NORTHWESTERN UNIVERSITY

College of Law
Laoag City
S.Y. 2016-2017, 2nd sem

REPUBLIC ACT NO. 10142

FINANCIAL REHABILITATION AND

INSOLVENCY ACT OF 2010

Submitted by:

JO ERIKA F. MARQUEZ
LLB-II

Submitted to:

CHARLES JAVIER CALAPINI

Instructor/Judge
Background of FRIA

The FRIA took effect on August 31, 2010, repealing the Insolvency Law.

The FRIA governs all further proceedings in insolvency, suspension of payments

and rehabilitation cases pending at the time it became effective, except to the extent
that in opinion of the court, the application of which would not be feasible or would
work injustice, in which event the procedures set forth in prior laws and regulations
will apply. It shall apply as well to all contracts of the debtor regardless of the date of
perfection.

Policy of the Law

 To encourage debtors, both juridical and natural persons, and their creditors to
collectively and realistically resolve and adjust competing claims and property
rights.
 To ensure a timely, fair, transparent, effective and efficient rehabilitation or
liquidation of debtors.
 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.
 When rehabilitation is not feasible, to facilitate a speedy and orderly liquidation
of these debtor's assets and the settlement of their obligations.

Nature of Proceedings
In Rem

As such, jurisdiction over all persons affected by the proceedings shall be

considered as 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 to be promulgated by the Supreme
Court.

Summary/Non-Adversarial

The proceedings shall be conducted in a summary and non-adversarial

manner consistent with the declared policies of this Act and in accordance with
the rules of procedure that the Supreme Court may promulgate.
Coverage

Insolvent shall refer 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.

Debtor shall refer to, unless specifically excluded by a provision of this Act, a
sole proprietorship duly registered with the Department of Trade and Industry (DTI), a
partnership duly registered with the Securities and Exchange Commission (SEC), a
corporation duly organized and existing under Philippine laws, or an individual debtor
who has become insolvent as defined herein. Also, government financial institutions
other than banks and government-owned or controlled corporations shall be covered
by the Act, unless their specific charter provides otherwise.

Exclusions: banks, insurance companies, pre-need companies, and national and

local government agencies or units.

Claims under FRIA

Claims shall 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:
1. all claims of the government, whether national or local, including taxes,
tariffs and customs duties; and
2. claims against directors and officers of the debtor arising from acts done in
the discharge of their functions falling within the scope of their authority:
Provided, That, this inclusion does not prohibit the creditors or third parties
from filing cases against the directors and officers acting in their personal
capacities.

The claim must be against the debtor or its property, monetary or non-
monetary. The rehabilitation court has no jurisdiction over claims by the debtor against
its own debtors or against third parties.

Examples of claims: a claim by an employee for alleged illegal dismissal; a

preferred maritime lien over the assets of the company under rehabilitation by virtue of
unpaid services to the lienholder; a claim for damages for alleged design infringement
Registry of Claims

Within twenty (20) days from his assumption into office the liquidator
shall prepare a preliminary registry of claims of secured and unsecured
creditors. Secured creditors who have waived their security or lien, or have fixed
the value of the property subject of their security or lien by agreement with the
liquidator and is admitted as a creditor for the balance shall be considered as
unsecured creditors. The liquidator shall make the registry available for public
inspection and provide publication notice to creditors, individual debtors,
owner/s of the sole proprietorship-debtor, the partners of the partnership-
debtor and shareholders or members of the corporation-debtor, on where and
when they may inspect it. All claims must be duly proven before being paid.

Right of Set-off

If the debtor and creditor are mutually debtor and creditor of each other
one debt shall be set off against the other, and only the balance, if any shall be
allowed in the liquidation proceedings.

Opposition or Challenge to Claims

Within thirty (30) days from the expiration of the period for filing of
applications for recognition of claims, creditors, individual debtors, owner/s of
the sole proprietorship-debtor, partners of the partnership-debtor and
shareholders or members of the corporation -debtor and other interested
parties may submit a challenge to claim or claims to the court, serving a
certified copy on the liquidator and the creditor holding the challenged claim.
Upon the expiration of the (30) day period, the rehabilitation receiver shall
submit to the court the registry of claims containing the undisputed claims that
have not been subject to challenge. Such claims shall become final upon the
filling of the register and may be subsequently set aside only on grounds or
fraud, accident, mistake or inexcusable neglect. [Back to the top]

Submission of Disputed to the Court

The liquidator shall resolve disputed claims and submit his findings
thereon to the court for final approval. The liquidator may disallow claims.
Remedies under FRIA

The FRIA provides the following remedies in the event a debtor is insolvent: (1)
Rehabilitation, (2) Out-of-court Restructuring and (3) Liquidation.

