THE FINANCIAL
REHABILITATION AND
INSOLVENCY ACT OF 2010

SUBMITTED BY:

DANIEL, Zen Deane Danielle

GARCIA, Julrey Florence

GENERILLO, Celestine Jeanne

YANEZ, Justin Andrew

SUBMITTED TO:

Atty. Noelle Gavino-Dungo

CREDIT 2-C
Introduction
The Financial Rehabilitation and Insolvency Act of 2010 (FRIA) took effect on 31 August
2010 which repealed the Insolvency Law. FRIA contains three main parts: (i)
rehabilitation, for the purpose of restoring the financial health of insolvent debtors; (ii)
liquidation, which provides for the orderly liquidation of the debtor’s assets and liabilities,
once it has been determined that operations can no longer be successfully restored; (iii)
cross-border insolvency, whose purpose is to address insolvency-related matters
involving foreign companies with Philippine-based assets or foreign-based assets of
Philippine companies.

In 2013, the Supreme Court approved the Financial Rehabilitation Rules of Procedure
(2013), otherwise known as the FR Rules. Unlike the Insolvency Act of 1909, FRIA and
the FR Rules do not limit insolvency to a situation where the debtor’s assets are less
than its liabilities. It now covers a situation where the debtor is unable to meet its
obligations as they fall due even if its assets are more than its liabilities.

Constitutionality of Insolvency Laws

The Supreme Court ruled that the restructuring of the debt of the debtor pursuant to
rehabilitation plan does not constitute a violation of the non-impairment clause. Even
assuming that the non-impairment clause may be invoked, the non-impairment clause
must yield to the police power as the constitutional guaranty of non-impairment of
obligations is limited by the exercise of the police power of the State for the common
good of the general public.

Policy of FRIA
The FRIA states that it is the policy of the State:

1) To encourage debtors, both juridical and natural persons, and their creditors to
collectively and realistically resolve and adjust competing claims and property
rights.

2) To ensure a timely, fair, transparent, effective and efficient rehabilitation or

liquidation of debtors.

3) To ensure or maintain certainly and predictability in commercial affairs, preserve

and maximize the value of the assets of these debtors, recognize creditor rights
and respect priority of claims, and ensure equitable treatment of creditors who
are similarly situated.

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 4) When rehabilitation is not feasible, to facilitate a speedy and orderly liquidation of
these debtor's assets and the settlement of their obligation

Concept of Insolvency
Under the FRIA, the term “insolvent” refers to the financial condition of a debtor that is
generally unable to pay its or his liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or his assets. Thus, the term
“insolvent” covers both bankruptcy and illiquidity.

In determining whether the debtor’s liabilities are greater than his assets, reference
must be made to the fair valuation of his assets. The debtor’s assets must not, at fair
valuation, be sufficient to pay his debts.

Debtors covered by the FRIA

Under FRIA, a debtor may be:

1) A sole proprietorship duly registered with the Department of Trade and Industry
(DTI)

2) A partnership duly registered with the Securities and Exchange Commission

(SEC)

3) A corporation duly organized and existing under Philippines laws

4) An individual debtor who has become insolvent as defined in the law

5) Remedies from FRIA

For a partnership or association to be considered a “debtor” under the FRIA, it must be

duly registered with the SEC. Government financial institutions other than banks and
government owned or controlled corporations (GOCCs) are covered by the FRIA,
unless their specific charter provides otherwise.

Claims covered by the FRIA

Under the FRIA, the term “claim” refer to all claims or demands of whatever nature or
character against the debtor or its property, whether for money or otherwise, liquidated
or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed,
including, but not limited to:

- All claims of the government, whether national or local, including taxes, tariffs
and customs duties; and

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 - Claims against directors or officers of the debtor arising from the acts done in the
discharge of their functions falling within the scope of their authority; however,
this inclusion does not prohibit the creditors or third parties from filing cases
against the directors and officers acting in their personal capacities.

The FRIA covers claims of whatever nature or character. It covers both monetary and
non-monetary claims.

Remedies under the FRIA

The remedies available to an insolvent debtor may either be judicial or extrajudicial. The
FRIA provides the following remedies in the event a debtor is insolvent:
- Rehabilitation, which may be voluntary, involuntary, or pre-negotiated

- Out of court restructuring

- Liquidation, which may be voluntary or involuntary

The FRIA also provides the remedy of filing a petition for suspension of payment for
individual debtors.

Nature of proceedings under the FRIA

Proceedings under the FRIA are proceedings ​in rem​. Under the FRIA, the court
acquires jurisdiction over all persons affected by the proceedings upon publication of
the notice of the commencement of the proceedings in any newspaper of general
circulation in the Philippines (in the manner prescribed by the rules of procedure to be
promulgated by the Supreme Court).

The FRIA mandates that proceedings will be conducted in a summary and

non-adversarial manner. The court may decide matters on the basis of the pleadings
and other documentary evidence, and conduct clarificatory hearings when necessary.

Any order issued by the court under the procedural rules is immediately executory.
Review of any order of the court will be in accordance with the procedural rules. The
reliefs ordered by the trial or appellate courts must take into account the need for
resolution of the proceedings in a just, equitable, and speedy manner.

The procedural rules must be liberally construed to promote a timely, fair, transparent,
effective, and efficient liquidation and suspension of payments of debtors.

Advantages of judicial remedies

Retention of management

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 - Unless otherwise provided by the court, the management of the juridical debtor
will remain with the existing management subject to the applicable law/s and
agreement/s, if any, on the election or appointment of directors, managers, or
managing partner.

Non-withholding of supply

- After the issuance of the Commencement Order, the debtor’s suppliers of goods
or services are prohibited from withholding the supply of goods and services in
the ordinary course of business for as long as the debtor makes payments for the
services or goods supplied after the issuance of the Commencement Order.
Thus, the debtor will have the resources to continue operations.

