Under Republic Act No. 10142, known as the Financial Rehabilitation and Insolvency Act of 2010 (“FRIA”), and the Financial Rehabilitation Rules of Procedure (A.M. No. 12-12-11-SC) (“FRIA Rules”), corporations undergoing financial rehabilitation are able to consolidate disputes pending before other courts and quasi-judicial offices to one court – the rehabilitation court. This is because of Section 17(e) (Effects of Commencement Order) of FRIA and Section 9(E), Rule 2 of the FRIA Rules allowing the consolidation of all legal proceedings by and against the debtor to the rehabilitation court.
What about disputes that are the subject of an arbitration agreement? For arbitrable disputes, rather than consolidating them to the rehabilitation court, the FRIA and FRIA Rules authorize the rehabilitation court to refer them to arbitration.
As a welcome development and a step in the right direction, Section 26 of FRIA and Section 18, Rule 2 of the FRIA Rules expressly allow the rehabilitation court to refer any arbitrable dispute relating to the rehabilitation plan or pending rehabilitation proceedings before it to arbitration or other modes of dispute resolution, if such mode will resolve the dispute more quickly, fairly and efficiently. This referral should not, however, prejudice the confirmation of the rehabilitation plan within the one-year period prescribed by the law.
A referral to arbitration offers the following advantages to a distressed corporation:
- greater flexibility as to the applicable procedural rules,
- efficiency in the conduct of the proceedings,
- expeditious resolution of disputes compared to that in regular courts, and d) certainty and autonomy – even finality – of arbitral awards, which is a feature not available to decisions of regular courts.
A plain reading of the FRIA and the FRIA Rules, together with jurisprudence, support the view that actions that may be referred to arbitration include not only disputes involving claims against the distressed corporation, but also claims by the distressed corporation itself. This is particularly appealing when there are debtors who refuse to pay or recognize their debts to the distressed corporation, who can then go to the rehabilitation court to enforce an arbitration agreement and compel a debtor to arbitrate with it to settle the dispute. This can result in a speedier and more efficient resolution of the dispute, ultimately benefiting the rehabilitation proceedings.
The referral to arbitration under FRIA and the FRIA Rules allows distressed corporations, creditors, and other stakeholders in the rehabilitation proceedings to resolve certain disputes without the usual delay in regular courts. Referral to arbitration comes in handy for disputes that involve multiple parties like a debtor’s insurance claims against multiple co-insurers and disputes that require technical expertise and review of voluminous documents, which the rehabilitation court has no authority to resolve, let alone in a timely, effective, and efficient manner. Further, and since the FRIA and FRIA Rules do not limit the number of arbitration proceedings that the rehabilitation court can refer to arbitration, multiple arbitrations can proceed independently of each other. Consequently, several disputes are resolved outside the rehabilitation court proceedings allowing the distressed corporation to recover according to the rehabilitation plan.