I. Rehabilitation

Rehabilitation shall refer to the restoration of the debtor to a condition of

successful operation and solvency, if it is shown that its continuance of
operation is economically feasible and its creditors can recover by way of the
present value of payments projected in the plan, more if the debtor continues as
a going concern than if it is immediately liquidated. This may be voluntary
(debtor-initiated), involuntary (creditor-initiated) or pre-negotiated.

Rehabilitation Plan shall refer to a 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 or quasi-reorganization, dacion en pago, debt-equity conversion
and sale of the business (or parts of it) as a going concern, or setting-up of new
business entity as prescribed in Section 62 of the Act, or other similar
arrangements as may be approved by the court or creditors.

In rehabilitation proceedings, jurisdiction over all persons affected by the

proceedings is acquired upon publication of the notice of the commencement of
the proceedings and the commencement order or any similar order of the
proceedings in one (1) newspaper of general circulation in the Philippines for
two (2) consecutive weeks.

II. Out-of-Court Restructuring

Minimum Requirements

For an out-of-court or informal restructuring/workout agreement or

Rehabilitation Plan to qualify under this chapter, it must meet the following
minimum requirements:
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 sixty-seven
(67%) of the secured obligations of the debtor;
 c. It must be approved by creditors representing at least seventy-five
percent (75%) of the unsecured obligations of the debtor; and
d. It must be approved by creditors holding at least eighty-five percent
(85%) of the total liabilities, secured and unsecured, of the debtor.

The notice of the Rehabilitation Plan or restructuring agreement or Plan

shall be published once a week for at least three (3) consecutive weeks in a
newspaper of general circulation in the Philippines. The Rehabilitation Plan or
restructuring agreement shall take effect upon the lapse of fifteen (15) days
from the date of the last publication of the notice thereof.

A restructuring/workout agreement or Rehabilitation Plan that is

approved pursuant to an informal workout framework referred to in this chapter
shall have the same legal effect as confirmation of a Plan under Section 69
hereof.

III. Liquidation

The liquidation of insolvent debtors, as opposed to individual debtors,

may be voluntary or involuntary. Voluntary liquidation proceedings are initiated
by the debtor itself, while involuntary insolvency proceedings are initiated by
three or more creditors.

A. Voluntary Liquidation

An insolvent debtor may apply for liquidation by filing a petition for

liquidation with the court. The petition shall be verified, shall establish the
insolvency of the debtor and shall contain, whether as an attachment or as
part of the body of the petition:

a. a schedule of the debtor’s debts and liabilities including a list of creditors

with their addresses, amounts of claims and collaterals, or securities, if
any;
b. an inventory of all its assets including receivables and claims against
third parties; and
c. the names of at least three (3) nominees to the position of liquidator.
 At any time during the pendency of court-supervised rehabilitation
proceedings or pre-negotiated rehabilitation proceedings, the debtor 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. The motion shall be
verified, shall contain or set forth the same matters required in the preceding
paragraph, and state that the debtor is seeking immediate dissolution and
termination of its corporate existence. If the petition or the motion, as the
case may be, is sufficient in form and substance, the court shall issue a
Liquidation Order.

B. Involuntary Liquidation

Three (3) or more creditors the aggregate of whose claims is at least

either One Million Pesos (PhP1,000,000.00) or at least twenty-five percent
(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 of the debtor with the court. The
petition shall show that:

a. there is no genuine issue of fact or law on the claim/s of the petitioner/s,

and that the due and demandable payments thereon have not been made
for at least one hundred eighty (180) days or that the debtor has failed
generally to meet its liabilities as they fall due; and
b. there is no substantial likelihood that the debtor may be rehabilitated.

