FINANCIAL REHABILITATION AND

INSOLVENCY ACT OF 2010 (FRIA)

(GROUP 6)

Reporters:
Alapag, Hazel
Basir, Monaifah
Dy, Rudy
Ismael, Amil Khan
Naduma, Leian Kae
Quina, Alyssa Gabriela
Silvidad, Franklin
FINANCIAL REHABILITATION INSOLVENCY ACT OF 2010

Basic Concepts

Declaration of Policy – Sec. 2:

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.

4. When rehabilitation is not feasible, to facilitate a speedy and orderly liquidation

of these debtor's assets and the settlement of their obligations.

Rehabilitation - refers to the restoration of the debt or to a condition of

successful operation and solvency, if it sown that its continuance op operation is
economically feasible and its creditors can recover by way of the present value of
payments projected in the plan, more of the debtor continues as a going concern
than if it is immediately liquidated.

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.

Liquidation - A proceeding which consists of a number cases properly classified

as “claims”. It involves administration and disposition, with judicial intervention of
an insolvent’s assets for the benefit of its creditors.
Suspension of Payments - A petition which 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.

Modes of Rehabilitation

1. COURT-SUPERIVISED REHABILITATION

A. Voluntary Proceedings.
How initiated – Sec. 12. Petition to initiate voluntary proceedings filed by
debtor, approved by:
i. Sole Proprietorship – by the owner;
ii. Partnership – by a majority of the partners;
iii. Stock Corporation – by a majority vote of the board of directors or
trustees and authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the members, in a
stockholder’s or member’s meeting duly called for the purpose;
iv. Insolvent Debtor – may initiate voluntary proceedings under this
Act by filing a petition for rehabilitation with the court based on
the grounds provided; or
v. A group of debtors may jointly file a petition for rehabilitation
under this Act when one or more of its members foresee the
impossibility of meeting debts when they respectively fall due,
and the financial distress would likely adversely affect the
financial condition and/or operations of the other members of the
group and/or the participation of the other members of the group
is essential under the terms and conditions of the proposed
Rehabilitation Plan (A.M. No. 12-12-11-SC, Rule 2, Sec. 1).
Grounds: Insolvency of debtor and viability of rehabilitation.
Contents of Petition – Sec 12: The petition shall be verified to establish
the insolvency of the debtor and the viability of its rehabilitation, and
include, whether as an attachment or as part of the body of the petition,
as a minimum the following:
i. Identification of the debtor, its principal activities and its
addresses;
ii. Statement of the fact of and the cause of the debtor’s insolvency
or inability to pay its obligations as they become due;
iii. The specific relief sought pursuant to this Act;
iv. The grounds upon which the petition is based;
v. Other information that may be required under this Act depending
on the form of relief requested;
vi. 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;
vii. An inventory of all its assets including receivables and claims
against third parties;
viii. A Rehabilitation Plan;
ix. The names of at least three (3) nominees to the position of
rehabilitation receiver; and
x. Other documents required to be filed with the petition pursuant to
this Act and the rules of procedure as may be promulgated by the
Supreme Court.
B. Involuntary Proceedings.

How initiated – Sec 13: By petition for rehabilitation filed by any creditor
or group of creditors with a claim of, or the aggregate of whose claims is,
at least One Million Pesos (Php 1,000,000.00) or at least twenty-five
percent (25%) of the subscribed capital stock or partners’ contributions,
whichever is higher.
Circumstances Necessary to Initiate Involuntary Proceedings – Sec
13:
i. There is no genuine issue of fact on the law on the claim/s of the
petitioner/s, and that the due and demandable payments thereon
have not been made for at least sixty (60) days or that the debtor
has failed generally to meet its liabilities as they fall due; or
ii. A creditor, other than the petitioner/s, 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.
Contents of Petition – Sec 14: The petition shall be verified to establish
the substantial likelihood that the debtor may be rehabilitated, and
include:
i. Identification of the debtor its principal activities and its address;
ii. The circumstances sufficient to support a petition to initiate
involuntary rehabilitation proceedings under Section 13 of this Act;
iii. The specific relief sought under this Act;
iv. A Rehabilitation Plan
v. The names of at least three (3) nominees to the position of
rehabilitation receiver;
vi. Other information that may be required under this Act depending
on the form of relief requested; and
vii. Other documents required to be filed with the petition pursuant to
this Act and the rules of procedure as may be promulgated by the
Supreme Court.

C. Commencement of Proceedings and Issuance of a Commencement Order – Sec

16: The rehabilitation proceedings shall commence upon the issuance of the
Commencement Order which shall, among others, appoint rehabilitation receiver, and
include a Stay or Suspension Order which shall:

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.

Effects of the Commencement Order – Sec 17: Unless otherwise

provided for in this Act, the court’s issuance of a Commencement Order shall, in
addition to the effects of a Stay or Suspension Order described in Section 16
hereof:
i. Vest the rehabilitation receiver with all the powers and functions
provided for in 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;
ii. Prohibit or otherwise serve 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 hereof;
iii. Serve as the legal basis for rending null and void any set-off after
the commencement date of any debt owed to the debtor by any of
the debtor’s creditors;
iv. 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
v. Consolidate 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.
Exceptions to the Stay or Suspension Order – Sec 18: The Stay or
Suspension Order shall not apply:
i. To cases already pending appeal in the Supreme Court as of
commencement date. Provided, that any final and executory
judgment arising from such appeal shall be referred to the court
for appropriate action;
ii. Subject to the discretion of the court, to cases pending or filed at a
specialized court or quasi-judicial agency which, upon
determination by the court is capable of resolving the claim more
quickly, fairly and efficiently than the court: Provided, that 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;
iii. To the enforcement of claims against sureties and other persons
solidarily liable with the debtor, and third party or accommodation
mortgagors as well as issues of letters of credit, unless the
 property subject of the third party or accommodation mortgage is
necessary for the rehabilitation of the debtor as determined by the
court upon recommendation by the rehabilitation receiver;
iv. 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 course of the
latter’s business as well as any action of such securities market
participant or the appropriate regulatory agency or self-regulatory
organization to pay or settle such claims or liabilities;
v. 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 in
accordance with the provisions of the Securities Regulation Code
and its implementing rules and regulations;
vi. The clearing and settlement of financial transactions through the
facilities of a clearing agency or similar entities duly authorized,
registered and/or recognized by the appropriate regulatory agency
like the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as
any form of actions of such agencies or entities to reimburse
themselves for any transactions settled for the debtor; and
vii. Any criminal actions against individual debtor or owner, partner,
director or officer of a debtor shall not be affected by any
proceeding commenced under this act.

