THE CONCEPT OF INSOLVENCY

INSOLVENCY
- State of a person whose liabilities are more than his assets. It
is the inability of a person to pay his debts as they become
due in the ordinary course of business.
* HOW IS IT DIFFER FROM BANKRUPTCY?
- The only distinction between insolvency and bankruptcy is a
matter of terminology and the source of the laws relating
thereto. Either a bankruptcy or insolvency statute may operate
to discharge a debt as well as release the debtor from
imprisonment, and either may operate on the petition of the
debtor or that of his creditors.
 BALANCE SHEET TEST
- relative condition of a man’s assets and liabilities that the
former if all made immediately available, would not be
sufficient to discharge the latter.

 EQUITY TEST
- A person may be insolvent although he may be able to pay his
debts at some future time on a settlement and winding up his
affairs.
 General concepts:
- debtor is liable with all his property, present and future, for the
fulfillment of his obligations, subject to the exemptions provided by
law ( Art. 2236 of NCC)
- shall be governed by RA 10142, Financial Rehabilitation and
Insolvency Act (FRIA) of 2010 (w/c repealed The Insolvency Law Act
No. 1956)
- the FRIA shall govern all petitions filed after it has taken effect. All
further proceedings in insolvency, suspension of payments and
rehabilitation cases then pending, except to the extent that in opinion
of the court their application would not be feasible or would work
injustice, in which event the procedures set forth in prior laws and
regulations shall apply.
- shall apply to all contracts of the debtor regardless of the date of
perfection.
Nature of Insolvency Proceedings:
- shall be in rem
- Jurisdiction shall be acquired 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
- Courts that will hear and resolve cases brought under FRIA
and shall promulgate the rules of pleading, practice and
procedure to govern the proceedings shall be designated by
the SC
- Each juridical entity shall be considered as a separate entity
- The ASSETS AND LIABILITIES of a debtor may not be commingled or aggregated
with those of another, unless the latter is a related enterprise that is owned or
controlled directly or indirectly by the same interests: Provided, however, That the
commingling or aggregation of assets and liabilities of the debtor with those of a
related enterprise may only be allowed where:
 (a) there was commingling in fact of assets and liabilities of the debtor and the
related enterprise prior to the commencement of the proceedings;
 (b) the debtor and the related enterprise have common creditors and it will be more
convenient to treat them together rather than separately;
 (c) the related enterprise voluntarily accedes to join the debtor as party petitioner
and to commingle its assets and liabilities with the debtor's; and
 (d) The consolidation of assets and liabilities of the debtor and the related enterprise
is beneficial to all concerned and promotes the objectives of rehabilitation.

Provided, finally, That nothing in this section shall prevent the court from joining other
entities affiliated with the debtor as parties pursuant to the rules of procedure as may
be promulgated by the Supreme Court.
Liabilities:
* CIVIL
Individual debtor, owner of a sole proprietorship, partners in
a partnership, or directors and officers of a debtor shall be
liable for double the value of the property sold, embezzled or
disposed of or double the amount of the transaction involved,
whichever is higher to be recovered for benefit of the debtor
and the creditors, if they, having notice of the
commencement of the proceedings, or having reason to
believe that proceedings are about to be commenced, or in
contemplation of the proceedings, willfully commit the
following acts:
 (a) Dispose or cause to be disposed of any property of the debtor
other than in the ordinary course of business or authorize or approve
any transaction in fraud of creditors or in a manner grossly
disadvantageous to the debtor and/or creditors; or
 (b) Conceal or authorize or approve the concealment, from the
creditors, or embezzles or misappropriates, any property of the
debtor.