At any time during the pendency of or after a court-supervised

rehabilitation proceedings or pre-negotiated rehabilitation proceedings,
three (3) or more creditors whose claims is at least either One Million Pesos
(PhP1,000,000.00) or at least twenty-five percent (25%) of the subscribed
capital or partner’s contributions of the debtor, whichever is higher, 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. The motion shall be
verified, shall contain or set forth the same matters required in the preceding
paragraph, and state that the movants are seeking the immediate liquidation
of the debtor.
 If the petition or motion is sufficient in form and substance, the court
shall issue an Order:

1. directing the publication of the petition or motion in a newspaper of

general circulation once a week for two (2) consecutive weeks; and
2. directing the debtor and all creditors who are not the petitioners to file
their comment on the petition or motion within fifteen (15) days from the
date of last publication.

If, after considering the comments filed, the court determines that the
petition or motion is meritorious, it shall issue the Liquidation Order.

Conversion by the Court into Liquidation Proceedings

During the pendency of court-supervised or pre-negotiated

rehabilitation proceedings, the court may order the conversion of
rehabilitation proceedings to liquidation proceedings pursuant to (a) Section
25(c) of this Act; or (b) Section 72 of this Act; or (c) Section 75 of this Act; or
(d) Section 90 of this Act; or at any other time upon the recommendation of
the rehabilitation receiver that the rehabilitation of the debtor is not feasible.
Thereupon, the court shall issue the Liquidation Order.

The provisions regarding the liquidation of insolvent juridical debtors

shall not affect the regulatory powers of the Securities and Exchange
Commission (SEC) under Section 6 of Presidential Decree No. 902-A, as
amended, with respect to any dissolution and liquidation proceeding
initiated and heard before it.

Insolvency of Individual Debtors

Insolvent individual debtors have the following options: (1) Suspension of

Payments;(2) Voluntary Liquidation; and (3) Involuntary Liquidation.

I. Suspension of Payments

Petition

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 by the court of the province or city in which
he has resides for six (6) months prior to the filing of his petition. He shall
attach to his petition, as a minimum: (a) a schedule of debts and liabilities;
(b) an inventory of assets; and (c) a proposed agreement with his creditors.

Action on the Petition

If the court finds the petition sufficient in form and substance, it shall,
within five (5) working days from the filing of the petition, issue an Order:

a. calling a meeting of all the creditors named in the schedule of debts and
liabilities at such time not less than fifteen (15) days nor more than forty
(40) days from the date of such Order and designating the date, time and
place of the meeting;
b. directing such creditors to prepare and present written evidence of their
claims before the scheduled creditors’ meeting;
c. directing the publication of the said order in a newspaper of general
circulation published in the province or city in which the petition is filed
once a week for two (2) consecutive weeks, with the first publication to
be made within seven (7) days from the time of the issuance of the Order;
d. directing the clerk of court to cause the sending of a copy of the Order by
registered mail, postage prepaid, to all creditors named in the schedule
of debts and liabilities;
e. forbidding the individual debtor from selling, transferring, encumbering
or disposing in any manner of his property, except those used in the
ordinary operations of commerce or of industry in which the petitioning
individual debtor is engaged so long as the proceedings relative to the
suspension of payments are pending;
f. prohibiting the individual debtor from making any payment outside of the
necessary or legitimate expenses of his business or industry, so long as
the proceedings relative to the suspension of payments are pending; and
g. appointing a commissioner to preside over the creditors’ meeting.

Suspension Order

Upon motion filed by the individual debtor, the court may issue an
order suspending any pending execution against the individual debtor.
Properties held as security by secured creditors shall not be the subject of
such suspension order. The suspension order shall lapse when three (3)
months shall have passed without the proposed agreement being accepted
by the creditors or as soon as such agreement is denied.

No creditor shall sue or institute proceedings to collect his claim from

the debtor from the time of the filing of the petition for suspension of
payments and for as long as proceedings remain pending except: (a) those
creditors having claims for personal labor, maintenance, expense of last
illness and funeral of the wife or children of the debtor incurred in the sixty
(60) days immediately prior to the filing of the petition; and (b) secured
creditors.