D. Rehabilitation Receiver, Management Committee, and Creditors’ Committee

Rehabilitation Receiver - Person/s, natural or juridical, appointed as

such by the court pursuant to FRIA and which shall be entrusted with
such powers, duties, and responsibilities as set forth in these Rules.
Where the rehabilitation receiver is a juridical entity, the term includes the
juridical entity’s designated representative (A.M. No. 12-12-11-SC, Rule
1, Sec 5 (p)).
a. Qualifications - Sec 29:
i. Philippine citizen or resident for 6 months immediately
preceding his nomination;
ii. Of good moral character and with acknowledged integrity,
impartiality and independence;
iii. Has 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 rehabilitation receiver; and
iv. Has no conflict of interest: Provided, that such conflict of
interest may be waived, expressly or impliedly, by a party
who may be prejudiced thereby; and
 v. Other qualifications and disqualifications of the
rehabilitation receiver shall be set forth in procedural rules,
taking into consideration the nature of the business of the
debtor and the need to protect the interest of all
stakeholders concerned.

Powers, Duties and Responsibilities – Sec 31: Deemed an officer of

the court with the principal duty of preserving and maximizing the value of
the assets of the debtor during the rehabilitation proceedings, determining
the viability of the rehabilitation of the debtor, preparing and
recommending a Rehabilitation Plan to the court, and implementing the
approved Rehabilitation Plan.
Management Committee
Role of the Management Committee – Sec 37: When appointed
pursuant to Sec 36, the management committee shall take the place of
the management and the governing body of the debtor and assume their
rights and responsibilities. Specifics to be provided by procedural rules.
Qualifications of Members of the Management Committee – Sec 38:
Specifics to be provided by the procedural rules, taking into consideration
the nature of the business of the debtor and the need to protect the
interest of all stakeholders concerned.
Creditors’ Committee
Organization of the Creditors’ Committee - After the petition is given
due course, the court shall issue an order directing the rehabilitation
receiver to call a meeting with the debtor and all classes of creditors, to
take place in not less than 2 weeks nor more than 4 weeks from the date
of the order, to consider the organization of a creditors’ committee (A.M.
No. 12-12-11-SC, Rule 2, Sec 39).
Role of Creditors Committee – Sec 43: The creditors’ committee shall
be the primary liaison between the rehabilitation receiver and the
creditors. The creditors’ committee cannot exercise or waive any right or
give consent on behalf of any creditor unless specifically authorized in
writing by such creditor. The creditor’s committee may be authorized by
the court or by the rehabilitation receiver to perform such other tasks and
functions to facilitate the rehabilitation process. The committee’s act shall
be valid if a majority of its members voted, and a majority of the members
who cast their votes have voted in favor of the resolution (A.M. No. 12-12-
11-SC, Rule 2, Sec. 42).

E. Determination of Claims

Definition of Claim – Sec. 4(c): Claim 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
discharged 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.
Registry of Claims – Sec. 44: Within twenty (20) days from his
assumption into office, the rehabilitation receiver shall establish a
preliminary registry of claims. The rehabilitation receiver shall make the
registry available for public inspection and provide publication notice to
the debtor, creditors and stakeholders on where and when they may
inspect it. All claims included in the registry of claims must be duly
supported by sufficient evidence.
Opposition or Challenge of Claims – Sec. 45: Within thirty (30) days
from the expiration of the period stated in the immediately preceding
section, the debtor, creditors, stakeholders and other interested parties
may submit a challenge to claim/s to the court, serving a certified copy on
the rehabilitation receiver and the creditor holding the challenged claim/s.
Upon the expiration of the thirty (30) day period, the rehabilitation receiver
shall submit to the court the registry of claims which shall include
undisputed claims that have not been subject to challenge.
Appeal – Sec. 46: Any decision of the rehabilitation receiver regarding a
claim may be appealed to the court.

F. Rehabilitation - It refers to the restoration of the debtor to a condition of successful

operation and solvency.

Rehabilitation Plan - It refers to a plan which the financial well-being and

viability of an insolvent debtor can be restored using various means
including, but not limited to:

a. debt forgiveness
b. debt scheduling
c. reorganization or quasi reorganization
d. dacion en pago
e. debt equity conversion
f. sale of the business in whole or in part
-
As a going concern, or setting-up of new business entity as prescribed in Sec. 62
hereof, or other similar arrangements as may be approved by court or creditors.
Contents - Rehabilitation plan shall include: (Sec 18, Rule 3 of the 2008 Rules of
Procedure on Corporate Rehabilitation)
a. desired business targets or goals and the duration and coverage of
the rehabilitation
b. the terms and conditions of such rehabilitation which shall include the
manner of its implementation, giving due regard to the interests of
secured creditors such as, but not limited, to the non-impairment of
their security liens or interests
c. the material financial commitments to support the rehabilitation plan
d. the means of execution of the rehabilitation plan, which may include
debt to equity conversion, restructuring of the debts, dacion en pago
or sale or exchange or any disposition of assets or of the interest of
shareholders, partners or members
e. a liquidation analysis setting out for each creditor that the present
value of payments it would receive under the plan is more than than
that which it would receive if assets of the debtor were sold by a
liquidator within a six-month period from the estimated date of filing of
the petition
f. such other relevant information to enable a reasonable investor to
make an informed decision on the feasibility of the rehabilitation plan.

Concept of Feasibility - The test in evaluating the economic feasibility of the

plan was laid down in Bank of the Philippine Islands v. Sarabia Manor Hotel
Corporation.

“In order to determine the feasibility of a proposed rehabilitation plan, it is

imperative that a thorough examination and analysis of the distressed
corporation’s financial data must be conducted. If the results of such
examination and analysis show that there is a real opportunity to rehabilitate the
corporation in view of the assumptions xmade and financial goals stated in the
rehabilitation plan, then it may be said that a rehabilitation is feasible. Otherwise,
the rehabilitation court may convert the proceedings into one of liquidation.”

In the case of Viva Shipping Lines, Inc. v. Keppel Philippines Mining, Inc., the
court took note of characteristics of an economically feasible rehabilitation plan
as opposed to an infeasible rehabilitation plan. The following are:

a. the debtor has assets that can generate more cash if used in its daily
operations than if sold.
b. Liquidity issues can be addressed by a practicable business plan that
will generate enough cash to sustain daily operations
c. debtor has a definite source of financing for the proper and full
implementation of a rehabilitation plan that is anchored on realistic
assumptions and goals.
These requirements put emphasis on liquidity, the cash flow that the distressed
corporation will obtain from rehabilitating its assets and operation. Rehabilitation
sees to it that these assets generate more value if used efficiently rather than if
liquidated.

