NEGOTIABLE INSTRUMENTS LAW

Atty. Maria Zarah R. Villanueva - Castro

FINANCIAL REHABILITATION AND INSOLVENCY ACT (Lecture)

STATE POLICY (Section 2, FRIA)

It is the policy of the State to encourage debtors, both juridical and natural persons, and their creditors to collectively and
realistically resolve and adjust competing claims and property rights. In furtherance thereof, the State shall ensure a timely,
fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The rehabilitation or liquidation shall be made
with a view 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, it is in the interest of the State to facilities a speedy and orderly
liquidation of these debtor's assets and the settlement of their obligations.

- Purpose of FRIA
- Direction of the State on how to carry out rehabilitation of corporations
- Even if the corporation is in debt, the State looks at it as it may still be helped. There might just be
something wrong somewhere (i.e., management, projects taken are not really feasible, bad
investments)

Liquidation – ending
Assets converted into cash so it’s easier to pay debts and distribute remaining money to the shareholders
of the corporation

1. Maintain certainty and predictability in commercial affairs

2. Preserve and maximize the value of the assets of debtors
3. Recognize creditor rights
4. Respect priority of payments (Preference of Credits)

- Ending is fair treatment to all creditors and to provide

NATURE OF PROCEEDING (Section 3, FRIA)

The proceedings under this Act shall be in rem. 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.

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.

- In rem
Actions usually commence when you serve the summons; not in this case.
Everyone is bound by the publication in a newspaper of general circulation.

- Summary and non – adversarial

More of position papers, document submission, argumentation via pleadings submitted in court.

DEBTORS INCLUDED
- Those who may become the subject matter of rehabilitation

1. Sole Proprietorship
2. Partnership
3. Corporations
4. Natural Persons
5. Judicial Persons

DEBTORS EXCLUDED
1. Banks – because they have their own process under the Banking Laws
2. Insurance Companies – Insurance Commission takes care of the rehabilitation of insurance
companies
3. Pre-need companies
4. National and Local Government Agencies / Units

SAN BEDA COLLEGE OF LAW – MENDIOLA || JPEDLP || Questions based from recitations of 2J 2017 – 2018
Answers are based on the books of Aquino and Take Note: A Commercial Law Reviewer, Zarah Notes, SBC COL Memory
Aid 2016 and lectures from Atty. Z || Digests c/o GANP
Disclaimer: Use with caution
 NEGOTIABLE INSTRUMENTS LAW
Atty. Maria Zarah R. Villanueva - Castro
PROHIBITED ACTS
- Does not help the corporation fix its processes; restore the corporation to its former financial
capabilities particularly in payment of debts

1. Disposal of Property not in the ordinary course of business

2. Concealment of property
3. Penalty is double the value of the property sold, embezzled or disposed; or double the amount of
the transaction, whichever is higher
For directors and officers – they become personally liable (Section 10, FRIA)
- They can not invoke the separate entity of the corporation, because what they did creates personal
liability

INITIATION
1. Voluntary – Initiated by the corporation itself with concurrence of the majority of its Board of
Directors; 2/3 outstanding capital stock
2. Involuntary – creditor / group of creditors with at least 1 million debt or at least 25% of the capital
stock subscribed, whichever is higher

Condition:
1. No genuine issue of fact or law; or
2. Creditor, other than petitioners, has initiated foreclosure which will prevent debt payment
- If these prior creditors are able to foreclose the property, the ending would be the other creditors
may no longer be paid since the corporation will no longer be able to pay.

- The Court becomes in charge primarily.

MANAGEMENT COMMITTEE or RECEIVER

- Caretakers

Important things that the Court will look into to justify the rehabilitation of a corporation:
Management committees and receivers are appointed when the corporation is in imminent danger of:
a. Dissipation, loss, wastage or destruction of assets and other properties;
b. Paralysis of its business operations that may be prejudicial to the interest of the stockholders,
parties-litigants, or the general public.
- Must concur.