Creditors’ Meeting

The presence of creditors holding claims amounting to at least three-

fifths (3/5) of the liabilities shall be necessary for holding a meeting. The
commissioner appointed by the court shall preside over the meeting and the
clerk of court shall act as the secretary thereof, subject to the following
rules:

a. The clerk shall record the creditors present and amount of their
respective claims;
b. The commissioner shall examine the written evidence of the claims. If the
creditors present hold at least three-fifths (3/5) of the liabilities of the
individual debtor, the commissioner shall declare the meeting open for
business;
c. The creditors and individual debtor shall discuss the propositions in the
proposed agreement and put them to a vote;
d. To form a majority, it is necessary: (1) that two-thirds (2/3) of the
creditors voting unite upon the same proposition; and (2) that the claims
represented by said majority vote amount to at least three-fifths (3/5) of
the total liabilities of the debtor mentioned in the petition; and
e. After the result of the voting has been announced, all protests made
against the majority vote shall be drawn up, and the commissioner and
the individual debtor together with all creditors taking part in the voting
shall sign the affirmed propositions.

No creditor who incurred his credit within ninety (90) days prior to the
filing of the petition shall be entitled to vote.
Persons who may refrain from voting

Creditors who are unaffected by the Suspension Order may refrain

from attending the meeting and from voting therein. Such persons shall not
be bound by any agreement determined upon at such meeting, but if they
should join in the voting they shall be bound in the same manner as are the
other creditors.

Rejection of the proposed agreement

The proposed agreement shall be deemed rejected if the number of

creditors required for holding a meeting do not attend thereat, or if the two
(2) majorities mentioned in Section 97 hereof are not in favor thereof. In
such instances, the proceeding shall be terminated without recourse and the
parties concerned shall be at liberty to enforce the rights which may
correspond to them.

Objections

If the proposal of the individual debtor, or any amendment thereof

made during the creditors’ meeting, is approved by the majority of creditors
in accordance with Section 97 hereof, any creditor who attended the meeting
and who dissented from and protested against the vote of the majority may
file an objection with the court within ten (10) days from the date of the last
creditors’ meeting. The causes for which objection may be made to the
decision made by the majority during the meeting shall be: (a) defects in the
call for the meeting, in the holding thereof and in the deliberations had
thereat which prejudice the rights of the creditors; (b) fraudulent connivance
between one or more creditors and the individual debtor to vote in favor of
the proposed agreement; or (c) fraudulent conveyance of claims for the
purpose of obtaining a majority. The court shall hear and pass upon such
objection as soon as possible and in a summary manner.

In case the decision of the majority of creditors to approve the

individual debtor’s proposal or any amendment thereof made during the
creditors’ meeting is annulled by the court, the court shall declare the
proceedings terminated and the creditors shall be at liberty to exercise the
rights which may correspond to them.
 Effects of approval of proposed agreement

If the decision of the majority of the creditors to approve the

proposed agreement or any amendment thereof made during the creditors’
meeting is uphold by the court, or when no opposition or objection to said
decision has been presented, the court shall order that the agreement be
carried out and all parties bound thereby to comply with its terms.

The court may also issue all orders which may be necessary or proper
to enforce the agreement on motion of any affected party. The Order
confirming the approval of the proposed agreement or any amendment
thereof made during the creditors’ meeting shall be binding upon all
creditors whose claims are included in the schedule of debts and liabilities
submitted by the individual debtor and who were properly summoned, but
not upon: (a) those creditors having claims for personal labor, maintenance,
expenses of last illness and funeral of the wife or children of the debtor
incurred in the sixty (60) days immediately prior to the filing of the petition;
and (b) secured creditors who failed to attend the meeting or refrained from
voting therein.

Failure of individual debtor to perform agreement

If the individual debtor fails, wholly or in part, to perform the

agreement decided upon at the meeting of the creditors, all the rights which
the creditors had against the individual debtor before the agreement shall
revest in them. In such case the individual debtor may be made subject to
the insolvency proceedings in the manner established by this Act.

II. Voluntary Liquidation

Application

An individual debtor whose properties are not sufficient to cover his

liabilities, and owing debts exceeding Five hundred thousand pesos
(Php500,000.00), may apply to be discharged from his debts and liabilities
by filing a verified petition with the court of the province or city in which he
has resided for six (6) months prior to the filing of such petition. He shall
attach to his petition a schedule of debts and liabilities and an inventory of
assets. The filing of such petition shall be an act of insolvency.
 Liquidation Order

If the court finds the petition sufficient in form and substance it shall,
within five (5) working days issue the Liquidation Order.

III. Involuntary Liquidation

Petition

Any creditor or group of creditors with a claim of, or with claims

aggregating at least Five hundred thousand pesos (Php500, 000.00) may file
a verified petition for liquidation with the court of the province or city in
which the individual debtor resides.