On the other hand, this court enumerated the characteristics of rehabilitation plan
that is infeasible:

a. absence of a sound and workable business plan

b. baseless and unexplained assumptions, targets and goals
c. speculative capital infusion or complete lack thereof for the execution
of the business plan.
d. Cash flow cannot sustain daily operations;
e. Negative net worth and assets are near full depreciation or fully
depreciated
In addition, Prof. Stephanie V. Gomez also suggests that the FRIA emphasizes
on rehabilitation that provides for better present value recovery for its creditors.

Trial courts must ensure the projected cash flow from a business’ rehabilitation
plan allows for the closest present value recovery for its creditors. If the latter is
realistic and allows the corporation to meet all its obligations, then courts should
favor rehabilitation over liquidation. Otherwise, courts should consider converting
the proceedings into that for liquidation to protect the creditors.

Material Financial Commitments - One of the contents of the rehabilitation plan

is that there should be a material financial commitments to support the
rehabilitation plan.

“It is critical in gauging the resolution, determination, earnestness, and good faith
in financing its proposed rehabilitation plan. It may include voluntary undertakings
of stockholders or would-be investors of debtor corporation indicating their
readiness, willingness and ability to contribute funds or property to guarantee
continued successful operation of debtor corporation during period of
rehabilitation.” (BPI Family Savings Bank Inc., v. St. Michael Medical Center Inc.)

SC struck down rehabilitation plan due to lack of Material Financial

Commitments. The company argued that there were pending negotiations for a
group of investors to pump on new money to help in its rehabilitation. According
to the SC, it held that pending negotiations was not Material Financial
Commitments that was required by our rehabilitation law for it does not partake of
a voluntary undertaking because there was no actual financial commitment has
been made. (PBC v. Basic Polyprinters)

The following are some guidelines in determining Material Financial

Commitments:
 a. It must be significant enough as to meaningfully support the
rehabilitation of financially distressed debtor.
b. It must demonstrate “sincere commitment to fund implementation of
the rehabilitation plan.
c. There must be firm assurance to convince creditors, future investors
and general public of its financial and operational viability.
d. It must be material, otherwise, it would be struck down for being
insufficient. According to the court, “no commitment in relation to the
infusion of fresh capital by its shareholders. (PBC v. Basic
Polyprinters)

Liquidation Analysis

One of the contents of the rehabilitation plan is that a liquidation analysis should
set out for each creditor that the present value of payments it would receive
under the plan is more than that which it would receive if assets of debtor are
sold and liquidated.

Respondents failed to include any liquidation analysis in their rehabilitation plan.

The total liquidation assets and estimated liquidation return to creditors, as well
as the fair market value vis-à-vis the forced liquidation value of the fixed assets
were not shown. As such, the court could not ascertain if the petitioning debtor’s
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 a crucial factor in a corporate rehabilitation case, which the CA,
unfortunately, failed to address. (Phil. Asset Growth two, Inc. and Planters Dev’t
Bank vs. Fastech Synergy Phil., Inc.)

G. CREDITOR APPROVAL OF REHABILITATION PLAN

How is rehabilitation plan approved?

a. Rehabilitation receiver, after making the rehabilitation plan, shall notify the
creditors and stakeholders that the plan is ready for examination
b. Within 20 days form said notification, the rehabilitation receiver shall convene
with creditors in whole or in part for purposes of voting on approval of plan
 Plan is deemed rejected unless approved by all classes of
creditors whose rights are adversely affected by then plan
 Plan is deemed approved by a class of creditors, if members of
said class holding more than 50% of total claims of said class vote
is in favor of the plan. Votes shall be based solely on the amount
of their respective claims based on the registry of claims
submitted by the rehabilitation receiver.
c. If plan is rejected by creditors, court may confirm the same if the following
conditions are present:
  Rehabilitation plan complies with the requirements specified
 Rehabilitation receiver recommends the confirmation of rehabilitation
plan
 Shareholders, owners or partners of the juridical debtor lose at least
their controlling interest as a result of rehabilitation plan.
d. If plan is approved, rehabilitation receiver shall submit the same to the court
for confirmation
e. 5 days thereafter, court shall notify the creditors that the same has been
submitted for confirmation
f. Creditor may file an objection within 20 days from receipt of notice from the
court only of the following grounds:
 Creditor’s support was induced by fraud
 Documents or data relied upon in the rehabilitation plan are materially
false or misleading
 Rehabilitation plan is in fact not supported by voting creditors

How is rehabilitation plan confirmed?

It is deemed confirmed if:

a. No objections are filed

b. Objection is filed but lacked merit
c. Objection has been cured
d. Debtor complies to cure objection
The court shall then issue an order confirming the rehabilitation plan.

Effects of Confirmation:
a. Rehabilitation plan binds the debtor and all other or all persons
affected
b. Debtor shall comply with the provisions of rehabilitation plan
c. Payments shall be made to creditors in accordance with the
rehabilitation plan
d. Contracts and other arrangements between debtors and creditor shall
continue provided that it does not conflict with the provisions of the
rehabilitation plan
e. Any compromises on amounts or rescheduling of timing of payments
by the debtor shall be binding on creditor’s regardless of whether or
not plan is successfully implemented

How are proceedings terminated?

Rehabilitation proceedings shall be terminated either there is successful

implementation or failure of said plan. There is failure of plan in the following
cases:
 a. Dismissal of petition
b. Debtor fails to submit to rehabilitation plan
c. No substantial likelihood that debtor can be rehabilitated within
reasonable period
d. Although rehabilitation plan is approved by court, but debtor fails to
perform its obligations thereunder or failed to realize objectives,
targets and goals
e. Commission of fraud in securing approval of rehabilitation plan or its
amendments
f. Other analogous cases
Upon breach or failure of the plan, the court, upon its motion or by any
affected party may:

a. Issue an order directing that breach be cured within specified period

of time; failure to comply will lead to conversion of proceeding into
liquidation
b. Issue order converting proceedings to liquidation
c. Allow debtor or rehabilitation receiver to submit amendments and
approval shall be governed by the same requirements
d. Issue an order to remedy the breach consistent with the present
regulation, other applicable law and the best interests of creditors
e. Enforce applicable provisions of rehabilitation plan through writ of
execution

Effect of termination:
a. Discharge rehabilitation receiver subject to submission of final report
b. Lifting of stay order and other court order holding in abeyance any
action for enforcement of a claim against debtor
Conversion to liquidation can only be resorted to if reason for termination is due
to failure of rehabilitation or dismissal of petition for reasons other than technical
grounds.

