FRIA or

Financial Rehabilitation and

Insolvency Act of 2010
(RA 10142)
Rocille S. Aquino-Tambasacan
Senior Assistant City Prosecutor of Manila, Trial Prosecutor, RTC 5
Law Professor - San Sebastian College-Recoletos and Polytechnic University of the Philippines
Bar Reviewer – Academicus Review Center, Recoletos Law Review Center,
Albano Review Center, Villasis Review Center
Author: Handbook in Insurance Law
Negotiable Instruments in a Nutshell
“Disneyfication” vis-à-vis Copyright: Original Stories Lost – Volume 795 SCRA
What is the purpose behind rehabilitation?
Restoration is the central idea behind the remedy of corporate
rehabilitation. To "restore" means "to bring back to or put back into a
former or original state." Corporate rehabilitation contemplates a
continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation
and solvency, the purpose being to enable the company to gain a new
lease on life and allow its creditors to be paid their claims out of its
earnings. BPI Family Savings Bank vs. St. Michael Medical Center,
March 25, 2015, J. Perlas-Bernabe
What is a corporate rehabilitation case?
It is a special proceeding in rem wherein the petitioner seeks to
establish the status of a party or a particular fact, i.e., the inability of
the corporate debtor to pay its debts when they fall due. It is summary
and non-adversarial in nature. Its end goal is to secure the approval of
a rehabilitation plan to facilitate the successful recovery of the
corporate debtor. It does not seek relief from an injury caused by
another party. Golden Cane Furniture Manufacturing Corp. vs.
Steelpro Phils., Inc., April 4, 2016, J. Brion
Who can ask for rehab?
Debtor (natural or juridical) does NOT include banks, insurance
companies, pre-need companies, and national and local government
agencies but government financial institutions other than banks and
GOCC are covered, unless their specific charter provides otherwise.
(Sec. 5) (2014 Bar)
Can an insolvent corporation qualify for
rehabilitation?
Yes. Under RA 10142, rehabilitation proceedings covers a corporate
debtor. The latter is defined as a corporation organized and existing
under Philippine laws that has become insolvent - 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. The contention that rehabilitation
becomes inappropriate because of the perceived insolvency of Basic
Polyprinters was incorrect. PBCom vs. Basic Polyprinters, October 20,
2014, J. Bersamin
Who has jurisdiction over corporate
rehabilitation cases?
This originally fell within the jurisdiction of the Securities and Exchange
Commission but with the enactment of the Securities Regulation Code
in 2000, this jurisdiction was transferred to the Regional Trial Courts.
Golden Cane Furniture Manufacturing Corp. vs. Steelpro Phils., Inc.,
April 4, 2016, J. Brion
What is the significance of a material financial
commitment in rehabilitation?
It is significant in gauging the resolve, determination, earnestness and
good faith of the distressed corporation in financing the proposed
rehabilitation plan. This commitment may include the voluntary
undertakings of the stockholders or the would-be investors of the
debtor-corporation indicating their readiness, willingness and ability to
contribute funds or property to guarantee the continued successful
operation of the debtor corporation during the period of rehabilitation.
BPI Family Savings Bank vs. St. Michael Medical Center, March 25,
2015, J. Perlas-Bernabe
Steps in a Court-Supervised Rehab
A. Initiation proceedings
1. Voluntary
2. Involuntary
B. Action on the petition
1. Issuance of a commencement order; appointment of
receiver
2. Initial hearing; notice of claim of creditors
3. Governance
Steps in a Court-Supervised Rehab
4. Use, Preservation and Disposal of Assets and Treatment of
Assets and Claims after Commencement Date
5. Avoidance Proceedings
6. Treatment of Secured Creditors
7. Administration of Proceedings; treatment and approval of
the rehab plan
8. Termination; success/failure
Voluntary vs. involuntary
Voluntary - owner in case of a sole proprietorship, or by a majority of
the partners in case of a partnership, or, in case of a corporation, by a
majority vote of the BOD + 2/3 of the OCS, or in case of nonstock, by
the vote of at least 2/3 of the members (2014 Bar)
Voluntary vs. involuntary
Involuntary - creditor with a claim of P1M or at least 25% of the
subscribed capital stock or partners' contributions, whichever is higher,
by filing a petition if:
(a) there is no genuine issue of fact or law on the claim, and that the
due and demandable payments have not been made for at least 60
days or that the debtor has failed generally to meet its liabilities as they
fall due; or
(b) 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.
Issuance of Commencement Order as well as
a Stay or Suspension Order
Stay or Suspension Order:
(1) suspend all actions or proceedings, in court or otherwise, for the
enforcement of claims against the debtor;
(2) suspend all actions to enforce any judgment, attachment or
other provisional remedies against the debtor;
Issuance of Commencement Order as well as
a Stay or Suspension Order
(3) prohibit the debtor from selling, encumbering, transferring or
disposing in any manner any of its properties except in the ordinary
course of business; and
(4) prohibit the debtor from making any payment of its liabilities
outstanding as of the commencement date except as may be provided
herein.