Acts of Insolvency

The following shall be considered acts of insolvency, and the petition

for liquidation shall set forth or allege at least one of such acts:

a. That such person is about to depart or has departed from the Republic of
the Philippines, with intent to defraud his creditors;
b. That being absent from the Republic of 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 hindering or delaying the liquidation or of defrauding his
creditors;
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 or legal
process for three (3) days for the purpose of hindering or delaying the
liquidation or of defrauding his creditors;
f. That he has confessed or offered to allow judgment in favor of any
creditor or claimant for the purpose of hindering or delaying the
liquidation or of defrauding any creditors or claimant;
g. That he has willfully suffered judgment to be taken against him by
default for the purpose of hindering or delaying the liquidation or of
defrauding his creditors;
h. That he has suffered or procured his property to be taken on legal
process with intent to give a preference to one or more of his creditors
 and thereby hinder or delay the liquidation or defraud any one of his
creditors;
i. That he has made any assignment, gift, sale, conveyance or transfer of
his estate, property, rights or credits with intent to hinder or delay the
liquidation or defraud his creditors;
j. That he has, in contemplation of insolvency, made any payment, gift,
grant, sale, conveyance or transfer of his estate, property, rights or
credits;
k. That being a merchant or tradesman, he has generally defaulted in the
payment of his current obligations for a period of thirty (30) days;
l. That for a period of thirty (30) days, he has failed, after demand, to pay
any moneys deposited with him or received by him in a fiduciary; 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.

The petitioning creditor/s shall post a bond in such as the court shall
direct, conditioned that if the petition for liquidation is dismissed by the
court, or withdrawn by the petitioner, or if the debtor shall not be declared
an insolvent the petitioners will pay to the debtor all costs, expenses,
damages occasioned by the proceedings and attorney’s fees.

Order to Individual Debtor to Show Cause

Upon the filing of such creditors’ petition, the court shall issue an
Order requiring the individual debtor to show cause, at a time and place to
be fixed by the said court, why he should not be adjudged an insolvent.
Upon good cause shown, the court may issue an Order forbidding the
individual debtor from making payments of any of his debts, and
transferring any property belonging to him. However, nothing contained
herein shall affect or impair the rights of a secured creditor to enforce his
lien in accordance with its terms.

Default

If the individual debtor shall default or if, after trial, the issues are
found in favor of the petitioning creditors the court shall issue the
Liquidation Order.
Absent individual debtor

In all cases where the individual debtor resides out of the Republic of
the Philippines; or has departed therefrom; or cannot, after due diligence, be
found therein; or conceals himself to avoid service of the Order to show
cause, or any other preliminary process or orders in the matter, then the
petitioning creditors, upon submitting the affidavits requisite to procedure
an Order of publication, and presenting a bond in double the amount of the
aggregate sum of their claims against the individual debtor, shall be entitled
to an Order of the court directing the sheriff of the province or city in which
the matter is pending to take into his custody a sufficient amount of
property of the individual debtor to satisfy the demands of the petitioning
creditors and the costs of the proceedings. Upon receiving such Order of the
court to take into custody of the property of the individual debtor, it shall be
the duty of the sheriff to take possession of the property and effects of the
individual debtor, not exempt from execution, to an extent sufficient to
cover the amount provided for and to prepare within three (3) days from the
time of taking such possession, a complete inventory of all the property so
taken, and to return it to the court as soon as completed. The time for taking
the inventory and making return thereof may be extended for good cause
shown to the court. The sheriff shall also prepare a schedule of the names
and residences of the creditors, and the amount due each, from the books of
the debtor, or from such other papers or data of the individual debtor
available as may come to his possession, and shall file such schedule or list
of creditors and inventory with the clerk of court.

