FRIA Handout

CREDIT TRANSACTIONS | ASG Marissa B.
Dela Cruz-Galandines | 2I
Financial Rehabilitation and Insolvency Act of 2010 (FRIA)
ACAL • BARNACHEA • CHAVEZ • DILLA • GEROY • GUMELA • SALMANI • SAMSON
I. GENERAL CONCEPTS
• Laws Governing Insolvency
• Before the enactment of the FRIA, the special law governing insolvency was the Insolvency Law (Act 1956)
• In 1976, the President issued PD 902-A which introduced rehabilitation. The same law gave the Securities and
Exchange Commission jurisdiction over matters relating to suspension of payments.
• On 1999, the SEC issued Rules on Corporate Recovery.
• In 2000, the Supreme Court issued Interim Rules of Procedure on Corporate Recovery. The Securities Regulations
Code (RA 8799) transferred jurisdiction over suspension of payment and rehabilitation from SEC to regular courts
• In 2009, the Supreme Court Issued its Rules of Procedure on Corporate Rehabilitation. (SC AM No. 00-8-10-SC)
• Under the New Civil Code, insolvency will be governed by special laws insofar as they are not inconsistent with
the Civil Code. RA 10142, also known as Financial Rehabilitation and Insolvency Act of 2010. Thus, Insolvency
is primarily governed by the Civil Code, and subsidiarily the FRIA.
• The FRIA
• Upon the effectivity of the FRIA on August 31, 2010, it repealed the Act 1956 also known as Insolvency Law. All
laws, orders, rules and regulations inconsistent with any provision of FRIA are deemed repealed or modified. (Sec.
148, FRIA)
• In 2013, the SC promulgated Financial Rehabilitation Rules of Procedure (FR Rules). It applies to petitions for
rehabilitation of:
(1) Corporation;
(2) partnerships;
(3) and sole proprietorships.
• In 2015, the SC approved the Financial Liquidation and Suspension of Payments Rules of Procedure for Insolvent
Debtors (FLSP Rules). It governs the procedure for liquidation of:
(1) insolvent juridical and insolvent debtors;
(2) and the suspension of payments of insolvent debtors
• FRIA governs all petitions filed after it has taken effect except that the application of the FRIA would not be feasible
or would work injustice, in which prior rules will apply. FRIA applies to all contracts of the debtor regardless of
the date of perfection. (Sec. 147, FRIA)
• Constitutionality of Insolvency Laws
• The 1987 Constitution prohibits enactment of a law which impairs obligations of contracts. In this regard, an
insolvency law generally does not violate the non-impairment clause unless it discharges a contractual obligation
before the law was passed or alters the substantive rights of a party to the contract.
• The Supreme Court has ruled that the restructuring of debt of the debtor pursuant to a rehabilitation plan does not
constitute a violation of the non-impairment clause. The matter does not involve a law or an executive issuance
declaring the modification of the contract among the debtor, its creditors and its accommodation mortgagors; thus
the non-impairment clause must not be invoked.
• Assuming that the non-impairment clause may be invoked, the same must yield to the Police Power of the State for
property rights and contractual rights are not absolute. (Pacific Wide Realty and Development and Corporation v.
Puerto Azul Land, Inc., 620 Phil. 520 [2009]; Victorio-Aquino v. Pacific Plans. Inc., GR No. 193108, Dec. 10,
2014)
• Policy of the Law
• To encourage debtors, both and juridical and natural persons, and their creditors to collectively and realistically
resolve and adjust competing claims and property rights.
• The State will ensure a timely, fair, transparent, effective, and efficient rehabilitation.
• When rehabilitation is not feasible, it is in the interest of the state to facilitate a speedy and orderly liquidation of
these debtors’ assets and settlement of their obligation.
• Concept of Insolvency
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CREDIT TRANSACTIONS | ASG Marissa B. Dela Cruz-Galandines | 2I
• Generally, a person whose liabilities are more than his assets is in a state of insolvency. Balance sheet test - A
condition of a man’s assets and liabilities that the former if all made immediately available, would not be sufficient
to discharge the latter. In this sense, insolvency is bankruptcy.
• Equity test - The inability of a person to pay his debts as they become due in the ordinary course of his business.
Here, the debtor is said to be illiquid not bankrupt.
• Under the FRIA, insolvency means 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 greater than its or his assets.
• The debtor’s assets must not, at fair valuation, be sufficient to pay his debts.
• Insolvency of a corporation – using the balance sheet test, the solvency of a corporation is determined if whether or
not its assets, fairly valued as of that date, are excess of its liabilities, disregarding liability to stock holders, either
preferred or common, since the lawmakers had in mind such an insufficiency of assets that nothing is left to the
stockholders as such.
• Insolvency of a partnership – using the balance sheet test, a partnership is not insolvent as long as the property of
the partnership, together with the individual property of the partners who are liable for partnership debts, ins
insufficient to pay its indebtedness.
• Bankruptcy v. Insolvency Laws
• Before, one distinguishing factor was the difference between the former and the latter as regards the person who
will petition to discharge the debts of the debtor. On one hand, it’s the debtor himself who does it to discharge him
from his debts. On the other hand, the debtor’s creditors petition to apply his properties to the payment of his debts.
• However, this distinction is of no more importance as both bankruptcy and insolvency statutes may be initiated by
either debtor or creditor, and may be used for either purpose.
II. COVERAGE
• Debtors Covered
• Sole proprietorship duly registered with the Department of Trade and Industry;
• A partnership duly registered with the Securities and Exchange Commission;
• A corporation duly organized and existing under Philippine Laws; or
• An individual debtor who has become insolvent as defined in the law. (FRIA, Sec. 4[k].)
• Debtors Not Covered
• Banks;
• Insurance companies;
• Pre-need companies; and
• National and local government agencies or units. (FRIA, Sec. 5)
• The rehabilitation of these entities are covered by RA 7653 (the New Central Bank Act), PD No. 612 (Insurance
Code of the Philippines, and RA 9829 (Pre-Need Code of the Philippines), respectively.
• Others are unincorporated company, joint venture not registered with SEC, estate of deceased person, and trust.
• Claims Covered
• Claim – 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) Against directors and officers of the debtor in their official capacity; but may extend to the same in their personal
capacities
• The claim must be against the debtor or its property. Hence, only over debtor under rehabilitation, but not over
claims by the debtor against its own debtors or against third parties (Steel Corporation of the Philippines v.
Mapre Insurance Corporation, 707 SCRA 601 [2013].)
• Includes monetary and non-monetary claims (Castillo v. Uniwide Warehouse Club, 619 SCRA 641 [2010].)
• Examples:
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(1) Claim of employee for alleged illegal dismissal (Castillo v. Uniwide Warehouse Club, 619 SCRA 641
[2010].);
(2) Preferred maritime lien over the assets of the company under rehabilitation by virtue of unpaid services of
the lienholder (Negros Navigations Co., Inc. v. Court of Appeals, 573 SCRA 434 [2008].)
(3) A claim for damages for alleged design infringement. (Philippine Airlines, Inc. v. Court of Appeals, 576
SCRA 471 [2009].)
III. REMEDIES
• Remedies Available to an Insolvent Debtor
• Judicial: rehabilitation, and suspension of payment
• Extra-judicial: adding equities, selling core assets to raise funds, implementing a debt-to-equity conversion, or
transferring assets as payment of its debt.
• Remedies under FRIA
• Rehabilitation – voluntary or involuntary;
• Out of court restructuring (Sec. 83);
• Liquidation – voluntary (Sec. 90) or Involuntary (Sec. 91)
• Filing a petition for suspension of payment for individual debtors.
• Nature of Proceedings
• Proceeding in rem (FRIA, Sec. 3)
• The court acquires jurisdiction over all persons affected by the proceedings upon publication of the notice of
commencement of the proceedings in any newspaper of general circulation.
(1) Rehabilitation proceedings – publication in
(a) Newspaper of general circulation for 2 consecutive weeks (FR Rules, Rule 1, Sec. 4)
(2) Involuntary Liquidation proceedings (juridical debtors) – publication of petition or motion under Sec. 7, Rule
2(b) of FLSP Rules (FLSP Rules, Rule 1, Sec. 3)
(3) Involuntary Liquidation proceedings (individual debtors) – upon service of summons in accordance with Sec.
15, Rule 3(c) of FLSP Rules; all other persons by upon publication of Liquidation Order under Sec. 2, Rule
4(a) of FLSP Rules (FLSP Rules, Rule 1, Sec. 3.)
(4) Suspension of Payments – over all persons upon publication of Suspension of Payments Order as provided in
the FLSP Rules (FLSP Rules, Rule 1, Sec. 3.)
• Summary and non-adversarial (Town and Country Enterprises, Inc. v. Quisimbing, 682 SCRA 128 [2012].)
(1) Court may decide on basis of the pleadings and other documentary evidence. May conduct clarificatory hears
when necessary.
(2) May prohibit filing of certain pleadings (i.e. motion to dismiss)
• Orders by the court are immediately executory.
• Liberally construed in to promote a timely, fair, transparent, effective and efficient liquidation and suspension of
payment.
• Advantages of Judicial Remedies
• Retention of management – management of juridical debtor will remain in the existing management, on the election
or appointment of:
(1) Directors;
(2) Managers; or
(3) Managing partner
• Non-withholding of supply – the debtor’s supplier of goods or services are prohibited from withholding the same
in the ordinary course of business for as long as the debtor can pay.
• Protection from certain action and processes:
(1) Commencement Order –
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(a) prohibits and renders null and void the results of any extra judicial activity to seize property, or otherwise
attempt to collect or enforce a claim against the debtor;
(b) to render null and void any set-off after the commencement date of any debt owed to the debtor by any of
the debtor’s creditors;
(c) renders null and void the perfection of any lien against the debtor’s property after the commencement date.
(2) Stay Order or Suspension Order –
(a) Suspend all actions or proceedings, judicially or extra judicially, for the enforcement of claims against the
debtor;
(b) Suspend all actions to enforce any judgment, attachment or other provisional remedies;
(c) Prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date
except as may be provided for by law.
• Exemption from or waiver of, taxes –
(1) Upon issuance of Commencement Order; and
(2) Approval of Rehabilitation Plan; or
(3) Dismissal of the petition:
(a) imposition of taxes and fees, including penalties, interests and charges thereof due to the national
government or LGUs are considered waived.
(4) Compromises Binding – any compromises on amounts or rescheduling of timing of payments will be binding
on creditors regardless whether or not the rehabilitation plan is successful.
(5) Cram-down Power – the court has the power to approve or implement the Rehabilitation plan despite the lack
of approval or objection from the owners, partners or stockholders of the insolvent debtor provided that the
terms are necessary to restore the financial well-being of the insolvent debtor.
(6) Binding effect of the rehabilitation plan – the same will be binding upon the debtors and all persons who may
be affected by it, including the creditors, whether or not they have participated in the proceedings.
IV. SUSPENSION OF PAYMENT
• This is a kind of remedy available to an individual debtor who seeks to suspend the payments outside of the necessary
or legitimate expenses of his business while the proceedings are pending
• Voluntary act by the debtor
• SECTION 94. Petition. — An individual debtor who, possessing sufficient property to cover all his debts but foreseeing
the impossibility of meeting them when they respectively fall due, may file a verified petition that he be declared in the
state of suspension of payments by the court of the province or city in which he has resided for six (6) months prior to
the filing of his petition. He shall attach to his petition, as a minimum: (a) a schedule of debts and liabilities; (b) an
inventory of assets; and (c) a proposed agreement with his creditors. (FRIA)
• Individual Debtor – is a natural person who is a resident and citizen of the Philippines who has become insolvent
• EXCEPTIONS:
(1) A married individual debtor
(2) Corporations and other juridical persons
(3) Non-Philippine citizen
• SECTION 94. Petition. — The petition for suspension of payment is filed in the court having jurisdiction over the
province or city where the debtor has resided for six (6) months prior to the filing of the petition
• Procedure for Suspension of Payment
Step 1. Filing of petition by the debtor
• The debtor must attach the ff. to his petition
(1) Schedule of debts and liabilities
(2) An inventory of assets
(3) Proposed agreement with his creditors
(4) Names of at least three (3) nominees to the position of commissioner
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- No creditor can sue or institute proceedings to collect his claim from the time of the filing, unless:
(5) Those creditors have claims for personal labor, maintenance, expense of last illness and funeral of the wife
or children of the debtor incurred in the 60 days immediately prior to the filing of the petition
(6) Secured creditors
Step 2. Court action on the petition together with the notification and sending of notices
• If the court finds the petition sufficient in form and substance, it shall, within five (5) working days from the
filing of the petition, issue an Order:
(a) calling a meeting of all the creditors named in the schedule of debts and liabilities at such time not less than
fifteen (15) days nor more than forty (40) days from the date of such Order and designating the date, time
and place of the meeting;
(b) directing such creditors to prepare and present written evidence of their claims before the scheduled
creditors' meeting;
(c) directing the publication of the said order in a newspaper of general circulation published in the province
or city in which the petition is filed once a week for two (2) consecutive weeks, with the first publication
to be made within seven (7) days from the time of the issuance of the Order;
(d) directing the clerk of court to cause the sending of a copy of the Order by registered mail, postage prepaid,
to all creditors named in the schedule of debts and liabilities;
(e) forbidding the individual debtor from selling, transferring, encumbering or disposing in any manner of his
property, except those used in the ordinary operations of commerce or of industry in which the petitioning
individual debtor is engaged, so long as the proceedings relative to the suspension of payments are pending;
(f) prohibiting the individual debtor from making any payment outside of the necessary or legitimate expenses
of his business or industry, so long as the proceedings relative to the suspension of payments are pending;
and
(g) appointing a commissioner to preside over the creditors’ meeting. (FRIA,Sec.95)
- The Suspension Order will lapse when three (3) months will have passed without the proposed
agreement being accepted by the creditors or as soon as such agreement is denied
Step 3. Creditors’ meeting
• The presence of creditors holding claims amounting to at least three-fifths (3/5) of the liabilities shall be
necessary for holding a meeting. The commissioner appointed by the court shall preside over the meeting and
the clerk of court shall act as the secretary thereof, subject to the following rules:
(a) The clerk shall record the creditors present and amount of their respective claims;
(b) The commissioner shall examine the written evidence of the claims. If the creditors present hold at least
three-fifths (3/5) of the liabilities of the individual debtor, the commissioner shall declare the meeting open
for business;
(c) The creditors and individual debtor shall discuss the propositions in the proposed agreement and put them
to a vote;
(d) To form a majority, it is necessary:
(1) that two-thirds (2/3) of the creditors voting unite upon the same proposition; and
(2) that the claims represented by said majority vote amount to at least three-fifths (3/5) of the total
liabilities of the debtor mentioned in the petition; and
(e) After the result of the voting has been announced, all protests made against the majority vote shall be drawn
up, and the commissioner and the individual debtor together with all creditors taking part in the voting shall
sign the affirmed propositions.
• No creditor who incurred his credit within ninety (90) days prior to the filing of the petition shall be entitled
to vote.
• The proposed agreement is deemed rejected if the number of creditors required for holding a meeting do
not attend.
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• Creditors who are unaffected by the Suspension Order may refrain from attending the meeting and from
voting therein
V. REHABILITATION
• Concept: Refers to the restoration of the debtor to a condition of successful operation and solvency, if it is shown that
its continuance of operation is economically feasible and its creditors can recover by way of the present value of payment
projected in the plan, more if the debtor continues as a going concern than it is immediately liquidated. (FRIA Sec. 4
(gg)).
• Types of Rehabilitation Proceedings
(1) Court-supervised
(2) Pre-negotiated
(3) Out of court or informal
• Purpose
• To restore and reinstate the corporation to its former position of successful operation and solvency
• To enable the company to gain a new lease on life and allow its creditors to be paid their claims out of its earnings.
• Two-pronged purpose
(1) To efficiently and equitably distribute the assets of the insolvent debtor on its creditors; and
(2) To provide the debtor with a fresh start by relieving them of the weight of their outstanding debts and permitting
them to reorganize their affairs
• Likelihood of rehabilitation
• The rehabilitation must be viable or likely.
• If rehabilitation is not feasible, the appropriate proceeding would be a liquidation proceeding instead of
rehabilitation proceeding
• Minimum requirements to be met in order to determine whether there is substantial likelihood for the debtor to be
successfully rehabilitated: (FRIA, Sec. 21)
(1) there are sufficient assets with which to rehabilitate the debtor;
(2) there is sufficient cash flow to maintain the operations of the debtor;
(3) the debtor's owner/s, partners, stockholders, directors and officers have been acting in good faith and with due
diligence;
(4) the petition is not a sham filing intended only to delay the enforcement of the rights of the creditor/s or of any group
of creditors; and
(5) the debtor would likely be able to pursue a viable Rehabilitation Plan;
(6) The petition, the Rehabilitation Plan and the attachments thereto do not contain any materially false or misleading
statement;
(7) If the petitioner is the debtor, that the debtor has met with its creditor/s representing at least three-fourths (3/4) of
its total obligations to the extent reasonably possible and made a good faith effort to reach a consensus on the
proposed Rehabilitation Plan; if the petitioner/s is/are a creditor or group of creditors, that the petitioner/s has/have
met with the debtor and made a good faith effort to reach a consensus on the proposed Rehabilitation Plan; and
(8) The debtor has not committed acts of misrepresentation or in fraud of its creditor/s or a group of creditors.
A. COURT-SUPERVISED REHABILITATION
• Kinds
• In order to determine whether the rehabilitation is voluntary or involuntary, check who initiates the rehabilitation
proceedings.
(1) Voluntary – when the insolvent debtor initiates
(2) Involuntary – when creditor or group of creditors initiate
• Who May File