2. Pre-negotiated Rehabilitation

Initiation of Proceedings – Sec. 76

Who may initiate: An insolvent debtor, by itself or jointly with any of its creditors.
How initiated: By filing a verified petition with the court for the approval of a pre-
negotiated Rehabilitation Plan which has been endorsed or approved by
creditors.
Approval of petition: By creditors holding at least two-thirds (2/3) of the total
liabilities of the debtor, including:

a. secured creditors holding more than 50% of the total secured

claims of the debtor; and

 b. unsecured creditors holding more than 50% of the total

unsecured claims of the debtor

Contents of Petition, as a minimum:

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 should any
such claims be ruled valid or their amounts adjusted.

Issuance of Order – Sec. 77

When issued: Within 5 working days, and after determination that the petition is
SUFFICIENT in form and substance, the court shall issue an Order which shall:

1. identify the debtor, its principal business of activity/ies and its principal
place of business;

2. declare that the debtor is under rehabilitation;

3. summarize the ground/s for the filling of the petition;

4. direct the publication of the Order in a newspaper of general circulation

in the Philippines once a week for at least 2 consecutive weeks, with the
first publication to be made within 7 days from the time of its issuance;

5. direct the service by personal delivery of a copy of the petition on each

creditor who is not a petitioner holding at least 10% of the total liabilities
of the debtor, as determined in the schedule attached to the petition,
within 3 days;

6. state that copies of the petition and the Rehabilitation Plan are available
for examination and copying by any interested party;

7. state that creditors and other interested parties opposing the petition or
Rehabilitation Plan may file their objections or comments thereto within
a period of not later than 20 days from the second publication of the
Order;

8. appoint a rehabilitation receiver, if provided for in the Plan; and

9. include a Suspension or Stay Order as described in this Act.

Approval of the Plan – Sec. 78:

When approved: Within 10 days from the date of the second publication of the
Order, court shall approve the Rehabilitation Plan unless a creditor or other
interested party submits an objection to it in accordance with the next preceeding
section.

Objection to the Petition or Rehabilitation Plan – Sec. 79:

Who may submit: Any creditor or other interested party may submit to the court
not later than 8 days from the date of the second publication of the Order
mentioned in Section 77.
The objections shall be limited to the ff:

1. The allegations in the petition or the RehabPlan or the attachments

thereto are materially false or misleading;

2. The majority of any class of creditors do not in fact support the

Rehabilitation Plan;

3. The RehabPlan fails to accurately account for a claim against the debtor
and the claim in not categorically declared as a contested claim; or

4. The support of the creditors, or any of them was induced by fraud.

NOTE: Copies of any objection to the petition of the Rehab Plan shall be
served on:

1. the debtor

2. the rehabilitation receiver (if applicable),

3. the secured creditor with the largest claim and who supports the
RehabPlan

4. the unsecured creditor with the largest claim and who supports the
RehabPlan.

Hearing on the Objections – Sec. 80:

When is it set: After receipt of an objection, court shall set the hearing on a date
no earlier than 20 days and no later than 30 days from the date of the second
publication of the Order mentioned in Section 77.

• If the court finds merit in the objection – it shall direct the debtor, when
feasible to cure the defect within a reasonable period.

• If the court determines that the debtor or creditors supporting the Rehab
Plan acted in bad faith, or that the objection is non-curable – the court may
 order the conversion of the proceedings into liquidation. A finding by the
court that the objection has no substantial merit, or that the same has been
cured shall be deemed an approval of the Rehabilitation Plan.

Period for Approval of Rehabilitation Plan – Sec. 81: The court shall have a
maximum period of 120 days from the date of the filing of the petition to approve
the Rehabilitation Plan. Otherwise, the Rehabilitation Plan shall be deemed
approved.
Effect of Approval – Sec. 82: Same legal effect as confirmation of a Plan under
Chapter II.

3. Out-of-Court or Informal Restructuring Agreement or Rehabilitation Plan

Otherwise known as OCRA, this rehabilitation plan must be agreed upon by both

the debtor and the required number of creditors. Unlike the pre-negotiated

rehabilitation, the OCRA is not submitted to the court for approval.

Minimum requirements – FRIA, Sec. 84, FR Rules, Rule 4, Sec. 1

1. The debtor must agree to the rehabilitation plan.

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

secured obligations of the debtor.

3. It must be approved by creditors representing at least 75% of the

unsecured obligations of the debtor.

4. It must be approved by creditors holding at least 85% of both the

SECURED and UNSECURED liabilities of the debtor.

OCRA Notice

Another requirement is the publication of the OCRA once agreed by the parties.
It must be published once a week for at least 3 CONSECUTIVE WEEKS in a
newspaper of general circulation in the Philippines. The OCRA takes effect upon
the lapse if fifteen (15) days from the date of the last publication of the notice
thereof. (FRIA, Sec. 85; FR Rules, Rule 4, Sec. 1).

Contents of the Notice

1. Salient Provisions of the OCRA
2. It must specify that the OCRA is available for inspection or reproduction in

the offices of the debtor at the expense of the requesting party.

3. The number of secured creditors who approved the OCRA and the extent

of their representation (in %) – at least 67%

4. The number of unsecured creditors who approved the OCRA and the

extent of their representation (in %) – at least 75%

5. The total number of secured and unsecured creditors who approved the

OCRA and the extent of their representation (in %) among the total liabilities of

the debtor – at least 85%

6. The provisions would be binding upon the parties including the creditors

who did not participate in the proceedings or opposed the plan or whether their

claims have been scheduled.

7. Payments would be secured in accordance with the OCRA provisions

8. The manner and other requirements for the amendment or modification of

the OCRA

STANDSTILL PERIOD - This refers to the period agreed upon by the debtor and
its creditors to enable them to negotiate and enter into an OCRA. The standstill
agreement may include provisions identical with or similar to the legal effects of a
Commencement Order under Sec. 9, Rule 2 of the FR Rules (FR Rules Rule 1,
Sec. 5 [q]).

Requirements:

During negotiations, the parties may agree on a standstill period. It must be

before the finalization of the OCRA and its effectivity. It is enforceable not only

against the contracting parties but also against the other creditors, provided:

1. Approved by creditors representing 50% of the total liabilities of the

debtor;
2. Notice is published in a newspaper of general circulation in the

Philippines once a week for two (2) consecutive weeks;

3. The standstill period does not exceed 120 days from the date of

effectivity.

 The notice must invite the creditors to participate during the negotiations

for OCRA or a restructuring agreement informing that it shall be binding on all the

creditors IF the required majority votes (Sec. 84) are met (FRIA Sec. 85, FR

Rules, Rule 4, Sec. 2).

Contents of the Notice of the Standstill Period

1. Identity of the debtor, its principal business, or activities, and its principal

place of business.

2. The total amount of the debtor’s liabilities classified into secured and

unsecured.