Protection from certain action and processes

- The court’s Commencement Order (i) generally prohibits, or otherwise serve as

the legal basis for rendering null and void the results of any extrajudicial activity
or process to seize property, or otherwise attempt to collect on or enforce a claim
against the debtor, (ii) serve as the legal basis for rendering null and void any
set-off after the commencement date of any debt owed to the debtor by any of
the debtor’s creditors; (iii) serve as the legal basis for rendering null and void the
perfection of any lien against the debtor’s property after the commencement date

- The court’s Stay Order or Suspension Order generally (i) suspend all actions or
proceedings for the enforcement of claims against the debtor; (ii) suspend all
actions to enforce any judgment, attachment, or other provisional remedies
against the debtor; and (iii) prohibit the debtor from making any payment of its
liabilities outstanding as of the commencement date except as may be provided
herein

Exemption from, or waiver of, taxes

- Upon issuance of Commencement Order by the court, and until the approval of
the Rehabilitation Plan or dismissal of petition, the imposition of all taxes and
fees due to the national government are considered waived, in furtherance of the
objectives of rehabilitation.

Compromises binding

- Any compromises on amounts or rescheduling of timing of payments by the

debtor will be binding on creditors regardless of whether or not the Rehabilitation
Plan is successfully implemented

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Cram-down power

- The court has the power to approve or implement the Rehabilitation Plan despite
the lack of approval, or objection from the owners, partners, or stockholders of
the insolvent debtor, provided that the terms thereof are necessary to restore the
financial well-being and viability of the insolvent debtor

Binding effect of rehabilitation plan

- The Rehabilitation Plan and its provisions will be binding upon the debtor and all
persons who may be affected by it, including the creditors, whether or not such
persons have participated in the proceedings or opposed the Rehabilitation Plan
or whether or not their claims have been scheduled

Suspension of payment
A petition for suspension of payment is a remedy available to an individual debtor who
seeks to suspend the payments outside of the necessary or legitimate expenses of his
business while the proceedings are pending.

Under the FRIA, an individual debtor who, possessing sufficient property to cover all his
debts but foreseeing the impossibility of meeting them when they respectively fall due,
may file a verified petition that he be declared in the state of suspension of payments.
The creditors cannot file the said petition against the debtor.

The petition is filed in the court having jurisdiction over the province or city where the
debtor has resided for six months prior to the filing of the petition.

Basic Procedure in Suspension of Payment

1) Filing of petition

2) Action on petition

3) Notification through publication and sending of notices

4) Holding of creditor’s meeting and voting by creditors

5) Objections to proposal

6) Hearing and issuance of court order

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The Commissioner
The commissioner, who will preside over the creditors’ meeting in connection with the
proceedings, must be a natural person who will have the following minimum
qualifications:

(a) A citizen of the Philippines or a resident thereof for six months immediately
preceding his appointment;

(b) Of good moral character and with acknowledged integrity, impartiality, and
independence;

(c) Has the requisite knowledge of insolvency laws, rules and procedures; and

(d) Has no conflict of interest

The debtor or any creditor may file a written objection to the commissioner appointed by
the court on the ground that he does not meet the foregoing minimum requirements. If
the court finds merit in the objection, it will appoint a new commissioner.

Rights of secured creditors in suspension of payment proceedings

The petition for suspension of payments will generally not affect the rights of secured
creditors. Thus, notwithstanding the filing of the petition and during the pendency of
proceedings, secured creditors can sue or institute proceedings to collect their claims.
Secured creditors can also proceed with any pending execution against an individual
debtor, as a court order suspending pending execution will not be applicable to them.

The order confirming the approval of the proposed agreement is also not binding on
secured creditors who failed to attend the meeting or refrained from voting. Should the
secured creditor vote, then the order confirming the agreement will be binding upon
him.

Prohibited transactions
The following transactions are prohibited upon the issuance of the Order, and so long
as the proceedings relative to the suspension of payments are pending:

(1) Prohibition against sale or encumbrance of assets

The order prohibits the sale, transfer, encumbrance or disposition by the

individual debtor of his property, ​except those used in the ordinary operations of
commerce or of industry in which the individual debtor is engaged.

(2) Prohibition against payment

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 The order prohibits the individual debtor from making any payment outside of the
necessary or legitimate expenses of his business or industry.

Rehabilitation
Rehabilitation refers 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.

Rehabilitation proceedings have two-pronged purpose: (a) to efficiently and equitably

distribute the assets of the insolvent debtor to its creditors; and (b) to provide the debtor
with a fresh start by relieving them of the weight of their outstanding debts and
permitting them to reorganize their affairs.

The rehabilitation must be viable or likely. If the rehabilitation is not feasible, the FRIA
states that is in the interest of the State to facilitate a speedy and orderly liquidation of
the debtor’s assets and the settlement of the obligations.

Types of Rehabilitation Proceedings:

- Court supervised, which may be voluntary or involuntary;

- Pre-Negotiated; and
- Out of court or informal.

Court-supervised rehabilitation
Voluntary Court-Supervised Rehabilitation

- ​ he insolvent debtor
Who initiates the proceedings? T
- Who may file the petition?
(1) The owner in case of single proprietorship;

(2) The majority of partners in case of partnership; and

(3) The majority vote of the board and the vote of stockholders representing
at least ⅓ of capital stock. However, if the articles of partnership or the
articles of incorporation impose a higher vote requirement for instituting
voluntary proceedings, then that vote requirement shall prevail.

