&

DIME EVIOTA LAW FIRM

Corporate Rescue and the

New Financial
Rehabilitation and
Insolvency Act of 2010
[A DLDTE LAW CLIENT PAPER]
Ronald B. Dime

2010
Corporate Rescue and the New Financial Rehabilitation and Insolvency
Act of 2010 2010

2 / FM IDWAYCOURTBLDG. ,2 4 1EDSAMAND.CITY,PHILS.
I. INTRODUCTION: A BRIEF HISTORY

For a long time, a distressed corporation in the Philippines had no other real
recourse than to commit legal seppuku, whether or not its financial condition was
due to the fundamental unsoundness of its business or merely a temporary run in
with bad luck.

This lack of any real corporate rescue vehicle characterized the legal
environment that prevailed under the regime of Act No. 1956 (otherwise known as
the “Insolvency Law”) from the time of its enactment on 20 May 1909 until the
early 1980s1.

Act 1956 by itself introduced major changes to corporate law and removed
the distinction in the Spanish system between “insolvency” and “bankruptcy.”
Nonetheless, the Insolvency Law’s approach to corporate rescue was simply to
provide a “solvent but illiquid” debtor temporary relief from payment of its debts
while an “insolvent” corporation was forced to undertake a gradual and organized
liquidation process2.

1 The Insolvency Law of the Philippines is in fact a derivative of even

older laws from other jurisdictions, such as the California Insolvency

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Corporate Rescue and the New Financial Rehabilitation and Insolvency
Act of 2010 2010

Law of 1895 and the American bankruptcy Act of 1867 [See Sun Life
Assurance Co. of Canada v. Frank B Ingersoll, et. al.; GR No. 164758
(November 1921)]

2 The three main remedies under Act 1956 are:

a) Petitions for the suspension of payments by an individual, sociedad or
corporation under Section 2 of the Insolvency Law:
Section 2. The debtor who, possessing sufficient property to
cover all his debts, be it an individual person, be it a
sociedad or corporation, foresees the impossibility of
meeting them when they respectively fall due, may petition
that he be declared in the state of suspension of payments
by the court, or the judge thereof in vacation, of the
province or of the city in which he has resided for six months
next preceding the filing of his petition.
b) Petitions for Voluntary dissolution under Section 14:
Section 14. An insolvent debtor, owing debts exceeding in
amount the sum of one thousand pesos, may apply to be
discharged from his debts and liabilities by petition to the
Court of First Instance of the province or city in

In 1981, then President Marcos issued Presidential Decree (P.D.) No. 1758
which amended P.D. No. 902-A. For the first time, the concept of “corporate
rehabilitation” was introduced. This is contained in an addendum to the powers
formerly granted to the Securities and Exchange Commission (SEC)3 under Section
5 of PD No. 902-A, to wit:

“Section 5. In addition to the regulatory and adjudicative

functions of the Securities and Exchange commission over
corporations, partnerships and other forms of association
registered with it expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
xxx
“d) Petitions of corporations, partnerships or associations to
be declared in the state of suspension of payments in cases
where the corporation, partnership or association possesses
sufficient property to cover all its debts but foresees the
impossibility of meeting them when they respectively fall due
or in cases where the corporation,

which he has resided for six months next preceding the filing
of such petition. In his petition he shall set forth his place
of residence, the period of his residence therein immediately
prior to filing said petition, his inability to pay all his
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Corporate Rescue and the New Financial Rehabilitation and Insolvency
Act of 2010 2010

debts in full, his willingness to surrender all his property,

estate, and effects not exempt from execution for the benefit
of his creditors, and an application to be adjudged an
insolvent. He shall annex to his petition a schedule and
inventory in the form hereinafter provided.
the filing of such petition shall be an act of insolvency.
c) Petitions for Involuntary Insolvency:
Section 20. An adjudication of insolvency may be made on the
petition of three or more creditors, residents of the
Philippine islands, whose credits or demands accrued in the
Philippine Islands, and the amount of which credits or demands
are in the aggregate of not less than one thousand pesos;
Provided, that none of said creditors has become a creditor
by assignment, however made, within thirty days prior to the
filing of said petition. Such petition must be filed in the
Court of first Instance of the province or city in which the
debtor resides or has his principal place of business, and
must be verified by at least three of the petitioner. the
following shall be considered acts of insolvency, and the
petition shall set forth one or more of such acts: xxx

3 Jurisdiction has since been transferred to the Regional Trial Court.

partnership or association has no sufficient assets to cover its
liabilities, but is under the management of a Rehabilitation
Receiver or Management Committee created pursuant to this
Decree.”
[as amended by P.D. 1758]

One of the innovations created by PD 1758 is that while an insolvent

corporation (i.e. one that does not have sufficient assets to cover its debts) was
limited to a Petition for Insolvency resulting in liquidation of assets under Act
1956; a corporation, which is technically “insolvent,” was given the authority to
prove that it can be rehabilitated with court supervision. As explained by the
Supreme Court:

“Section 5, par. (d) should be construed as vesting upon

the SEC original and exclusive jurisdiction only over petitions
to be declared in a state of suspension of payments, which may
either be: (a) a simple petition for suspension for payments
based on the provisions of the Insolvency Law, or (b) a similar
petition accompanied by a prayer for the creation/
appointment of a management committee and/ or
rehabilitation receiver based on the provision of P.D. No. 902-
A. Said provision cannot be stretched to include petitions for
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Act of 2010 2010

insolvency. The reason is that under said Section 5, par. (d)

