DUE TO the unprecedented threat posed by the COVID-19 pandemic, the Philippine government declared a Community Quarantine in most parts of the country in an attempt to curb the spread of the virus. However, with public transport either suspended or limited nationwide and industries forced to adapt on the fly to a rapidly shifting business landscape, the measure came at great cost to the economy.
In the recent Labor Force Survey conducted by the Philippine Statistics Authority, unemployment rate rose to 17.7% translating to over 7.3 million unemployed Filipinos in April of 2020 — a record high unseen in decades. These numbers coincide with the millions of workers who have reportedly been displaced and the thousands of business establishments that have reportedly been forced to close shop.
Recognizing that the economy could not survive with its citizens kept out of work for so long, the government has since eased its lockdown measures across the country. In a recent statement, the Presidential Spokesman cited the need to jumpstart the economy as a factor in shifting to a General Community Quarantine.
However, for many businesses, the damage had already been done. Around the country, business owners may now be wondering how will they be able to wind down, reboot, and restart their operations?
Closing Up Shop: Legally Winding Down the Business
For the worst-hit establishments, a total shutdown of operations may be their best bet for survival. However, business owners looking to cut their losses must be aware that the winding down of operations involves a multi-fold process. Businesses owners closing shop must plan for settling their obligations to their employees, dissolving the corporate entity, and securing clearance from the appropriate government agencies.
Before resorting to permanent closure, businesses may consider implementing temporary measures such as Flexible Work Arrangements (FWA) or Temporary Closures to mitigate losses suffered due to COVID-19.
However, prior to implementing the same, enterprises should submit their Establishment Reports on COVID-19 to the appropriate regional, provincial, or field office to notify the Department of Labor and Employment of its temporary measures. The report must be filed at least 30 calendar days prior to the effectivity of the closure or at least one week prior to the implementation of FWA.
However, when temporary measures will not be enough to stop the bleeding, permanently ceasing operations may be the only way forward. In these instances, businesses must observe due process as to the employees who will be affected by the closure. While the closure of one’s business is an authorized cause for the termination of employees, an employer must ensure that it:
(1) sends a Notice of Termination to its employees at least 30 days before the intended date of termination;
(2) file an Establishment Termination Report with the DOLE at least 30 days before the intended date of termination; and
(3) pay separation pay of at least one month’s salary or one-half month’s salary for every year of services, whichever is higher, with six months service considered as one whole year of service.
However, an employer may exempt itself from payment of separation pay in cases where the business closure is due to serious business losses or financial reverses. Business owners looking to exempt themselves from payment of separation pay however should note that the onus is on them to establish that the closure was done in good faith and not to circumvent any provisions of the Labor Code.
After closing down shop, a business owner can then consider its options in dissolving the corporate entity.
A business owner that has no existing liabilities that will need to be paid can file (1) an amendment of its Articles of Incorporation to shorten its corporate term of existence; or (2) a Verified Request for Dissolution with the Securities and Exchange Commission. If the corporate entity has various creditors, the business owner will need to file a Verified Petition for Dissolution with the SEC, which shall include a list of all claims and demands against the corporation.
All three of these modes require the approval of at least a majority of the corporation’s Board of Directors and of its stockholders representing at least 2/3 of its outstanding capital stock in a meeting duly called for the purpose. The SEC shall issue a Certificate of Dissolution upon submission of all documentary requirements, which will include obtaining a tax clearance from the Bureau of Internal Revenue.
Finally, a closing business must also notify a myriad of government agencies in order to legally wind down business operations in order to ensure a clean slate moving forward. Generally speaking, almost all business owners will have to secure clearances from the Social Security System, PhilHealth, Home Development Mutual Fund, the relevant Local Government Unit, and the BIR, with each office having its own set of requirements that vary depending on the locality.
However, businesses in industries subject to secondary licenses, should be mindful as well of any additional requirements from the appropriate governing bodies.
Bouncing Back: Laws at the Service of the Filipino Entrepreneur
It’s not all gloom and doom though for the Filipino entrepreneur. While the Asian Development Bank in its Outlook for the year 2020 projects Philippine economic growth to fall to 2.0% in 2020, 2021 is poised to be a bounce back year with a strong economic growth rate recovery at 6.5% assuming that the COVID-19 outbreak is contained.
For those looking to start anew from the rubble of the current landscape, a number of laws may prove valuable for the emerging startup.
Republic Act No. 11293, otherwise known as the Philippine Innovation Act, has promising features that include the establishment of an Innovation Fund to strengthen enterprises engaged in developing innovative solutions benefiting the marginalized as well as reforms to regulatory red-tape, which seek to shorten the period for business license applications to three working days.
There is also the Innovative Startup Act, which seeks to streamline initiatives to create new jobs and opportunities for:
(1) startups, defined as persons or registered entities in the Philippines which aim to develop innovative products, processes, or business models; and
(2) startup enablers, which are persons or registered entities in the Philippines registered under the Philippine Startup Development Program that provide goods, services, or capital identified to be crucial in supporting the operation and growth of startups.
Under its IRR, exciting features of the Innovative Startup Act are:
(1) the Startup Investment Development Plan which incentivizes investing in startups or startup enablers;
(2) the Startup Grant Fund, from which qualified startups or startup enablers will be issued grants-in-aid;
(3) the Startup Venture Fund, which will be used to match investments made by selected investors in startups based in the Philippines;
(4) Startup Visas for qualified foreign nationals; and (5) the creation of Philippine Startup Economic Zones.
There are also pending bills which aim to provide assistance to various sectors affected by the pandemic. The Accelerated Recovery and Investments Stimulus for the Economy of the Philippines Act (ARISE) has already been approved by the House of Representatives. The said Act provides for a P1.3-trillion three-year economic stimulus which aims to create jobs through infrastructure projects and shall provide wage subsidies for self-employed, freelancers, and overseas Filipino workers.
The Corporate Income Tax and Incentives Rationalization Act (CITIRA), now referred to as Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), proposes a lower income tax rate which will benefit all enterprises.
With these laws geared to promote innovation among enterprises as well as the pending bills to soften the blow dealt by the pandemic, new and innovative businesses can look forward to receiving a much-needed boost to bounce back in the new normal.
The Role of Tech in the New Normal
On the other hand, existing businesses that manage to weather the storm must ensure that they learn and adapt to the changes brought about by the pandemic. For the few businesses that have gained rather than lost during the ECQ, a strong digital presence was the common denominator.
Stressing the importance of financial technology tools in responding to the crisis, the Philippine arm of the Asia-Pacific Economic Cooperation Business Advisory Council (ABAC) recently identified four key issues moving forward: (1) digital technology; (2) supply chain resilience; (3) open markets for goods and services; and (4) MSME support.
With consumer habits projected to lean more towards online channels in the post-COVID world, it is imperative that enterprises have the technology and systems ready in time to make the shift. While businesses may still be reeling from the effects of the pandemic, there is no time but the present to regain their footing as innovative startups and tech-savvy businesses will hold a clear advantage moving forward. From the rubble of the current economic landscape, one thing can be said: the path to the new normal is digital.
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ATTY. MARK S. GORRICETA is the Managing Partner and head of the Corporate Group of Gorriceta Africa Cauton & Saavedra www.gorricetalaw.com. He is a well-recognized expert in the fields of Capital Markets, Securities Law, Mergers & Acquisitions, Technology Law and Real Estate./PN