Involuntary Court-Supervised Rehabilitation

- ​ creditor or a group of creditors

Who initiates the proceedings? A

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 - Who may file the petition? ​A creditor or group of creditors with aggregate claims
of at least P1,000,000 or at least 25% of subscribed capital or partners’
contribution, whichever is higher, if:
(a) There is no genuine issue of fact or law on the claim of the petitioner, and
that the due and demandable payments thereon have not been made for
at least 60 days; or

(b) The debtor failed generally to meet its liabilities as they fall due; or

(c) A creditor, other than the petitioner, has initiated foreclosure proceedings
against the debtor that will prevent the debtor from paying its debts as
they become due or will render it insolvent.

Venue for Petition

The petition for rehabilitation must be filed in the Regional Trial Court which has
jurisdiction over the principal office of the debtor alleged to be insolvent.

Commencement Order
Contents of the Order​:

The Order will, among others,:

(a) Declare that the debtor is under rehabilitation;

(b) Appoint a rehabilitation receiver who may or may not be from among the
nominees of the petitioner;

(c) Prohibit the debtor’s suppliers of goods or services from withholding the supply of
goods and services in the ordinary course of business for as long as the debtor
makes payments for those supplied after the issuance of the order;

(d) Authorize the payment of administrative expenses as they become due; and

(e) Set the case for initial hearing, which will not be more than 40 days from the filing
of the petition for the purpose of determining whether there is substantial
likelihood for the debtor to be rehabilitated.

Effects of the Order:

The issuance of the Order will:

(a) Vest the rehabilitation receiver with all the powers and functions provided for in
the FRIA;

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 (b) Prohibit, or otherwise serve as the legal basis for rendering null and void the
results of any extrajudicial activity or process to seize the property, sell
encumbered property, or otherwise attempt to collect on or enforce a claim
against the debtor after the commencement date unless otherwise allowed in the
FRIA;

(c) Serve as the legal basis for rendering null and void any set-off after the
commencement date of any debt owed to the debtor by any of the debtor’s
creditors;

(d) Serve as the legal basis for rendering null and void the perfection of any lien
against the debtor’s property after the commencement date; and

(e) Consolidate the resolution of all legal proceedings by and against the debtor to
the court.

Effectivity and Duration of the Order

The Order is effective for the duration of the rehabilitation proceedings, unless

● Earlier lifted by the court;

● The rehabilitation plan is seasonable confirmed or approved; or

● The rehabilitation proceedings are ordered terminated by the court.

Suspension Order
Contents of Order​:

The Suspension Order will:

(a) Suspend all actions or proceedings, in court or otherwise, for the enforcement of
claims against the debtor;

(b) Suspend all actions to enforce any judgment, attachment or other provisional
remedies against the debtor;

(c) Prohibit the debtor from selling, encumbering, transferring, or disposing in any
manner any of its properties except in the ordinary course of business; and

(d) Prohibit the debtor from making any payment of its liabilities outstanding as of the
commencement date except as may be provided herein.

Exceptions to the Stay or Suspension Order​:

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The Order does not apply:

● to cases already pending appeal in the Supreme Court as of commencement

date;

● to cases pending or filed at specialized court or quasi-judicial agency which is

capable of resolving the claim more quickly, fairly and efficiently that the
rehabilitation court, subject to the discretion of the rehabilitation court;

● to enforcement of claims against sureties and other persons solidarily liable with
the debtor, and third parties or accommodation mortgagors as well as insurers of
letters of credit;

● to any form of action of customers or clients of a securities market participant to

recover or otherwise claim moneys and securities entrusted to the latter in the
ordinary court of the latter’s business as well as anybaction of such securities
market participant or the appropriate regulatory agency or self-regulatory
organization to pay or settle such claims or liabilities;

● to the actions or a licensed broker or dealer to sell pledged securities of a debtor;

● Clearing and settlement of financial transactions through the facilities of a

clearing agency or similar entities; and

● To any criminal action against the individual debtor or owner, partner, director or
officer of a debtor will not be affected by any proceeding commenced under the
FRIA

The Rehabilitation Receiver

The rehabilitation receiver is the person appointed as such by the court, who is
entrusted with such powers, duties, and responsibilities in relation to the rehabilitation of
the debtor. Any qualified natural or juridical person may serve as rehabilitation receiver.
If the receiver is a juridical entity, it must designate a natural person who possesses all
the qualifications and none of the disqualifications as its representative.

Qualifications of a Rehabilitation Receiver:

(a) He is a citizen of the Philippines or a resident of the Philippines for at least six
months immediately preceding his nomination;

(b) He is of good moral character and with acknowledged integrity, impartiality, and
independence;

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 (c) As far as practicable, he has expertise and acumen to manage and operate a
business similar in size and complexity to that of the debtor;

(d) He has an operating knowledge in management, finance, and rehabilitation of

distressed companies;

(e) He has a general familiarity with the rights of creditors subject to suspension of
payments or rehabilitation and general understanding of the duties and
obligations of a rehabilitation receiver;

(f) He has not been earlier dismissed as a rehabilitation receiver;

(g) He has no conflict of interest; and

(h) He is willing and able to file a bond in such amount as may be determined by
court

Oath and Bond of the Receiver

- Prior to entering upon his powers, duties and responsibilities, the receiver must
take an oath and file a bond, in such amount to be fixed by the court, conditioned
upon the faithful and proper discharge of his powers, duties and responsibilities.

Removal of the Receiver:

- A Receiver may be removed at any time by the court on such grounds as the
rules of procedure may provide which will include, but are not limited to, the
following:
(a) Incompetence, gross negligence, failure to perform or failure to exercise
the proper degree of care in the performance of his duties and powers;

(b) Lack of a particular or specialized competency required by the specific

case;

(c) Illegal acts or conduct in the performance of his duties and powers;

(d) Lack of qualification or presence of any disqualification;

(e) Conflict of interest that arises after his appointment; and

(f) Manifest lack of independence that is detrimental to the general body of

stakeholders

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The Rehabilitation Plan
The Rehabilitation Plan is the plan by which the financial well-being and viability of an
insolvent debtor can be restored using various means including, but not limited to, debt
forgiveness, debt rescheduling, reorganization of quash-reorganization, dacion en pago,
debt-equity conversion and sale of the business as a going concern, or setting-up of
new business entity, or other similar arrangements as may be approved by the court or
creditors.