The bonds to procure the order for custody of the property and
effects of the individual debtor shall be conditioned that if, upon final
hearing of the petition in insolvency, the court shall find in favor of the
petitioners, such bonds and all of them shall be void; if the decision be in
favor of the individual debtor, the proceedings shall be dismissed, and the
individual debtor, his heirs, administrators, executors or assigns shall be
entitled to recover such sum of money as shall be sufficient to cover the
damages sustained by him, not to exceed the amount of the respective
bonds. Such damages shall be fixed and allowed by the court.
All property held for all creditors; Appeal bonds; Exemptions to sureties

In all cases where property is taken into custody by the sheriff, if it

does not embrace all the property and effects of the debtor not exempt from
execution, any other creditor or creditors of the individual debtor, upon
giving bond to be approved by the court in double the amount of their
claims, singly or jointly, shall be entitled to similar orders and to like action,
by the sheriff; until all claims be provided for, if there be sufficient property
or effects. All property taken into custody by the sheriff by virtue of the
giving of any such bonds shall be held by him for the benefit of all creditors
of the individual debtor whose claims shall be duly proved. The bonds to
procure the order for custody of the property and effects of the individual
debtor shall be conditioned that if, upon final hearing of the petition in
insolvency, the court shall find in favor of the petitioners, such bonds and all
of them shall be void; if the decision be in favor of the individual debtor, the
proceedings shall be dismissed, and the individual debtor, his heirs,
administrators, executors or assigns shall be entitled to recover such sum of
money as shall be sufficient to cover the damages sustained by him, not to
exceed the amount of the respective bonds. Such damages shall be fixed and
allowed by the court. If either the petitioners or the debtor shall appeal from
the decision of the court, upon final hearing of the petition, the appellant
shall be required to give bond to the successful party in a sum double the
amount of the value of the property in controversy, and for the costs of the
proceedings.

Any person interested in the estate may take exception to the

sufficiency of the sureties on such bond or bonds. When excepted to the
petitioner’s sureties, upon notice to the person excepting of not less than
two (2) nor more than five (5) days, must justify as to their sufficiency; and
upon failure to justify, or of others in their place fail to justify at the time and
place appointed the judge shall issue an Order vacating the order to take the
property of the individual debtor into the custody of the sheriff, or denying
the appeal, as the case may be.

Sale under execution

If, in any case, proper affidavits and bonds are presented to the court
or a judge thereof, asking for and obtaining an order of publication and an
order for the custody of the property of the individual debtor and thereafter
 the petitioners shall make it appear satisfactorily to the court or a judge
thereof that the interest of the parties to the proceedings will be subserved
by a sale thereof, the court may order such property to be sold in the same
manner as property is sold under execution, the proceeds to deposited in
the court to abide by the result of the proceedings.

Common provisions

Cram-down Clause

Cram-down is the power of the rehabilitation court to approve and

implement a rehabilitation plan notwithstanding the objection of the majority of
creditors. As noted in the case of Bank of the Philippine Islands vs. Sarabia
Manor Hotel Corporation (G.R. No. 175844, 29 July 2013), the “cram-down”
clause, which is currently incorporated in Section 64 of Republic Act No. 10142,
also known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, “is
necessary to curb the majority creditors’ natural tendency to dictate their own
terms and conditions to the rehabilitation, absent due regard to the greater
long-term benefit of all stakeholders. Otherwise stated, it forces the creditors to
accept the terms and conditions of the rehabilitation plan, preferring long-term
viability over immediate but incomplete recovery.” In this regard, Sections 64
and 68 are relevant.

Section 64. Creditor Approval of Rehabilitation Plan. – The rehabilitation receiver

shall notify the creditors and stakeholders that the Plan is ready for their
examination. Within twenty (2Q) days from the said notification, the
rehabilitation receiver shall convene the creditors, either as a whole or per class,
for purposes of voting on the approval of the Plan. The Plan shall be deemed
rejected unless approved by all classes of creditors w hose rights are adversely
modified or affected by the Plan. For purposes of this section, the Plan is deemed
to have been approved by a class of creditors if members of the said class
holding more than fifty percent (50%) of the total claims of the said class vote in
favor of the Plan. The votes of the creditors shall be based solely on the amount
of their respective claims based on the registry of claims submitted by the
rehabilitation receiver pursuant to Section 44 hereof.

Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm
the Rehabilitation Plan if all of the following circumstances are present:

a. The Rehabilitation Plan complies with the requirements specified in this Act.
 b. The rehabilitation receiver recommends the confirmation of the
Rehabilitation Plan;
c. The shareholders, owners or partners of the juridical debtor lose at least
their controlling interest as a result of the Rehabilitation Plan; and
d. The Rehabilitation 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.