(1) Voluntary – insolvent debtor or a group of debtor initiate
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• There must be approval from:

(a) In case of single proprietorship – the owner
(b) In case of partnership – the majority of partners; AND
(c) The majority vote of the board and the vote of stockholders representing at least 2/3 of capital stock (Sec. 12;
FR Rules, Rule 2, Sec.1)
• Take note of the following for voluntary initiation:
• If the Articles of Partnership or the Articles of Incorporation impose a higher vote requirement, then that vote
requirement should prevail
• An individual not engaged in business as a sole proprietorship may not file a petition for rehabilitation
(2) Involuntary – creditor or group of creditors with aggregate claims of:
(a) At least 1,000,000 OR
(b) At least 25% of subscribed capital or partner’s contribution, whichever is higher, if:
• There is no genuine issue of fact or law on the claim/s of the petitioner/s, and that the due and demandable
payments thereon have not been made for at least 60 days; or
• The debtor has failed generally to meet its liabilities as they fall due; OR
• 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 (Sec. 13; FR Rules,
Rule 2, Secs. 4 and 5)
• Venue for Petition
• Voluntary or Involuntary
• Regional Trial Court which has jurisdiction over the principal office of the debtor alleged to be insolvent as specified
in DTI registration (in case of sole proprietorship) or Articles of Incorporation or Partnership (in case of partnership)
• If involving group of debtors – RTC which has jurisdiction over the principal office of ANY of the debtors alleged
to be insolvent.
• Contents of the Petition
(1) Voluntary - petition filed by the debtor must be verified and must set forth:
(a) the name, business, and principal address and other addresses of the debtor;
(b) the nature of the business and principal activities of the debtor, and the addresses where these activities are
conducted;
(c) the history of the debtor;
(d) the fact and the cause of the debtor's insolvency;
(e) the specific relief sought under this Rule;
(f) the grounds upon which the petition is based;
(g) all pending actions or proceedings by or against the debtor/s and the courts or tribunals where they are pending;
(h) the threats or demands to enforce claims or liens against the debtor/s;
(i) the manner by which the debtor may be rehabilitated and how such rehabilitation may bene t the general body
of creditors, employees and stockholders; and
(j) the exact address/es at which documents regarding the debtor and the proceedings may be reviewed and copied.
(FR Rules, Rule 2, Sec. 2)
(2) Involuntary - the petition for rehabilitation shall be verified to establish the substantial likelihood that the debtor
may be rehabilitated. The petition shall include:
(a) the name, business, and principal address and other known addresses of the debtor;
(b) the nature of the business and the principal activities of the debtor;
(c) the circumstances sufficient to support a petition to initiate involuntary rehabilitation proceedings under this
Rule;
(d) the specific relief sought under this Rule;
(e) a Rehabilitation Plan;
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(f) the names of at least three (3) nominees to the position of rehabilitation receiver, as well as their qualifications,
office and email addresses;
(g) the exact address/es at which documents regarding the debtor and the proceedings may be reviewed and copied,
if known to the petitioner/s; and
(h) documents showing that there is substantial likelihood that the debtor may be rehabilitated.
• Basic Procedure
Step 1. Filing of petition
• Voluntary or involuntary
• File on the grounds provided in the FRIA
• Petition must be verified to establish the insolvency of the debtor and the viability of its rehabilitation
Step 2. Action on petition
• If sufficient in form and substance, issuance of Commencement Order.
• What is Commencement Order? It will set the case for initial hearing, which will not be more than 40 days from
the date of filing of the petition for the purpose of determining whether there is substantial likelihood for the
debtor to be rehabilitated
• If NOT sufficient in form and substance: (a) court may in its discretion give petitioner to amend or supplement the
petition, or (b) submit such documents as may be necessary or proper
• The court will dismiss the petition if the deficiency is not complied within the extended 5-day period
Step 3. Publication of commencement order and delivery of notices
• Once a week for at least two (2) consecutive weeks
• First publication to be made within seven (7) days from issuance of Commencement Order
Step 4. Establishment of registry of claims
• Duty of Rehabilitation Receiver
Step 5. Filing of creditor’s claims
• At least 5 days before initial hearing
• If belatedly filed, he will not be entitled to participate in the rehabilitation proceedings but will be entitled to receive
distributions arising therefrom
Step 6. Challenge of claims
• Within 30 days from the expiration of the period to inspect the registry of claims
• Rehabilitation Receiver to submit Registry of Claims
• Registry of Claims include the lists of:
(1) Claims that have not been subject to challenge
(2) Claims resolved by the rehabilitation receiver after these have been challenged; and
(3) Disputed but unresolved claims
Step 7. Initial hearing and subsequent hearings
• After making a determination that the jurisdictional requirements have been complied with, the court shall:
(1) determine the creditors who have made timely and proper ling of their notice of claims and issue an order that
the creditors not named therein shall not be entitled to participate in the proceedings but shall be entitled to
receive distributions arising from the proceedings;
(2) hear and determine any objection to the qualifications and appointment of the rehabilitation receiver and, if
necessary, appoint a new one; and
(3) direct the creditors to discuss their comments on the petition and the Rehabilitation Plan submitted pursuant to
Section 8 (N) of this Rule;
(4) direct the rehabilitation receiver to evaluate the financial condition of the debtor and to prepare and submit to
the court within forty (40) days from the last initial hearing the report provided in Section 16 of this Rule; and
(5) determine the reasonableness of the rehabilitation receiver's fees stated in the Rehabilitation Plan, which shall
be presumed reasonable unless the creditors object to it. (FR Rules, Rule 2 Sec. 14)
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• The court may hold additional hearings as may be necessary to continue the initial hearing process but these
hearings must be concluded not later than ninety (90) days from the first hearing date fixed in the
Commencement Order. (FR Rules, Rule 2 Sec 15)
Step 8. Creditors’ comment on the petition and rehabilitation plan
• Submit the comments to the court and the rehabilitation receiver.
Step 9. Submission of report of the rehabilitation receiver
• Rehabilitation Receiver submit a report regarding preliminary findings and recommendations
(1) the debtor is insolvent; the causes thereof; and any unlawful or irregular act or acts committed by the owner/s
of a sole proprietorship, partners of a partnership, or directors or officers of a corporation in contemplation of
the insolvency of the debtor or which may have contributed to the insolvency of the debtor;
(2) the underlying assumptions, the financial goals and the procedures to accomplish such goals as stated in the
petitioner's Rehabilitation Plan are realistic, feasible and reasonable;
(3) there is a substantial likelihood that the debtor could be successfully rehabilitated;
(4) the petition should be dismissed; and
(5) the debtor should be dissolved and/or liquidated. (FR Rules Rule 2 Sec. 16)
Step 10. Grant of due course to or dismissal of petition or conversion of proceedings (FR Rules, Rule 2, Sec. 17)
• Within ten (10) days from receipt of the report of the rehabilitation receiver mentioned in the immediately preceding
section, the court may:
(1) give due course to the petition upon a finding that:
(a) the debtor is insolvent, and
(b) there is a substantial likelihood that the debtor could be successfully rehabilitated;
(2) dismiss the petition upon a finding that:
(a) the debtor is not insolvent,
(b) the petition is a sham ling intended only to delay the enforcement of the rights of the creditor/s or of any
group of creditors,
(c) the petition, the Rehabilitation Plan, and the attachments thereto contain any materially false or misleading
statements, or
(d) the debtor has committed acts of misrepresentation or fraud to its creditor/s or a group of creditors;
(3) convert the proceedings into one for the liquidation of the debtor upon a finding that:
(a) the debtor is insolvent and there is no substantial likelihood for the debtor to be successfully rehabilitated
as determined, and
(b) there is failure of rehabilitation.
Step 11. Consultation with debtor and creditors
• Proceed to this step if the petition has been given due course.
Step 12. Formation of creditors’ committee
• After this meeting is called and held, the creditors belonging to a class may formally organize a committee among
themselves. In addition, the creditors may, as a body, agree to form a creditors' committee composed of a
representative from each class of creditors, such as the following:
(1) secured creditors;
(2) unsecured creditors;
(3) trade creditors and suppliers; and (D) employees of the debtor.
• A creditors' committee may be organized if the creditors, representing at least a majority of all the claims as reflected
in the registry of claims determined pursuant to Section 44 of this Rule, cast their votes for its creation.
Step 13. Review, revision and preparation of rehabilitation plan by receiver
Step 14. Creditors meeting to approve rehabilitation plan
Step 15. Submission of rehabilitation plan to the court
Step 16. Filing of objections (FR Rules Rule 2, Section 64)
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• A creditor may file a verified opposition containing its written objections to the Rehabilitation Plan accompanied
by affidavits and supporting documents within twenty (20) days from receipt of notice from the court that the
Rehabilitation Plan has been submitted for confirmation.
• Objections to a Rehabilitation Plan shall be limited to the following:
(1) the creditors' support was induced by fraud;
(2) the documents or data relied upon in the Rehabilitation Plan are materially false or misleading; or
(3) the Rehabilitation Plan is in fact not supported by the voting creditors.
Step 17. Hearing on objections
Step 18. Court action
• Order confirming rehabilitation
Step 19. Amendments to the approved rehabilitation plan
• The debtor, rehabilitation receiver or any creditor may file a verified motion for leave to amend the Plan. Motion
must state the reasons.
• Court will grant or deny.
Step 20. Termination of proceedings
• At any time from the ling of the petition, any interested party or the rehabilitation receiver may le a motion for the
termination of the proceedings. After hearing the motion, the court may order the proceedings terminated by either
declaring a successful implementation of the Rehabilitation Plan or a failure of rehabilitation.
• There is failure of rehabilitation in the following cases:
(1) Dismissal of the petition by the court;
(2) Failure to submit a Rehabilitation Plan;
(3) A Rehabilitation Plan is not confirmed by the court;
(4) Under the Rehabilitation Plan submitted by the debtor, there is no substantial likelihood that the debtor can be
rehabilitated within a reasonable period based on the requirements of Section 21 of the Act;
(5) The Rehabilitation Plan or its amendment is approved by the court but in the implementation thereof, the debtor
fails to perform its obligations thereunder or there is a failure to realize the objectives, targets or goals set forth
therein, including the timelines and conditions for the settlement of the obligations due to the creditors and
other claimants;
(6) Determination that the Rehabilitation Plan may no longer be implemented in accordance with its terms,
conditions, restrictions, or assumptions;
(7) There is a finding that fraud was committed in securing the approval of the Rehabilitation Plan or its
amendment;
(8) In cases falling under Section 65 of this Rule, where, after finding merit in the objection/s raised against the
confirmation of the Rehabilitation Plan, the defect is not cured within such time as the court may order, or if
the court determines that the debtor acted in bad faith, or that it is not feasible to cure the defect; and
(9) Failure of the debtor to comply with these Rules, the Rules of Court, or any order of the court.
• Upon a breach of, or failure of the Rehabilitation Plan, the court, upon motion by an affected party, and after hearing,
may:
(1) issue an order directing that the breach be cured within a specified period of time, failing which the proceedings
may be converted to liquidation proceedings;
(2) issue an order converting the proceedings to liquidation proceedings;
(3) allow the debtor or rehabilitation receiver to submit amendments whose approval shall be governed by the same
requirements for creditor approval and court confirmation of a Rehabilitation Plan under this Rule;
(4) issue any other order to remedy the breach consistent with the Act and these Rules, other applicable law and
the best interests of the creditors; or
(5) enforce the applicable provisions of the Rehabilitation Plan through a writ of execution.
• Commencement Order
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• Contents of the Commencement Order