Cram-down power
The court has the power to approve or implement the Rehabilitation Plan despite the
lack of approval, or objection from the owners, partners, stockholders or creditors of the
insolvent debtor, provided that the terms thereof are necessary to restore the financial
well-being and viability of the insolvent debtor. However, the following circumstances
must be present:

(a) The Rehabilitation Plan complies with the requirements specified in the FRIA;

(b) The rehabilitation receiver recommends the confirmation of the Plan;

(c) The shareholders, owners or partners of the juridical debtor lose at least their
controlling interest as a result of the Plan; and

(d) The Plan would likely provide the objecting class of creditors with compensation
which has a net present value greater than that which they would have received
if the debtor were under liquidation

Management of the company under rehabilitation

As a rule, the management of the juridical debtor remains with the existing management
subject to the applicable laws and agreements on the election or appointment of
directors, managers or managing partner. The rehabilitation receiver will not generally
take over the management and control of the debtor. However, the rehabilitation
receiver may recommend the appointment of a management committee over the debtor
under the following circumstances:

(a) Actual or imminent danger of dissipation, loss, wastage, or destruction of the

debtor’s assets or other properties;

(b) Palayzation of the business operations of the debtor; or

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 (c) Gross mismanagement of the debtor, or fraud or other wrongful conduct on the
part of, or gross or willful violation of the FRIA by existing management, or the
owner, partner, director, officer or representatives in management of the debtor

The Management Committee

Role:

- The Committee will take the place of the management and the governing body of
the debtor and assume their rights and responsibilities. It has the power to take
custody of and control of all assets and properties owned or possessed by the
debtor. It may overrule or revoke the actions of the previous management or the
governing body of the debtor.

Composition:

- Unless the court otherwise provides, the management committee will be

composed of three qualified members appointed by the court as follows:
(a) First member - nominated by the debtor

(b) Second member - nominated by the creditor/s holding more than 50% of
the total obligations of the debtor;

(c) Third member - acts as the chairman of the committee; nominated by the
first and second members within ten days from appointment

- The court will appoint the first member in case the decision to appoint a
management committee is due to:
(1) Gross mismanagement of the debtor;

(2) Fraud or other wrongful conduct on the part of, or gross or willful violation
of the FRIA by existing management, or the owner, partner, director,
officer or representatives in management of the debtor

Creditor’s Committees
Organization

- After the creditors’ meeting called, the creditors belonging to a class may formally
organize a committee among themselves which may be composed of:
1) Secured creditors
2) Unsecured creditors
3) Trade Creditors and Suppliers
4) Employees of the debtor

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 - Creditors, representing at least majority of all the claims as reflected in the
registry of claims, must cast their vote for its creation

Election of Representatives to the Creditors’ Committee

- Each creditor will vote in proportion to his interest vis-a-vis the total claims of all
the creditors within the same class as determined by the rehabilitation receiver
- Voting may be done personally, by mail or by proxy accompanied by the
necessary authority to cast the vote

Election of Chairman of the Creditors’ Committee

- The rehabilitation receiver will convene the chosen representatives to elect the
chairman of the committee
- Each class of creditors are entitled to only one vote and any tie will be resolved
by drawing of lots
- The chairman will be responsible for convening the creditors’ committee,
whenever necessary, to discuss, eliberate, and confer with the rehabilitation
receiver, on any view or proposal in the preparation, review or revision of a
Rehabilitation Plan for the debtor

Role of Creditors’ Committee

- To assist the rehabilitation receiver in communicating with the creditors and will
be the primary liaison between the rehabilitation receiver and the creditors

Sale or disposition of assets after commencement date

Use or Disposition of Assets by Debtor

- GENERAL RULE: No funds or property of the debtor can be used or disposed of

- EXCEPTIONS:
a. Sale or disposition is in the ordinary course of business of the debtor

b. Sale or disposition is necessary to finance the administrative expenses of

the rehabilitation proceedings

c. The sale or disposition is made, with approval of the court and upon
application of the rehabilitation receiver, of unencumbered property of tje
debtor outside the ordinary course of business upon showing that the
property, by its nature or because of other circumstances, is perishable,
costly to maintain, susceptible to devaluation or otherwise in jeopardy.

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d. The sale, disposition or encumbrance of unencumbered property is mae
with authority of the court and after notice and hearing if:

i. The transaction is in the interest of administering the debtor and

facilitating the preparation and implementation of rehabilitation plan

ii. Transaction is necessary in order to provide a substitute lien,

mortgage, or pledge of property

iii. The proceeds will be used to meet administrative expenses as they

arise

iv. The proceeds will be used to pay victims of quasi delicts upon
showing a valid claim and the debtor has insurance

v. The proceeds will be used to repurchase property of the debtor that

is auctioned off

vi. The proceeds will be used to reclaim property of the debtor held
pursuant to a possessory lien

e. Upon application by secured creditor holding a lien against a holder of an

ownership interest in property held by debtor that is subject to potentially
rapid obsolescence, depreciation, or diminution, in value and with the
approval of the court, if depreciation cannot be avoided and such
depreciation is jeopardizing the security or property interest of the secured
or owner, in which case the court will:

i. Allow the encumbered property to be foreclosed provided that the

proceeds will be distributed with the order prescribed under the
rules

ii. Order the conveyance of a lien against or ownership interest in

substitute property of the debtor to the secured debtor provided that
other creditors holding liens do not object

iii. Order the conveyance to the secured creditor or holder of an

ownership interest of a lien on the residual funds from the sale

iv. Allow the sale or disposition of property, provided that it will

maximize the value of the property for the benefit of the secured
creditor and debtor and the proceeds will be distributed accordingly