Alfredo Villamor, Jr. v. John Umale

G.R. No. 172853; September 24, 2014
- While the waiver of rental income is enough to constitute loss or dissipation of asses, complainant
failed to show that there was an imminent danger of paralysis to the company’s business
operations.
- The Court of Appeals has no power to appoint a receiver or a management committee.
It rests upon the RTC – Intra-corporate controversies including incidences of such controversies.
Where the corporation’s primary or main office resides

PETITION FOR REHABILITATION (Section 15, FRIA)

If the court finds the petition for rehabilitation to be sufficient in form and substance, it shall, within five (5) working days
from the filing of the petition, issue a Commencement Order. If, within the same period, the court finds the petition deficient
in form or substance, the court may, in its discretion, give the petitioner/s a reasonable period of time within which to amend
or supplement the petition, or to submit such documents as may be necessary or proper to put the petition in proper order. In
such case, the five (5) working days provided above for the issuance of the Commencement Order shall be reckoned from the
date of the filing of the amended or supplemental petition or the submission of such documents

Commencement Order – what the corporation may expect from the court
The Order is to contain among other things:
a. Appointment of Receiver
b. Prohibit suppliers from withholding goods/services as long as the debtor can pay
c. Authorize payment of administrative expenses
d. Stay Order (Section 16, FRIA)
- Only current bills; arrears are suspended
SAN BEDA COLLEGE OF LAW – MENDIOLA || JPEDLP || Questions based from recitations of 2J 2017 – 2018
Answers are based on the books of Aquino and Take Note: A Commercial Law Reviewer, Zarah Notes, SBC COL Memory
Aid 2016 and lectures from Atty. Z || Digests c/o GANP
Disclaimer: Use with caution
 NEGOTIABLE INSTRUMENTS LAW
Atty. Maria Zarah R. Villanueva - Castro

Stay or Suspension order which shall:

1. Suspend all actions or proceedings for the enforcement of claims against the debtor
2. Suspend all actions to enforce all judgments
3. Prohibit debtor from encumbering his mortgages, transferring properties
4. Prohibit debtor from making any payment of its outstanding creditors except for administrative
expenses

CLAIMS
- Pecuniary Claims (i.e., breach of contract of carriage, labor related claims, collection cases)
- Definition is all encompassing; for money or otherwise, liquidated or not, fixed or contingent,
matured or not and disputed or not are all suspended including taxes.
- No prejudice to actions against directors and officers acting on their personal capacity

EXCLUDED CLAIMS
1. Pending Supreme Court cases
2. Specialized court / quasi – judicial securities
3. Broker or dealer / clearing agencies
4. Criminal action against directors (Section 18, FRIA)
5. Sureties, persons solidarily liable with the debtor and third party

CONTROL AND MANAGEMENT

- Even liability for taxes, including penalties, interests and charges thereof are suspended during the
period of rehabilitation

CLAIMS THAT ARE STAYED

1. Sobrejuanite v. ASB Development Corporation
2. Negros Navigation v. Court of Appeals
3. Castillo v. Uniwide Warehouse Club
4. Garcia v. Philippine Airlines
5. Philippine Airlines v. Court of Appeals and Koschinger
6. Philippine National Bank v. Court of Appeals
7. Panlilio v. Regional Trial Court

SUSPENSION OF PAYMENT
- Deferral only

MANAGEMENT (Section 47, FRIA)

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.

- Despite the rehabilitation process, management still continues.

- Shall remain with existing management; but there can be change if the the findings reported to the
court shows mismanagement.
- All disbursements, payments, disposal, and transfers will have to go through the receiver or the
committee.

IMMUNITY (Section 41, FRIA)

The rehabilitation receiver and all persons employed by him, and the members of the management committee and all persons
employed by it, shall not be subject to any action. claim or demand in connection with any act done or omitted to be done by
them in good faith in connection with the exercise of their powers and functions under this Act or other actions duly approved
by the court.

- From liability or suit from people if the corporation is in rehabilitation as long as they act in good
faith.

SAN BEDA COLLEGE OF LAW – MENDIOLA || JPEDLP || Questions based from recitations of 2J 2017 – 2018
Answers are based on the books of Aquino and Take Note: A Commercial Law Reviewer, Zarah Notes, SBC COL Memory
Aid 2016 and lectures from Atty. Z || Digests c/o GANP
Disclaimer: Use with caution