Mervidelle F.

Castro

THE FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010

The Financial Rehabilitation and Insolvency Act of 2010 (FRIA)

-took effect on 31 August 2010 which repealed the Insolvency Law.

FRIA contains three main parts:

(i) rehabilitation, for the purpose of restoring the financial health of insolvent
debtors;
(ii) (ii) liquidation, which provides for the orderly liquidation of the debtor’s
assets and liabilities, once it has been determined that operations can no
longer be successfully restored;
(iii) (iii) cross-border insolvency, whose purpose is to address insolvency-related
matters involving foreign companies with Philippine-based assets or foreign-
based assets of Philippine companies.

In 2013, the Supreme Court approved the Financial Rehabilitation Rules of Procedure
(2013), otherwise known as the FR Rules. Unlike the Insolvency Act of 1909, FRIA and the
FR Rules do not limit insolvency to a situation where the debtor’s assets are less than its
liabilities. It now covers a situation where the debtor is unable to meet its obligations as
they fall due even if its assets are more than its liabilities.

Constitutionality of Insolvency Laws

The Supreme Court ruled that the restructuring of the debt of the debtor
pursuant to rehabilitation plan does not constitute a violation of the non-impairment
clause. Even assuming that the non-impairment clause may be invoked, the non-impairment
clause must yield to the police power as the constitutional guaranty of non-impairment of
obligations is limited by the exercise of the police power of the State for the common
good of the general public.

The FRIA states that it is the policy of the State:

1) To encourage debtors, both juridical and natural persons, and their creditors to
collectively and realistically resolve and adjust competing claims and property rights.
2) To ensure a timely, fair, transparent, effective and efficient rehabilitation or
liquidation of debtors.
3) To ensure or maintain certainly and predictability in commercial affairs, preserve
and maximize the value of the assets of these debtors, recognize creditor rights and
respect priority of claims, and ensure equitable treatment of creditors who are similarly
situated.
4) When rehabilitation is not feasible, to facilitate a speedy and orderly liquidation
of these debtor's assets and the settlement of their obligation
DEFINITION OF TERMS UNDER FRIA
1. Claims - refer to all claims or demands of whatever nature or character against the
debtor or its property, whether for money or otherwise, liquidated or unliquidated, fixed
or contingent, matured or unmatured, disputed or undisputed, including, but not limited to:
- All claims of the government, whether national or local, including taxes, tariffs
and customs duties;
- Claims against directors or officers of the debtor arising from the acts done in
the discharge of their functions falling within the scope of their authority; however, this
inclusion does not prohibit the creditors or third parties from filing cases against the
directors and officers acting in their personal capacities. The FRIA covers claims of
whatever nature or character.
It covers both monetary and non-monetary claims.

2. Debtors -
1) A sole proprietorship duly registered with the Department of Trade and
Industry (DTI)
2) A partnership duly registered with the Securities and Exchange Commission
(SEC)
3) A corporation duly organized and existing under Philippines laws
4) An individual debtor who has become insolvent as defined in the law
5) Remedies from FRIA

3.Insolvency - refers to the financial condition of a debtor that is generally unable to pay
its or his liabilities as they fall due in the ordinary course of business or has liabilities that
are greater than its or his assets. Thus, the term “insolvent” covers both bankruptcy and
illiquidity. In determining whether the debtor’s liabilities are greater than his assets,
reference must be made to the fair valuation of his assets. The debtor’s assets must not,
at fair valuation, be sufficient to pay his debts.
For a partnership or association to be considered a “debtor” under the FRIA, it
must be duly registered with the SEC. Government financial institutions other than banks
and government owned or controlled corporations (GOCCs) are covered by the FRIA, unless
their specific charter provides otherwise.

4. Remedies - remedies available to an insolvent debtor may either be judicial or

extrajudicial.
- The FRIA provides the following remedies in the event a debtor is insolvent:
o Rehabilitation, which may be voluntary, involuntary, or pre-negotiated
- Out of court restructuring
o Liquidation, which may be voluntary or involuntary
 - The FRIA also provides the remedy of filing a petition for suspension of
payment for individual debtors.