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 v. The sale or disposition is made of encumbered property where
there is a security interest pertaining to third parties under financial,
credit or other similar transactions, should the court determine that:

1. It be necessary for the continued operation of business

2. Debtor has made arrangements to provide a substitute lien

or ownership right providing an equal level of security

Use Or Disposition Of Assets Of Debtor Held By Third Parties

- Third parties will not transfer, convey, or otherwise dispose of possessory

pledges, mechanic’s liens or similar claims, to persons other than the debtor
unless upon prior approval of the rehabilitation receiver. The rehabilitation
receiver may also:
a. Demand the surrender or the transfer of the possession or control of such
property subject to payment of the claims secured by any possessory liens

b. Allow said third parties to retain possession or control if such an

arrangement would more likely preserve or increase the value of the
property

c. Undertake any other disposition of the said property as may be beneficial

Rescission Or Nullity Of Sale, Payment, Transfer, Or Conveyance Of Assets

- GENERAL RULE: the court may rescind or declare as null and void any sale,
payment, transfer or conveyance of the debtor’s unencumbered property or any
unencumbering thereof which are not in the ordinary course of the business of
the debtor
- EXCEPTION: May not be nullified if made for the following purposes:
a. To administer the debtor and facilitate the preparation and implementation
of a Rehabilitation Plan

b. To provide a substitute lien, mortgage, or pledge of property

c. To pay or meet administrative expenses as they arise

d. To psy victims of quasi-delicts upon showing that the claim is valid and the
debtor has insurance to reimburse the debtor for the payments made

e. To repurchase property of the debtor that is auctioned off in a judicial or

extrajudicial sale

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 f. To reclaim or redeem property of the debtor held pursuant to a possessory
lien

Credit arrangements and encumbrance of property after

commencement date
Credit Arrangements

- GENERAL RULE: The debtor cannot enter into credit arrangements after
commencement date.
- EXCEPTION: With the approval of the court upon the recommendation of the
rehabilitation receiver, the debtor, in order to enhance its rehabilitation, may:
a. Enter into credit arrangements

b. Enter into credit arrangements secured by mortgages of it unencumbered

property or secondary mortgages with the approval of senior secured
parties with regard to the encumbered property

c. Incur other obligations as may be essential for rehabilitation

Encumbrance Of Property

- GENERAL RULE: The debtor cannot encumber property

- EXCEPTIONS:
a. When done in the ordinary course of business

b. When authorized by the court

Payment of liabilities and claims outstanding as of commencement

date
Pre-commencement Claim

- A claim that is outstanding as of the commencement date. It includes:

- Claims of separation pay for months worked prior to the

commencement date

- Claims for actual damages, if any, arising as a result of the election

to terminate a contract

Payment

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 - Generally, the debtor is prohibited by the Stay or Suspension Order from making
any payment of its liabilities outstanding as of the commencement date

- The Rehabilitation Plan must disclose all payments to creditors for

pre-commencement debts made during the proceedings and its justifications

Post-commencement Interest

- The rate and term of interest. If any, on secured and unsecured claims will be
determined and provided for in the approved Rehabilitation Plan

Payment of administrative expenses

Concept

- Administrative expenses refer to those reasonable and necessary expenses:

a) Incurred from filing a petition under the FRIA;

b) Arising from the conduct of proceedings under the FRIA;

c) Incurred in the ordinary course of business of the debtor after the

commencement date;

d) For the payment of new obligations obtained after the commencement

date to finance rehabilitation of the debtor;

e) Incurred for the fees of the rehabilitation receiver or liquidator and of the
professionals engaged by them; and

f) That are otherwise authorized or mandated by the FRIA or the

Supreme Court in its rules.

- The FRIA also considers the following as administrative expenses:

a) Compensation of employees required to carry on the business;

b) Claims for salary and separation pay for work performed after the
commencement date; and

c) Contractual obligations of the debtor performed during the 90-day

period for confirmation, and afterwards for confirmed contracts.

Payment

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 - The Commencement Order authorizes the payment of administrative expenses
as they fall due.
- The Rehabilitation Plan will also arrange for the payment of administrative
expenses as a condition to the Plan’s approval
- Exception: Unless such condition has been waived by the creditors
concerned

Pre-commencement contract and obligations

Pre-commencement contracts

- Rule: All valid and subsisting contracts of the debtor with the creditors and other
third parties at the commencement date remain in force.
- Exceptions:

a) The rehabilitation court may cancel the contract at any time after the
issuance of the Commencement Order;

b) Contracts not confirmed by the debtor will be considered terminated.

Pre-commencement transactions

- Any transaction occurring prior to commencement date entered into by the debtor
or involving its funds or assets may be rescinded or declared null and void on the
ground that the same was executed with intent to defraud a creditor or creditors
or which constituted undue preference of creditors.
- A disputable presumption of such design will arise if the transaction:

a) Provides unreasonably inadequate consideration to the debtor and is

executed within 90 days prior to the commencement date;

b) Involves an accelerated payment of a claim to a creditor within 90 days

prior to the commencement date;

c) Provides security or additional security executed within 90 days prior to

the commencement date;

d) Involves creditors, where a creditor obtained more than its pro rata
share in the assets of the debtor, executed at a time when the debtor was
insolvent; or

e) Is intended to defeat, delay or hinder the ability of the creditors to

collect claims where the effect of the transactions is to put assets of the

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 debtor beyond the reach of creditors or to otherwise prejudice the interest
of the creditors.