The court shall determine the extent of the liability of an owner,

partner, director or officer under this section. In this connection, in
case of partnerships and corporations, the court shall consider the
amount of the shareholding or partnership or equity interest of such
partner, director or officer, the degree of control of such partner,
director or officer over the debtor, and the extent of the involvement
of such partner, director or debtor in the actual management of the
operations of the debtor.
* CRIMINAL
 An owner, partner, director, officer or other employee of the
debtor who commits any one of the following acts shall, upon
conviction thereof, be punished by a fine of not more than One million
pesos (Php 1, 000,000.00) and imprisonment for not less than
three(3) months nor more than five (5) years for each offense;
 (a) if he shall, having notice of the commencement of the proceedings,
or having reason to believe that proceedings are about to be
commented, or in contemplation of the proceedings hide or conceal,
or destroy or cause to be destroyed or hidden any property belonging
to the debtor or if he shall hide, destroy, after mutilate or falsify, or
cause to be hidden, destroyed, altered, mutilated or falsified, any book,
deed, document or writing relating thereto; if he shall, with intent to
defraud the creditors of the debtor, make any payment sale,
assignment, transfer or conveyance of any property belongings to the
debtor
 (b) if he shall, having knowledge belief of any person having
proved a false or fictitious claim against the debtor, fail to
disclose the same to the rehabilitation receiver of liquidator
within one (1) month after coming to said knowledge or
belief; or if he shall attempt to account for any of the debtors
property by fictitious losses or expense; or
 (c) if he shall knowingly violate a prohibition or knowingly
fail to undertake an obligation established by this Act.
CONCURRENCE &
PREFERENCE OF CREDIT
 CONCURRENCE OF CREDIT
- implies possession by two or more creditors of equal right or
privileges over the same property or all of the property of a
debtor.
 PREFERENCE OF CREDIT
- The right held by a creditor to be preferred in the payment of his
claim above other out of the debtor’s assets.
General provisions:
- The debtor is liable with all his property, present and future,
for the fulfillment of his obligations, subject to exemptions as
follows:
1. Present property
 Family home
 Right to receive support as well as money or property obtained by such
support shall not be levied upon on attachment or execution
 Properties exempt from execution as enumerated in sec 13, rule 39 of
the Rules of Court
 Public lands ( CA No. 141)
2. Future property
 A debtor who obtains a discharge from his debts on account of
insolvency, is not liable for the unsatisfied claims of his creditors with
said property
3. Property in custodia legis and of public dominion
- Shall be governed by FRIA
- Exemption of conjugal property or absolute community or
property provided:
 Partnership or community subsists
 Obligations of the insolvent spouse have not redounded to the
benefit of the family
- If there is co-ownership, and one of the co-owners is the
insolvent debtor, his undivided share or interest in the
property shall be possessed by the assignee in insolvency
proceedings because it is part of his assets.
- Property held by the insolvent debtor as a trustee of an
express or implied trust, shall be excluded from the
insolvency proceedings.
 Classification of credits:
SPECIAL PREFERRED CREDITS
* With reference to specific movable property of the debtor,
the following claims or liens shall be preferred (Art 2241 of NCC):
1. Duties, taxes and fees due thereon to the State or any subdivision
thereof;
2. Claims arising from misappropriation, breach of trust, or malfeasance
by public officials committed in the performance of their duties, on
the movables, money or securities obtained by them;
3. Claims for the unpaid price of movables sold, on said movables, so
long as they are in the possession of the debtor, up to the value of the
same; and if the movable has been resold by the debtor and the price is
still unpaid, the lien may be enforced on the price; this right is not lost
by the immobilization of the thing by destination, provided it has not
lost its form, substance and identity; neither is the right lost by the sale
of the thing together with other property for a lump sum, when the
price thereof can be determined proportionally;
4. Credits guaranteed with a pledge so long as the things pledged are in
the hands of the creditor, or those guaranteed by a chattel
mortgage, upon the things pledged or mortgaged, up to the value
thereof;
5. Credits for the making, repair, safekeeping or preservation of
personal property, on the movable thus made, repaired, kept or
possessed;
6. Claims for laborers' wages, on the goods manufactured or the work
done;
7. For expenses of salvage, upon the goods salvaged;
8. Credits between the landlord and the tenant, arising from the
contract of tenancy on shares, on the share of each in the fruits or
harvest;
9. Credits for transportation, upon the goods carried, for the price of
the contract and incidental expenses, until their delivery and for
thirty days thereafter;
10. Credits for lodging and supplies usually furnished to travellers by
hotel keepers, on the movables belonging to the guest as long as such
movables are in the hotel, but not for money loaned to the guests;
11. Credits for seeds and expenses for cultivation and harvest advanced to
the debtor, upon the fruits harvested;
12. Credits for rent for one year, upon the personal property of the lessee
existing on the immovable leased and on the fruits of the same, but not
on money or instruments of credit;
13. Claims in favor of the depositor if the depositary has wrongfully sold
the thing deposited, upon the price of the sale.

