IN INSOLVENCY PROCEEDINGS
November 2014
Stephanie V. Gomez-Somera Professorial Lecturer University of the Philippines, College of Law Author Credit Transactions: Notes and Cases, I & II UP Law Centennial Textbook Series
Records that outline the financial activities of a business, an individual or any other entity. Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers. http://www.investopedia.com/ Summary report that shows how a firm has used the funds entrusted to it by its stockholders and lenders, and what is its current financial position. http://www.businessdictionary.com/
“Management’s Responsibility on the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud and error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement... Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC and Subsidiaries as of December 31, xxxx and yyyy, and their financial performance and their cash flows for the years then ended in compliance with Philippine Financial Reporting Standards. As discussed in Note 1 to the consolidated financial statements, the ability of the Company to continue as a going concern depends largely on the successful implementation of the Rehabilitation Plan of XYZ, its ability to sustain revenue growth and successful debt restructuring of QRS. XYZ and QRS are the Company’s major operating subsidiaries.”
• Explanations of Accounting Entries and Standards Applied • Corporate Information • Industry Information • Regulatory Environment • Material Cases • Summary of Other Material Information
The statutory procedures by which an insolvent debtor obtains financial relief and undergoes judicially supervised rehabilitation or liquidation for the benefit of its creditors. Sec. 4, Chapter I, FRIA. (p) Insolvent shall refer to the financial condition of a debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary course of business [Illiquidity or Equity Insolvency] or has liabilities that are greater than its or his assets. [Balance Sheet Insolvency]
FR Rules, Rule 1, Section 5 (k) Insolvency shall refer to the financial incapacity of the debtors to pay their liabilities as they fall due in the ordinary course of business [Illiquidity or Equity Insolvency] or whenever their liabilities are greater than their assets. [Balance Sheet Insolvency]
SEC. 94, Chapter VI (A), FRIA. Petition. - An individual debtor who, possessing sufficient property to cover all his debts but foreseeing the impossibility of meeting them when they respectively fall due [Illiquidity or Equity Insolvency], may file a verified petition that he be declared in the state of suspension of payments by the court of the province or city in which he has resided for six (6) months prior to the filing of his petition. He shall attach to his petition, as a minimum: (a)  a schedule of debts and liabilities; (b) an inventory of assets; ...
SEC. 12, Chapter 2, FRIA. Petition to Initiate Voluntary Proceedings by Debtor. - ... The petition shall be verified to establish the insolvency of the debtor and the viability of its rehabilitation, and include, whether as an attachment or as part of the body of the petition, as a minimum, the following: ... (b) Statement of the fact of and the cause of the debtor's insolvency or inability to pay its obligations as they become due; ... (f)Â Schedule of the debtor's debts and liabilities including a list of creditors with their addresses, amounts of claims and collaterals, or securities, if any [secured claim]; (g) An inventory of all its assets including receivables and claims against third parties; ... (j) Other documents required to be filed with the petition pursuant to this Act and the rules of procedure as may be promulgated by the Supreme Court.
(1) the income tax returns stamped as received by the BIR for the past two (2) years prior to the year of filing; (2) an audited financial statement of the debtor at the end of its last fiscal year; (3) interim financial statements not earlier than thirty (30) days prior to the filing of the petition and certified under oath by the appropriate officer, except when the petition is filed within thirty (30) days after the end of the fiscal year; (4) a Schedule of Debts and Liabilities which lists all the creditors of the debtor, indicating the name and last address of record of each creditor; the amount of each claim as to principal, interest, or penalties due thirty (30) days prior to the date of filing; the nature of the claim; and any pledge, lien, mortgage, judgment or other security given for the payment thereof; (5) an Inventory of Assets which must list with reasonable particularity all the assets of the debtor, whether in the possession of the debtor or third parties, stating the nature of each asset; the location and condition thereof; the book value and market value of the asset, and attaching the corresponding certified copy of the certificate of title thereof in case of real property, or the evidence of title or ownership in case of movable property; the encumbrances, liens or claims thereon, if any, and the identities and addresses of the lien holders and claimants.