above-quoted, the jurisdiction of the SEC over cases where the
corporation, partnership or association has no sufficient
assets to cover its liabilities, and therefore insolvent, is
qualified by the conjunctive phrase "but is under the
management of a Rehabilitation Receiver or Management
Committee created pursuant to this Decree." This
qualification effectively circumscribes the jurisdiction of the
SEC over insolvent corporations, partnerships and
associations and consequently, over proceedings or the
declaration of insolvency. It demonstrates beyond doubt that
jurisdiction over insolvency proceedings pertains neither in
the first instance nor exclusively to the SEC, but only in
continuation of or as incident to the exercise of its jurisdiction
over petitions to be declared in a state of suspension of
payments wherein the petitioning corporation, partnership or
association had previously been placed under a rehabilitation
receiver or management committee by the
SEC itself.
“Viewed differently, where the petition filed is one for
declaration of a state of suspension of payments due to a
recognition of the inability to pay one's debts and liabilities,
and where the petitioning corporation either : (a) has
sufficient property to cover all its debts but foresees the
impossibility of meeting them as they fall due (solvent but
illiquid) or (b) has no sufficient property (insolvent) but is
under the management of a rehabilitation receiver or a
management committee, the applicable law is P.D. No. 902A
pursuant to Sec. 5, par. (d) thereof. However, if the
petitioning corporation has no sufficient assets to cover its
liabilities and is not under a rehabilitation receiver or a
management committee created under P.D. 902-A, and does
not seek merely to have the payments of its debts suspended,
but seeks a declaration of insolvency, as in this case, the
applicable law is Act 1956 on voluntary insolvency, specifically
section 14 therefor, which states: “x x x”
[Land Bank of the Philippines vs. Capistrano, et al. G.R. No
73123, 2 September 1991]

It may be convenient to mention at this juncture that by the “Law” on

corporate rehabilitation, is meant that body of rules that govern: (i) formal and
substantive requirements of rehabilitation, (ii) effects of rehabilitation, (iii)
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Corporate Rescue and the New Financial Rehabilitation and Insolvency
Act of 2010 2010

procedural rules as well as (iv) liquidation and disposition of assets. For the most
part, this body of rules was developed over time by the courts1. Thus, aside from
jurisprudence, the chief tomes of rehabilitation practice are Administrative Matter
(A.M.) No. 00-8-10-SC, otherwise known as the “Rules of Procedure on Corporate
Rehabilitation2 of 2008” (hereinafter, the “2008 Rules”) which took the place of
the 2000 Interim Rules on Corporate Rehabilitation (hereinafter, the “Interim
Rules”) as well as some related provisions of A.M. No. 01-2-04 SC or the “Interim
Rules of Procedure for Intra-Corporate Controversies” (circa 2001).

While the current corporate rehabilitation rules are a marked improvement

over the antiquated Insolvency Law, certain gaps in the law have prevented it from
being a definitive corporate rescue vehicle.

II. THE FRIA

The Lower House approved House Bill (HB) 7090, its version of the
Financial Rehabilitation and Insolvency Act of 2010 (the “FRIA”), on 02 February
2010 or just before the end of its 14th Session3.

Off the bat, it would be accurate to conclude that the FRIA4 is not a simple
codification of the existing rules on corporate rehabilitation but a veritable system
overhaul. Broadly speaking, the FRIA integrates rehabilitation and restructuring
along with insolvency law. Furthermore, it moves from the debtor controlled
process of the older system to a framework where the creditors take the fore in
determining the future of the distressed corporation.

1 Thus, in a sense, mimicking Common Law.

2 Which amended the 2000 Interim Rules on Corporate Rehabilitation.

3 As of this writing, HB 7090 is to be consolidated with its counterpart
Senate Bill (SB) 61 and thereafter transmitted to the President for
approval.

4 The author uses FRIA and HB 2070 interchangeably as a practical

convention.
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Corporate Rescue and the New Financial Rehabilitation and Insolvency
Act of 2010 2010

What follows below are some of the key features of the new FRIA pertaining
to rehabilitation of corporate debtors.

Meaning of “insolvent”

The old Insolvency Law of 1909 made a distinction between a debtor who
was “insolvent” and one which was solvent but “illiquid.” Given that prior to the
passage of the Securities Regulation Code (Republic Act 8799) the jurisdiction over
Petitions to Declare Suspension of Payments and/or for the appointment of a
Rehabilitation Receiver was given to the Securities and Exchange Commission
(SEC) while Petitions for Insolvency had to be heard by the Regional Trial Court
(RTC), some confusion resulted which eventually required some clarification by
the Supreme Court8.

On the other hand, both the 2000 Interim Rules on Corporate

Rehabilitation as well as the 2008 Rules on Corporate Rehabilitation made
rehabilitation available to any debtor “who foresees the impossibility of meeting
its debts when they respectively fall due.”

The FRIA avoids the trap entirely by providing for a broad definition of the
term “insolvent,” as follows:
“Section 4. Definition of Terms. – As used in this Act,
the term: xxx

“(p) 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.”
xxx

Three ways to rescue a corporation;

Out-of-Court Rehabilitation

While the old rehabilitation regime did not expressly provide for

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Corporate Rescue and the New Financial Rehabilitation and Insolvency
Act of 2010 2010

8 For instance, see Rubberworld v. NLRC, GR No. 126773.

See also: Union Bank v. Concepion, GR No. 160272 where the Supreme
Court declared that the SEC retained jurisdiction over a Petition for
the declaration of suspension of payments and rehabilitation even if the
debtor became insolvent during the course of the proceedings.

Finally, see Philippine National Bank v. CA [GR No. 165571, 20 January

2009] where one of the issues raised was whether or not a “technically
insolvent corporation” (i.e. one which foresees its inability to pay its
obligations for more than one year) can file a Petition for
Rehabilitation with the SEC despite not having filed a prior petition
for Suspension of Payments. The Supreme Court ruled that the SEC Rules
on Corporate Recovery allowed rehabilitation without “[r]equiring a
previous filing of a petition for suspension of payments.”
rehabilitation without court intervention, it did not specifically disallow it either.
Thus, a rehabilitation plan entered into by the debtor and its creditors partakes of
the nature of a contract and should not be invalidated simply on the ground that it
was done without court approval. Following the general rule however, nonparties
cannot be bound by the terms of the negotiated rehabilitation plan.

