REHABILITATION

Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and solvency,
if it is shown that its continuance of operation is economically feasible and its creditors can recover by way
of the present value of payments projected in the plan, more if the debtor continues as a going concern than
if it is immediately liquidated.
o Sec 4. (gg) of R.A. No 10142, the Financial Rehabilitation and Insolvency Act of 2010
In the context of insolvency, rehabilitation is the process of reorganizing a debtors financial affairs
o PURPOSE: Enables an insolvent debtor to gain a new lease on life

Helps the debtor continue to exist as a financial entity

Benefits its employees, creditors, owners, and even the general public
It contemplates a continuance of financial life and activities to reinstate a debtor to its former position of
successful operation and solvency

Two Important Conditions for Rehabilitation

Considering the definition in the law, there are two important conditions for rehabilitation:

Economic feasibility; and

Present value recovery for creditors

o Absent these conditions, rehabilitation is not proper. The recourse to be taken should be liquidation.
Three Modes of Rehabilitation
1. Court-Supervised Rehabilitation
2. Pre-Negotiated Rehabilitation
3. Out-of-Court Rehabilitation
1.

Court-Supervised Rehabilitation
Judicial rehabilitation proceedings (involves filing a petition to court)
Two types:
o Voluntary Proceedings
It is the debtor (only juridical debtors) who initiates the rehabilitation
o Involuntary Proceedings
The creditor or group of creditors initiate (natural or juridical creditors allowed)
A.

Voluntary Rehabiliation Proceedings

o Judicial insolvency proceedings instituted by a juridical debtor. The debtor may be a sole
proprietorship, partnership, or corporation.
o The debtor may be insolvent in the illiquid concept or balance sheet concept.
Under the illiquidity concept:
Debtor possesses sufficient property to cover all its liabilities, but foresees the
impossibility of meeting them when they fall due.
Under the balance sheet concept:
Assets are insufficient to cover its liabilities.
o In every case, the rehabilitation of the insolvent debtor is economically feasible and results in better
present value recovery for the creditors.
o Cf. Individual debtor that is not a sole proprietorship
The sole proprietorship debtor is different from a mere individual debtor comes into play
when we look in the purpose of rehabilitation which is to restore and reinstate a debtor
to its former position for successful operation.
A mere individual debtor with no business to speak of is not contemplated under this
proceeding. This is not the course of action for him.
(His courses of actions may be to petition for suspension of payments or for
liquidation.)

B.

Involuntary Rehabilitation Proceedings

o Judicial insolvency proceedings instituted by a creditor or group of creditors against an insolvent
debtor, provided:
The requirements of the law on number of creditors, or value of claims, or both are met
The circumstance requiring rehabilitation is alleged and established.

o
o

Value of claims: The aggregate claim should

At least be Php 1 Million; or
At least 25% of the subscribed capital stock / partners contributions, whichever is higher
This is without regard to the number of creditors who file.
As long as the aggregate value of the creditors who are claiming amount to that which is
required by the law, they may file a petition for involuntary rehabilitation.
Although the status of being insolvent is calculated based on liabilities (claims), the FRIA bases the
value requirement for involuntary rehabilitation proceedings on the creditors claims.
The circumstance requiring rehabilitation are:
(a) There is no genuine issue of fact or law on the claims of the creditors and that ;
(b) due and demandable payments have not been made for at least 60 days; or
(c) The debtor has failed generally to meet its liabilities they fall due; (illiquidity concept)
(d) A creditor, other than the debtor, has initiated foreclosure proceedings against the
debtor that will prevent the debtor from paying its debts as they become due (illiquid
concept) or will render it insolvent (balance sheet concept).