Effects of the Commencement Order
In addition to the effects of a Stay or Suspension Order:
(a) vest the rehabilitation receiver with all the powers and functions
including the right to review and obtain all records to which the
debtor's management have access, including bank accounts of the
debtor, subject to the approval by the court of the performance bond
filed by the receiver;
(b) serve as the legal basis for rendering null and void the results of
any extrajudicial activity to seize or sell encumbered property, or
attempt to enforce a claim against the debtor after the commencement
date;
Effects of the Commencement Order
(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 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 but the court may allow the continuation of
cases in other courts where the debtor had initiated the suit.
Exceptions to the Stay or Suspension Order
(a) to cases already pending appeal in the SC as of commencement
date but any final and executory judgment arising from such appeal
shall be referred to the court for appropriate action;
(b) subject to the discretion of the court, to cases pending or filed at
a specialized court or quasi-judicial agency which is capable of resolving
the claim more quickly, fairly and efficiently than the court but any final
and executory judgment of such court or agency shall be referred to
the court and shall be treated as a non-disputed claim; (2014 Bar)
Exceptions to the Stay or Suspension Order
(c) to the enforcement of claims against sureties and third party or
accommodation mortgagors as well as issuers of LoC, unless the
property subject is necessary for the rehabilitation of the debtor;
(d) to any form of action of customers of a securities market
participant to recover or claim moneys and securities entrusted to the
latter in the ordinary course of business as well as any action of such
securities market participant or appropriate regulatory agency or self-
regulatory organization to pay or settle such claims;
Exceptions to the Stay or Suspension Order
(e) to the actions of a licensed broker or dealer to sell pledged
securities of a debtor pursuant to a securities pledge or margin
agreement for the settlement of securities transactions;
(f) the clearing and settlement of financial transactions through the
facilities of a clearing agency duly authorized by the appropriate
regulatory agency like the BSP and the SEC as well as any actions of
such agencies to reimburse themselves for any transactions settled for
the debtor; and
(g) any criminal action against the individual debtor or owner,
partner, director or officer of a debtor shall not be affected by any
proceeding commenced under this Act.
Standstill period
Period agreed upon by the debtor and its creditors to enable them to
negotiate and enter into an out-of-court or informal
restructuring/workout agreement or rehabilitation plan
Effect of Failure to File Notice of Claim
A creditor whose claim is not listed in the schedule of debts and
liabilities and who fails to file a notice of claim in accordance with the
Commencement Order but subsequently files a belated claim shall NOT
be entitled to participate in the rehabilitation proceedings BUT shall be
entitled to receive distributions arising therefrom.
No Diminution of Secured Creditor Rights
The issuance of the Commencement Order and the Suspension or Stay
Order shall 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,
EXCEPT that his right to enforce said security or lien may be suspended
during the term of the Stay Order.
The court may allow a secured creditor to enforce his security or lien,
or foreclose upon property of the debtor securing its claim, IF the said
property is not necessary for the rehabilitation of the debtor. The
secured creditor shall be admitted to the rehabilitation proceedings
only for the balance of his claim.
Factors to determine likelihood of rehab
(a) The proposed Rehab Plan submitted complies with the minimum
contents prescribed;
(b) There is sufficient monitoring by the rehabilitation receiver of
the debtor's business for the protection of creditors;
(c) The debtor has met with its creditors to reach a consensus on
the proposed Rehab Plan;
Factors to determine likelihood of rehab
(d) The rehabilitation receiver submits a report stating that the
assumptions and the financial goals stated in the Rehabilitation Plan are
realistic, feasible and reasonable; or, if not, there is a substantial likelihood
for the debtor to be successfully rehabilitated because:
(1) there are sufficient assets with which to rehabilitate the
debtor;
(2) there is sufficient cash flow to maintain the operations of the
debtor;
(3) the debtor's owners, partners, stockholders, directors and
officers have been acting in good faith and with due diligence;
(4) the petition is not a sham filing intended only to delay the
enforcement of the rights of the creditors; and
(5) the debtor would likely be able to pursue a viable Rehab Plan;
Factors to determine likelihood of rehab
(e) The petition, the Rehabilitation Plan and the attachments do not
contain any materially false or misleading statement;
(f) If the petitioner is the debtor, that the debtor has met with its
creditors representing 3/4 of its total obligations and made a good faith
effort to reach a consensus on the proposed Rehabilitation Plan; if the
petitioner is a creditor, that the petitioner has met with the debtor and
made a good faith effort to reach a consensus on the proposed
Rehabilitation Plan; and
(g) The debtor has not committed acts of misrepresentation or in
fraud of its creditors.