- Nothing in the FRIA prevents the court from rescinding or declaring null and void
a transaction on other grounds provided by law or jurisprudence.

Actions for rescission or nullity of pre-commencement transactions

- The rehabilitation receiver or, with his conformity, any creditor may initiate and
prosecute any action to rescind, or declare null and void any pre-commencement
transaction.
- If the rehabilitation receiver does not consent to the filing or prosecution of
such action, any creditor may seek leave of the court to commence such
action.
- If leave of court is granted, the rehabilitation receiver will assign and
transfer to the creditor all rights, title and interest in the chose in action or
subject matter of the proceeding, including any document in support
thereof.
- Any benefit derived from a proceeding undertaken by the creditor, to the extent of
his claim and the costs, belongs exclusively to the creditor instituting the
proceeding, and the surplus, if any, belongs to the estate.
- Where, before an order is made by the court, the rehabilitation receiver (or
liquidator) signifies to the court his readiness to institute the proceeding for the
benefit of the creditors, the order will fix the time within which he will do so and, in
that case, the benefit derived from the proceeding, if instituted within the time
limits so fixed, belongs to the estate.

Treatment if secured creditors in rehabilitation proceedings

The FRIA gives preferential treatment to secured creditors, who are creditors whose
claims are secured by liens such as a pledge or mortgage.

No diminution of secured creditor rights

- Rule: The issuance of the Commencement Order and the Suspension or Stay
Order, and any other provision of the FRIA, will not be deemed in any way to
diminish or impair the security or lien of a secured creditor, or the value of his lien
or security.
- Exception: His right to enforce the said security or lien may be suspended
during the term of the Stay Order.
- The court, upon motion or recommendation of the rehabilitation receiver, may
allow a secured creditor to enforce his security or lien, or foreclose upon the

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 property of the debtor securing his claim, if the said property is not necessary for
the rehabilitation of the debtor.
- The secured creditor and/or other lien holders will be admitted to the
rehabilitation proceedings only for the balance of his claim, if any.
- In suspension of payments (unlike rehabilitation proceedings), secured creditors
may institute proceedings to collect claims even after the filing of the petition for
suspension of payment.
- Section 96: Except for secured creditors, no creditor will sue or institute
proceedings to collect his claim from the time of the filing of the petition for
suspension of payments and for as long as proceedings remain pending.
- Similarly, in a petition for involuntary insolvency, the FRIA provides that “nothing
contained herein will affect or impair the rights of a secured creditor to enforce
his lien in accordance with the terms.”
- The FRIA likewise provides that the “Liquidation Order will not affect the right of a
secured creditor to enforce his lien in accordance with the applicable contract or
law.”

Sale of encumbered property

- The court may authorize the sale, transfer, conveyance or disposal of

encumbered property of the debtor with the consent of the secured creditors.
- Upon the application of a secured creditor holding a lien property held by the
debtor that is subject to potentially rapid obsolescence, depreciation or
diminution in value, the court may take various steps for the protection of the
secured creditors.

Maintenance of security interest

- The rehabilitation plan must maintain the security interest of secured creditors
and preserve the liquidation value of the security.
- Exception: Unless such has been waived or modified voluntarily.
- Similarly, the Liquidation Plan and its implementation must ensure that the
concurrence and preference of credits as enumerated in the Civil Code and other
relevant laws will be observed.
- Exception: Unless a preferred creditor voluntarily waives his preferred
right.

Pre-negotiated rehabilitation
Concept

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 - In pre-negotiated rehabilitation, the debtor and the required number of creditors
agree in the rehabilitation plan before the filing of a petition with the rehabilitation
court.

Who may file petition

- An insolvent debtor, by itself or jointly with any of its creditors, may file a verified
position with the court for the approval of a pre-negotiated Rehabilitation Plan.

a) With respect to the debtor, the filing of the petition must be authorized
by:

i. the owner, in case of a sole proprietorship;

ii. the majority of partners in a partnership; or

iii. the majority vote of the Board of Directors/Trustees and by the

vote of stockholders representing 2/3 of the outstanding capital
stock or members

b) The pre-negotiated Rehabilitation Plan must have been approved by

creditors holding at least 2/3 of the total liabilities of the debtor, including
secured creditors holding more than 50% of the total secured claims of the
debtor and secured creditors holding more than 50% of the total
unsecured claims of the debtor.

Venue for petition

- Filed in the RTC which has jurisdiction over the principal office of the debtor
alleged to be insolvent as specified in its articles of incorporation or partnership
or in its registration papers with the DTI in cases of sole proprietorship, as the
case may be.
- Where the principal office of the corporation, partnership or association as
registered in the SEC is in Metro Manila, filed in the RTC of the city or
municipality where the head office is located.

Out of Court Restructuring Agreements

Out of Court Restructuring Agreements (OCRA) or Rehabilitation Plan is a rehabilitation
plan agreed upon by the debtor and the required number of creditors. OCRA need not
be submitted to the court for approval.

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Minimum requirements:

1. The debtor must agree to the OCRA.

2. It must be approved by the creditors representing at least ​67% of the secured

and ​75% of the unsecured​ obligations of the debtor.

3. It must be approved by the creditors by holding at least 85% of the total liabilities
of the debtor.

Publication of notice of OCRA: Once a week for at least 3 consecutive weeks in a

newspaper of general circulation in the Philippines. It will take effect after 15 days from
the date of last publication.

Standstill
Standstill period refers to the period agreed upon by the debtor and its creditors to
enable them to negotiate and enter into an OCRA.

Requirements:

A. Such agreement is approved by creditors representing more than 50% of the

total liabilities of the debtor.

B. Notice thereof is published in a newspaper of general circulation in the

Philippines once a week for 2 consecutive weeks.