(1) declare that the debtor is under rehabilitation;
(2) appoint a rehabilitation receiver who may or may not be from among the nominees of the petitioner;
(3) 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;
(4) authorize the payment of administrative expenses as they become due;
(5) set the case for initial hearing, which will not be more than 40 days from the date of filing of the petition for
the purpose of determining whether there is substantial likelihood for the debtor to be rehabilitated
• Effects of the Commencement Order (Rule 2 Sec. 9)
• Retroact to the date of the filing of the petition
• Effectivity and Duration
• The Commencement Order shall be effective for the duration of the rehabilitation proceedings, unless (a) earlier
lifted by the court, (b) the rehabilitation plan is seasonably confirmed or approved, or (c) the rehabilitation
proceedings are ordered terminated by the court pursuant to Section 73 of this Rule.
• Suspension Order
(1) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor;
(2) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor;
(3) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except
in the ordinary course of business; and
(4) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date
• Exceptions to the Stay or Suspension Order (Sec. 18)
(1) 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;
(2) subject to the discretion of the court, to cases pending or led 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;
(3) to the enforcement of claims against sureties and other persons
(4) 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;
(5) 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;
(6) 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;
(7) 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
(8) 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.
• The Rehabilitation Receiver
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• Who may serve – Any qualified natural or juridical person may serve as a rehabilitation receiver. Provided, that if
the rehabilitation receiver is a juridical entity, it must designate a natural person/s who possess/es all the
qualifications and none of the disqualifications as its representative, it being understood that the juridical entity and
the representatives are solidarily liable for all obligations and responsibilities of the rehabilitation receiver (Sec.
28).
• Qualifications – Sec. 29
(1) Philippine citizen or resident for 6 months immediately preceding his nomination;
(2) Of good moral character and with acknowledged integrity, impartiality, and independence;
(3) Has the requisite knowledge of insolvency and other relevant commercial laws, rules, and procedures, as well
as relevant training and/or experience that may be necessary to enable him to properly discharge the duties and
obligations of a rehabilitation receiver; and
(4) 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.
• 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.
• Initial Appointment – Sec. 30
• The court will initially appoint the rehabilitation receiver, who may or may not be from among the nominees
of the petitioner. However, at the initial hearing of the petition, the creditors and the debtor who are not
petitioners may nominate other persons to the position. The court may retain the rehabilitation receiver initially
appointed or appoint another who may or may not be from among those nominated.
• If a qualified natural person or entity is nominated by more than 50% of the secured creditors and the general
unsecured creditors, the court must appoint such.
• Powers, Duties, and Responsibilities
• The rehabilitation receiver is 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. See Sec. 31 for enumeration.
• The court may limit the powers and functions of the rehabilitation receiver, as may be appropriate.
• Unless appointed by the court, the rehabilitation receiver does not take over the management and control of the
debtor but may recommend the appointment of a management committee over the debtor in cases provided by
the FRIA
• Removal of Rehabilitation Receiver – The rehabilitation receiver may be removed at any time by the court, either
motu proprio or upon motion by any creditor/s holding more than 50% of the total obligations of the debtor, on such
grounds as the rules of procedure may provide which shall include, but are not limited to, the following:
(1) Incompetence, gross negligence, failure to perform or failure to exercise the proper degree of care in the
performance of his duties and powers;
(2) Lack of a particular or specialized competency required by the specific case;
(3) Illegal acts or conduct in the performance of his duties and powers;
(4) Lack of qualifications or presence of any disqualification;
(5) Conflict of interest that arises after his appointment; and
(6) Manifest lack of independence that is detrimental to the general body of the stakeholders (Sec. 32).
• Discharge of Rehabilitation Receiver
• Upon confirmation of the Rehabilitation Plan, the rehabilitation receiver will submit a report and accounting to
the court within 30 days from such confirmation for the approval of the court
• Upon approval of such, the court will order the rehabilitation receiver’s discharge
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• The Rehabilitation Plan

