FINANCIAL REHABILITATION Sole Prop Involuntary Creditors or

Partnership REHAB Group of

AND INSOLVENCY ACT OF Corp creditors with a
2010 (R.A. No. 10142) claim at least
Php1M or at
1. POLICIES least 25% of the
a) Ensure efficient capital,
rehabilitation whichever is
a. Ensure certainty and higher
predictability in Sole Prop Pre-negotiated Insolvent debtor
commercial affairs Partnership REHAB- and the Rehab
b. Preserve and Corp petition for plan is endorsed
maximize the value of approval of or approved by
the assets of these pre-negotiated creditors holding
debtors rehab 2/3 of the total
c. Respect priority of liabilities,
claims including
d. Ensure equitable secured creditors
treatment of debtors with 50% of the
b) If rehabilitation cannot be secured claim
done, the State must and unsecured
ensure a speedy and creditors holding
orderly liquidation of 50% of the
debtor’s assets unsecured
claims
KEY DEFINITIONS: Sole Prop Voluntary Insolvent debtor
Partnership LIQUID
Debtor – sole proprietorship registered with DTI Corp
- Partnership duly registered with the Sole Prop Involuntary Three or more
SEC Partnership LIQUID creditors
- Corporations duly organized and Corp Aggregate claim
existing under Philippine law if at least Php 1M
- Individual debtor who is insolvent or 25% if the
- INDIVIDUAL DEBTOR – resident capital stock,
and citizen of the Philippines who whichever is
has become insolvent higher
- GROUP OF DEBTORS – (1) Individual Suspension of Individual Debtor
corporations that are financially debtor payment
related to each other (2) Individual Voluntary Individual debtor
partnerships, 50% of which are debtor LIQUID with at least Php
owned by the same persons; (3) 500K debts
single proprietorships that are Individual Involuntary Any creditor or
owned by the same person Debtor LIQUID group of
Insolvent – a condition where he is unable to pay creditors with at
as his liabilities have fallen due least claims of
Liabilities – monetary claim against the debtor Php 500k
(ex. stockholder’s advances recorded) Group of Voluntary Any debtor
Ordinary course of business – actions in the debtors REHAB
pursuit of the individual debtors business PRIOR
to rehabilitation proceedings 2. EXCLUDED DEBTORS
Creditor – natural or juridical person that has a
claim against the debtor that arose before the
a. Banks (Central Bank Act)
commencement date
b. Pre-need companies (Pre-need
Commencement Date – issuance of the
Code R.A. 9829)
Commencement Order
c. Insurance Companies (Insurance
General unsecured creditor – no security, nor
Code)
preferences under the FRIA
d. National and Local Got agencies
Secured creditor – secured by a claim that has a
lien
Lien – statutory or contractual claim or judicial 3. REHABILITATION
charge on real or personal property that entitles a
creditor to resort to said property for payment - Restoration of the debtor to a
condition of successful operation
and solvency, if it shown that
continuance is economically
PROCEEDINGS AND WHO WHILL
feasible, and the creditors may
FILE/APPROVE THEM recover by way of present value or
payments projected in the plan
BUS ORG PROCEEDING WHO FILES REHABILITATION OF SOLE
Sole Voluntary Owner/Proprietor PROP, PARTNERSHIP, CORP
Proprietorship REHAB 1. VOLUNTARY
Partnership Voluntary Majority The following requisites must
REHAB be present: (a) insolvency of
Corporation Voluntary Majority of the the debtor; (b) viability of its
REHAB Director or rehabilitation
Trustees
Stockholders Section 12 provides for the contents
(2/3) of Capital of the Petition, to wit:

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 (a) Identification of the debtor, its
principal activities and its
addresses;
(b) Statement of the fact and cause
of the debtor's insolvency or inability
to pay its obligations as they
become due;
(c) The specific relief sought;
(d) The grounds which petition is
based;
(e) Other information that may be
required under this Act depending
on the form of relief requested;
(f) Schedule of the debtor's debts
and liabilities including a list of
creditors with their addresses,
amounts of claims and collaterals,
or securities, if any;
(g) An inventory of all its assets
including receivables and claims
against third parties;
(h) A Rehabilitation Plan;
(i) The names of at least three (3)
nominees to the position of
rehabilitation receiver; and
(j) Other documents required to be
filed with the petition pursuant to
this Act and the rules of procedure
as may be promulgated by the
Supreme Court.
2. INVOLUNTARY
Via a petition for the rehabilitation w
the court if:
(a) The due and demandable
payment have not been made
within 60 days, or that the
debtor has failed to meet its
liabilities;
(b) A creditor, other than the
petitioner has initiated a
foreclosure proceeding against
the debtor that prevents the
debtor to pay.
REHABILITATION PLAN
- Plan by which the financial well-
being of the insolvent debtor can be
restored using various means, as
may be approved by the court, like:
o Debt forgiveness
o Debt rescheduling
o Reorganization
o Quasi-reorganization
o Dacion en pago
o Debt-equity conversion
o Sale of the business
o Setting up of new business
entity
- It is attached to the Petition for
Rehabilitation
- It may be (1) approved by the
creditors holding 50% of the claims;
or (2) by the court, with or without
approval/objection of the creditors
- Cram Down Rule. The plan, once
confirmed by the court, shall be
binding to all, even those who have
not participated in the proceedings,
and those who have opposed the
plans
STAY/SUSPENSION ORDER
- Included in the Commencement
Order
1. Suspend all actions or
proceedings for the
enforcement of claims
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2. Suspend all actions enforcing
any judgment
3. Prohibits the debtor from
selling encumbering or
transferring any of its
properties
4. Prohibit the debtor from making
any payment of its liabilities
- It shall be effective for the entire
duration of the rehabilitation
proceedings
- May be lifted if there is no
substantial likelihood for the debtor
to be successfully rehabilitated.
SUSPENDED CLAIMS
Claims refer to all demands of any
nature against the debtor or its
property, whether for money or
otherwise, liquidated or not, mature
or not, including claims of the gov’t
and claims against the directors or
officers of the debtor
Examples: passenger claims on
missing luggages, employees’
claims, revocation of a contract of
sale
Suspended claims are intended to
make the rehabilitation receiver to
effectively exercise his powers free
from judicial/extrajudicial
interference
- IT SHALL COVER ALL
CREDITORS, SECURED OR
UNSECURED – the preference is
retained, only the enforcement is
suspended
Exceptions:
1. Criminal actions independent to
the rehabilitations
2. Cases already pending appeal
in the SC
3. Cases pending at a specialized
quasi-judicial agency
4. Enforcement of claims against
sureties
5. Action of customers or clients
of a securities market
6. Action of a broker to sell
pledged securities pursuant to
a margin agreement
7. Transactions in a clearing
agency
WHO WILL MANAGE
GENERALLY, the Board of the
Management of the debtor
However, the court may replace it
by appointing a Rehabilitation
Receiver or Management
Committee to undertake the
rehabilitation, on these grounds:
1. Actual imminent danger of loss
2. Paralysis of the business
operations
3. Gross mismanagement
COURT ACTION ON PETITION FOR himself unable to pay by time it falls
REHABILITATION due
2) Purpose is to delay payment
Maybe (a) given due course; (b) 3) Amount of indebtedness is not
dismissed; (c) converted to affected
liquidation proceedings 4) Number of creditors in immaterial

DISTINCTIONS
COURT ACTION REQUIRED COURT
FINDINGS
Given due course 1. Debtor is Suspension of Payments Liquidation
insolvent; Debtor is NOT insolvent Debtor is
2. There is insolvent
possibility for Payment of obligation is stayed Obligations
successful are
rehabilitation discharged
Dismiss petition 1. Debtor is not Applies only to individual debtor May apply
insolvent to Juridical
2. The petition Persons
is a sham and
intended only Individual
to delay the debtors
enforcement Maybe FILED by the debtor May be
of the rights INITIATED
of the by the
creditor debtor or
3. The petition, by the
Rehab plan creditors
is materially No minimum amount of liability is Must not e
false or prescribed less than
misleading Php 500K
4. Debtor has Rules on concurrence/preference Only Art.
committed of credits in NCC shall apply 2236 (GR
misrepresent on
ation or fraud Preference
of creditors and Order)
Conversion 1. Debtor is and 2251
insolvent (Credits
2. There is no not
possibility for enjoying
the preference)
successful shall apply
rehabilitation
Suspension of payments Rehabilitation
Applies to Individual Debtor Applies to BUS
4. OUT-OF-COURT ORG
REHABILITATION Debtor has sufficient Is insolvent
properties to cover his
debts
a) Must comply with the minimum
Secured debtors not Secured debtors
requirements:
affected are affected by
1) The debtor has agreed to out-
stay order
of-court restructuring
Filed by debtor Maybe initiated
2) Approved by creditor
by debtor/creditor
representing 67% of the
No minimum requirement Must be at least
secured obligations
Php 1,000,000 or
3) Approved by creditors
25 % of the
representing 75% of the
subscribed
unsecured obligations
capital stock or
4) Approved by creditors
partner’s
representing 85% of secured
contribution,
and unsecured liabilities
which ever is
b) Standstill Period
higher
* Cram Down rule applies
1) Agreement is approved by
SUSPENSION ORDER (Sec. 96) –
creditors representing 50%
suspends any pending execution against the
of total liabilities of the
individual debtor
debtor
- Shall last for 3 month and must
2) Notice thereof
lapse thereafter without a proposed
3) Standstill period doe not
agreement accepted by creditors
exceed 120 days fro the
- No creditor shall sue from the
date of effectivity
beginning of the filing of the petition
until it has reasonably lapsed or
5. SUSPENSION OF PAYMENTS lifted
EXCEPT:
Filed only by the INDIVIDUAL DEBTOR - Cannot affect secured creditors
1) Debtor has sufficient properties to - Claims for personal labor,
cover all his debts BUT he sees maintenance and expenses for
funeral of wife or children of the

