation plan. All classes of lenders and creditors can vote on the approval of the rehabilitation plan to be proposed by the rehabilitation receiver.

Liquidation proceedings are based on the fact that the debtor does not have enough assets/property to cover its obligations. Liquidations may be voluntary (i.e., applied for by the debtor itself) or involuntary (i.e., applied for by three or more creditors that satisfy the relevant requirements).

If the court finds the petition or motion for liquidation sufficient in form and substance, it issues a liquidation order. A liquidation order is an order issued by the court that declares that the debtor is insolvent and orders the liquidation or dissolution of the debtor. On the issuance of the liquidation order, the debtor is dissolved, and legal title and control of its assets are vested in the liquidator. The effects of the liquidation order are different for secured and unsecured creditors. 

An unsecured creditor is not permitted to bring a separate action against the debtor for the collection of debts owing to the unsecured creditor. Any action already pending will be transferred to the liquidator to accept or settle or to contest. The court will hear and resolve the matter, and any final and executory judgment against the debtor will be filed and allowed in court.

A liquidation order will not affect the right of a secured creditor to enforce its security. Therefore, a secured creditor may do either of the following:

• Waive its right under its security, prove its claim in the liquidation proceedings and share in the distribution of assets of the debtor
• Maintain its rights under the security or lien

1. Under the Republic Act No. 10142, the pre-negotiated rehabilitation plan must be endorsed or approved by creditors holding at least two-thirds of the total liabilities of the debtor, including secured creditors holding more than 50% of the total secured claims of the debtor and unsecured creditors holding more than 50% of the total unsecured claims of the debtor.

Yes, but only for financially distressed individuals who may apply for a suspension of payments. 

For financially distressed entities, the moratorium, pursuant to a stay or liquidation order, is only issued upon an application for insolvency (i.e., either corporate rehabilitation or liquidation). 

Yes. Any transaction by the debtor or involving its assets entered into prior to the issuance of the stay order or liquidation order may be rescinded or declared null and void on the grounds that it was executed with the intent to defraud the creditor or creditors or that it constitutes an unfair preference.

The requirements for a lender to be able to enforce its security depend on the type of security that will be enforced. The types of security and their requirements for enforcement are discussed below.

Guarantee

Generally, a guarantor (but not a surety) cannot be compelled to pay the creditor unless the following events occur: 

• All of the property of the principal debtor has been exhausted.
• The creditor has exhausted all of its legal remedies in relation to the principal debtor.

• The creditor must first file a case against the principal debtor alone.
• In that case, the creditor must ask the court to notify the guarantor.

The creditor may hold the guarantor liable only after judgment has been obtained against the principal debtor and the principal debtor is unable to pay.

On the other hand, the benefit of exhaustion does not apply to a surety. Hence, the creditor may sue, separately or together, the principal and the surety.

Real estate mortgage

A real estate mortgage may be enforced extrajudicially if the mortgage instrument expressly allows extrajudicial foreclosure. On the other hand, if there is no stipulation allowing extrajudicial foreclosure, the mortgage must be enforced judicially.

In an extrajudicial foreclosure, the foreclosure sale at public auction can proceed after the filing of an application for extrajudicial foreclosure with the executive judge that has jurisdiction over the area where the relevant real property is located and upon compliance by the applicant with all of the requirements. The sheriff will conduct the foreclosure sale.

For judicial foreclosure, a petition for foreclosure must be filed in the proper court that has jurisdiction over the area where the relevant real property (or a portion of the real property) is situated.

Security arrangement over personal property

A secured creditor may take possession of the collateral without a judicial process if the security agreement so stipulates. However, this is assuming possession may be taken without breach of the peace. If possession cannot be taken without breach of the peace, the secured creditor is entitled to an expedited hearing for a court order granting possession of the property.

After default, a secured creditor may sell or otherwise dispose of the collateral, publicly or privately. It may also propose to the debtor and grantor to take all or part of the collateral in total or partial satisfaction of the secured obligation.

Yes. Under the Civil Code, an action to enforce a right arising from written contracts must be enforced within 10 years from the time the cause of action accrues (i.e., upon failure by the debtor to perform the secured obligation when due). 

Upon the default of the secured obligation, the creditor is not entitled to automatically appropriate the pledged or mortgaged property. The creditor is permitted to recover its credit from the proceeds of the foreclosure sale of the property at public auction through a public officer in the manner provided by law.

The proceeds of the foreclosure sale of a pledged or mortgaged property will be applied in the following order:

• The costs of the sale
• The amount of the principal obligation and interest
• The junior encumbrances

In a pledge, the sale of the pledged property extinguishes the principal obligation, whether or not the proceeds of the foreclosure sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the proceeds are more than the principal obligation, the debtor is not entitled to the excess unless there is a contrary stipulation in the pledge agreement. If the proceeds are less, the creditor is not entitled to recover the deficiency and a contrary stipulation is void.

In a mortgage, if the proceeds from the foreclosure sale are not sufficient to satisfy the mortgage debt, the creditor is entitled to obtain a deficiency judgment. The deficiency judgment may be satisfied from other properties of the debtor.

Generally, as set out in the answer to question 4 of this section in relation to the enforcement of a guarantee, the guarantor (but not a surety) cannot be compelled to pay the creditor unless all of the property of the principal debtor has been exhausted. The creditor may hold the guarantor (but not a surety) liable only after judgment has been obtained against the principal debtor and the principal debtor is unable to pay. This benefit of exhaustion is subject to exceptions, such as insolvency or an express waiver by the guarantor.

The creditor cannot automatically appropriate the security or dispose of it in the event of default. Any stipulation to the contrary is void. A foreclosure sale conducted in accordance with the prescribed requirements and procedure is necessary to enforce a mortgage. Further, in the case of insolvency, as discussed in the answer to question 1 of this section, the right of a creditor to enforce a security may be suspended by the court on the commencement of the rehabilitation proceedings of the insolvent debtor until the proceedings are terminated either due to the failure of the rehabilitation or the successful implementation of the rehabilitation plan.

Another practical consideration is that cases in the Philippines generally take considerable time to be decided. Securities that are sought to be enforced through court proceedings for foreclosure are often not immediately enforced. Therefore, creditors typically prefer extrajudicial proceedings.

See the answer to question 8 of the section "If taking security."

In addition, security agents and trustees are typically Philippine residents.

Arbitration is generally more advantageous to foreign lenders than litigation. Disputes submitted to arbitration are more speedily resolved. Furthermore, the rules on arbitration are more favorable to foreign investors as the parties mutually agree on these rules. A valid arbitration clause in a loan contract allows a foreign awardee to enforce an award in the Philippines. The disadvantage of arbitration is that it is a more costly process in the Philippines than litigation proceedings.

The validity of asymmetrical jurisdiction clauses has not yet been decided in the Philippines. It may be argued that these clauses are valid under the "freedom to contract" clause provided in the Civil Code, i.e., that "contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy." 

However, the Philippine Supreme Court has invalidated clauses granting exclusive jurisdiction to non-Philippine courts. The court's reasoning was that a Philippine court's jurisdiction, being determined by law, cannot be limited by mere stipulation.

Moreover, asymmetrical dispute resolution clauses providing for litigation and arbitration, with options given to the lender but not the borrower, might be viewed as being contrary to public policy.