• The Rehabilitation Plan is the plan by which the financial well-being and viability of an insolvent debtor can be
restored using various means including, but not limited to, debt forgiveness, debt rescheduling, reorganization or
quasi-reorganization, dacion en pago, debt-equity conversion and sale of the business (or parts of it) as a going
concern, or setting-up a new business entity, or other similar arrangements as may be approved by the courts or
creditors.
• Cram-down Power
• The power to approve or implement the Rehabilitation Plan despite the lack of approval, or objection from the
owners, partners, stockholders, or creditors of the insolvent debtor, provided that the terms are necessary to restore
the financial well-being and viability of the insolvent debtor (Secs. 64, 68).
• Note: Notwithstanding the rejection of the Rehabilitation Plan by the creditors, the court may confirm the
Rehabilitation Plan if all the following circumstances are present:
(1) The Rehabilitation Plan complies with the requirements specified in the FRIA;
(2) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;
(3) The shareholders, owners, or partners, of the juridical debtor lose at least their controlling interest as a result of
the Rehabilitation Plan; and
(4) 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 (Sec.
64)
• Under interim rules, the rehabilitation plan may be approved even over opposition of creditors if there is showing
that rehabilitation is feasible and opposition of creditors is manifestly unreasonable (BPI v. Sarabia Manor Hotel
Corporation, 702 SCRA 432 [2013], Victorio-Aquino v. Pacific Plans, Inc., G.R. No. 193108, Dec. 10, 2014).
• Confirmation of Rehabilitation Plan
• Effect – The confirmation of the Rehabilitation Plan by the court will result in the following:
(1) The Rehabilitation Plan and its provisions will be binding upon the debtor and all persons who may be affected
by it, including the creditors, whether or not such persons have participated in the proceedings or opposed the
Rehabilitation Plan or whether or not their claims have been scheduled;
(2) The debtor must comply with the provisions of the Rehabilitation Plan and must take all actions necessary to
carry out the Plan;
(3) Payments will be made to the creditors in accordance with the provisions of the Rehabilitation Plan;
(4) Contracts and other arrangements between the debtor and its creditors will be interpreted as continuing to apply
to the extent that they do not conflict with the provisions of the Rehabilitation Plan;
(5) Any compromises on amounts or rescheduling of timing of payments by the debtor will be binding on creditors
regardless of whether or not the Plan is successfully implemented; and
(6) Claims arising after approval of the Plan that are otherwise not treated by the Plan are not subject to any
Suspension Order (Sec. 67).
• Liability of general partners of a partnership for unpaid balances under an approved plan – The approval of the plan
will not affect the rights of the creditors to pursue actions against the general partners of a partnership to the extent
that they are liable under relevant legislation for the debts thereof (Sec. 70).
• Treatment of Amounts of Indebtedness or Obligations Forgiven or Reduced – Amounts of any indebtedness or
obligations reduced or forgiven will not be subject to any tax (Sec. 71).
• Accounting Discharge of Rehabilitation Receiver – Upon confirmation of the Rehabilitation Plan, the rehabilitation
receiver will provide a final report and accounting to the court. Unless the Rehabilitation Plan specifically requires
and describes the role of the rehabilitation receiver after the approval of the rehabilitation plan, the court will
discharge the rehabilitation receiver (Sec. 73).
• Management of the company under rehabilitation
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• Debtor-in-place – As a rule, the management of the juridical debtor remains 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 (Sec. 47). The rehabilitation receiver will not generally take over the management and control of the debtor
(Sec. 31).
• All disbursements, payments or sale, disposal, assignment, transfer or encumbrance of property, or any other act
affecting title or interest in property are subject to the approval of the rehabilitation receiver and/or the court.
• Rehabilitation receiver may recommend the appointment of a management committee. The court may also, upon
motion of any interested party, appoint and direct the former to assume management powers.
• The Management Committee
• Composed of 3 qualified members appointed by the court with same qualifications as those prescribed for a
rehabilitation receiver.
• The management committee takes the place of the management and governing body of the debtor and assume their
rights and responsibilities (Sec. 37). The committee has the power to take custody of and control all assets and
properties owned or possessed by the debtor. It may overrule or revoke the actions of the previous management or
the governing body of the debtor.
• A majority of all members will be necessary for the management committee to act or make a decision.
• Employment of professionals
• Upon approval of the court, and after notice and hearing, the rehabilitation receiver or the management committee
may employ specialized professionals and other experts to assist each in the performance of their duties. Such
professionals and other experts will be considered either employees or independent contractors of the rehabilitation
receiver or the management committee, as the case may be (Sec. 39).
• Conflict of Interest
• No person may be appointed as a rehabilitation receiver or as a member of a management committee, or be engaged
by the rehabilitation receiver or the management committee if he has a conflict of interest. An individual is deemed
to have a conflict of interest if he is so situated as to be materially influenced in the exercise of his judgment for or
against any party to the proceedings.
• A rehabilitation receiver may be deemed to have a conflict of interest if:
(1) He is a creditor, owner, partner, or stockholder of the debtor;
(2) He is engaged in a line of business which competes with the debtor;
(3) He is, or was within 5 years from the filing of the petition, a director, officer, owner, partner, employee, or
auditor or accountant of the debtor;
(4) He is, or was within 2 years from the filing of the petition, an underwriter of the outstanding securities if the
debtor;
(5) He is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owner/s of a
sole proprietorship-debtor, partners of a partnership-debtor, or to any stockholder, director, officer, employee,
or underwriter of the corporation-debtor; or
(6) He has any other direct or indirect material interest in the debtor of any creditor (Sec. 40).
• Any conflict of interest must be disclosed at all times throughout the proceedings to the court and to the creditors.
• Any party may within 10 days from receipt of disclosure of conflict of interest may file his objection to the
appointment of the rehabilitation receiver or a member of the management committee, or to the employment by
them of professionals, experts or employees – failure to do so will be deemed a waiver.
• Immunity of receiver and management committee
• The rehabilitation receiver and all persons employed by him, and the members of the management committee and
all persons employed by it, are not subject to any action, claim, or demand in connection with any act done by them
in good faith in connection with the exercise of their powers and functions under the FRIA or other actions duly
approved by the court (Sec. 41).
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• In order for the immunity to apply, the receiver or the management committee member must have acted in good
faith. Mere mistake or simple negligence will not remove the immunity of there was good faith. When negligence
shows bad faith or if there was fraud, the immunity cannot be claimed.
• Creditors’ Committee
• After the creditors’ meeting called pursuant to Sec. 63, the creditors belonging to a class may formally organize a
committee among themselves. In addition, the creditors may, as a body, agree to form a creditors’ committee
composed of a representative from each class of creditors (secured, unsecured, trade creditors and suppliers, and
employees) (Sec. 42).
• The creditors’ committee will assist the rehabilitation receiver in communicating with the creditors and will by the
primary liaison between the rehabilitation receiver and the creditors. The creditors’ committee cannot exercise or
waive any right or give any consent on behalf of any creditor unless specifically authorized in writing by such
creditor (Sec. 43).
• Sale or disposition of assets after commencement date
• No funds or property of the debtor can be used or disposed of
• Exceptions: When the sale or disposition is
(1) in the ordinary course of business
(2) necessary to finance the administrative expenses
(3) made with approval of the court
• The court may rescind or declare as null and void any sale, payment, transfer, or conveyance of the debtor’s
unencumbered property after the commencement date which are not in the ordinary course of business of the debtor
(Sec. 52).
• Credit arrangements and encumbrances of property after commencement date
• Credit arrangements – As a rule, the debtor cannot enter into credit arrangements after commencement date.
However, with the approval of the court upon the recommendation of the rehabilitation receiver, the debtor, in order
to enhance its rehabilitation, may:
(1) Enter into credit arrangements (excluding restructured obligations); or
(2) Enter into credit arrangements (excluding restructured obligations), secured by mortgages of its unencumbered
property or secondary mortgages of encumbered property with the approval of senior secured parties with
regard to the encumbered property; or
(3) Incur other obligations as may be essential for its rehabilitation (Sec. 55)
• Encumbrance of property – As a rule, the debtor cannot encumber property except:
(1) When done in the ordinary course of business;
(2) When encumbrance of the property is authorized by the court under Sec. 52;
• Payment of liabilities and claims outstanding as of commencement date
• A pre-commencement claim is a claim that is outstanding as of the commencement date. Pre-commencement claims
include:
(1) Claims of separation pay for months worked prior to the commencement date (Sec. 56);
(2) Claims for actual damages, if any, arising as a result of the election to terminate a contract (Sec. 57).
• The Stay or Suspension Order generally prohibits the debtor from making any payment of its liabilities outstanding
as of the commencement date (Sec. 17). The Rehabilitation Plan must disclose all payments to creditors for pre-
commencement debts made during the proceedings and the justifications thereof (Sec. 62[k]). Payments to the
creditors may be made pursuant to the confirmed Rehabilitation Plan (Sec. 69[c]).
• The rate and term of interest, if any, on secured and unsecured claims will be determined and provided for in the
approved Rehabilitation Plan.
• Payment of administrative expenses
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• The Commencement Order authorizes the payment of administrative expenses as they fall due (Sec. 16[1]). The
Rehabilitation Plan will also arrange for the payment of all outstanding administrative expenses as a condition to
the Plan’s approval unless such condition has been waived in writing by the creditors concerned (Sec. 62[r]).
• Pre-commencement contracts and obligations
• As a rule, all valid and subsisting contracts of the debtor with creditors and other third parties as at the
commencement date will continue in force, however:
(1) The rehabilitation court may cancel the contract at any time after the issuance of the Commencement Order;
(2) Contracts not confirmed by the debtor will be considered terminated.
• Any transaction occurring prior to commencement date entered into by the debtor or involving its funds or assets
may be rescinded or declared null and void on the ground that the same was executed with intent to defraud a
creditor or creditors or which constitute undue preference of creditors.
• Treatment of secured creditors in rehabilitation proceedings
• As a rule, the issuance of the Commencement Order and the Suspension or Stay Order, and any other provision of
the FRIA, will not be deemed in any way to diminish or impair the security or lien of a secured creditor, or the value