The FRIA takes it a step further by expressly providing rules to govern

extrajudicial rehabilitation. More specifically, there are three (3) processes to
resuscitate a financially distressed corporation under the FRIA, namely: (i) court
supervised rehabilitation, (ii) pre-negotiated rehabilitation and/or (iii) out-ofcourt
restructuring agreements. The choice largely depends on whether or not the
initiating party can accumulate the necessary number of votes, to wit:

Voluntary Involuntary. Pre-Negotiated Informal

Rehabilitation Rehabilitation Rehabilitation Rehabilitation
(Debtor Initiated (Creditor
Court Initiated Court
Supervised) Supervised)

Provision Section 12 Section 13 Section 76 Section 83

Petitioner Debtor Creditors Debtor who may be None

joined by any of its
creditors

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Corporate Rescue and the New Financial Rehabilitation and Insolvency
Act of 2010 2010

General - in case of a - creditors must - Pre-negotiated - debtor must

Conditions corporation, by a have an Rehabilitation Plan agree to the out-of-
majority vote of the aggregate claim which has been court or informal
board of directors or of endorsed or restructuring/
trustees and PhP1,000,000. approved by workout agreement
authorized by a vote 00 or at least creditors holding at or Rehabilitation
of the stockholders 25 % of the least two-thirds Plan
representing at least subscribed (2/3) of the total - it must be
two-thirds (2/3) of capital stock or liabilities of the approved by
the outstanding partner's debtor, including creditors
capital stock, or in contributions, secured creditors representing at least
case of a non-stock whichever is holding more than sixty-seven percent
corporation, by the higher fifty percent (50%) (67%) of the secured
vote of at least two- provided that: of the total secured obligations of the
thirds (2/3) of the claims of the debtor debtor
members (a) there is no and unsecured - it must be
- in case of a genuine issue of fact creditors holding approved by
partnership, the or law on the more than fifty creditors
approval of a claim/s and due and percent (50%) of the representing at least
majority of the demandable total unsecured seventy-five percent
partners payments have not claims of the debtor (75%) of the
been made for at unsecured
least 60 days or obligations of the
debtor has generally debtor
defaulted on - it must be
obligations as they approved by
fall due; or creditors holding at
least eighty-five
(b) a creditor, other percent (85%) of the
than petitioner/s, total liabilities,
has initiated secured and
foreclosure unsecured, of the
proceedings against debtor.
the debtor that will
prevent the debtor
from paying its
debts as they fall
due.

Other than some salient points that will be touched on later, the rules on
voluntary and involuntary court supervised rehabilitation proceedings, as well as
pre-negotiated rehabilitation, remain essentially the same. Nonetheless, one of
the most significant developments under the new law is the recognition of out-

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Act of 2010 2010

ofcourt restructuring agreements and the establishment of the legal vehicle to

encourage informal rehabilitation of the debtor.

Procedure for Court Supervised Rehabilitation

A. Filing of Petition and Issuance of Commencement Order

In court supervised rehabilitation proceedings, the rehabilitation of the

debtor officially commences after the court makes the finding that the Petition
(whether voluntary or involuntary) is sufficient in form or substance. More
specifically, the rehabilitation proceedings are deemed to commence on the date of
the issuance of the Commencement Order, pursuant to Sections 15 and 16 of the
law, to wit:

“Section 15. Action on the Petition. – 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 and
substance, the court may, in its discretion, give the
petitioner/s a reasonable 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.
Section 16. Commencement of Proceedings and
Issuance of a Commencement Order. – The rehabilitation
proceedings shall commence upon the issuance of the
Commencement Order, which shall:
xxx

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Corporate Rescue and the New Financial Rehabilitation and Insolvency
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Under the same Section 16, the “Commencement Order” shall, among
others: (i) declare that the debtor is under rehabilitation5, (ii) direct publication of
the Order and notice to creditors6, (iii) appoint a rehabilitation receiver7, (iv) set
the date of the initial hearing for the determination of whether or not the debtor
can be rehabilitated8, (v) direct all creditors to file their claims at least five (5) days
from initial hearing 9 and (vi) direct the government, through the Bureau of
Internal Revenue (BIR) to either file its Comment to the Petition for Rehabilitation
or present its claims against the debtor.

Suspension or Stay Order

In addition, the Commencement Order shall include a Suspension or Stay

Order prohibiting the sale or disposition of assets of the debtor and ordering the
suspension of all actions against the debtor and/or the debtor’s estate. The scope
and/or coverage of the stay order under the FRIA remain as broad as before.
However, certain cases are allowed to proceed until the execution stage10.
These and other exceptions are enumerated in Section 18 of the law, to wit:

“Section 18. Exceptions to the Stay or Suspension Order. –

The Stay or Suspension Order shall not apply:
“(a) to cases already pending appeal in the Supreme
Court as of commencement date: Provided, That any final and

5 Subparagraph (e)

6 Subparagraphs (f) and (g)

7 Subparagraph (h)

8 Subparagraph (m)

9 Subparagraph (i)

10In Philippine Airlines v. Court of Appeals [GR No. 150592, 20 January

2009], it was held that the stay order suspends the proceedings and not
just the enforcement of the claim. However, the 2008 Rules allow the
commencement of actions to prevent prescription of actions.
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Corporate Rescue and the New Financial Rehabilitation and Insolvency
Act of 2010 2010

executory judgment arising from such appeal shall be referred

to the court for appropriate action;
“(b) subject to the discretion of the court, to cases
pending or filed at a specialized court or quasi-judicial agency
which, 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;
“(c) to the enforcement of claims against sureties and
other persons solidarily liable with the debtor, and third party
or accommodation mortgagors as well as issuers 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;
“(d) to any form of action of customers or clients of a
securities market participant to recover or otherwise claim
moneys or 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-regulating organization to pay of settle such
claims or liabilities;
“(e) to the actions of a licensed broker or dealer to sell
pledged securities of a debtor pursuant to a securities pledge or
margin agreement for the settlement of securities transactions in
accordance with the provisions of the Securities Regulation Code
and its implementing rules and regulations;
“(f) 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
“(g) Any criminal action against the individual debtor
or owner, partner, director or officer of a debtor shall not be
affected by any proceeding commenced under this Act.”

Note that pursuant to sub-paragraph (c) above, the suspension order does
not cover the enforcement of claims against “persons solidarily liable with the
debtor” including “issuers of letters of credit.” This follows the rule in MWSS vs.
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Act of 2010 2010

Daway [GR No. 160732, 21 June 2004] which held that a letter of credit is excluded
from the jurisdiction of the rehabilitation court, thus:

“Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not

enjoin the enforcement of all claims against guarantors and
sureties, but only those claims against guarantors and
sureties who are not solidarily liable with the debtor.
Respondent Maynilad’s claim that the banks are not solidarily
liable with the debtor does not find support in jurisprudence.