3. Specification of a contact person including the existing office address,

phone numbers, and e-mail addresses.

4. That the creditors have been duly notified of the Standstill Period and that

they may contact the person specified.

5. Creditors representing the 50% of the total liabilities have agreed to the

period.

6. That the terms and conditions would be strictly observed during the

Standstill Period.

7. That the Standstill Period will be effective after publication of the notice

once a week for two (2) consecutive weeks in a newspaper of general circulation

in the Philippines.

8. The OCRA is binding on the debtor and all the affected persons if

approved by:
a. debtor

b. creditors representing at least 67% of the secured obligations of the

debtor

c. creditors representing at least 75% of the unsecured obligations of the

debtor

d. creditors holding at least 85% of the total liabilities

Effectivity of the Standstill Period

a. Expires at the lapse of the 120 days from effectivity

b. the effectivity of the OCRA

c. termination of negotiations for the OCRA declared by the creditors

representing more than 50% of the total liabilities WHICHEVER COMES FIRST.

CRAMDOWN EFFECT
The OCRA will have the same legal effect as confirmation of a Plan under
Section 69 of the FRIA. (FRIA, Sec. 86, FR Rules, Rule 4, Sec. 5)

Any amendment must be made in accordance with the terms of the OCRA and

with due notice on all the creditors (FRIA, Sec. 87; FR Rules, Rule 4, Sec. 6).

The said amendment must also be approved by the debtor and the required

number of creditors (FR Rules, Rule 4, Sec. 1).

The amendments or the modified OCRA would take effect upon the lapse of

fifteen (15) days from the date of the last publication of the required notice (FR

Rules, Rule 4, Sec. 6).

EFFECT OF THE COURT ACTION OR OTHER PROCEEDINGS

Any proceeding or court action related to the OCRA or Rehabilitation Plan will not
stay its implementation UNLESS the relevant party is able to secure a Temporary
Restraining Order or Injunctive Relief from the Court of Appeals (FFRIA, Sec. 88,
FR Rules, Rule 4, Sec. 7).
COURT ASSISTANCE

While the OCRA or standstill agreement is not filed with or approved by the court,
the insolvent debtor or creditor may file an APPPLICATION FOR COURT
ASSISTANCE to execute or implement a standstill agreement or an OCRA.

Form of Petition
1. Identity of the debtor, its principal business of activities, and its principal

place of business

2. Petition is filed by the creditor, the identity of the creditor and its principal

place of business

3. The identity and address of the parties against whom the assistance is

sought

4. Statement of the dates of the standstill agreement of the OCRA was

executed and became effective

5. Allegation that the requisite creditor approval for the standstill agreement

or for an OCRA has been obtained

6. An allegation that the notice of the standstill agreement and or the OCRA

has been duly published

7. The salient provisions of the standstill agreement and the OCRA including

the provisions sought to be enforced

8. The specific form of assistance or relief sought (FRIA, Sec. 89, FR Rules,

Rule 4, Sec. 9)

Additional Requirements

1. Venue of the petition filed with the Regional Trial Court having jurisdiction

over the place in which the insolvent debtor RESIDES or has its PRINCIPAL

PLACE OF BUSINESS.
Forms of Assistance Allowed

Issuance of a Writ of Execution: Court may provide any other form of additional

assistance as may be necessary including the award of damages properly

pleaded and proved, and to protect the interests of the creditors, the debtor, and

other interested parties (FR Rules, Rule 4, Sec. 10).

Respondent may raise that the standstill agreement or the OCRA is void for

failure to comply with the requirements OR invalidity of the consent ONLY if it

affects such a number of creditors required for the approval.

Failure to raise the defense constitutes as a waiver and PRECLUDE the

respondent from filing a separate petition to annul (FR Rules, Rule 4, Sec. 13).

Petition for Annulment of OCRA

Who May File? The debtor or the creditor on the ground of non-compliance with
the requirements of the standstill agreement under Rule 4, Sec 2 of the FR
Rules, or an OCRA under Rule 4, Section 1 of the FR Rules.

Grounds: vitiation of consent due to fraud, intimidation or violence

Court determines if there is a genuine issue of material fact before granting the

petition and order the same within five (5) days from the receipt of the comment

or opposition.

The standstill period continues to run during the pendency of the action. If the

issue is verified, the Court will conduct a summary hearing no later than twenty

(20) days from the filing of the petition. Rendering of Court’s judgment must be

within sixty (60) days from the filing of the petition. The same is final and

executory. Upon finality, the parties will have the remaining balance of the period

to enforce the decision, which may not be less than sixty (60) days.

Petition Contents for the Annulment

1. Identity of the debtor, its principal business or activities, and its principal

place of business
2. Ground for the petition: Must be accompanied by a copy of the Standstill

Agreement or the OCRA amendment or modifications, if any, and must be filed

not later than 30 days from the effectivity thereof.

Service of Summons

Upon filing, the court will immediately issue and cause to be serve the
corresponding summons to the respondents within five (5) days from receipt of
the petition.

Must be accompanied with:

1. Copy of the petition with all its attachments and served on all the persons

indicated as respondents.

 It will direct the respondent to file a comment and or opposition to the

petition within a non-extendable period of five (5) days from receipt of the

summons.

o Respondent must file a verified comment or opposition to the petition

together with supporting affidavits and documents within five (5) days from the

receipt of the summons and ensuring receipt thereof by the petitioner and the

court not less than three (3) days BEFORE the date of the summary hearing.

2. Filed with the sheriff, his deputy, or other proper court officer or, for

justifiable reasons, by the counsel or representative of the petitioner, or any

suitable person authorized or deputized by the court issuing the summons.

Any private person who is authorized or deputized by the court to serve

summons, orders, and other court processes will, for that purpose, be considered
an officer of the court.
 If the service of summons fails, it would be published in a manner the

court deems appropriate under the circumstances. Int eh case of juridical entities,

summons by publication, will be done by indicating the names of its officers or its

duly authorized representative.

 JUDGMENT OF OCRA
 Final after ten (10) days from receipt of the decision.

 May be appealable to the CA under Rule 65 (Petition for Certiorari)

WITHOUT PREJUDICE to the parties availing of other modes of

rehabilitation under Rule 2 or 3 of the FR Rules.

LIQUIDATION

Who is qualified to be a liquidator: A natural person or juridical entity may be

appointed as such by the court and entrusted with such powers and duties as set
forth in FRIA.
Kinds of debtors:

1. Individual debtors - refer to a natural person who is a resident and

citizen of the Philippines that has become insolvent as defined herein [FRIA, Sec.
4(c)]
2. Juridical debtors – refer to a juridical entity

VOLUNTARY LIQUIDATION VS. INVOLUNTARY LIQUIDATION VS.

