Privatization of Philippine Airlines: An Investigative Report

BACKGROUND

Philippine Airlines (PAL) was owned and managed by the Philippine government before eventually being privatized in 1992. The winning consortium in the privatization of PAL was beset with differences until 1996 on how to manage PAL. The difficulties of PAL worsened with the adoption of an open skies policy by then President Fidel Ramos and with the onset of the Asian crisis. All this time, PAL continued to lose. PAL management initiated cost-cutting measures but employees opposed these measures. On June 5, 1998, the pilots' union staged a strike paralyzing PAL's domestic and international operations.

FILING OF THE PETITION

PAL files petition on June 19, 1998, with the Philippine Securities and Exchange Commission (SEC) for the approval of a rehabilitation plan and for the appointment of a rehabilitation receiver. Only the parameters of the rehabilitation plan are attached to the petition. On June 22, 1998, PAL files petition in United States Bankruptcy Court in Northern California for ancillary relief praying for a permanent injunction prohibiting creditors from interfering with PAL's assets.
On June 23, 1998, the SEC appoints Interim Rehabilitation Receiver headed by the then senior vice president-corporate counsel of PAL, and included as members three other senior PAL officials plus a partner from PAL's auditor, Sycip Gorres Velayo & Co. On July 1, 1998, the SEC issues order prohibiting payments without its approval of any amounts in respect of liabilities incurred by PAL prior to June 23, 1998. PAL shuts down operations on September 23, 1998.
Export credit agencies seek return of aircraft. PAL makes initial US$37.9 million debt payment to its fully secured aircraft creditors on January 1999. SEC rejects the first rehabilitation plan filed by PAL on January 15, 1999. On May 17, 1999, SEC approves the amended and restated rehabilitation plan on condition that the required capital infusion of US$ 200 Million is realized not later than June 4, 1999. Lucio Tan announces that the deadline for the US$ 200 Million is met. The SEC orders payment to trade creditors with claims of less than US$ 25,000 on October 1999.

ISSUES

Three types of actions are available under the Insolvency Law, which was passed into law in 1909. These are suspension of payments where the debtor possesses sufficient property to cover all his debts, voluntary insolvency, and involuntary insolvency.
Under the Insolvency Law, specific procedures are prescribed for each type of proceeding. The contents of the petition, the calling of the meeting of creditors, participation of creditors in the proceeding and the effects thereof, periods within which the actions must proceed or terminate and such other details are set forth in the Insolvency Law. Requirements for the quorum and the voting of creditors are likewise set forth in the law. Proceedings under the Insolvency Law are under the jurisdiction of the Regional Trial Courts.
The economic turmoil in the late 1970s and early 1980s created the need for an agency that would be able to handle debt-relief proceedings with more efficiency and dispatch. At the same time, a rehabilitation procedure for corporations was needed. The logical agency to handle this was, it was felt, the SEC. Thus in 1981, a presidential decree was issued amending Presidential Decree No. 902-A (PD 902-A) and vesting the SEC with jurisdiction over petitions for suspension of payments. In addition, the SEC was vested with the power to appoint a rehabilitation receiver or a management committee for corporation in distress, upon the appointment of which all actions for claims against said corporation would be suspended.
The SEC was further granted the authority to evaluate the feasibility of continuing operations and of restructuring and rehabilitating such entities. For the past two decades, corporations file suspension of payments petitions with the SEC and not with the trial courts, which have jurisdiction over insolvency cases. Under PD 902-A, no procedures are prescribed for the actions and/or petitions mentioned therein.
There were conflicting views on whether the Insolvency Law or PD 902-A should apply on the PAL proceedings. A large creditor, the US Eximbank, believes that the Insolvency Law should apply and, as a consequence, the procedures prescribed therein should be complied with. The SEC believes that the proceeding is governed by PD 902-A as the petition is one for the approval of a rehabilitation plan and for the appointment of a rehabilitation receiver. The issues that have arisen because of the problem on what law to apply significantly affects the rights of the creditors (secured and unsecured), such as approval of the rehabilitation plan.
The US Eximbank contends that since PAL's petition suspends payment to creditors, the proceedings are governed by suspension of payment provision of the Insolvency Law. Under the Insolvency Law, creditors representing three-fifths of the liabilities shall be necessary for holding a creditors meeting in a suspension of payments proceeding. The manner of voting is specified and the determination of a majority vote is likewise set forth. Thus, to form a majority, two-thirds of the creditors voting must unite upon the same proposition, and claims represented by said majority vote amount to at least three-fifths of the total liabilities of the debtor mentioned in the petition.
Under PD 902-A, no procedure is prescribed for the approval of the rehabilitation plan by the creditors. US Eximbank contends that PD 902-A merely transferred to the SEC the jurisdiction over suspension of payment proceedings in reference to corporations but neither repealed nor amended the provisions of the Insolvency Law, which must be followed. The creditors did not participate in the preparation of the first rehabilitation plan, which was eventually ordered revised by the SEC. In the amended rehabilitation plan, which was subsequently approved by the SEC, the creditors were consulted in the preparation thereof.
When the amended rehabilitation plan was approved, SEC stated in its order that 55% of the creditors representing the total obligations of PAL approved the rehabilitation plan. US Eximbank contends that there was no explanation as to how the 55% figure was arrived at, who the consenting creditors were and the amount of claim held by each creditor. However, PAL contends that the Interim Rehabilitation Receiver conducted broad and intensive consultations with various creditors, including the US Eximbank who basically approved the plan.

Priority of Payments

Under PD 902-A, the SEC is not bound to follow the hierarchy of payments set forth in the Civil Code (for insolvent debtors) while the rehabilitation of the debtor-corporation is being worked out. Prior to the approval of the rehabilitation plan, the SEC authorized payments to certain creditors which did not follow the order of preference set forth in the Civil Code. Hence interests payment was made to the secured aircraft creditors in January 1999 while no payment was made to other type of creditors. In October 1999, after the approval of the rehabilitation plan, SEC approved payment to 1,004 trade creditors with claims of less than US$25,000 for administrative convenience, as such payment was viewed as not adversely affecting the cash flow position of PAL.

Lessors of Aircrafts

Lessors of properties such as the aircraft lessors, are not specifically covered by the Insolvency Law. Hence, if the PAL proceedings were held under the provision of the Insolvency Law, the aircraft lessors would most probably be able to recover their property. Under PD 902-A, there are no provisions on providers of property to the debtor-corporation such as the aircraft lessors. Lessors of properties which are considered by the SEC as essential for the operation of PAL were not allowed to recover the leased property. Included here are aircraft lessors who claim that the SEC has not adequately protected their interests because the value of their security – the leased aircrafts – will greatly depreciate as the aircrafts will still be used by PAL, whereas PAL has ceased making lease payments.