“We held in Feati Bank & Trust Company v. Court of Appeals

that the concept of guarantee vis-à-vis the concept of an
irrevocable letter of credit are inconsistent with each other.
The guarantee theory destroys the independence of the bank’s
responsibility from the contract upon which it was opened and
the nature of both contracts is mutually in conflict with each
other. In contracts of guarantee, the guarantor’s obligation is
merely collateral and it arises only upon the default of the
person primarily liable. On the other hand, in an irrevocable
letter of credit, the bank undertakes a primary obligation. We
have also defined a letter of credit as an engagement by a bank
or other person made at the request of a customer that the
issuer shall honor drafts or other demands of payment upon
compliance with the conditions specified in the credit.

“Letters of credit were developed for the purpose of insuring

to a seller payment of a definite amount upon the presentation
of documents and is thus a commitment by the issuer that the
party in whose favor it is issued and who can collect upon it
will have his credit against the applicant of the letter, duly paid
in the amount specified in the letter. They are in effect
absolute undertakings to pay the money advanced or the
amount for which credit is given on the faith of the
instrument. They are primary obligations and not accessory
contracts and while they are security arrangements, they are
not converted thereby into contracts of guaranty. What
distinguishes letters of credit from other accessory contracts,
is the engagement of the issuing bank to pay the seller once
the draft and other required shipping documents are
presented to it. They are definite undertakings to pay at sight
once the documents stipulated therein are presented.

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Act of 2010 2010

“Letters of Credits have long been and are still governed by

the provisions of the Uniform Customs and Practice for
Documentary Credits of the International
Chamber of Commerce. In the 1993 Revision it provides in
Art. 2 that “the expressions Documentary Credit(s) and
Standby Letter(s) of Credit mean any arrangement, however
made or described, whereby a bank acting at the request and
on instructions of a customer or on its own behalf is to make
payment against stipulated document(s)” and Art. 9 thereof
defines the liability of the issuing banks on an irrevocable
letter of credit as a “definite undertaking of the issuing bank,
provided that the stipulated documents are presented to the
nominated bank or the issuing bank and the terms and
conditions of the Credit are complied with, to pay at sight if
the Credit provides for sight payment.”

“We have accepted, in Feati Bank and Trust

Company v. Court of Appeals and Bank of America NT & SA
v. Court of Appeals, to the extent that they are pertinent, the
application in our jurisdiction of the international credit
regulatory set of rules known as the Uniform Customs and
Practice for Documentary Credits (U.C.P) issued by the
International Chamber of Commerce, which we said in Bank
of the Philippine Islands v. Nery was justified under Art. 2 of
the Code of Commerce, which states:
`Acts of commerce, whether those who execute them be
merchants or not, and whether specified in this Code or
not should be governed by the provisions contained in
it; in their absence, by the usages of commerce
generally observed in each place; and in the absence of
both rules, by those of the civil law.’

“The prohibition under Sec 6 (b) of Rule 4 of the Interim

Rules does not apply to herein petitioner as the prohibition is
on the enforcement of claims against guarantors or sureties of
the debtors whose obligations are not solidary with the debtor.
The participating banks’ obligation are solidary with
respondent Maynilad in that it is a primary, direct, definite
and an absolute undertaking to pay and is not conditioned on
the prior exhaustion of the debtor’s assets. These are the same
characteristics of a surety or solidary obligor.

“Being solidary, the claims against them can be pursued

separately from and independently of the rehabilitation case,

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Corporate Rescue and the New Financial Rehabilitation and Insolvency
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as held in Traders Royal Bank v. Court of Appeals and

reiterated in Philippine Blooming Mills, Inc.
v. Court of Appeals, where we said that property of the surety
cannot be taken into custody by the rehabilitation receiver
(SEC) and said surety can be sued separately to enforce his
liability as surety for the debts or obligations of the debtor.
The debts or obligations for which a surety may be liable
include future debts, an amount which may not be known at
the time the surety is given.

“The terms of the Irrevocable Standby Letter of Credit do not

show that the obligations of the banks are not solidary with
those of respondent Maynilad. On the contrary, it is issued at
the request of and for the account of Maynilad Water Services,
Inc., in favor of the Metropolitan Waterworks and Sewerage
System, as a bond for the full and prompt performance of the
obligations by the concessionaire under the Concession
Agreement and herein petitioner is authorized by the banks to
draw on it by the simple act of delivering to the agent a written
certification substantially in the form Annex “B” of the Letter
of Credit. It provides further in Sec. 6, that for as long as the
Standby Letter of Credit is valid and subsisting, the Banks
shall honor any written Certification made by MWSS in
accordance with Sec. 2, of the Standby Letter of Credit
regardless of the date on which the event giving rise to such
Written Certification arose.
“Taking into consideration our own rulings on the nature of
letters of credit and the customs and usage developed over the
years in the banking and commercial practice of letters of
credit, we hold that except when a letter of credit specifically
stipulates otherwise, the obligation of the banks issuing letters
of credit are solidary with that of the person or entity
requesting for its issuance, the same being a direct, primary,
absolute and definite undertaking to pay the beneficiary upon
the presentation of the set of documents required therein.

“The public respondent, therefore, exceeded his jurisdiction,

in holding that he was competent to act on the obligation of
the banks under the Letter of Credit under the argument that
this was not a solidary obligation with that of the debtor.
Being a solidary obligation, the letter of credit is excluded
from the jurisdiction of the rehabilitation court and therefore
in enjoining petitioner from proceeding against the Standby
Letters of Credit to which it had a clear right under the law and

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Act of 2010 2010

the terms of said Standby Letter of Credit, public respondent

acted in excess of his jurisdiction.”