Section 68.Confirmation of the Rehabilitation Plan. – If no objections are filed

within the relevant period or, if objections are filed, the court finds them lacking
in merit, or determines that the basis for the objection has been cured, or
determines that the debtor has complied with an order to cure the objection, the
court shall issue an order confirming the Rehabilitation Plan.

The court may confirm the Rehabilitation Plan notwithstanding unresolved

disputes over claims if the Rehabilitation Plan has made adequate provisions for
paying such claims.

For the avoidance of doubt, the provisions of other laws to the contrary
notwithstanding, the court shall have 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.

Avoidance Proceedings

Any transaction occurring prior to the issuance of the Liquidation Order

or, in case of the conversion of the rehabilitation proceedings 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. A disputable presumption of such intent shall arise if
the transaction:

a. provides unreasonably inadequate consideration to the debtor and is

executed within ninety (90) days prior to the commencement date;
b. involves an accelerated payment of a claim to a creditor within ninety (90)
days prior to the commencement date;
c. provides security or additional security executed within ninety (90) days prior
to the commencement date;
 d. involves creditors, where a creditor obtained, or received the benefit of,
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 or to otherwise prejudice the interests of
creditors.

The liquidator or, with his conformity, a creditor may initiate and
prosecute any action to rescind, or declare null and void any transaction
described in the immediately preceding paragraph. If the liquidator does not
consent to the filling or prosecution of such action, any creditor may seek leave
of the court to commence said action.

If leave of court is granted, the liquidator shall 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 the proceeding, 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, the liquidator signifies to the court his
readiness to the institute the proceeding for the benefit of the creditors, the
order shall fix the time within which he shall do so and, in that case the benefit
derived from the proceedings, if instituted within the time limits so fixed,
belongs to the estate.

Advantages of Judicial Remedies

1. Retention of management

Unless otherwise provided herein, the management of the juridical debtor

shall 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. However, all disbursements, payments or sale, disposal,
assignment, transfer or encumbrance of property, or any other act affecting title
or interest in property, shall be subject to the approval of the rehabilitation
receiver and/or the court, as provided in the following subchapter.
2. Non-withholding of supply

After the issuance of the Commencement Order, the debtor’s supplier 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.

3. Protection from certain action and processes

Commencement Order
a. vests the rehabilitation with all the powers and functions provided for this
Act, such as the right to review and obtain records to which the debtor's
management and directors have access, including bank accounts or whatever
nature of the debtor subject to the approval by the court of the performance
bond filed by the rehabilitation receiver;
b. prohibits or otherwise serves as the legal basis rendering null and void the
results of any extrajudicial activity or process to seize property, sell
encumbered property, or otherwise attempt to collection or enforce a claim
against the debtor after commencement date unless otherwise allowed in
this Act, subject to the provisions of Section 50 of the Act;
c. serves as the legal basis for rendering null and void any setoff after the
commencement date of any debt owed to the debtor by any of the debtor's
creditors;
d. serves 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. consolidates the resolution of all legal proceedings by and against the debtor
to the court Provided. However, That the court may allow the continuation of
cases on other courts where the debtor had initiated the suit.

Stay or Suspension Order

a. suspends all actions or proceedings, in court or otherwise, for the
enforcement of claims against the debtor;
b. suspends all actions to enforce any judgment, attachment or other
provisional remedies against the debtor;
c. prohibits the debtor from selling, encumbering, transferring or disposing in
any manner any of its properties except in the ordinary course of business;
and
 d. prohibits the debtor from making any payment of its liabilities outstanding
as of the commencement date except as may be provided herein.

4. Exemption from, or waiver of taxes

Upon issuance of the Commencement Order by the court, and until the
approval of the Rehabilitation Plan or dismissal of the petition, whichever is
earlier, the imposition of all taxes and fees including penalties, interests and
charges thereof due to the national government or to LGUs shall be considered
waived, in furtherance of the objectives of rehabilitation.

Amounts of any indebtedness or obligations reduced or forgiven in

connections with a rehabilitation plan’s approval will also not be subject to any
tax.

5. Compromises binding

Any compromises on amounts or rescheduling of timing of payments by

the debtor shall be binding on creditors regardless of whether or not the Plan is
successfully implement.

6. Cram-down power

The court shall have 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.

7. Binding effect of Rehabilitation Plan

The Rehabilitation Plan and its provisions shall 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;