The insolvency legal framework in the Philippines is perceived to be very weak by independent observers including the Asian Development Bank (ADB) and the U.S. Department of Commerce (U.S. DoC). The ADB 2005 Private Sector Assessment Report, as well as the U.S. DoC 2007 Country Commercial Guide, found the laws and judicial pronouncements governing insolvency procedures to be outdated and sometimes inconsistent. The Government of the Philippines realizes the need to introduce changes to the current regime and has launched a reform program. The adoption of the Securities Regulation Code of 2000, which transferred the jurisdiction over rehabilitation from the Securities and Exchange Commission of the Philippines (SEC) back to the regular courts, and the Supreme Court's Interim Rules on Rehabilitation represent a step forward towards compliance with international standards, although some important gaps in legislation still exist. It is envisioned that the Draft Corporate Recovery Act will harmonize the antiquated insolvency law with world's best insolvency practices. However, progress on adoption of the new law has been somewhat slow, according to the U.S. DoC. As of 2007, adoption of the law was still pending.

General Overview

In 2005, the ADB published the Private Sector Assessment for the Philippines, which provides a foundation for a private sector development strategy aimed at encouraging investments and promoting fair competition. The ADB concluded that the main reasons for the recent slowdown in private sector growth in the Philippines are (1) lack of rule-based regulations; (2) weak infrastructure; and (3) lack of vibrant financial sector. Strengthening creditor and property rights was mentioned as one of the needed steps in achieving a rule-based business environment.

The 2005 ADB report observed that both secured and unsecured creditors rights are well defined; however the enforcement of these rights is "problematic," with trial court proceedings taking up to 4 years. The World Bank's 2006 Doing Business indicator, which offers information on the time and cost required to resolve bankruptcies in different countries, also confirms the inefficiency of bankruptcy proceedings in the Philippines, which, out of 175 countries surveyed, ranked 147, with 1 being the best. The process of closing a business in the Philippines takes 5.7 years and costs 38% of the estate value. The recovery rate, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm, is 4. In comparison, the regional average and Organization for Economic Co-operation and Development (OECD) countries' average are 2.4 years and 1.4 years respectively, the associated costs are 23.2% and 7.1%, and the recovery rate 27.5 and 74.

In the Philippines, insolvency procedures and debt payment suspension cases are covered in the Insolvency Law of 1909, while rehabilitation issues are dealt with in the Presidential Decree No. 902-A of 1976 (as amended in 1981). The U.S. Department of Commerce's (DoC) 2007 report notes that the Civil and the Corporation Codes, as well as Supreme Court rulings supplement the above mentioned laws. Overall, as the ADB's 2005 assessment asserts, the legal framework for insolvency is outdated and is "a cacophony of laws, jurisprudence, and rules of procedures" (p. 15). The DoC's Country Commercial Guide for 2007 also refers to the Philippines' insolvency framework as "a mixture of outdated and sometimes inconsistent laws and judicial pronouncements" (p. 86).

Both reports mention the adoption of the Securities Regulation Code of 2000, which transferred the jurisdiction over rehabilitation from the Securities and Exchange Commission of the Philippines (SEC) back to the regular courts, as a positive development. However, the U.S. DoC notes that "reforms should go beyond procedural improvements to rationalizing and updating the Philippine bankruptcy/insolvency system." The Supreme Court's interim rules on rehabilitation are also recognized by the ADB, in its 2005 report, as a step towards compliance with international standards, although some important gaps in legislation still exist.

Aware of these shortcomings, the Government of the Philippines prepared a new law on insolvency - the Corporate Recovery Act. Senator Edgardo Angara, in the introduction to the Draft Corporate Recovery Act, stated that "[the Corporate Recovery Act] seeks to establish a more systematic framework for insolvency proceedings and provide equitable treatment to all parties involved in a financial restructuring or rehabilitation. Moreover, it seeks to maximize the chances for the survival of the company concerned by providing an ailing enterprise four different remedies, to wit: (1) fast-track rehabilitation; (2) court-supervised rehabilitation; (3) pre-negotiated rehabilitation; and (4) dissolution-liquidation" (p. 1). However progress with the adoption of the new law has been somewhat slow, according to the U.S. DoC's 2007 Country Commercial Guide. As of 2007, adoption of the law was still pending.