On the other hand, the Stay or Suspension Order applies with equal force to
the enforcement of both secured and unsecured claims except that under Section
60 of the FRIA, the issuance of the Stay or Suspension Order “shall not be deemed
in any way to diminish or impair the security or lien of a secured creditor, or the
value of his lien or security, except that his right to enforce said security or lien
may be suspended during the term of the Stay Order.” Again, this paraphrases
the “equality in equity” principle the effects of which were explained in the case of
Tsuneishi Heavy Industries (Cebu), Inc. v. Negros Navigation Co., Inc. et. al. [GR
166845, 10 December 2008], thus:

“PD 902-A mandates that upon appointment of a

management committee, rehabilitation receiver, board or
body, all actions for claims against corporations, partnerships
or associations under management or receivership pending
before any court, tribunal, board or body shall be suspended.
PD 902-A does not make any distinction as to what claims are
covered by the suspension of actions for claims against
corporations under rehabilitation. No exception is made
therein in favor of maritime claims. Thus, since the law does
not make any exemptions or distinctions, neither should we.
Ubi lex non distinguit nec nos distinguere debemos.

“The justification for the suspension of actions or claims,

without distinction, pending rehabilitation proceedings is to
enable the management committee or rehabilitation receiver
to effectively exercise its/his powers free from any judicial or
extra-judicial interference that might unduly hinder or
prevent the "rescue" of the debtor company. To allow such
other actions to continue would only add to the burden of the
management committee or rehabilitation receiver, whose
time, effort and resources would be wasted in defending
claims against the corporation instead of being directed
toward its restructuring and rehabilitation.

“It is undisputed that THI holds a preferred maritime lien

over NNC’s assets by virtue of THI’s unpaid services. The
issuance of the stay order by the rehabilitation court does not
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Act of 2010 2010

impair or in any way diminish THI’s preferred status as a

creditor of NNC. The enforcement of its claim through court
action was merely suspended to give way to the speedy and
effective rehabilitation of the distressed shipping company.
Upon termination of the rehabilitation proceedings or in the
event of the bankruptcy and consequent dissolution of the
company, THI can still enforce its preferred claim upon NNC.

“PD 902-A was designed not only to salvage an ailing

corporation but also to protect the interest of investors,
creditors and the general public. Section 6 (d) of PD 902-A
provides: "the management committee or rehabilitation
receiver, board or body shall have the power to take custody
of, and control over, all the existing assets and property of
such entities under management; to evaluate the existing
assets and liabilities, earnings and operations of such
corporations, partnerships or other associations; to determine
the best way to salvage and protect the interest of the investors
and creditors; to study, review and evaluate the feasibility of
continuing operations and restructure and rehabilitate such
entities if determined to be feasible by the [court]. It shall
report and be responsible to the [court] until dissolved by
order of the [court]: Provided, however, That the [court] may,
on the basis of the findings and recommendation of the
management committee, or rehabilitation receiver, board or
body, or on its own findings, determine that the continuance
in business of such corporation or entity would not be feasible
or profitable nor work to the best interest of the stockholders,
partieslitigants, creditors, or the general public, order the
dissolution of such corporation entity and its remaining assets
liquidated accordingly. The management committee or
rehabilitation receiver, board or body may overrule or revoke
the actions of the previous management and board of
directors of the entity or entities under management
notwithstanding any provision of law, articles of
incorporation or by-laws to the contrary."

“When a distressed company is placed under rehabilitation,

the appointment of a management committee follows to avoid
collusion between the previous management and creditors it
might favor, to the prejudice of the other creditors. The stay
order is effective on all creditors of the corporation without
distinction, whether secured or unsecured. All assets of a
corporation under rehabilitation receivership are held in trust
for the equal benefit of all creditors to preclude one from
obtaining an advantage or preference over another by the
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Corporate Rescue and the New Financial Rehabilitation and Insolvency
Act of 2010 2010

expediency of attachment, execution or otherwise. As between

the creditors, the key phrase is equality in equity. Once the
corporation threatened by bankruptcy is taken over by a
receiver, all the creditors ought to stand on equal footing. Not
any one of them should be paid ahead of the others. This is
precisely the reason for suspending all pending claims against
the corporation under receivership.

“Rizal Commercial Banking Corporation v.

Intermediate Appellate Court [GR No. 74851, 9 December
1999], promulgated by the Court en banc before the effectivity
of the Interim Rules on Corporate Rehabilitation, is still valid
case law up to the present. It enumerates the guidelines in the
treatment of claims involving corporations undergoing
rehabilitation, viz.:

“1. All claims against corporations, partnerships, or

associations that are pending before any court,
tribunal, or board, without distinction as to whether or
not a creditor is secured or unsecured, shall be
suspended effective upon the appointment of a
management committee, rehabilitation receiver,
board, or body in accordance with the provisions of
Presidential Decree No. 902-A.

“2. Secured creditors retain their preference over unsecured

creditors, but enforcement of such preference is equally
suspended upon the appointment of a management
committee, rehabilitation receiver, board, or body.

“In the event that the assets of the corporation, partnership,

or association are finally liquidated, however, secured and
preferred credits under the applicable provisions of the Civil
Code will definitely have preference over unsecured ones.”

B. Other effects of Commencement

Continuous Supply of Goods and Services

To ensure continuous delivery of goods and services necessary for the

debtor’s business, the FRIA adopts the provision under the 2008 Rules granting
the rehabilitation court authority to include in the Commencement Order a
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Act of 2010 2010

prohibition enjoining the debtor’s suppliers from withholding supply of essential

goods and services11, to wit:

“Section 16. Commencement of Proceedings and

Issuance of a Commencement Order. – The rehabilitation
proceedings shall commence upon the issuance of the
Commencement Order, which shall:
xxx

“(k) prohibit the debtor’s suppliers of goods or services

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;”
xxx

[Italics ours]

Waiver of Taxes

Section 19 of the law provides that from the time of the issuance of the
Commencement Order until the approval of the Rehabilitation Plan or dismissal of
the petition, the imposition of all taxes shall be waived, thus:
“Section 19. Waiver of Taxes and Fees Due to the
National Government and to Local Government Units. –
Upon issuance of the Commencement Order by the court, and
until the approval of the Rehabilitation Plan or dismissal of
the Petition, which is earlier, the imposition of all taxes and
fees, including penalties interests and charges thereof, due to

11Presumably, the authority of the court under this section applies

only to valid and subsisting contracts for continuous supply of goods
or services, as opposed to supply contracts on a per order basis. In
other words, it would be one thing to require the supplier to fulfill
the terms of an existing supply contract by continuing to supply the
debtor. It would be a different matter to compel the supplier to
continue supplying the debtor where each order is covered by a separate
contract as this would be tantamount to requiring the supplier to
contract with the debtor.