CONVERSION

Voluntary Liquidation proceedings are initiated and applied for by the

insolvent debtor himself. (R.A. No. 10142, Sec. 90 & 103)

Involuntary Liquidation proceedings are imitated by the creditors of the

insolvent debtors after sufficient demonstration that their claims are uncontested,
due and demandable but the debtor is unwilling or unable to pay all his
outstanding debts. (R.A. No. 10142, Sec. 91 & 105)

Conversion is the act by an insolvent debtor under court-supervised or pre-

negotiated rehabilitation is ordered by the court to be liquidated upon proper
motion by the insolvent debtor, his creditors, or the rehabilitation receiver. As
such, conversion may result to the commencement of voluntary or involuntary
liquidation proceedings. (R.A. No. 10142, Sec. 90, 91 & 92)

LIQUIDATION OF INDIVIDUAL DEBTORS

BASIS VOLUNTARY LIQUIDATION INVOLUNTARY
(FRIA, Sec. 103) LIQUIDATION
(FRIA, Sec. 105)
Who may file An individual debtor whose Any creditor or group of
properties are not sufficient creditors whose claims
to cover his liabilities provided amount to at least
 that his outstanding debts Php500,000
exceed Php500,000
How to initiate File a verified petition with File a verified petition for
the court of the province or liquidation with the court of
city in which he has resided the province or city in which
for six (6) months prior to the the individual debtor resides
filing of such petition

Contents of the petition He shall attach to his petition The following shall be
a schedule of debts and considered acts of insolvency,
liabilities and an inventory and the petition for
of assets. The filing of such liquidation shall set forth or
petition shall be an act of allege at least one of such
insolvency. Acts of acts:
insolvency need not be
alleged. 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 creditor 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 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.
Conversion of rehabilitation When: At any time during the When: At any time during the
proceedings to liquidation pendency of court-supervised pendency of or after a
proceedings or pre-negotiated rehabilitation court-supervised
rehabilitation proceedings or pre-negotiated
rehabilitation proceedings

Who may initiate: The debtor Who may initiate: Three (3)
may also initiate liquidation or more creditors whose
proceedings by filing a motion claims is at least either One
in the same court where the million pesos
rehabilitation proceedings are (Php1,000,000.00) or at least
pending twenty-five percent (25%) of
the subscribed capital or
How: By filing a motion to partner's contributions of the
convert the rehabilitation debtor, whichever is higher,
proceedings into liquidation may also initiate liquidation
proceedings. proceedings by filing a motion
in the same court where the
rehabilitation proceedings are
pending

How: By filing a motion to

convert the rehabilitation
proceedings into liquidation
proceedings.

LIQUIDATION OF JURIDICAL DEBTORS

BASIS VOLUNTARY LIQUIDATION INVOLUNTARY
(FRIA, Sec. 90) LIQUIDATION
(FRIA, Sec. 91)
Who may file An insolvent debtor may apply Three (3) or more creditors
for liquidation by filing a the aggregate of whose
petition for liquidation with the claims is at least either One
court. 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.
Contents of the petition The petition shall be verified, The petition shall show that:
shall establish the insolvency
of the debtor and shall a. there is no genuine issue
contain, whether as an of fact or law on the claim/s
attachment or as part of the of the petitioner/s, and that the
body of the petition: due and demandable
payments thereon have not
a. a schedule of the debtor's been made for at least one
debts and liabilities including hundred eighty (180) days
a list of creditors with their or that the debtor has failed
addresses, amounts of claims generally to meet its
and collaterals, or securities, if liabilities as they fall due;
any; and
b. an inventory of all its
assets including receivables b. there is no substantial
and claims against third likelihood that the debtor
parties; and may be rehabilitated.
c. the names of at least
three (3) nominees to the
position of liquidator
Issuance of Liquidation Order Issued without trial. Issued after trial.

If the court finds petition Upon filing of such creditors’

sufficient in form and petition, court shall issue a
substance, it shall, within 5 show-cause order against the
working days, issue a individual debtor, at a time
liquidation order. and place to be fixed therein
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. If the
individual debtor shall default
or if, after trial, the issues are
found in favor of petitioning
creditors, court shall issue
liquidation order.

PROCEDURE
 The liquidation process refers to the proceeding where claims are filed and the assets of
the insolvent debtor are disposed and the proceeds are divided among the creditors.

LIQUIDATION ORDER

The liquidation order shall:

a. Declare the debtor insolvent;
b. Order the liquidation of the debtor and, in the case of a juridical debtor,
declare it as dissolved;
c. Order the sheriff to take possession and control of all the property of the
debtor, except those that may be exempt from execution;
d. Order the publication of the petition or motion in a newspaper of general
circulation once a week for two (2) consecutive weeks;
e. Direct payments of any claims and conveyance of any property due the
debtor to the liquidator;
f. Prohibit payments by the debtor and the transfer of any property by the
debtor;
g. Direct all creditors to file their claims with the liquidator within the period set
by the rules of procedure;
h. Authorize the payment of administrative expenses as they become due;
i. State that the debtor and creditors who are not petitioner/s may submit the
names of other nominees to the position of liquidator; and
j. Set the case for hearing for the election and appointment of the liquidator,
which date shall not be less than thirty (30) days nor more than forty-five (45)
days from the date of the last publication. (FRIA, Sec. 112)

EFFECTS OF LIQUIDATION ORDER

Upon the issuance of the liquidation order:

1.) The juridical debtor shall be deemed dissolved and its corporate or juridical
existence terminated;
2.) Legal title to and control of all the assets of the debtor, except those that may be
exempt from execution, shall be deemed vested in the liquidator or, pending his election
or appointment, with the court;
3.) All contracts of the debtor shall be deemed terminated and/or breached, unless
the liquidator, within ninety (90) days from the date of his assumption of office, declares
otherwise and the contracting party agrees;
4.) No separate action for the collection of an unsecured claim shall be allowed.
Such actions already pending will be transferred to the liquidator for him to accept and
settle or contest.
5.) If the liquidator contests or disputes the claim, the court shall 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 shall be filed and allowed in court; and
6.) No foreclosure proceeding shall be allowed for a period of one hundred eighty
(180) days. (FRIA, Sec. 113)

DETERMINATION 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. (FRIA, Sec.
123)

Right of set-off

If the debtor and a 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. (FRIA, Sec. 124)

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 a claim or
claims to the court, serving a certified copy on the liquidator and the creditor holding the
challenged claim. (FRIA, Sec. 125)

Finality of the claims

Upon the expiration of the thirty (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 filing of the register and
may be subsequently set aside only on grounds of fraud, accident, mistake or
inexcusable neglect. (FRIA, Sec. 125)

SUSPENSION OF PAYMENTS

Only an INDIVIDUAL DEBTOR may file a petition for suspension of payment.

a. The debtor has sufficient properties to cover all his debts but he foresees the
impossibility of meeting his debts when they respectively fall due.

b. The purpose is to suspend or delay the payment of debts.

c. The amount of indebtedness is not affected (not reduced or discharged).