of his lien or security, except that his right to enforce said security or lien may be suspended during the term of the
Stay Order.
• The court, upon motion or recommendation of the rehabilitation receiver, may allow a secured creditor to enforce
his security or lien, if the said property is not necessary for the rehabilitation of the debtor (Sec. 60).
• The court may authorize the sale, transfer, conveyance, or disposal of encumbered property of the debtor with the
consent of the secured creditors (Sec. 50).
B. PRE-NEGOTIATED REHABILITATION
• Concept: The debtor and the required number of creditors agree in the rehabilitation plan before the filing of a petition
with the rehabilitation court
• Who may file petition: Insolvent debtor by itself or jointly with any of its creditors, may file a verified petition for the
approval of a pre-negotiated Rehabilitation Plan. (FRIA, Sec. 76)
• FR Rules, Rule 3, Sec. 1
• With respect to the debtor, the filing of the petition must be authorized by
(1) the owner in a single proprietorship
(2) the majority of partners in a partnership
(3) the majority vote of the Board of Directors/Trustees and by the vote of stockholders representing two/thirds
of the outstanding capital stock or members
• FRIA, Sec. 76; FR Rules, Rule 3, Sec. 1
• The pre-negotiated Rehabilitation Plan must have been endorsed or approved by creditors holding at least two-
thirds (2/3) of the total liabilities of the debtor, including:
• secured creditors holding more than 50% of the total secured claims of the debtor; and
• unsecured creditors holding more than 50% of the total unsecured claims of the debtor
• Venue for petition: Regional Trial Court which has jurisdiction over the principal office of the debtor alleged to be
insolvent as specified in its articles of incorporation, partnership or in its registration papers with the Department of
Trade and Industry (DTI) in cases of sole proprietorship as the case may be
• Where the principal office of the corporation, partnership or association as registered in the Securities and
Exchange Commission (SEC) is in Metro Manila, the action must be filed in the Regional Trial Court of the
city or municipality where the head office is located
• Basic Procedure
Step 1. Filing of the petition by the debtor
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• An insolvent debtor, by itself or jointly with any of its creditors, may file a verified petition with the court of
for the approval of a Pre-Negotiation Rehabilitation Plan
• Included in the petition:
(1) A schedule of the debtor’s debts and liabilities;
(2) An inventory of the debtor’s assets (including a Schedule of Accounts Receivables, Schedule of Existing
Claims);
(3) Affidavit of General Financial Conditions
(4) The Pre-negotiated Rehabilitation Plan, including the names of at least three (3) qualified nominees for
rehabilitation receiver; and
(5) 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
Step 2. Issuance of Court Order
• FRIA, Sec. 77; FR Rule 3, Sec. 2
• Within 5 working days, and after determination that the petition is sufficient in form and substance, the court
will issue an Order which shall:
(1) Identify the debtor, its principal business or activity/ies and its principal place of business;
(2) Declare that the debtor is under rehabilitation;
(3) Summarize the ground/s for the filing of the petition;
(4) Direct the publication of the Order in a newspaper of general circulation;
(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, within
three (3) days;
(6) State that:
• copies of the petition and the Rehabilitation Plan are available for examination and copying by any
interested party;
• 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 twenty (20) days from the second
publication of the Order;
(7) Appoint a rehabilitation receiver, if provided for in the Plan; and
(8) Include a Suspension or Stay Order
• The Order will have the same effects as a Commencement Order under FR Rules, Rule 2, Sec. 9
• Retroacts to the date of the filing of the petition and will be effective for 120 days from the filing
of the petition unless earlier lifted by the court on account of: (a) the approval of the Pre-Negotiated
Rehabilitation Plan, or (b) the termination of the rehabilitation proceedings.
Step 3. Publication of Order and notification of creditors
• The Order will be published in a newspaper of general circulation in the Philippines once a week for at least two
(2) consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance
• FRIA, Sec. 77. FR Rules, Rule 3, Sec. 2 [D], [E]
• Service by personal delivery of a copy shall be made on each creditor who is not a petitioner holding at least
ten percent (10%) of the total liabilities of the debtor, as determined in the schedule attached to the petition,
within three (3) days from the issuance of the Order
Step 4. Verified 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 Rehabilitation
plan not later than eight (8) days from the date of the second publication of the order
• Grounds for Objections:
(1) Allegations or attachments to the petition or Rehabilitation Plan are materially false or misleading;
17
(2) The majority of any class of creditors do not in fact support the Rehabilitation Plan;
(3) 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
(4) The support of the creditors, or any of them, was induced by fraud.
• FRIA, Sec. 78, FR Rules, Rule 3, Sec. 5
• Copies of any objection will 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
• The objection must be submitted to and received by the court not later than eight (8) days from the date of the
second publication of the Commencement Order (FR Rules, Rule 3, Sec. 5)
Step 5. Comments
• Any creditor or other interested party may submit his comments on the petition or the Pre-Negotiated
Rehabilitation Plan based on grounds other than those enumerated in the FR Rules.
Step 6. Hearing on the Objections
• After receipt of objections and/or comments, the court will set the same for hearing. The date of hearing will
be no earlier than 20 days and no later than 30 days from the date of the second publication of the Order.
• If the court finds merit in the objection: direct the debtor, when feasible to cure the defect within 15 days from
receipt of the order.
• If the court finds the debtor or creditors supporting the Rehabilitation plan acting 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 Plan.
Step 7. Approval of the Plan
• Within 10 days from the date of the second publication of the Order, the court will approve the Rehabilitation Plan
unless a creditor or other interested party submits a verified objection to it.
• The approved plan will not be implemented until after the lapse of 20 days from the date of the second
publication of the Order, unless the court conducts a hearing to consider the comments filed within 20 days
from the second publication date.
• Period for Approval of the Rehabilitation Plan (Sec. 81, FRIA; Sec. 8, Rule 3, FR Rules)
• Maximum period to approve rehabilitation plan is 120 days from date of the filing of the petition to approve
• If the court fails to act within the said period, the Rehabilitation Plan shall be deemed approved and the court
shall issue a certification to that effect.
• Approval of the Plan will have the same legal effect as confirmation of a Plan under Sec. 69 of a FRIA (FRIA, Sec.
82; FR Rules, Rule 3, Sec. 9)
C. OUT-OF-COURT OR INFORMAL RESTRUCTURING AGREEMENTS OR REHABILITATION PLANS
(OCRA)
• Concept: A rehabilitation plan agreed upon by the debtor and the required number of creditors. Unlike in a 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) Approval by the:
(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 representing at least 85% of the total liabilities, secured and unsecured, of the debtor
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(2) Publication of the notice of OCRA (once a week for at least 3 consecutive weeks in a newspaper of general
circulation in the Philippines)
• Contents of the notice of OCRA (FRIA, Sec. 86; FR Rules, Sec. 4):
(a) Salient provisions of the OCRA
(b) The OCRA is available for inspection or reproduction in the offices of the debtor at the expense of the
requesting party
(c) Number of secured creditors who approved the OCRA, indicating how much they represent, in terms of
percentage, among the secured obligations of the debtor, which should be at least 67%
(d) Number of unsecured creditors who approved the OCRA, indicating how much they represent, in terms of
percentage, among the unsecured obligations of the debtor, which should be at least 75%
(e) Total number of creditors, secured or unsecured, who approved the OCRA, indicating how much they
represent, in terms of percentage, among the total liabilities of the debtor, which should be at least 85%
(f) Upon its effectivity, the OCRA and its provisions shall be binding upon the debtor and all affected persons,
including the creditors, whether or not they participated in the proceedings or opposed the plan or whether
or not their claims have been scheduled
(g) Payments shall be made to the creditors in accordance with the provisions of the OCRA
(h) The manner and other requirements for the amendment or modification of the OCRA
• The OCRA shall take effect upon the lapse of 15 days from the date of the last publication of its notice.
• Cram Down Effect: Same legal effect as confirmation of a Plan under Sec. 69 of the FRIA/Rule II, Sec. 66 of the FR
Rules (FRIA, Sec. 86; FR Rules, Rule 4, Sec. 5)
• Amendment or Modification: Must be made in accordance with the terms of the agreement and with due notice on all
creditors; must comply with the approval and publication requirements; the amended or modified OCRA shall take
effect upon the lapse of 15 days from the date of the last publication of its notice (FRIA, Sec. 87; FR Rules, Rule 4,
Sec. 6)
• Standstill Period: Refers to the period agreed upon by the debtor and its creditors to enable them to negotiate and enter
into an out-of-court or informal restructuring/workout agreement or rehabilitation plan pursuant to Rule 4 of these Rules.
The standstill agreement may include provisions identical with or similar to the legal effects of a commencement order
under Section 9, Rule 2 of these Rules (FR Rules, Rule 1, Sec. 5[q])
• Requirements (FRIA, Sec. 85; FR Rules, Rule 4, Sec. 2):
(1) Approval of the agreement for a standstill period by creditors representing more than 50% of the total liabilities
of the debtor
(2) Publication of the notice of the agreement in a newspaper of general circulation in the Philippines, once a week
for 2 consecutive weeks
• Notice of the standstill agreement shall substantially state:
(1) Identity of the debtor, its principal business or activity/ies, and its principal place of business
(2) Total amount of the liabilities of the debtor, classified into secured and unsecured
(3) That a contact person is identified, together with his contact details, which should include existing
office address, phone numbers, and email addresses
(4) That creditors are invited to participate in the negotiations for an OCRA and may do so by contacting
the person specified in the notice
(5) That the creditors representing more than 50% of the total liabilities of the debtor have agreed to observe
a standstill period which shall not exceed 120 days from its date of effectivity
(6) That the terms and conditions agreed upon by the parties shall be strictly observed during the standstill
period
(7) That the standstill period shall be effective after publication of the notice once a week for 2 consecutive
weeks in a newspaper of general circulation in the Philippines
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(8) That the OCRA shall be binding on the debtor and all affected persons, including the creditors, whether
or not they will participate in the negotiations, if approved by all of the following:
(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, secured and unsecured, of the debtor
(3) Standstill period shall not exceed 120 days from the date of effectivity
• Expiration (FR Rules, Rule 4, Sec. 3): Whichever comes first:
(1) Lapse of 120 days from the effectivity of the standstill agreement
(2) Effectivity of the OCRA
(3) Termination of the negotiations for the OCRA as declared by creditors representing more than 50% of the total
liabilities of the debtor
• Court Action (FR Rules, Rule 4, Sec. 7): Jurisdiction of the RTC, as a court of general jurisdiction:
(1) Petition for Court Assistance: To execute or implement the standstill agreement or the OCRA (FRIA, Sec. 89; FR
Rules, Rule 4, Sec. 9)
• May be filed by the insolvent debtor or the creditor