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Corporate Rescue and the New Financial Rehabilitation and Insolvency
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the national government or to LGUs shall be considered

waived, in furtherance of the objectives of rehabilitation.”

C. Duration of the Commencement Order and Modification of the

Suspension Order

The Commencement Order shall be effective for the entire duration of the
rehabilitation proceedings and “for as long as there is a substantial likelihood that
the debtor will be successfully rehabilitated12.” The determination of this fact will
be based primarily on a report (by the Rehabilitation Receiver] either that the
Rehabilitation Plan is “realistic, feasible and reasonable” or even if the
Rehabilitation Plan is not feasible, there still exists “a substantial likelihood for the
debtor to be rehabilitated.”

As in the old Rules, the FRIA allows the court to modify the terms of the
suspension order or relieve a claim from its coverage if a creditor does not have
adequate protection over the security, thus:

“Section 61. Lack of Adequate Protection. – The court,

on motion or motu proprio, may terminate, modify or set
conditions for the continuance of suspension of payment, or
relieve a claim from the coverage thereof, upon showing that:
(a) a creditor does not have adequate protection over property
securing its claim; or (b) the value of a claim secured by a lien
on property which is not necessary for the rehabilitation of the
debtor exceeds the fair market value of the said property.
“For purposes of this section, a creditor shall be deemed to
lack adequate protection if it can be shown that:
“(a) the debtor fails or refuses to honor a pre-existing
agreement with the creditor to keep the property insured;
“(b) the debtor fails or refuses to take commercially reasonable
steps to maintain the property;
“(c) the property has depreciated to an extent that the creditor
is under secured.

12 Section 21
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“Upon showing of lack of protection, the court shall

order the debtor or rehabilitation receiver to make
arrangements to provide for the insurance or maintenance of
the property; or to make payments or otherwise provide
additional or replacement security such that the obligation is
fully secured. If such arrangements are not feasible, the court
may modify the Stay Order to allow the secured creditor
lacking adequate protection to enforce its security claim
against the debtor: Provided, however, That the court may
deny the creditor the remedies in this paragraph if the
property subject of the enforcement is required for the
rehabilitation of the debtor.”

D. Use, Treatment and Disposition of Assets

As a general rule, funds or property of the debtor cannot be used except in

the ordinary course of business or unless necessary to pay off the administrative
expenses during the rehabilitation proceedings13. These include court-approved
pre-commencement loans, as discussed above14 and compensation of employees
necessary to carry on the debtor’s business15.

Nonetheless, the court may, upon application by the rehabilitation receiver,

allow the disposition of the debtors’ encumbered property subject to the general
requirement that the disposition is necessary for the continued operation of the
business. However, the debtor must make an arrangement with the secured
creditor for a substitute lien16. This applies to the sale of property covered by a
trust receipt or consignment agreement, in which case the law provides that the
disposition shall “not give rise to any criminal liability under applicable laws.”

E. Treatment of Contracts

13 Section 48

14 Section 55

15 Section 56

16 Section 50.
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Confirmation of Cancellation of Existing Contracts

Likewise, the issuance of the Commencement Order marks the start of a

cleanup period which requires the debtor and the rehabilitation receiver to chop
out those contractual commitments which are not necessary for the continued
existence of the business and/or the rehabilitation of the debtor.

Section 57 of the law grants the debtor the power to confirm or cancel pre-
existing contracts within ninety (90) days from the issuance of the Commencement
Order in order to weed out extremely onerous contracts that may have been the
cause of the debtor’s predicament. Those not confirmed expressly by the debtor
shall be deemed terminated but the party whose contract is not confirmed will be
allowed to pursue a claim for damages on account of the debtor’s election, which
claim shall be considered a demand existing prior to the filing of the Petition for
Rehabilitation, to wit:

“Section 57. Treatment of Contracts. – Unless

cancelled by virtue of a final judgment of a court of competent
jurisdiction issued prior to the issuance of the
Commencement Order, or at anytime thereafter by the court
before which the rehabilitation proceedings are pending, all
valid and subsisting contracts of the debtor with creditors and
other third parties as at the commencement date shall
continue in force: Provided, That within ninety (90) days
following the commencement of proceedings, the debtor, with
the consent of the rehabilitation receiver, shall notify each
contractual counterparty of whether it is confirming the
particular contract. Contractual obligations arising or
performed during this period, and afterwards for confirmed
contracts, shall be considered administrative expenses.
Contracts not confirmed within the required deadline shall be
considered terminated. Claims for actual damages, if any,
arising as a result of the election to terminate a contract shall
be considered a pre-commencement claim against the debtor.
Nothing contained herein shall prevent the cancellation or
termination of any contract of the debtor for any ground
provided by law.
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New Money

Stay Order notwithstanding, the FRIA allows the debtor to incur

postcommencement loans and/or other obligations subject to the approval of the
court17. This has a similar import as the “New Money” clause under the 2008 Rules.
Debt payments falling under this provision will be considered as administrative
expenses during the pendency of the proceedings.

F. The Rehabilitation Receiver

The initial appointment of the Rehabilitation Receiver (as one of the

elements of the Commencement Order under Section 16) is subject to the
discretion of the court, which may retain the original appointee or choose another
from the petitioners’ nominees. However, this discretion is limited in the following
circumstances:

(a) In case the debtor is a securities market participant, in which case the
court shall give priority to the nominee of the appropriate securities or
investor protection fund; or

(b) If the qualified natural or juridical person is nominated by more than

50% of secured creditors and general unsecured creditors, in which case the
court “shall appoint the creditors’ nominee18.”