What is “cram down” doctrine?

It means that courts have the power to approve a rehabilitation plan

over the objection of creditors and even when such proposed
rehabilitation plan involves the impairment of contractual obligations.
Victorino-Aquino vs. Pacific Plans, December 10, 2014, J. Peralta
Rescission or Nullity of Certain Pre-
commencement Transactions
Any transaction occurring prior to commencement date entered into by
the debtor or involving its funds may be rescinded or declared null and
void on the ground that the same was executed with intent to defraud
a creditor or which constitute undue preference of creditors. A
disputable presumption arises 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;
Rescission or Nullity of Certain Pre-
commencement Transactions
(c) provides 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 transaction is to put assets of
the debtor beyond the reach of creditors.
Pre-Negotiated Rehab
An insolvent debtor, by itself or jointly with any of its creditors, may file a
verified petition with the court for the approval of a pre-negotiated
Rehabilitation Plan which has been endorsed or 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 unsecured creditors holding more than 50% of the total unsecured
claims of the debtor. The petition shall include:
(a) a schedule of the debtor's debts and liabilities;
(b) an inventory of the debtor's assets;
(c) the pre-negotiated Rehabilitation Plan, including the names of at least
3 qualified nominees for rehabilitation receiver; and
(d) a summary of disputed claims against the debtor and a report on the
provisioning of funds to account for appropriate payments
Out-of-Court or Informal Restructuring
Agreements and Rehabilitation Plans (OCRA)
(a) The debtor must agree to the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan;
(b) It must be approved by creditors representing at least 67% of the
secured obligations of the debtor;
(c) It must be approved by creditors representing at least 75% of the
unsecured obligations of the debtor; and
(d) It must be approved by creditors holding at least 85% of the total
liabilities, secured and unsecured, of the debtor.
Involuntary Liquidation
Three (3) or more creditors the aggregate of whose claims is at least
either P1M or at least 25% of the subscribed capital stock or partner's
contributions of the debtor, whichever is higher, may apply for and
seek the liquidation of an insolvent debtor by filing a petition for
liquidation. The petition shall show that:
(a) there is no genuine issue of fact or law on the claim, and that the
due and demandable payments thereon have not been made for at
least 180 days or that the debtor has failed generally to meet its
liabilities as they fall due; and
Involuntary Liquidation
(b) there is no substantial likelihood that the debtor may be
rehabilitated.
At any time during the pendency of or after a rehabilitation court-
supervised or pre-negotiated rehabilitation proceedings, the said
creditors may also initiate liquidation proceedings by filing a motion in
the same court where the rehabilitation proceedings are pending to
convert the rehabilitation proceedings into liquidation proceedings.
Insolvency of Individual Debtors
A. Suspension of payments - possessing sufficient property to cover all
his debts but foreseeing the impossibility of meeting them when
they respectively fall due
B. Voluntary liquidation - debtor whose properties are not sufficient to
cover his liabilities, and owing debts exceeding P500K
C. Involuntary liquidation
Involuntary liquidation
Any creditor or group of creditors with a claim of, or with claims
aggregating, P500K may file a verified petition for liquidation. The
following shall be considered acts of insolvency:
(a) That such person is about to depart or has departed from the
Philippines, with intent to defraud his creditors;
(b) That being absent from the Philippines, with intent to defraud his
creditors, he remains absent;
(c) That he conceals himself to avoid the service of legal process for the
purpose of defrauding his creditors;
Involuntary liquidation
(d) That he conceals, or is removing, any of his property to avoid its
being attached or taken on legal process;
(e) That he has suffered his property to remain under attachment for 3
days for the purpose of defrauding his creditors;
(f) That he has confessed judgment in favor of any creditor for the
purpose of defrauding any creditor;
(g) That he has willfully suffered judgment to be taken against him by
default for the purpose of defrauding his creditors;
Involuntary liquidation
(h) That he has procured his property to be taken on legal process with
intent to give preference to creditors and thereby hinder or delay
the liquidation or defraud his creditors;
(i) That he has made any assignment, gift, sale, conveyance of his
property;
(j) That he has, in contemplation of insolvency, made any payment,
gift, grant, sale, conveyance or transfer of his estate, property, rights
or credits;
Involuntary liquidation
(k) That being a merchant or tradesman, he has defaulted in the
payment of his current obligations for a period of 30 days;
(l) That for a period of 30 days, he has failed to pay any moneys
deposited with him or received by him in a fiduciary capacity; and
(m)That an execution having been issued against him on final judgment
for money, he shall have been found to be without sufficient
property subject to execution to satisfy the judgment.
Good luck!