DISTINCTIONS
 SUSPENSION OF PAYMENTS LIQUIDATION
1. Debtor is not insolvent – The debtor has 1. Debtor is insolvent – His assets are
sufficient assets to cover its liabilities. insufficient to cover the debtor’s liabilities.
2. Payment of obligations is stayed. 2. The obligations are discharged.
3. Applies only to individual debtor. 3. Proceedings can cover juridical persons and
individual debtors.
4. May be filed by the debtor. 4. May be initiated by the debtor (voluntary
insolvency) or by the creditors (involuntary
insolvency).
5. There is no minimum amount of liabilities 5. It is required that the debt of the individual
prescribed. debtor is not less than P500,000.00.
6. The rules on concurrence and preference of 6. The rules on concurrence and preference of
credits under the New Civil Code do not apply. credits under Articles 2236 and 2251 of the
New Civil Code apply.

SUSPENSION OF PAYMENTS REHABILITATION

1. Applies to Individual Debtor. 1. Applies to Business Organizations – Single
Proprietorship, Partnership, and Corporation.
2. The debtor has sufficient assets to cover its 2. The debtor is insolvent.
liabilities.
3. Secured debtors are not affected. 3. Secured debtors are affected by stay order
4. Filed by the debtor. 4. May be initiated by the debtor (voluntary
rehabilitation) or by the creditors (involuntary
rehabilitation).
5. There is no minimum requirement for the 5. The claim of, or the aggregate of claims
amount of the claims. against the debtor is at least P1,000,000.00 or
at least twenty-five percent (25%) of the
subscribed capital stock or partners’
contributions, whichever is higher.

SUSPENSION ORDER

Upon motion filed by the individual debtor, the court may issue an order suspending any
pending execution against the individual debtor.

a. Properties held as security by secured creditors shall not be the subject of such
suspension order.

b. 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.

c. 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.

Exceptions - The following creditors are not affected by the Stay Order:
 1. 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

2. Secured Creditors.

Prohibited Acts

The Individual Debtor is prohibited (in the Order to be issued by the court after the filing
of the Petition for Suspension of Payments) from:

a. Selling, transferring, encumbering or disposing in any manner of is property, except

those used in the ordinary operations of commerce or industry in which the petitioning
individual debtor is engaged, so long as the proceedings relative to the suspension of
payments are pending; and

b. 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.

Creditor’s Meeting

The proposed agreement shall be approved or rejected in the Creditors’ Meeting. The
presence of creditors holding claims amounting to at least 3/5 of the liabilities of the
debtor is necessary for the meeting.

Double Majority - is necessary for the approval of proposed agreement with the
creditors, to wit :

1.) Two-thirds (2/3) of the creditors voting unite upon the same proposition; and

2.) 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.

Effect of Disapproval by Creditors

If there is no approval of the double majority, the suspension of payments proceedings

will be terminated and the creditors shall be at liberty to enforce their rights which
correspond to them.

Remedies

Motion for Reconsideration

REHABILITATION LIQUIDATION SUSPENSION OF

PAYMENTS
Rule 6 SECTION 1. Motion Rule 5 ,SECTION 3. Motion SECTION 1. Motion for
for Reconsideration - A party for Reconsideration in Reconsideration in
may file a motion for Liquidation Proceedings. — Suspension of Payments
reconsideration of any order A party may file a motion for Proceedings. — A party may
issued by the court prior to the reconsideration of any order file a motion for
approval of the Rehabilitation issued by the court prior to the reconsideration of a
Plan. No relief can be issuance of the Liquidation Suspension of Payments
extended to the party Order. No relief can be Order, or any order issued by
aggrieved by the court's order extended to the party the court prior to its order
on the motion through a aggrieved by the court's order confirming or disapproving the
special civil action on the motion through a proposed agreement
for certiorari under Rule 65 of special civil action mentioned in Section 9, Rule
the Rules of Court. for certiorari under Rule 65 of 3 (A) of these Rules. No relief
An order issued after the the Rules of Court. can be extended to the party
approval of the Rehabilitation aggrieved by the court's order
Plan can be reviewed only on the motion through a
through a special civil action special civil action
for certiorari under Rule 65 of for certiorari under Rule 65 of
the Rules of Court. the Rules of Court.

Petition for Certiorari

REHABILITATION LIQUIDATION SUSPENSION OF

PAYMENTS
Rule 6, SECTION 2. Review Rule 5, SECTION 4. Review Rule 5, SECTION 2. Review
of Decision or Order on of Decision or Order in of Decision or Order in
Rehabilitation Plan. — An Liquidation Proceedings. — Suspension of Payments
order approving or The Liquidation Order, and Proceedings. — The court's
disapproving a rehabilitation the order approving or dismissal of the petition for
plan can only be reviewed disapproving the Liquidation suspension of payments on
through a petition Plan under Section 27, Rule 4 the ground of insufficiency in
for certiorari to the Court of (F) of these Rules can only be form and substance resulting
Appeals under Rule 65 of the reviewed through a petition in the non-issuance of a
Rules of Court within fifteen for certiorari to the Court of Suspension of Payments
(15) days from notice of the Appeals under Rule 65 of the Order, and its order
decision or order. Rules of Court within fifteen confirming or disapproving the
(15) days from notice of the proposed agreement
decision or order. mentioned in Section 9, Rule
3 (A) of these Rules can only
be reviewed through a petition
for certiorari to the Court of
Appeals under Rule 65 of the
Rules of Court within fifteen
(15) days from notice of the
decision or order.
Sources:

Financial Rehabilitation and Insolvency Act 2010

REVIEWER ON COMMERCIAL LAW by Jose R. Sundiang, SR. & Timoteo B. Aquino

(Financial Rehabilitation Rules of Procedure (2013), A.M. No. 12-12-11-SC, [August 27, 2013])

(Financial Liquidation and Suspension of Payments Rules of Procedure for Insolvent Debtors
(2015), A.M. No. 15-04-06-SC, [April 21, 2015])
 Questions & Answers (FRIA)

1. Q: a. What are the preferred claims that shall be satisfied first from the assets of an
insolvent corporation? b. How shall the remaining non-preferred creditors share in the estate of
the insolvent corporation above? (2007 Bar)

A: a) Under the Insolvency Law necessary funeral expenses of the debtor is the most preferred
claim. However, this is an insolvent corporation, thus, claims shall be paid in the following order:

1. Debts due for personal services rendered the insolvent by employees, laborers, or domestic
servants immediately preceding the commencement of proceedings in insolvency;

2. Compensation due to the laborers or their dependents under the provisions of Act Numbered
3428, known as the Workmen’s Compensation Act, as amended by Act Numbered 3812 and
under the provisions of Act Numbered 1874, known as the Employees’ Liability Act, and of other
laws providing for payment of indemnity for damages in cases of labor accidents;

3. 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;

4. Debts, taxes, and assessments due the Insular Government;

5. Debts, taxes and assessments due to any province/s of the Philippine Islands;

6. Debts, taxes and assessments due to any municipality or municipalities of the Philippine
Islands.

b) The remaining non-preferred creditors, whose debts are duly proved and allowed, shall be
entitled to share pro-rata in the assets, without priority or preference whatsoever. Suspension of
Payments

2. Q: a. Distinguish insolvency from suspension of payment. b. Horacio opened a coffee

shop using money borrowed from financial institutions. After 3 months, Horacio left for the USA
with the intent of defrauding his creditors. While his liabilities are P1.2M, his assets, however
are worth P1.5M. May Horacio be declared insolvent? (1998 Bar)

A: a) In insolvency, the liabilities of the debtor are more than his assets, while in suspension of
payments, assets of the debtor are more than his liabilities. In insolvency, the assets of the
debtor are to be converted into cash for distribution among his creditors, while in suspension of
payments, the debtor is only asking for time within which to convert his frozen assets into liquid
cash with which to pay his obligations when the latter fall due. b) No. Horacio may not be
declared insolvent. His assets worth P1.5 M are more than his liabilities worth P1.2 M.
3. Q: 1. Distinguish between suspension of payments and insolvency. 2. Distinguish
between voluntary insolvency and involuntary insolvency. (1995 Bar)

A: 1. In suspension of payments, the debtor is not insolvent. He only needs time within which to
convert his asset/s into cash with which to pay his obligations when they fall due. In the case of
insolvency, the debtor is insolvent, that is, his assets are less than his liabilities 2. In voluntary
insolvency, it is the debtor himself who files the petition for insolvency, while in involuntary
insolvency, at least 3 creditors are the ones who file the petition for insolvency against the
insolvent debtor.

4. Q: Distinguish between “suspension of payments” and “insolvency”. Who has jurisdiction

over suspension of payments filed by corporations, partnerships, or association? (1988 Bar)

A: Suspension of payment is a legal scheme whereby a debtor, who has sufficient assets but
who may be unable to meet his obligations as when they fall due, may petition for more time
within which to settle such obligations. The debtor’s proposal, or a modification thereof, can be
sustained if it is approved by at least 2/3 of the creditors representing at least 3/5 of the total
liabilities of the debtor. Insolvency, upon the other hand, may be petitioned when the assets of
the debtor are less than, or insufficient to answer for, his total liabilities. Whereas, a suspension
of payment may be initiated only by the debtor, an insolvency petition may be filed by either by
the debtor (voluntary insolvency) or at least three of his creditors whose aggregate credit is not
than PH=1,000 (involuntary insolvency). There is no discharge in suspension of payment, but
such discharge is possible in insolvency proceedings. In the case of corporations, partnerships
or associations, a suspension of payment (but not insolvency) now falls under the exclusive
jurisdiction of the SEC.

5. Q: One day Jerry Haw, doing business under the name Starlight Enterprises, a sole
proprietorship, finds himself short on cash and unable to pay his debts as they fall due although
he has sufficient property to cover such debts. He asks you, as his retained counsel, for advice
on the following queries:

a. Should he file a petition with the SEC to be declared in a state of suspension of

payments in view of the said financial condition he faces? Explain your answer.

b. Should he sell profit participation certificates to his 10 brothers and sisters in order to
raise cash for his business? Explain your answer. (1990 Bar)

A:

a) I would counsel Jerry Haw to file the Petition for Suspension of Payment with the
ordinary courts, rather than the SEC. SEC’s jurisdiction over such cases is confined only to
petitions filed by corporations and partnerships under its regulatory powers. b) Instead of selling
profit participation certificates, I would urge Jerry Haw to enter into a partnership or to
incorporate in order to raise cash for his business. Conversion of Rehabilitation Proceedings to
Liquidation Proceedings

6. Q: Family Bank was placed under statutory receivership and subsequently ordered
liquidated by the Central Bank (CB) due to fraud and irregularities in its lending operations
which rendered it insolvent. Judicial proceedings for liquidation were thereafter commenced by
the CB before the RTC. Family Bank opposed the petition. Shortly thereafter, Family Bank filed
in the same court a special civil action against the CB seeking to enjoin and dismiss the
liquidation proceeding on the ground of grave abuse of discretion by the CB. The court was
poised to: (1) restrain the CB from closing Family Bank; and (2) authorize Family Bank to
withdraw money from its deposits during the pendency of the case. If you were the judge, would
you issue such orders? Why?

A: No, the RTC has no authority to restrain the monetary board of the Central Bank from
statutory authority to undertake receivership and ultimate liquidation of a bank. Any opposition
to such an action could be made to the court itself where assistance is sought. The action of the
RTC where the proceeding is pending appeal have to be made in the Court of Appeals. Rights
of Secured Creditors

7. Q: Union Corporation was declared insolvent by order of the court. All creditors of Union
were asked to file their claims and attend a meeting to elect the assignee in insolvency.
Merchant Finance Corporation (MFC) has a claim for P500,000, which is secured by a
mortgage on a piece of land worth P1M. MFC seeks your advice as counsel whether it should
participate in the foregoing proceedings. What advice would you give MFC?

A: I would advice MFC that, having a contractual mortgage (the value of the mortgaged property
being well over the secured obligation), it should refrain from participating in the proceedings
and instead pursue its preferential right to foreclose the mortgage.

8. Q: Is the issuance of an order, declaring a petitioner in a Voluntary Insolvency proceeding

insolvent mandatory upon the court?

A: Assuming that the petition was in due form and substance and that the assets of the
petitioners are less than his liabilities, the court must adjudicate the insolvency.

9. Q: What are the effects of a judgment in insolvency in Voluntary Insolvency cases?

A: The adjudication or declaration of insolvency by the court, after hearing or default, shall have
the following effects:
 1. Forbid the payment to the debtor of any debt due to him and the delivery to him of any
property belonging to him;

2. Forbid the transfer of any property by him; and

3. Stay all civil proceedings against the insolvent but foreclosure may be allowed.

10. Under the FRIA, what is the meaning of claim?

A: Claim 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 discharged 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.