As a rule, the Rehabilitation Receiver will not supplant the existing

management of the debtor corporation unless otherwise ordered by the court on
motion of any interested party, thus:

17 Section 55
18 Section 30

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Corporate Rescue and the New Financial Rehabilitation and Insolvency
Act of 2010 2010

“Section 36. Displacement of Existing Management by

the Rehabilitation Receiver or Management Committee. -
Upon motion of any interested party, the court may appoint
and direct the rehabilitation receiver to assume the powers of
management of the debtor, or appoint a management
committee that will undertake the management of the debtor,
upon clear and convincing evidence of any of the following
circumstances:

“(a) Actual or imminent danger of dissipation, loss,

wastage or destruction of the debtor’s assets or other
properties;
“(b) Paralyzation of the business operations of the debtor; or
“(c) Gross mismanagement of the debtor, or fraud or
other wrongful conduct on the part of, or gross or willful
violation of this Act by, existing management of the debtor or
the owner, partner, director, officer or representative/s in
management of the debtor.

“In case the court appoints the rehabilitation receiver

to assume the powers of management of the debtor, the court
may:
“(1) require the rehabilitation receiver to post an additional
bond;
“(2) authorize him to engage the services or employ
persons or entities to assist him in the discharge of his
managerial functions; and
“(3) authorize a commensurate increase in his compensation.”

F. Actions by the Rehabilitation Receiver

As part of its functions, the Rehabilitation Receiver retains the authority to

file an action to annul certain pre-commencement transactions intended to
defraud the creditors. Indeed, this power can be traced back to the basic authority

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Corporate Rescue and the New Financial Rehabilitation and Insolvency
Act of 2010 2010

of the receiver to undertake measures to preserve property under receivership

under the Rules of Court19.

Should the receiver refuse to institute proceedings, any creditor may take up
the cudgels of the corporation with leave of court. If successful, Section 59 of the
law provides that the fruits of the case will redound to the pro-active creditor to the
extent of the value of its credit plus costs, thus:

“Section 59. Actions for Rescission or Nullity. – (a) The

rehabilitation receiver or, with his conformity, any creditor
may initiate and prosecute any action to rescind, or declare
null and void any transaction described in Section 58 hereof.
If the rehabilitation receiver does not consent to the filing or
the prosecution of such action, any creditor may seek leave of
the court to commence said action.
“(b) If leave of court is granted under subsection (a), the
rehabilitation receiver 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;
“(c) Any benefit derived from a proceeding taken
pursuant to subsection (a), 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.
“(d) Where before an order is made under subsection
(a), the rehabilitation receiver (or liquidator) signifies to the
court his readiness to 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
proceeding, if instituted within the time limits so fixed,
belongs to the estate.”

H. Administration of Proceedings

Within forty (40) days from the issuance of the Commencement Order, the
court shall set the case for Initial Hearing to determine whether or not there is

19 Salientes v. IAC [GR 66211, 4 July 1995]

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Corporate Rescue and the New Financial Rehabilitation and Insolvency
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substantial likelihood that the debtor can be rehabilitated and undertake the
following:
(a) determine the creditors who have made timely and proper filing of
their notice of claims;
(b) hear and determine any objection to the qualifications or the
appointment of the rehabilitation receiver and if necessary, appoint a new
one;
(c) direct the creditor to comment on the petition and the Rehabilitation
Plan, and to submit the same to the court and to the rehabilitation receiver
within a period not exceeding twenty (20) days;
(d) direct the rehabilitation receiver to evaluate the financial condition
of the debtor and to prepare and submit his report to the court20.

Within forty (40) days from the Initial Hearing, the Rehabilitation Receiver
is required to submit his written Report to the court, which will include a
determination of (a) whether or not there is substantial likelihood for the debtor
to be successfully rehabilitated or in the alternative (b) whether the debtor should
be dissolved or liquidated21. After submission of report, the Court shall act on the
petition by: (i) giving due course to the petition, (ii) dismissing the petition or (iii)
converting the proceedings into one for liquidation22.

In the event the court gives due course to the petition, the court will require
the Rehabilitation Receiver to review the Rehabilitation Plan, taking into
consideration the views of the debtor and all creditor classes. While the
consultation is a necessary procedure, the Receiver is not bound by the objections
of the parties23.

20 Section 22
21 Section 24

22 Section 25

23 Section 63

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Corporate Rescue and the New Financial Rehabilitation and Insolvency
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Among others, Section 62 of the FRIA provides that Rehabilitation Plan

must include provisions establishing classes and subclasses of voting creditors 24.
After identifying the appropriate creditor classes and sub-classes, the Plan must
“specify the treatment of each class or subclass 25 ” and “provide for equal
treatment for all claims within the same class 26.” Similar to the 2008 Rules,
Section 62 grants additional protection to secured creditors by requiring the Plan
to “maintain the security interest of secured creditors and preserve the
liquidation value of the security.”

Once satisfied with the version of the Rehabilitation Plan, the receiver must
convene the creditors and present the plan to them for approval. Unlike the old
procedure however27, the vote of the debtor is not required for the approval of the
plan, thus:

“Section 64. Creditor Approval of the Rehabilitation

Plan. – The rehabilitation receiver shall notify the creditors
and stakeholders that the Plan is ready for their examination.
Within twenty (20) 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 whose 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 per cent
(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

24 Sub-paragraph (d) and (e)

25 Sub-paragraph (g)

26Sub-paragraph (h)
27See Section 8 of the Rules of Procedure on Corporate Rehabilitation
(2008)
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Act of 2010 2010

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 all 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.”

Note that under the foregoing provision, separate arrangements can be

made with different classes of creditors subject to approval of 50% of the affected
creditors or 80% of all creditors. This grants flexibility in dealing with varying
needs of each class28.

Even if the Rehabilitation Plan is not approved by the creditors, the court
may still confirm the Plan if it can be shown that objecting class of creditors shall
receive a “net present value greater than that they would have received if the
debtor were under liquidation.” Under the Interim Rules, the debtor can force
court approval of a Rehabilitation Plan over the objection of creditors by merely
showing that “[t]he plan would likely provide the objecting class of creditors with
compensation greater than that which they would have received if the assets of the

28 See also Section 42 on the formation of Creditors’ Committee.

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debtor were sold by a liquidator within a three-month period.” The 2008 Rules29
changed the basis to “present value projected in the plan”. Requiring that the
computation be based on “net present value” is intended to prevent debtors from
railroading a rehabilitation plan disadvantageous to the creditors by the simple
expedient of stretching the repayment schedule without regard to the costs of
borrowing.