• Minimum requirements as to content:
(a) Identity of the debtor, its principal business of activity/ies, and its principal place of business
(b) If the petition is filed by the creditor, the identity of the creditor and its principal place of business
(c) Identity and addresses of the party/ies against whom the assistance is sought
(d) Statement of the dates the standstill agreement or the OCRA was executed and became effective
(e) An allegation that the requisite creditor approval for a standstill agreement or for an OCRA has been
obtained
(f) An allegation that the notice of the standstill agreement or the OCRA has been duly published
(g) Salient provisions of the standstill agreement or the OCRA, including the provisions sought to be enforced
(h) Specific form of assistance or relief sought
• Accompanied by a copy of the standstill agreement or the OCRA, as the case may be
• Forms of assistance (FR Rules, Rule 4, Sec. 10):
(a) Issuance a writ of execution to enforce its terms
(b) Other forms of additional assistance as may be necessary to execute or implement the standstill agreement
or the OCRA, including the award of damages properly pleaded and proved, and to protect the interests of
the creditors, the debtor, and other interested parties
(2) Petition for Annulment: Of the standstill agreement or the OCRA (FR Rules, Rule 4, Sec. 11)
• May be filed by the debtor or creditor
• Minimum requirements as to content:
(a) Identity of the debtor, its principal business or activity/ies, and its principal place of business
(b) Ground for the petition
• Grounds:
(a) Non-compliance with the requirements
(b) Vitiation of consent due to fraud, intimidation, or violence, if committed against such number of creditors
required for the approval of the standstill agreement or the OCRA, as the case may be
• Accompanied by a copy of the standstill agreement or the OCRA, as the case may be
• Shall be filed not later than 30 days from the effectivity of the standstill agreement or the OCRA, as the case
may be
• Service of Summons (FR Rules, Rule 4, Sec. 12):
• To be issued and served within 5 days from receipt of the petition, on all the persons indicated as
respondents
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• Shall be accompanied with a copy of the petition, with all its attachments
• Shall direct the respondent to file a comment and/or opposition within a non-extendible period of 5 days
from receipt of summons
• Who serves:
(a) Sheriff
(b) His deputy
(c) Other proper court officer
(d) Counsel or representative of the petitioner, for justifiable reasons
(e) Any suitable person authorized or deputized by the court issuing the summons
• How served:
(a) Residing in the Philippines
(a) Personal
(b) Substituted
(c) Publication
(b) Residing elsewhere
(a) Personal service coursed through the appropriate court in the foreign country, with the assistance
of the DFA
(b) Publication once in a newspaper of general circulation in the country where the respondent may be
found and by serving a copy of the summons and the court order by registered mail at the last
known address of the respondent
(c) Facsimile or any recognized electronic means that could generate proof of service
(d) Other means as the court may in its discretion direct
• Comment or Opposition (FR Rules, Rule 4, Sec. 13):
• Filed, together with supporting affidavits and documents, within 5 days from receipt of the summons and
ensuring receipt thereof by the petitioner and the court not less than 3 days before the date of the summary
hearing
• In an action for court assistance, a respondent may raise the defense that the standstill agreement or the
OCRA is void for failure to comply with the requirements, and may raise the invalidity of the standstill
agreement or the OCRA on the ground of vitiation of consent if it affects such number of creditors required
for the approval of the standstill agreement of the OCRA, as the case may be
• The failure to raise either defense shall constitute as waiver and preclude the respondent from filing a
separate petition to annul the standstill agreement or the OCRA
• Court Order on Petition (FR Rules, Rule 4, Sec. 14):
• The court shall determine whether there is a genuine issue of material facts on the basis of the allegations
of the petition and the comment and/or opposition, and their supporting documents
• In case respondent fails to file a comment and/or opposition, the court may conduct clarificatory hearings
• If the court determines that there is no genuine issue of material fact, the court shall rule whether the petition
shall be granted, which order shall be issued within 5 days from receipt of the comment or opposition
• Summary Hearing (FR Rules, Rule 4, Sec. 15):
• If the court determines that there exists a genuine issue of material facts, it shall conduct a summary hearing
not later than 20 days from the filing of the petition
• The 120-day standstill period shall continue to run during the pendency of an action involving a standstill
agreement. Upon the finality of the decision, the parties shall have the remaining balance of the period to
enforce the decision, which in any case shall not be less than 60 days
• The court shall render judgment which shall be not later than 60 days from the filing of the petition
• Decision or Order (FR Rules, Rule 4, Sec. 16):
• Judgment involving a standstill agreement shall be final and immediately executory
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• Judgment involving the OCRA shall be final within 10 days from receipt of the decision and is immediately
executory
• Judgment may be elevated to the CA under Rule 65 of the ROC
• Final judgment shall be without prejudice to the parties availing of the other mode of rehabilitation
• Effect of Court Action or Other Proceedings (FRIA, Sec. 88 FR Rules, Rule 4, Sec. 7): Any court action or other
proceedings arising from, or relating to, the OCRA shall not stay its implementation, unless a temporary restraining
order or preliminary prohibitory injunction is issued by the CA in an original action under Rule 65 of the ROC
• Venue (FR Rules, Rule 4, Sec. 8): RTC having jurisdiction over the place in which the insolvent debtor resides or
has its principal place of business
VI. LIQUIDATION
• Liquidation Process
• A proceeding where claims are filed and the assets of the insolvent debtor are disposed and the proceeds are divided
among the creditors.
• Proceedings under Chapter V of R.A. 10142 or the Financial Rehabilitation and Insolvency Act (FRIA)
• The proceedings apply to individual debtors, sole proprietorships, partnerships and corporations.
• Types of Liquidation
(1) Voluntary Liquidation- debtor initiated liquidation proceedings
(2) Involuntary Liquidation- creditor initiated liquidation proceedings
• NOTE: Under the FRIA, a liquidation proceeding may also be an original liquidation proceeding or a proceeding
which is originally a rehabilitation proceeding but converted into liquidation proceedings.
• Voluntary Liquidation
• Who may file?
• An individual debtor whose liabilities exceed his assets and whose debts exceed Five Hundred Thousand Pesos
(P500,000)
• Where to file:
• In the court having jurisdiction over the province or city where he has resided for six (6) months prior to the
filing of the petition.
• For an insolvent juridical debtor, petition may be filed in the Regional Trial Court (RTC) which has jurisdiction
over its principal office as specified in its articles of incorporation or partnership;
• Where the principal office of the corporation or partnership as registered with the SEC is in Metro Manila, the
petition must be filed in the RTC of the city or municipality where the head office is located.
• Conversion from Rehabilitation Proceedings to Liquidation
• Any time during the pendency of court-supervised or pre-negotiated rehabilitation proceedings the debtor may
also initiate liquidation by filing a verified motion in the same rehabilitation court to convert the proceedings
into liquidation proceedings.
• Involuntary Liquidation
• Who may file?
• With respect to involuntary liquidation of an individual debtor any creditor or creditors with a claim of, or the
aggregate of whose claim is, at least Five Hundred Thousand Pesos (P500,000).
• With respect to involuntary liquidation of a juridical person, three (3) or more creditors the aggregate of whose
claim is at least either One Million Pesos (P1,000,000) or at least 25% of the subscribed capital stock or partner’s
contributions of the debtor, whichever is higher.
• Where to file?
• A verified petition for liquidation of an individual debtor may be filed by the creditor/s with the court of the
province or city where the debtor resides.
• In case of liquidation of a juridical debtor, creditor/s may file the petition in the RTC which has jurisdiction
over the principal office of the debtor as specified in its articles of incorporation or partnership;
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• Where the principal office of the corporation or partnership as registered with the SEC is in Metro Manila, it
should be filed in the RTC of the city or municipality where the head office is located.
• Conversion from Rehabilitation Proceedings to Liquidation
• Any time during the pendency or after of court-supervised or pre-negotiated rehabilitation proceedings, three
(3) or more creditors—whose claim fulfill the requisites as those of an original creditor-initiated liquidation
proceedings, may also initiate liquidation proceedings by filing a motion in the same rehabilitation court to
convert the proceedings into liquidation.
• Basic Procedure
Step 1. Filing of Petition
• Voluntary Liquidation:
• An insolvent debtor, whether juridical or individual, shall file a verified petition for liquidation with the court
• The verified petition shall establish the insolvency of the debtor and shall contain the following:
• Schedule of the debtor’s debts and liabilities including list of creditors with their addresses, amounts of
claims and collaterals, or securities, if any;
• Inventory of all its assets including receivables and claims against third parties; and
• Names of at least three (3) nominees for Liquidator.
• Involuntary Liquidation:
• With respect to insolvent juridical debtor, the petition must show that:
• There is no genuine issue of fact or law on the claim/s of the petitioner/s, and that the due and demandable
payments thereon have not been made for at least 180 days or that the debtor has failed generally to meet
its liabilities as they fall due; and
• There is no substantial likelihood that the debtor may be rehabilitated.
• With respect to individual debtor, the petition must state the particulars of at least one of the following acts of
insolvency:
• Individual is about to depart or has departed from the Philippines, with intent to defraud his creditors;
• He remains absent, with intent to defraud his creditors;
• He conceals himself to avoid legal processes for delaying the liquidation and defrauding the creditors;
• Concealment or removal of any of his property to avoid its being attached or taken on legal process;
• He has suffered his property to remain under attachment or legal process for three days for the purpose of
hindering or delaying the liquidation or of defrauding his creditors;
• He has willfully suffered judgment to be taken against him by default for the purpose of hindering or
delaying the liquidation or of defrauding any creditors;
• He has suffered or procured his property to be taken on legal process with intent to give preference to one
or more of his creditors;
• 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;
• He has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his
estate, property, rights or credits;
• Being a tradesman or merchant, he has generally defaulted in the payment of his current obligations for a
period of thirty (30) days;
• That for a period of thirty (30) days, he has failed, after demand, to pay any money, deposited with him or
received by him in a fiduciary; and/ or
• That an execution having been issued against him on final judgment for money, he shall have been found
to be without sufficient property subject to execution to satisfy the judgment.
• The petitioning creditor/s must post a bond in such sum as the court will direct. If the petition for liquidation is
dismissed by the court, or withdrawn by the petitioner, or if the debtor is not be declared insolvent, the
petitioners will pay the debtor all costs, expenses, damages occasioned by the proceedings, and attorney’s fees.
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Step 2. Issuance of the Court Order

