Philippine e-Legal Forum

With the increased media coverage this past months regarding businesses undergoing corporate rehabilitation (e.g., College Assurance Plan [CAP] and Pacific Plans, Inc. [PPI]), even the general pubic has started asking questions about corporate rehabilitation, a legal option that is available to distressed corporations.

Philippine corporate rehabilitation, which is similar to Chapter 11 reorganization in the United States of America, is distinct and separate from insolvency. Rehabilitation is intended to enable a distressed corporation to gain a new lease on life, so to speak, and to continue its business as a going concern. On the other hand, insolvency is intended to close and liquidate an insolvent corporation.

Jurisdiction over petitions for corporate rehabilitation was previously lodged with the Securities and Exchange Commission (SEC), pursuant to Presidential Decree (”P.D.“) No. 902-A, as amended by P.D. 1758 and P.D. 1799. While Republic Act No. 8799 (otherwise known as the “Securities Regulations Code of 2000“) transferred this jurisdiction to regular courts, P.D. 902-A remains to be the governing law on corporate rehabilitations. The procedure is set forth in the Interim Rules of Procedure on Corporate Rehabilitation (”Interim Rules).

Thrust of rehabilation. - Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency.

Issuance of Stay Order. - If the court is convinced that the petition is sufficient in form and substance, it will issue a Stay Order, which shall include, among other things, the appointment of a Receiver and the suspension of ALL pending claims against the corporation under rehabilitation.

Pari passu treatment of creditors. - All assets of a corporation under rehabilitation receivership are held in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over another by the expediency of attachment, execution or otherwise. All the creditors ought to stand on equal footing, with due regard to the rights of secured creditors.

Corporate rehabilitation is theoretically expeditious, but actual practice shows it could be otherwise. We had an ocassion to write the Supreme Court about these problems and, hopefully, the Supreme Court’s referral to the rules committee will bear fruit in the immediate future.

The concept of networking, whether in the virtual or real world, is basically the same. The purposes may be different (e.g., professional, personal, business, dating), but the general concept is the same - to link people/entities for optimum utilization of resources. In the real world (and in this side of the world), we have been exposed to the more common kind of business networking: the multi-level marketing (MLM).

This is a very effective business strategy, which is the reason why many companies utilize it. It is important to point out that MLM, per se, is not illegal. However, due to the increase in number of fraudulent transactions using variants of the MLM strategy, the Securities and Exchange Commission (SEC) issued guidelines defining and governing it.

The more common among the illegal variants is the “pyramid”, hence, the “pyramiding scam”. In “pyramiding”, as characterized by the SEC, the promoters (who are on top) entice others down the line to bring in others in an ever-widening triangle, so that the top feeds from those at the base. It is only a matter of time before new “recruits” will run out, and the whole triangle collapses. Administrative and criminal cases have been filed against certain companies, as well as their responsible officers. If cases were filed, it obviously means people (I know many) already parted with their hard-earned money.

Hence, before it is too late, a potential investor (whether someone who wants to set up an MLM company or one who wants to invest in it) must familiarize himself with the guidelines, as well as the pitfalls, of MLM (the guidelines will be another subject).

Anyway, here are some of the suggestions from the SEC (also sourced from the US Federal Trade Commission):

1. Avoid any plan that includes commissions for recruiting additional investors.

2. Be cautious of schemes that claim you will make more money through the growth of your “downlines”, rather than sales of products you make.

3. Beware of plans that require new investors to purchase expensive inventory. (The usual selling approach is this: if you are not using our product, how can you convince your buyers?)

4. Check with the local business bureau. (This is not really fool-proof, because those “pyramiding” companies ave regular incorporation papers and permits).

As for me, I always go by the time-tested cliche: If it’s too good to be true, it usually is.