C. Period does not exceed 120 days from effectivity.

Minimum requirements of notice of Standstill agreements:

A. The identity of the debtor, its principal business and its principal business place.

B. Total amount of the liabilities, classified into secured and unsecured.

C. That a contact person is identified, together with his contact details.

D. Creditors are invited to participate in the negotiations for an OCRA by contacting

the person specified in the notice.

E. Creditors representing 50% if the total liabilities agreed with the standstill period.

F. That the terms and conditions be strictly observed during the standstill period.

G. Standstill period will be effective after publication.

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 H. The OCRA will be binding on the debtor and all affected persons including the
creditors upon approval of the parties (debtor and creditors)

The standstill period will expire upon:

- The laps of 120 days from the effectivity of the agreement;

- The effectivity of the OCRA; or
- Termination of the negotiations for OCRA as declared by the creditors
representing more than 50% of the total liabilities, whichever comes first.

Court assistance
While the OCRA or standstill agreements is not filed with or approved by the court, the
insolvent debtor or a creditor may file an application for court assistance ​to execute or
implement a standstill agreement or an OCRA.

A petition for court assistance must be accompanied by a copy of the standstill

agreement or the OCRA.

Venue

- RTC having jurisdictions over the place in which the insolvent debtor resides or
has its principal place of business.

Liquidation
Either voluntary or involuntary. Voluntary when it is filed by the debtor and involuntary
when it is filed by the creditor.

Who may file and where

1. Voluntary

a. An individual who has more than P500,000 debts and such debt exceed
his total assets in the court having jurisdiction over the province or city
where he has resided for 6 months prior to the filing of petition.

b. An insolvent juridical debtor in RTC which has jurisdiction over its principal
office.

2. Involuntary

a. Any creditor or creditors with a claim of, or aggregate of whose claims is at

least P500,000 in the court having jurisdiction over the province or city
where the debtor resides.

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 b. With respect to liquidation of a juridical person, 3 or more creditors whose
claims is at least 1 million or at least 25% of the subscribed capital stock
or partner’s contributions of the debtor, whichever is higher. In the RTC
which has jurisdiction over debtor’s principal office.

Rehabilitation proceedings may be converted to liquidation proceedings. Example of

such instances:

- Upon finding of the court that the debtor is insolvent and there is no substantial
likelihood for the debtor to be successfully rehabilitated.
- If the court determines that the debtor or creditor acted in bad faith, or that it is
not feasible to cure the defect.
- Upon motion or motu proprio when the court does not confirm the Rehabilitation
Plan within 1 year.
- Upon breach or failure of the Rehabilitation Plan
- If the termination of rehabilitation proceedings is due to failure

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Liquidation Order
The Court that has jurisdiction over the liquidation proceedings shall, in proper cases,
issue a Liquidation Order which includes among others:

(1) Declaring that the debtor is insolvent;

(2) Ordering the liquidation of the debtor;

(3) In case of juridical person, declaring it as dissolved;

(4) Prohibiting payments and/or transfer of property by the debtor; and

(5) Directing all claims to be filed with the liquidator

Effects of the Liquidation Order

Upon the issuance of a Liquidation Order:

(a) The juridical debtor will be deemed dissolved and its corporate or juridical
existence terminated;

(b) Legal title to and Control of all the assets of the debtor, except those that
may be exempt from execution, will be deemed vested in the liquidator or,
pending his election or appointment, with the court;

(c) All contracts of the debtor will be deemed terminated and/or breached,
unless the liquidator, within 90 days from the date of his assumption of office,
declares otherwise and the contracting party agrees;

(d) No separate action for the collection of an unsecured claim will be

allowed. Such actions already pending will be transferred to the Liquidator for
him to accept and settle or contest. If the liquidator contests or disputes the
claim, the court will allow, hear and resolve such contest except when the case is
already on appeal. In such a case, the suit may proceed to judgment, and any
final and executor judgment therein for a claim against the debtor will be filed and
allowed in court; and

(e) No foreclosure proceeding will be allowed for a period of 180 days (FRIA,
Sec.113; FLSP Rules, Rule 4, Sec.3)

Review of Liquidation Order

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 - The Liquidation Order, and the order approving or disapproving the Liquidation
Plan can only be reviewed through a petition for certiorari to the Court of Appeals
under Rule 65 of Rules of Court within 15 days from notice of the decision or
order (FLSP Rules, Rule 5, Sec.4)

Rights of secured creditors under Liquidation Order and Liquidation

Plan
The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in
accordance with the applicable contract or law.

A Secured creditor may:

(1) Waive his right under the security or lien, prove his claim in the liquidation
proceedings and share in the distribution of the assets of the debtor; or

(2) Maintain his rights under the security or lien

(a) If the Secured Creditor maintains his rights under the security or lien:

(i) The value of the property may be fixed in a manner agreed upon by
the creditor and the liquidator.

● When the value of the property is less than the claim it

secures, the liquidator may convey the property to the
secured creditor and the latter will be admitted in the
liquidation proceedings as a creditor for the balance.