• Voluntary Liquidation:
• Within Ten (10) working days from the filing of petition, the court shall issue a Liquidation Order if the petition
filed is sufficient in form and substance, otherwise, the court will dismiss the petition.
• Involuntary Liquidation:
• With respect to individual debtor, the court will issue an Order requiring the individual debtor to show
cause at a time and place to be fixed by the court, why he should not be adjudged an insolvent. Upon good
cause shown, the court may issue an Order forbidding the individual debtor from making payments of any of
his debts, and transferring any property belonging to him.
• With respect to juridical debtor, if the petition or motion is sufficient in form and substance, the court will issue
an Order directing the:
• Publication of the petition or motion in a newspaper of general circulation;
• Filing of comment of the debtor and all creditors who are not petitioners on the petition or motion within
15 days from the date of last publication;
• Service of copy of the motion or petition on the debtor and all known creditors unless they exceed 20 in
number, in which case, service will be made on at least the first 20 largest known creditors of the debtors
in terms of credits held. However, if there are more than 20 known creditors (who are not petitioners) and
one or more of them acquired their credit/s within the six-month period immediately preceding the filing
of the petition, the number of creditors to be served copies of the petition will be increased by the same
number.
Step 3. Publication of the Petition and Notification of Parties
• With respect to juridical persons, the petition will be published in a newspaper of general circulation once a
week for two (2) consecutive weeks.
Step 4. Filing of Comments
• The debtors and creditors who are not petitioners will file their comments on the petition or motion within 15
days from the date of last publication.
Step 5. Hearing on the Petition or Motion
• If the petition or motion, as well as the comments thereto raise issues of facts.
• On the basis of pleadings and the hearing conducted, if any, the court will determine whether the evidence is
sufficient to warrant the issuance of a Liquidation Order. Otherwise, it will dismiss the petition or deny the
motion.
Step 6. Issuance of Liquidation Order
• if petition is meritorious
• if the debtor on whom summons is properly served fails to file a comment on or opposition to the petition within
the period given by the court.
Step 7. Publication of Liquidation Order
• in a newspaper of general circulation once a week for two (2) consecutive weeks
Step 8. Hearing for the election and appointment of the Liquidator
• within a date not less than 30 days nor more than 45 days from the date of last publication.
Step 9. Appointment of Liquidator
• creditors entitled to vote will elect the liquidator in open court
• the nominee receiving the highest number of votes cast in terms of amount of claims and who is qualified pursuant
to Sec. 118 of the FRIA, will be appointed as the liquidator.
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• a secured creditor will not be allowed to vote unless he waives his security or lien or he has the value of the property
subject of his security or lien fixed by the agreement with the liquidator, and is admitted for the balance of his claim.
• in some instances, the court may also appoint the liquidator.
Step 10. Registry of Claims
• Within 20 days from his assumption from office, the liquidator must prepare a preliminary registry of claims of
secured and unsecured creditors.
• Such registry will be made 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.
Step 11. Opposition or Challenge to Claims
• Within 30 days from the expiration of the period for filing of applications for recognition of claims
Step 12. Submission of Disputed Claims to Court
• The liquidator must resolve disputed claims and submit his findings thereon to the court for approval
• The liquidator may disallow claims.
Step 13. Submission of Liquidation Plan
• Within 3 months from his assumption into office, the Liquidator will submit a Liquidation Plan to the court.
• It will, as a minimum, enumerate all the assets of the debtor, all the claims against the debtor and a schedule of
liquidation of the assets and payment of the claims.
Step 14. Implementation of the Liquidation Plan
• As approved by the court
• Payments will be made to the creditors only in accordance with the provisions of the plan.
Step 15. Complete Implementation of the Plan
• Upon determination that the liquidation has been completed, the court will issue an Order approving the report and
ordering the SEC to remove the debtor from the registry of legal entities.
Step 16. Termination of Proceedings
• Upon receipt of evidence showing that the debtor has been removed from the registry of legal entitles at the SEC,
the court will issue an Order terminating the proceedings.
Step 17. Discharge of Liquidator
• The liquidator will file a final accounting with the court, with proof of notice to all creditors. The accounting will
be set for hearing. If the court finds the same in order, the court will discharge the liquidator.
• Liquidation Order
• Issued by the court if it determines that the petition for liquidation is meritorious or if the debtor on whom summons
is properly served fails to file a comment on or opposition to the petition within the period given by the court.
• It will:
• Declare the debtor insolvent;
• Order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved;
• Order the sheriff to take possession and control of all the property of the debtor, except those that may be
exempt from execution;
• Order the publication of the petition or motion in a newspaper of general circulation once a week for two (2)
consecutive weeks;
• Direct payments of any claims and conveyance of any property due the debtor to the liquidator;
• Prohibit payments by the debtor and the transfer of any property by the debtor;
• Direct all creditors to file their claims with the liquidator within the period set by FLSP Rules;
• Authorize the payment of administrative expenses as they become due;
• State that the debtor and creditors who are not petitioner/s may submit the names of other nominees to the
position of liquidator; and
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• Set the case for hearing for the election and appointment of the liquidator.
• Effects of Liquidation Order
(1) Juridical debtor will be deemed dissolved and all its corporate or juridical existence terminated;
(2) Legal title and control of all the assets of the debtor, except those that may be exempt from execution will be deemed
vested in the liquidator or, pending his election or appointment, with the court;
(3) All contracts of the debtor will be deemed terminated and/or breached unless the liquidator, within 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 will be allowed. Such actions already pending will be
transferred to the Liquidator for him to accept and settle or contest. If the liquidation contests or disputes the claim,
the court will allow, hear and resolve such contest except when the case is already on appeal. In such case, the suit
may proceed to judgment, and any final and executory judgment therein for a claim against the debtor will be filed
and allowed in court; and
(5) No foreclosure proceeding will be allowed for a period of 180 days.
• Rights of Secured Creditors
• Under the Liquidation Order
• The right of a secured creditor to enforce his lien in accordance with the applicable contract of law will not be
affected by the issuance of a liquidation order.
• At any time prior to the election of the liquidator, a secured creditor must manifest in writing to the court
whether he:
(1) Waive his rights under the security or lien, prove his claim in the liquidation proceedings and share in the
distribution of the assets of the debtor; or
(2) Maintain his rights under his security or lien.
• If the secured creditor fails to file such manifestation, he is deemed to have opted to maintain his right
under the security or lien.
• If the secured creditor maintains his rights under the security or lien:
(a) The value of the property may be fixed in a manner agreed upon by the creditor and the liquidator.
When the value of the property is less than the claim it secures, the liquidator may convey the
property to the secured creditor and the latter will be admitted in the liquidation proceedings as
creditor for the balance; if its value exceeds the claim secured, the liquidator may convey the
property to the creditor and waive the debtor’s right of redemption upon receiving the excess from
the creditor;
(b) The liquidator may sell the property and satisfy the secured creditor’s entire claim from the
proceeds of the sale; or
(c) The secured creditor may enforce the lien or foreclosure on the property pursuant to applicable
laws.
• Under the Liquidation Plan
• It must ensure that the concurrence and preference of credits as enumerated in the Civil Code of the Philippines
and other relevant laws will be observed, unless a preferred creditor voluntarily waives his preferred right.
• NOTE: For purposes of this chapter, credits for services rendered by employees or laborers to the debtor will enjoy
first preference under Art. 2244 of the Civil Code, unless the claims constitute legal liens under Art. 2241 and Art.
2242 thereof.
• Liquidator
• Qualifications of the Liquidator
(1) Citizen of the Philippines or a resident thereof for six (6) months immediately preceding his nomination;
(2) Good moral character and with acknowledged integrity, impartiality and independence;
(3) Knowledge of insolvency and other relevant commercial laws, rules and procedures;
(4) No conflict of interest (but the same may be waived by a party who may be prejudiced thereby)
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• NOTE: If the liquidator is a juridical entity, it must designate a natural person who possess all the qualifications
and none of the disqualifications as its representative.
• Conflict of Interest
• If he is so situated as to be materially influenced in the exercise of his judgment for or against any party to the
proceedings.
• A nominee or an elected or appointed liquidator and their personnel will immediately disclose to the court any
ground that may give rise to an actual or potential conflict of interest, regardless of his personal assessment of
its sufficiently, as soon as he becomes aware of it.
• Compensation of the Liquidator
• Reasonable compensation as may be deemed by the liquidation court, in consultation with the creditors
• Amount shall not exceed the maximum amount as may be prescribed by the Supreme Court.
• Oath and Bond of the Liquidator
• Prior entering upon his powers, duties and responsibilities
• Bond shall be in such amount to be fixed by the court, conditioned upon the proper and faithful discharge of
his powers, duties and responsibilities.
• Reporting Requirements
• Liquidator will make and keep record of all moneys received and all disbursements made by him or under his
authority as liquidator.
• Quarterly report to the court
• Submit reports which may be required by the court from time to time
• Final report shall be submitted at the end of the liquidation proceedings.
• Removal of Liquidator
• Pursuant to the procedures for removing a rehabilitation receiver.
• May be removed by the court either motu proprio or upon motion by the debtor or any creditor or creditors on
grounds specified under FLSP Rules, Rule 3, Sec. 13.
• Discharge of Liquidator
• In preparation for the final settlement of all the claims against the debtor, the liquidator will notify al the
creditors, either by publication or such other mode as the court may direct or allow,
• Liquidator will apply with the court for the settlement of his account and his discharge from liability as
liquidator. The liquidator will file a final accounting with the court, with proof of notice to all creditors.
• The accounting will be set for hearing. If the court finds the same in order, the court will discharge the liquidator.
• Sale of Assets in Liquidation
• Sale in Liquidation
• With the approval of the court, unencumbered assets of the debtor may be sold by the liquidator and convert
the same into money.
• Must be made at public auction.
• Private sale, transfer or disposition may be allowed with the approval of the court if: the goods to be sold are of
perishable nature, or are liable to quickly deteriorate in value, or are disproportionately expensive to keep or
maintain; or the private sale, transfer or disposition is for the best interest of the debtor and his creditors.
• With the approval of the court, unencumbered property of the debtor may also be conveyed to a creditor in
satisfaction of his claim or part thereof.
• Exempt Property to be Set Apart
• It is the duty of the court, upon petition and after hearing, to exempt and set apart, for the use and benefit of the
insolvent, such real and personal property as is by law exempt from execution, and also a homestead.
• Nullification of Transactions
• Rescission or Nullity of Certain Transactions
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• Any transaction occurring prior to the issuance of the Liquidation Order, or in case of the conversion of the
rehabilitation proceedings prior to the commencement date, entered into by the debtor, or involving its assets,
may be rescinded or declared null and void on the ground that the same was executed with intent to defraud a
creditor or creditors or which constitute undue preference of creditors.
• The presumptions set forth in Sec. 58 of FRIA are expressly made to apply for liquidation proceedings
• Actions for Rescission of Nullity
(a) The liquidator or, with his conformity, a creditor may initiate and prosecute any action to rescind, or declare
null and void any transaction described in the immediately preceding paragraph. If the liquidator does not
consent to the filing or prosecution of such action, any creditor may seek leave of the court to commence said
action.
(b) If leave of court is granted under paragraph (a) above, the liquidator will 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 paragraph (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 paragraph (a) hereof, the liquidator signifies to the court his readiness to
institute the proceeding for the benefit of the creditors, the order will fix the time within he will do so and, in
that case, the benefit derived from the proceedings, if instituted within the time limits so fixed, belongs to the
estate.
• Liquidation of a Securities Market Participant
• Securities Market Participant
• A broker, dealer, underwriter, transfer agent or other juridical persons transacting securities in the capital market.
• The foregoing provisions on liquidation are without prejudice to the power of regulatory agency or self-regulatory
organization to liquidate trade related claims of clients or customers of a securities market participant which, for
purposes of investor protection are hereby deemed to have absolute priority over other claims of whatever nature
of kind insofar as trade-related assets are concerned.
• Trade-related assets include cash, securities, trading right and other owned and used by the securities market
participant in the ordinary course of this business.
• Suspension order does not apply to any form of action of customers or clients of a securities market participant
• In case the debtor is a securities market participant, the court must give priority, in the appointment of the receiver,
to the nominee of the appropriate securities or investor protection fund.
VII. CROSS-BORDER INSOLVENCY
• Regulation of corporate insolvency and financial distress involving companies which have assets or creditors in more
than one state
• One where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are not
from the State where the insolvency proceeding is taking place
• UNCITRAL Model Law on Cross-Border Insolvency