The Inventory shall include (i)  a Schedule of Accounts Receivable which must indicate the amount of each, the persons from whom due and their correct addresses, the dates of maturity, and the degrees of collectability categorizing them as highly collectible to remotely collectible, and (ii)  a Schedule of Existing Claims against third parties which must indicate the name and last address of record of each third party against whom the debtor has a claim, the nature and amount of the claim, including the principal, interest, or penalties due from each third party and any pledge, lien, mortgage, judgment or other security or collateral given for the payment of each claim, and a brief statement of the facts which gave rise to the claim;
(6) a Rehabilitation Plan which conforms with the minimal requirements set out in Section 61, Rule 2 of these Rules; (7) a Schedule of Payments and Disposition of Assets which the debtor effected within one (1) year immediately preceding the filing of the petition; (8) a Schedule of Cash Flow of the debtor for three (3) months immediately preceding the filing of the petition, and a detailed schedule of the projected cash flow for the succeeding three (3) months; (9) a Statement of Possible Claims by or against the debtor which must contain a brief statement of the facts which might give rise to the claim and an estimate of the probable amount thereof...
SEC. 90, Chapter V, FRIA. Voluntary Liquidation. - ... The petition shall be verified, shall establish the insolvency of the debtor and shall contain, whether as an attachment or as part of the body of the petition: (a) A schedule of the debtor's debts and liabilities including a list of creditors with their addresses, amounts of claims and collaterals, or securities, if any [secured claims]; (b) An inventory of all its assets including receivables and claims against third parties; ...
FRIA Rules, Rule 1, Section 5 (c) Asset is anything of value which may be either tangible or intangible. Tangible assets can be current assets or fixed assets. Current assets may include cash on hand, money in banks or inventory, while fixed assets may include plant, building, property and equipment. Intangible assets may include intellectual property (such as copyrights, patents, and trademarks) and financial assets (such as accounts receivable, subscription receivables, and bonds and stocks). The value of these assets must appear in the latest audited financial statements immediately preceding the filing of the petition. In case the debtor is less than three (3) years in operation, it is sufficient that the book value is based on the audited financial statement/s for the two (2) years or year immediately preceding the filing of the petition, as the case may be.
SEC. 4, Chapter I, FRIA. (s) Liabilities shall refer to monetary claims against the debtor, including stockholder's advances that have been recorded in the debtor's audited financial statements as advances for future subscriptions. Example of a monetary claim: Art. 1933, Civil Code. By the contract of loan, one of the parties delivers to another ... money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. ... Simple loan may be gratuitous or with a stipulation to pay interest.
SEC. 4, Chapter I, FRIA. (c) Claim shall refer to all claims or demands of whatever nature or character against the debtor or its property, whether for money or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but not limited to: (1)  all claims of the government, whether national or local, including taxes, tariffs and customs duties; and (2) claims against directors and officers of the debtor arising from acts done in the discharge of their functions falling within the scope of their authority: Provided, That, this inclusion does not prohibit the creditors or third parties from filing cases against the directors and officers acting in their personal capacities.
SEC. 4, Chapter I, FRIA. (jj) Secured claim shall refer to a claim that is secured by a lien. ... (t) Lien shall refer to a statutory or contractual claim or judicial charge on real or personal property that legally entitles a creditor to resort to said property for payment of the claim or debt secured by such lien. Example of a secured claim: Art. 2087, Civil Code. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for payment to the creditor.
Analysis Tool
FRIA Schedule of Liabilities Inventory of Assets Insolvency Rehabilitation Liquidation
Inventory of Assets
Schedule of Liabilities
Current Assets
Current Liabilities
Total Assets = 18,014,563
Total Liabilities = 34,374,955
Rehabilitation Economic Feasibility Present Value Recovery
Liquidation
Feasibility Liquidity issues can be addressed by a practicable business plan that will generate enough cash to sustain daily operations, has a definite source of financing for its proper and full implementation, and is anchored on realistic assumptions and goals. Rehabilitation should be denied to corporations whose insolvency appears to be irreversible and whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious by the following: (a) the absence of a sound and workable business plan; (b) baseless and unexplained assumptions, targets and goals; (c) speculative capital infusion or complete lack thereof for the execution of the business plan; (d) cash flow cannot sustain daily operations; and (e) negative net worth and assets are near full depreciation or fully depreciated. (Citing Wonder Book Corporation v. Philippine Bank of Communications G.R. No. 187316, 16 July 2012)Â
Rehabilitation
Balance Sheet
Liquidation
Cash Flow Statements
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• Claims • Specific Assets • Collateral • Management Responsibility • “Snapshot”
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Thank you.
Stephanie V. Gomez-Somera www.someralaw.org