● If its value exceeds the claim secured, the liquidator may

convey the property to the creditor and waive the debtor’s
right of redemption upon receiving the excess from the
creditor

(ii) The liquidator may sell the property and satisfy the secured
creditor’s entire claim from the proceeds of the sale; or

(iii) The secured creditor may enforce the lien or foreclosure on the
property pursuant to applicable laws

The Liquidator
Qualifications of the Liquidator

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 (1) Be a citizen of the Philippines or a resident thereof for 6 months immediately
preceding his nomination;

(2) Be of good moral character and with acknowledged integrity, impartiality and
independence;

(3) Have the requisite knowledge of insolvency and other relevant commercial laws,
rules and procedures, as well as the relevant training and/or experience that may
be necessary to enable him to properly discharge the duties and obligations of a
liquidator; and

(4) Have no conflict of interest (but such conflict of interest may be waived, expressly
or impliedly, by a party who may be prejudiced thereby)

If the liquidator is a juridical entity, it must designate a natural person who possesses all
the qualifications and none of the disqualifications as its representative, it being
understood that the juridical entity and the representative are solidarily liable for all
obligations and responsibilities of the liquidator (FRIA, Sec. 118; FLSP Rules, Rule 4,
Sec. 8)

Conflict of Interest

- An individual will be deemed to have a conflict of interest if he is so situated as to

be materially influenced in the exercise of his judgment for or against any party to
the proceedings.
- Without limiting the generality of the foregoing, an individual will be deemed to
have a conflict of interest if:
(a) He is a creditor, owner, partner or stockholder of the debtor;

(b) He is a creditor, owner, partner or stockholder of the debtor;

(c) He is engaged in a line of business which competes with that of the

debtor;

(d) He is, or was, within 5 years from the filing of the petition or motion for
conversion, a director, officer, owner, partner or employee of the debtor or
any of the creditors, or acted as legal counsel or auditor or accountant of
the debtor or any of the creditors;

(e) He is, or was, within 2 years from the filing of the petition or motion for
conversion, an underwriter of the outstanding securities of the debtor;

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 (f) He is related by consanguinity or affinity within the 4th civil degree to any
individual creditor, owner of a sole proprietorship-debtor, partner in a
partnership-debtor or stockholder, director, officer, employee, or
underwriter of a corporate-debtor;

(g) He has any other direct or indirect material interest in the debtor or any of
the creditors; or

(h) He was the receiver of member of the management committee, the

counsel or an employee of either, when there is a showing that the
financial distress of the debtor was not arrested or its fiscal condition
deteriorated and resulted in its liquidation by reason of his lack of diligence
or foresight

Compensation of the Liquidator

- He is entitled to Reasonable Compensation

Oath and Bond of the Liquidator

- Prior to entering upon his powers, duties and responsibilities, Liquidator is

required to take an oath and file a bond

Reporting Requirements

- The liquidator will make and keep a record of

(1) all moneys received and

(2) all disbursements made by him or under his authority as liquidator

- He will render a quarterly report thereof to the court, which will be made available
to all interested parties
- The liquidator will also submit such reports as may be required by the court from
time to time as well as a final report at the end of the liquidation proceedings
(FRIA, Sec. 121; FLSP Rules, Sec.4, Rule 15)

Removal of Liquidator

Grounds:

(a) He did not actually receive the highest number of votes during the election for
liquidator;

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 (b) Incompetence, gross negligence, failure to perform or exercise the proper degree
of care in the performance of his duties and powers;

(c) Lack of a particular or specialized competency required by the specific case;

(d) Illegal acts or conduct in the performance of his duties and powers;

(e) Lack of any of the qualifications or presence of any disqualifications;

(f) Conflict of Interest, unless waived, expressly or impliedly, by a party who may be
prejudiced thereby;

(g) Partiality or lack of independence; or

(h) Any other ground analogous to the foregoing (FLSP Rules, Rule 3, Sec. 13)

Discharge of Liquidator

- In preparation for the final settlement of all the claims against the debtor, the
liquidator will notify all the creditors, either by publication in a newspaper of
general circulation, or such other mode as the court may direct or allow, that he
will apply with the court for the settlement of his account and his discharge from
liability as liquidator.
- The liquidator will file a final accounting with the court, with the proof of notice to
all creditors. The accounting will be set for hearing. If the courts finds the same in
order, the court will Discharge the Liquidator (FRIA, Sec. 122; FLSP Rules, Sec.
4, Rule 16)

Sale of Assets in Liquidation

With the approval of the court, the liquidator may sell the encumbered assets of the
debtor and convert the same into money. The sale, transfer or disposition must be
made at a public auction. However, a private sale, transfer or disposition may be
allowed with the approval of the court if:

(a) The goods to be sold are of a perishable nature, or are liable to quickly
deteriorate in value, or are disproportionately expensive to keep or maintain; or

(b) The private sale, transfer or disposition is for the best interested of the debtor
and his creditors.

With the approval of the court, unencumbered property of the debtor may also be
conveyed to a creditor in satisfaction of his claim or part thereof. (FRIA, Sec. 131; FLSP
Rules, Rule 4, Sec. 26.)

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Nullification of transactions
Any transaction occurring prior to the issuance of the Liquidation Order or, in case of the
conversion of the rehabilitation proceedings to prior to the commencement date,
entered into by the debtor or involving its assets, may be rescinded or declared null and
void on the ground that the same was executed with intent to defraud a creditor or
creditors or which constitute undue preference of creditors. The presumptions set forth
in Section 58 of the FRIA apply. (FRIA, Sec. 127; FLSP Rules, Rule 4, Sec. 1.)

Cross-border Insolvency
As part of the United Nations Center for International Trade and Development’s
(UNCITRAL) mandate to harmonize and unify the national laws regarding international
trade, it has developed the Model Law, which was adopted by UNCITRAL on 30 May
1997.

Initiation of Proceedings

- The court will set a hearing in connection with an insolvency or rehabilitation

proceeding taking place in a foreign jurisdiction, upon the submission of a petition
by the representative of the foreign entity that is the subject of the foreign
proceeding. (FRIA, Sec. 140.)
- The court may also issue orders:
(a) Suspending any action to enforce claims against the entity or otherwise
seize or foreclose on property of the foreign entity located in the
Philippines;

(b) Requiring the surrender of property of the foreign entity to the foreign
representative; or

(c) Providing other necessary relief. (FRIA, Sec. 141.)

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