• the FRIA adopted the Model Law on Cross-Border Insolvency of the United Nations Center for International Trade
and Development as part of the FRIA
• 30 May 1997
• to provide effective mechanisms for dealing with cases of cross-border insolvency
• the basic concept of the Model Law is to establish what the "main proceedings" are in relation to any international
insolvency
• commenced where the debtor has its centre of main interest, or "COMI"
• all other proceedings are referred to as the "non-main proceedings"
• may be commenced in any place where the debtor has a commercial establishment
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• Model Law does not require reciprocity between states, but focuses upon:
• ensuring that states give assistance to insolvency officials from other countries in relation to main proceedings and
non-main proceedings; and
• eliminating preferences for local creditors over international ones.
• KEY PROVISIONS
• Re: Access
• provisions give representatives of foreign insolvency proceedings and creditors a right of access to the
courts of an enacting State to seek assistance and authorize representatives of local proceedings being
conducted in the enacting State to seek assistance elsewhere
• Re: Recognition
• provisions accord recognition to orders issued by foreign courts commencing qualifying foreign
proceedings and appointing the foreign representative of those proceedings
• provided it satisfies specified requirements, a qualifying foreign proceeding should be recognized as either
a main proceeding or a non-main proceeding
• principal effect: the relief accorded to assist the foreign proceeding
• Re: Relief
• relief considered necessary for the orderly and fair conduct of cross-border insolvencies should be available
to assist foreign proceedings
• e.g. interim relief at the discretion of the court between the making of an application for recognition and
the decision on that application
• Re: Cooperation and Coordination
• address cooperation among the courts of States where the debtor's assets are located and coordination of
concurrent proceedings concerning that debtor
• expressly empowers courts to cooperate in the areas governed by the Model Law and to communicate
directly with foreign counterparts
• authorizes cooperation between courts and foreign representatives and between representatives, both
foreign and local
• Cross-Border Insolvency
• How do you initiate a proceeding?
(1) Court will set a hearing in connection with an insolvency or rehabilitation proceeding taking place in a foreign
jurisdiction;
(2) Upon the submission of a petition by the representative of the foreign entity that is the subject of the foreign
proceeding.
• Provisional reliefs?
• The court may issue orders:
(1) Suspending any action to enforce claims against the entity or otherwise seize or foreclose property of the
foreign entity located in the Philippines;
(2) Requiring the surrender of property of the foreign entity to the foreign representative; or
(3) Providing other necessary relief. (FRIA, Sec. 141)
• Factors to consider before granting relief?
(1) The protection of creditors in the Philippines and the inconvenience in pursuing their claims in a foreign
proceeding;
(2) The just treatment of all creditors through resort to a unified insolvency or rehabilitation proceeding;
(3) Whether other jurisdictions have given recognition to foreign proceeding;
(4) The extent that the foreign proceeding recognizes the rights of creditors and other interested parties in a
manner substantially in accordance with the manner prescribed in the FRIA; and
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(5) The extent that the foreign proceeding has recognized and shown deference to proceedings under the FRIA
and previous legislation. (FRIA, Sec. 142)
VIII. PENAL PROVISIONS
• An owner, partner, director, officer, or other employee of the debtor who commits any one of the following acts will,
upon conviction thereof, be punished by a fine of not more than One million pesos (P1,000,000) and imprisonment for
not less than three (3) months nor more than five (5) years for each offense:
(1) If he will, having notice of the commencement of the proceedings, or having reason to believe that proceedings are
about to be commenced, or in contemplation of the proceedings, hide or conceal, or destroy or cause to be destroyed
or hidden any property belonging to the debtor; or if he will hide, destroy, alter, mutilate or falsify, or cause to be
hidden, destroyed, altered, mutilated or falsified, any book, deed, document or writing relating thereto; or if he will,
with intent to defraud the creditors of the debtor, make any payment, sale, assignment, transfer or conveyance of
any property belonging to the debtor;
(2) If he will, having knowledge or belief of any person having proved a false or fictitious claim against the debtor, fail
to disclose the same to the rehabilitation receiver or liquidator within one (1) month after coming to said knowledge
or belief; or if he will attempt to account for any of the debtor’s property by fictitious losses or expenses; or
(3) If he will knowingly violate a prohibition or knowingly fail to undertake an obligation established by the FRIA.
(FRIA, Sec. 145)
30

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CREDIT TRANSACTIONS | ASG Marissa B.

• Who May File

• There must be approval from:

• Contents of the Commencement Order

• The Rehabilitation Plan

Step 2. Issuance of the Court Order

• UNCITRAL Model Law on Cross-Border Insolvency

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