Finally, creditors who take a haircut under the plan will not be taxed for any
amount of debt which is reduced or forgiven under Section 71 of the law.

H. Termination

After creditor approval of the Rehabilitation Plan as provided above, it must

be submitted to the court for confirmation. Creditors shall have the right to make
an Objection but on limited grounds, to wit:

(a) The creditors’ support was induced by fraud;

(b) The documents or data relied upon in the Rehabilitation Plan are
materially false or misleading; or
(c) The Rehabilitation Plan is in fact not supported by the voting creditors30

If, upon due hearing, the court finds merit in the objection, it may order the
receiver or the debtor to cure the defect whenever possible. On the other hand, it
shall order the proceedings to be turned into liquidation if the debtor acted in bad
faith or if the defect is incurable31.

However, in case (a) there are no objections to the Rehabilitation Plan, (b) the
objections are found to be without merit or (c) any defect in the Rehabilitation Plan

29 Specifically, Rule IV, Section 11

30 Section 66

31 Section 67

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has been cured; the court shall issue an order confirming the plan even over and
above the objections of the owners, partners or stockholders of the insolvent
debtor32

To prevent the debtor (or any interested party) from dragging out the proceedings
in the hopes of obtaining a settlement on the basis of attrition, the law fixes a
maximum period of one year (from the time of the filing of the petition) within
which the plan must be confirmed. Otherwise, the proceedings will turn into one
of liquidation. This should force the parties to negotiate in earnest.

Pre-Negotiated Rehabilitation

The concept of a pre-negotiated rehabilitation was introduced and is currently

available under the 2008 Rules, which the FRIA adopts without substantial
modification. Thus, the debtor, by itself or jointly with the creditors, may file a
petition for the approval of a pre-negotiated rehabilitation plan provided that it has
been endorsed by creditors holding at least 2/3 of the total liabilities of the debtor,
including secured creditors holding more than 50 percent of the total secured
claims and unsecured creditors holding more than 50 percent of the total
unsecured claims. However, while the 2008 Rules mandated the appointment of
a Rehabilitation Receiver either by election of the parties or by order of the court,
the FRIA gives the parties the freedom to undertake the proceedings without a
receiver.

The Order under Section 77 of the law which directs interested parties to file their
objections to the Pre-Negotiated Rehabilitation Plan also requires publication and
personal delivery of a copy of the Petition to each creditor who is not a petitioner
but who holds at least 10%33 of the total liabilities of the debtor.

32 Section 68
33 5% under the 2008 Rules.
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The FRIA enumerates grounds to object to the Rehabilitation Plan in addition to

those originally provided under the 2008 Rules. Thus, under Section 79:

“Section 79. Objection to the Petition or

Rehabilitation Plan. – Any creditor or other interested party
may submit to the court a verified objection to the petition or
the Rehabilitation Plan not later than eight (8) days from the
date of the second publication of the Order mentioned in
Section 77 hereof. The objection shall be limited to the
following:
“(a) The allegations in the petition or the Rehabilitation
Plan, or the attachments thereto are materially false or
misleading;
“(b) The majority of any class of the creditors do not in
fact support the Rehabilitation Plan;
“(c) The Rehabilitation Plan fails to accurately account
for a claim against the debtor and the claim is not categorically
declared as a contested claim; or
“(d) The support of the creditors, or any of them, was

induced by fraud.
“Copies of the objection to the petition or the
Rehabilitation Plan shall be served on the debtor, the
rehabilitation receiver (if applicable), the secured creditor
with the largest claim and who supports the Rehabilitation
Plan, and the unsecured creditor with the largest claim and
who supports the Rehabilitation Plan.”

If, after due hearing, the courts finds merit to the objection, it will order the debtor
to cure the defect. On the other hand, if it finds that the petitioners acted in bad
faith or that the defect is incurable, it may order the conversion of proceedings into
one for liquidation34. As in the 2008 Rules, the Rehabilitation Plan will be deemed
approved if the court fails to act within a period of 120 days35.

34 Section 80.

35 Section 81.

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Informal Rehabilitation

As mentioned previously, one of the most important and potentially far

reaching innovations under the FRIA is the recognition of out-of-court
restructuring/workout agreements. Pursuant to Section 89 of the Act, “[t]he
insolvent debtor and creditor may seek court assistance for the execution or
implementation” of the Rehabilitation Plan, provided that it meets the minimum
requirements of the law. Ultimately, this type of cooperative endeavor may offer
the best chances of rehabilitation as it theoretically provides the least amount of
disruption to the operations of an already beleaguered company.

Furthermore, to allow the parties to negotiate a feasible workout plan, the

debtor and creditors holding more than 50% of the debt may agree on a standstill
period pending the completion of the plan for up to 120 days 36 , provided in
addition that notice to all creditors is published in a newspaper of general
circulation once a week for two consecutive weeks. The said notice must invite the
creditors to participate in the negotiation of the plan and inform them that the plan
will be binding on all creditors if the required votes are obtained37.

An out-of-court Rehabilitation Plan approved by at least 67% of secured

creditors, 75% of unsecured creditors, and 85% of all creditors38 will be “crammed
down” all creditors pursuant to Section 86 of the law, to wit:

“Section 86. Cram Down Effect. – 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. The notice of
the Rehabilitation Plan or restructuring agreement or Plan

36 Section 85
37 Ibid.

38 Section 84
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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.”

Quick Notes on Insolvency and Liquidation: Cross Border

Insolvency

By virtue of Section 139 of the FRIA, the Philippines is now deemed to adopt the
provisions of the UNCITRAL Model Law on Cross Border Insolvency (1997) subject
to procedural rules to be promulgated by the Supreme Court. Essentially, the law
provides a framework for the recognition of foreign insolvency proceedings and
grants certain parties in such proceedings access to Philippine courts for purposes
of obtaining some form of affirmative or other relief.

33