In the foregoing cases, if the movables to which the lien or

preference attaches have been wrongfully taken, the creditor may
demand them from any possessor, within thirty days from the
unlawful seizure.
* With reference to specific immovable property and real
rights of the debtor, the following claims, mortgages and liens
shall be preferred, and shall constitute an encumbrance on the
immovable or real right (Art 2242 of NCC):
1. Taxes due upon the land or building;(2) For the unpaid price of
real property sold, upon the immovable sold;
2. Claims of laborers, masons, mechanics and other workmen, as
well as of architects, engineers and contractors, engaged in the
construction, reconstruction or repair of buildings, canals or
other works, upon said buildings, canals or other works;
3. Claims of furnishers of materials used in the construction,
reconstruction, or repair of buildings, canals or other works,
upon said buildings, canals or other works;
4. Mortgage credits recorded in the Registry of Property, upon the real
estate mortgaged;
5. Expenses for the preservation or improvement of real property when
the law authorizes reimbursement, upon the immovable preserved or
improved;
6. Credits annotated in the Registry of Property, in virtue of a judicial
order, by attachments or executions, upon the property affected, and
only as to later credits;
7. Claims of co-heirs for warranty in the partition of an immovable
among them, upon the real property thus divided;
8. Claims of donors or real property for pecuniary charges or other
conditions imposed upon the donee, upon the immovable donated;
9. Credits of insurers, upon the property insured, for the insurance
premium for two years.
POWER OF THE REGULATORY AGENCY
-to liquidate trade-related claims of clients or customers
of a securities market participant which, for purposes of
investor protection, are hereby deemed to have absolute
priority over other claims of whatever nature or kind insofar
as trade-related assets are concerned.
For this purpose, trade-related assets include cash,
securities, trading right and other owned and used by the
securities market participant in the ordinary course of this
business.
RULES UNDER SPECIFIC PREFERRED CREDITS:

 The claims or credits enumerated in special preference credits

shall be considered as mortgages or pledges of real or
personal property, or liens within the purview of legal
provisions governing insolvency. Taxes mentioned in No. 1,
Article 2241, and No. 1, Article 2242, shall first be satisfied.
 Those credits which enjoy preference with respect to
specific movables, exclude all others to the extent of the
value of the personal property to which the preference refers.
 If there are two or more credits with respect to the same
specific movable property, they shall be satisfied pro
rata, after the payment of duties, taxes and fees due the State
or any subdivision thereof. (1926a)
 Those credits which enjoy preference in relation to
specific real property or real rights, exclude all
others to the extent of the value of the immovable or real
right to which the preference refers.
 If there are two or more credits with respect to the
same specific real property or real rights, they shall
be satisfied pro rata, after the payment of the taxes and
assessments upon the immovable property or real right.
 The excess, if any, after the payment of the credits which
enjoy preference with respect to specific property, real or
personal, shall be added to the free property which the
debtor may have, for the payment of the other credits.
ORDINARY PREFERRED CREDITS

With reference to other property, real and personal, of the

debtor, the following claims or credits shall be preferred in the
order:
1. Proper funeral expenses for the debtor, or children under his or her
parental authority who have no property of their own, when
approved by the court;
2. Credits for services rendered the insolvent by employees, laborers,
or household helpers for one year preceding the commencement of
the proceedings in insolvency;
3. Expenses during the last illness of the debtor or of his or her spouse
and children under his or her parental authority, if they have no
property of their own;
4. Compensation due the laborers or their dependents under laws
providing for indemnity for damages in cases of labor accident, or
illness resulting from the nature of the employment;
5. Credits and advancements made to the debtor for support of
himself or herself, and family, during the last year preceding the
insolvency;
6. Support during the insolvency proceedings, and for three
months thereafter;
7. Fines and civil indemnification arising from a criminal offense;
8. Legal expenses, and expenses incurred in the administration of the
insolvent's estate for the common interest of the creditors, when
properly authorized and approved by the court;
9. Taxes and assessments due the national government, other than
those mentioned in Articles 2241, No. 1, and 2242, No. 1;
10. Taxes and assessments due any province, other than those referred
to in Articles 2241, No. 1, and 2242, No. 1;
11. Taxes and assessments due any city or municipality, other than
those indicated in Articles 2241, No. 1, and 2242, No. 1;
12. Damages for death or personal injuries caused by a quasi-delict;
13. Gifts due to public and private institutions of charity or
beneficence;
14. Credits which, without special privilege, appear in (a) a public
instrument; or (b) in a final judgment, if they have been the
subject of litigation. These credits shall have preference among
themselves in the order of priority of the dates of the
instruments and of the judgments, respectively. (1924a)
The Liquidation Plan and its Implementation shall ensure that the
concurrence and preference of credits as enumerated in the Civil
Code of the Philippines and other relevant laws shall be observed,
unless a preferred creditor voluntarily waives his preferred right.
For purposes of this chapter, credits for services rendered by
employees or laborers to the debtor shall enjoy first preference
under Article 2244 of the Civil Code, unless the claims constitute
legal liens under Article 2241 and 2242 thereof.
NONE PREFERRED CREDITS
Credits of any other kind or class, or by any other right or
title not comprised in the four preceding articles, shall enjoy no
preference.
Those credits which do not enjoy any preference with
respect to specific property, and those which enjoy preference,
as to the amount not paid, shall be satisfied according to the
following rules:
(1) In the order established in article 2244;
(2) Common credits referred to in article 2245 shall be paid pro
rata regardless of dates.