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 debtor incurred in the 60 days prior LIQUIDATION ORDER
the filing - Jurisdiction: regular courts
- Must allege the ff:
PROHIBITED ACTS o Insolvency of debtor
a) Selling, transferring and o Order of liquidation
encumbering his property, except o In case of juridical
those used in the ordinary course of personality, its dissolution
commerce where in the debtor is o Prohibition on payments
engaged and/or transfer of property
b) Making payments outside the o Directing that all claims be
necessary of legitimate expenses of filed with the liquidator
his business or industry
EFFECTS OF A LIQUIDATION ORDER
CREDITIOR’S MEETING 1) Juridical debtor shall be dissolved and
The individual debtor must attach to the its existence terminated
Petition for Suspension of Payment a 2) Legal title and control of assets are
proposed agreement with the creditors. vested in the liquidator, or pending his
This proposed agreement must be election, with the court
approved/rejected in the Creditor’s 3) All contracts are deemed terminated
Meeting. A double majority is unless the liquidator declares otherwise
required for the approval – (2/3 of the 4) No separate action for the collection of
creditors voting unite upon the same an unsecured claim shall be allowed
proposition OR claims represented by 5) No foreclosure proceeding shall be
majority vote amount to 3/5 of the total allowed
liabilities of the debtor.
RIGHTS OF A SECURED CREDITOR
Should there be disapproval, - Subject to temporary stay of foreclosure
suspension shall be terminated. proceedings for a period of 180 days
1. Waive his right under the security or
6. LIQUIDATION OF INDIVIDUAL lien, prove his claim in the liquidation
DEBTORS proceedings
2. Maintain his rights under the security or
lien – (a) the value of the property fixed
VOLUNTARY INVOLUNTARY
by the creditor (b) liquidator may sell the
LIQUIDATION OF LIQUIDATION OF
property to satisfy the secured creditors’
INDIV DEBTOR INDIV DEBTOR
claim, (c) secured creditor may enforce
Debtor is insolvent
his lien
Acts of insolvency Acts of insolvency
need not be must be alleged
alleged 8. LIQUIDATION PROCESS
Debts must be at least 500,000
- Must be done in accordance with
Individual debtor Creditor/s file the
the Liquidation Plan approved by
files the petitioner petition
the Court
Debtor is not Applies when debtor
- Rules on preference shall apply:
absent is absent
o There is preference with
Posting of bond Posting of bond
respect to taxes only in
NOT required requires
Arts. 2241 and 2242
Liquidation Order Liquidation Order is o As to all other claims or
is issued without issued after trial liens mentioned in the
trial aforementioned, there is
NO ORDER of preference
and the balance of the
Involuntary Involuntary proceeds of the specific
Liquidation of Liquidation of BUS movable or immovable, as
Indiv Debtor ORG it shall be divided among
At least three The can be one or the claimants
creditors are more creditors o The excess of the specific
required property shall be added t
Debts must be at Debt or aggregate the free property which the
least Php 500k claims must be at debtor may have
least Php 1M or o No tax clearance is
equivalent to 25% of required
the capital stock, RE: Pre-need Company – the trust fund that is
whichever is higher maintained by an insolvent Pre-Need Company is
Individual can Business is not part of the estate of said insolvent.
continue business DISSOLVED
Must be an act of No act of insolvency PREFERENCE AS TO SPECIFIC PROPERTIES
insolvency required – Follows Arts. 2241 & 2242

7. LIQUIDATION PROCESS ORDER OF PREFERENCE WITH RESPECT TO

- Proceeding where claims are filed
and the assets of the insolvent
debtor are disposed and divided
among the creditors.
- Applies to original liquidation
proceedings and rehabilitation
proceedings converted into
liquidation proceedings
OTHER PROPERTIES - Follows Art 2244, NCC
and Art 110 of the Labor Code
9. CROSS BORDER INSOLVENCY
- FRIA adopted the Model Law on
Cross-Border Insolvency of the
United Nations Center for
International Trade and
Development

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 If there is a rehabilitation
proceeding filed by a foreign entity
in another jurisdiction, a petition
may be filed by the latter’s
representative and the courts may
issue:

- Suspension of any action to enforce

claims against the entity or
seize/foreclose the property of the
foreign entity located in the PH
- Requirement of the surrender of
property to its representative
- Other necessary relief, considering
o The protection of the
creditors in the PH and
inconvenience
o Just treatment of all
creditors through the
insolvency or rehabilitation
proceedings
o Rights of the creditors