Advantages of judicial remedies

1. Retention of management - Unless otherwise provided by the court, the
management of the juridical debtor will remain with the existing management
subject to the applicable law/s and agreement/s, if any, on the election or
appointment of directors, managers, or managing partner.
2. Non-withholding of supply - After the issuance of the Commencement Order, the
debtor’s suppliers of goods or services are prohibited from withholding the supply
of goods and services in the ordinary course of business for as long as the debtor
makes payments for the services or goods supplied after the issuance of the
Commencement Order. Thus, the debtor will have the resources to continue
operations.
3. Protection from certain action and processes
A. The court’s Commencement Order
(i) generally prohibits, or otherwise serve as the legal basis for rendering null and
void the results of any extrajudicial activity or process to seize property, or otherwise
attempt to collect on or enforce a claim against the debtor,
(ii) serve as the legal basis for rendering null and void any set-off after the
commencement date of any debt owed to the debtor by any of the debtor’s creditors;
(iii) serve as the legal basis for rendering null and void the perfection of any lien
against the debtor’s property after the commencement date

B. The court’s Stay Order or Suspension Order generally

(i) suspend all actions or proceedings for the enforcement of claims against the
debtor;
(ii) suspend all actions to enforce any judgment, attachment, or other provisional
remedies against the debtor; and
(iv) prohibit the debtor from making any payment of its liabilities outstanding as
of the commencement date except as may be provided herein

5. Exemption from, or waiver of, taxes - Upon issuance of Commencement Order by the
court, and until the approval of the Rehabilitation Plan or dismissal of petition, the
imposition of all taxes and fees due to the national government are considered waived,
in furtherance of the objectives of rehabilitation.

6. Compromises binding - Any compromises on amounts or rescheduling of timing of

payments by the debtor will be binding on creditors regardless of whether or not the
Rehabilitation Plan is successfully implemented
7. 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 thereof are necessary
to restore the financial well-being and viability of the insolvent debtor

8. Binding effect of rehabilitation plan - 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

9. Suspension of payment
A petition for suspension of payment is a 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.
Under the FRIA, 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. The creditors cannot file the said petition against the debtor.
The petition is filed in the court having jurisdiction over the province or city where
the debtor has resided for six months prior to the filing of the petition.

Basic Procedure in Suspension of Payment

1) Filing of petition
2) Action on petition
3) Notification through publication and sending of notices
4) Holding of creditor’s meeting and voting by creditors
5) Objections to proposal
6) Hearing and issuance of court order

10. The Commissioner – one that preside over the creditors’ meeting in connection with the
proceedings, must be a natural person who will have the following minimum
qualifications:

(a) A citizen of the Philippines or a resident thereof for six months immediately
preceding his appointment;
(b) Of good moral character and with acknowledged integrity, impartiality, and
independence;
(c) Has the requisite knowledge of insolvency laws, rules and procedures; and
(d) Has no conflict of interest

The debtor or any creditor may file a written objection to the commissioner
appointed by the court on the ground that he does not meet the foregoing minimum
 requirements. If the court finds merit in the objection, it will appoint a new
commissioner.

11. Prohibited transactions

The following transactions are prohibited upon the issuance of the Order, and so
long as the proceedings relative to the suspension of payments are pending:
(1) Prohibition against sale or encumbrance of assets - The order prohibits the sale,
transfer, encumbrance or disposition by the individual debtor of his property, except
those used in the ordinary operations of commerce or of industry in which the
individual debtor is engaged.
(2) Prohibition against payment 6 - The order prohibits the individual debtor from
making any payment outside of the necessary or legitimate expenses of his business or
industry.

12. Rehabilitation
- 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 payments projected in the plan, more if the debtor continues as a
going concern than if it is immediately liquidated.
- Rehabilitation proceedings have two-pronged purpose:
o (a) to efficiently and equitably distribute the assets of the insolvent
debtor to its creditors; and
o (b) 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.

Types of Rehabilitation Proceedings:

- Court supervised, which may be voluntary or involuntary;
- Pre-Negotiated; and
- Out of court or informal.

