Difficult appeal in bankruptcy

It’s no surprise that Philippine Airlines (PAL) has incurred a lot of expense to get out of the Chapter 11 bankruptcy case it filed in a US court.

According to a report by Inquirer Business, PAL paid almost $3 million (approximately 150 million pesos) to American lawyers and consulting firms who helped him develop a rehabilitation program that quickly won the approval of the court.

It is common practice in most US law firms to calculate their fees based on the number of hours and minutes they spend handling a case. Sometimes they charge a “success fee” if they are able to get a favorable decision for their client.

Along with the US case, PAL has also retained the services of four local law firms whose fees have not been disclosed.

Although the main elements of the case have been heard in the US court, these law firms were required to provide legal advice to US attorneys on certain laws of the Philippines that apply to PAL with respect to its litigation in for financial assistance.

Also, the Filipino lawyers had to file a counterpart bankruptcy case in the Philippines because PAL has several creditors in the country who have claims for unpaid products and services.

Note that US courts are picky about submitting “attorney opinions” (or advice on certain legal matters) by non-US based attorneys on cases before them.

This privilege is generally reserved for local law firms that are listed in the Martindale-Hubbell Law Directory (an internationally recognized source of information about lawyers in different parts of the world) or other similar legal registries, or are the lawyers correspondents in the Philippines of reputable American law firms.

Until the Financial Rehabilitation and Insolvency Act of 2010 (Republic Act No. 10142) came into force, recovery from bankruptcy or business failure through the court system was a random affair.

This time there are established systems and procedures for dealing with companies that are experiencing financial problems which, if relieved by, for example, suspension of payments or restructuring of credit obligations, can be brought back to financial health.

But like any legal proceeding, this remedy comes at a financial cost.

Whether initiated by the company or made at the request of its creditors, a request for redress requires the engagement of the services of lawyers and chartered accountants who must convince the court of the merits of the request for recovery.

Although this procedure is supposed to be conducted quickly, it is not uncommon, based on past experience, for the court to take months or even years to decide on the application.

Will a pardon petition be worth the time, expense and effort it will require?

This is the first question that any company in financial difficulty must answer if it wants to keep its creditors at bay while taking the necessary measures to put its business back on the same footing.

Keep in mind that there is no guarantee that the court will grant the request.

Its decision will depend, among other things, on the state of the business (is it still viable or likely to be turned around?), the willingness of creditors to accept a restructuring of the debt or to accept a discount on their loans, or the merits of the rehabilitation plan presented by the company.

If the court is not convinced of the merits of the petition, it may dismiss the petition and, within the guidelines of the law, order an orderly and fair liquidation of the remaining assets of the company.

Ultimately, any company that benefits from the rehabilitation process takes the risk that their efforts and expenses may or may not pay off or achieve their intended purpose.

If the company decides to throw in the towel rather than seeking redress from the courts, then it would be each creditor for itself by attacking the remaining assets of the company to settle the unpaid debts.

Going back to PAL, it helps to have a white knight in Lucio Tan and a body of consultants who are familiar with bankruptcy cases in the United States.

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