A. Court-supervised rehabilitation
1. Voluntary Court-Supervised Rehabilitation
- Who initiates the proceedings? The insolvent debtor
- Who may file the petition?
(1) The owner in case of single proprietorship;
(2) The majority of partners in case of partnership; and
(3) The majority vote of the board and the vote of stockholders
representing at least ⅓ of capital stock. However, if the articles of partnership
or the articles of incorporation impose a higher vote requirement for instituting
voluntary proceedings, then that vote requirement shall prevail.
B. Involuntary Court-Supervised Rehabilitation
- Who initiates the proceedings? A creditor or a group of creditors
- Who may file the petition? A creditor or group of creditors with aggregate claims
of at least P1,000,000 or at least 25% of subscribed capital or partners’ contribution,
whichever is higher, if:
(a) There is no genuine issue of fact or law on the claim of the petitioner,
and that the due and demandable payments thereon have not been made for at
least 60 days; or
(b) The debtor failed generally to meet its liabilities as they fall due; or
(c) A creditor, other than the petitioner, has initiated foreclosure
proceedings against the debtor that will prevent the debtor from paying its

13. The Rehabilitation Receiver

- appointed as such by the court, who is entrusted with such powers, duties,
and responsibilities in relation to the rehabilitation of the debtor.
- Any qualified natural or juridical person may serve as rehabilitation receiver.
If the receiver is a juridical entity, it must designate a natural person who
possesses all the qualifications and none of the disqualifications as its
representative.

Qualifications of a Rehabilitation Receiver:

(a) He is a citizen of the Philippines or a resident of the Philippines for at least six
months immediately preceding his nomination;
(b) He is of good moral character and with acknowledged integrity, impartiality, and
independence;
(c) As far as practicable, he has expertise and acumen to manage and operate a
business similar in size and complexity to that of the debtor;
(d) He has an operating knowledge in management, finance, and rehabilitation of
distressed companies;
(e) He has a general familiarity with the rights of creditors subject to suspension
of payments or rehabilitation and general understanding of the duties and obligations of a
rehabilitation receiver;
(f) He has not been earlier dismissed as a rehabilitation receiver;
(g) He has no conflict of interest; and
(h) He is willing and able to file a bond in such amount as may be determined by
court

Removal of the Receiver:

- A Receiver may be removed at any time by the court on such grounds as the rules
of procedure may provide which will include, but are not limited to, the following:
(a) Incompetence, gross negligence, failure to perform or failure to exercise the
proper degree of care in the performance of his duties and powers;
 (b) Lack of a particular or specialized competency required by the specific case;
(c) Illegal acts or conduct in the performance of his duties and powers;
(d) Lack of qualification or presence of any disqualification;
(e) Conflict of interest that arises after his appointment; and
(f) Manifest lack of independence that is detrimental to the general body of
stakeholders

14. 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 of quash-reorganization, dacion en pago, debt-equity
conversion and sale of the business as a going concern, or setting-up of new business
entity, or other similar arrangements as may be approved by the court or creditors.

15. 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, stockholders or creditors of the
insolvent debtor, provided that the terms thereof are necessary to restore the financial
well-being and viability of the insolvent debtor.

16. The Management Committee Role:

- The Committee will take the place of the management and the governing body of the
debtor and assume their rights and responsibilities. It has the power to take custody of
and control of 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.

Composition:
- Unless the court otherwise provides, the management committee will be composed of
three qualified members appointed by the court as follows:
(a) First member - nominated by the debtor
(b) Second member - nominated by the creditor/s holding more than 50% of the
total obligations of the debtor;
(c) Third member - acts as the chairman of the committee; nominated by the first
and second members within ten days from appointment

- The court will appoint the first member in case the decision to appoint a management
committee is due to:
(1) Gross mismanagement of the debtor;
(2) Fraud or other wrongful conduct on the part of, or gross or willful violation of
the FRIA by existing management, or the owner, partner, director, officer or
representatives in management of the debtor
17. Creditor’s Committees Organization - After the creditors’ meeting called, the
creditors belonging to a class may formally organize a committee among themselves which
may be composed of:
1) Secured creditors
2) Unsecured creditors
3) Trade Creditors and Suppliers
4) Employees of the debtor