~.
,,,-
DIVINA ON coMMERCIAL LAW:
198 A COMPREHENSIVE GUIDE VOLUME II
f a receiver pursuant to existing
In addition to the powers 0
laws PDIC is empowered to:
' . _c ce liabilities to or recoveries of the
Bring smts
1. to emor
closed bank;
ii . an d h.ire persons or entities. of recognized
2 Appomt .
· • b nking or finance as its deputies and
competence m a .
I, . t to perform such powers and funct10ns of the
ass1stan s, . . f h db
. as receiver or !iqmdator o t e cIose ank·'
Corpora t 10n
3. Suspend or terminate the employ_ment of officers and
employees of the closed bank: Provided, that payment of
separation pay or benefits shall be made only after the
closed bank has been placed under liquidation pursuant
to the order of the Monetary Board under Section 30 of
R.A. No. 7653, and that such payment shall be made from
available funds of the bank after deducting reasonable
expenses for receivership and liquidation;
4. Pay accrued utilities, rentals and salaries of personnel
of the closed bank, for a period not exceeding three (3)
months, from available funds of the closed bank;
5. Collect loans and other claims of the closed bank, and
for the purpose, modify, compromise or restructure the
terms and conditions of such loans or claims as may be
deemed advantageous to the interest of the creditors and
claimants of the closed bank;
6. Hire or retain private counsels as may be necessary;
7. Borrow or obtain a loan, or mortgage, pledge or encumber
any asset of the closed bank, when necessary to preserve or
prevent dissipation of the assets, or to redeem foreclosed
assets-of the closed bank, or to minimize losses to the
depositors and creditors;
8. If the stipulated interest on deposits is unusually high
compared with the prevailing applicable interest rate, the
Corporation as receiver may exercise such powers which
may include a reduction of the interest rate to a reasonable
rate: Provided, that any modification or reduction shall
apply only to unpaid interest; and
,
I 'I
VI. BANKING 199
9. Exercise such other powers as are inherent and necessary
for the effective discharge of the duties of the Corporation
as a receiver.aa•
d) Liquidation
195, What follows after the order of bank's closure by the BSP?
Whenever a bank is ordered closed by the Monetary Board,
PDIC shall be designated as receiver and it shall proceed with the
takeover and liquidation of the closed bank in accordance with this
Act. For this purpose, banks closed by the Monetary Board shall no
longer be rehabilitated." 0
TRUTH IN LENDING ACT (R.A. NO. 3765)
197, What is the purpose of the Truth in Lending Act?
The purpose of the law is to complement the then Usury Law
and to protect the public from lack of awareness of the true cost
of credit by assuring a full disclosure of such cost with a view of
preventing the uninformed use of the credit to the detriment of the
national economy.
The creditors' full disclosure enables debtors to fully appreciate
the true cost of their loan and properly evaluate their options in
arriving a business decisions before giving full consent to the
contract. 341
This law, and other credit-related laws, such as Access Devices
Regulation Act (R.A. No. 8484), Consumer Act of the Philippines
(R.A. No. 7394), Lending Company Regulation Act of 2007 (R.A.
No. 9474) and the Pawnshop Regulation Act (P.D. No. 114) require
disclosure of the true cost of the credit.
198. What is the obligation of creditors to person to whom credit is
extended?
To disclose to the borrower in writing prior to the consummation
of the transaction the following information: a) the cash price
339
Section 13, as added by R.A. No. 10846.
340
Section 12, as added by R.A. No. 10846.
341
United Coconut Planters Bank v. Spouses Beluso, G.R. No. 159912, August
17, 2007.
 'V'"
DIVINA ON COMMERCIAL LAW: VI.BANKING 201
200 A COMPREHENSIVE GUIDE VOLUME 11
service to be acquired; b) the or for the delivery of, property or money; any purchase, or other
or delivered price of the propertydor ment and/or trade in· )
t b credited as own pay 'c acquisiti?~ of, or any credit upon the security of, any obligation of
amounts, if any, 0 e . . d) the charges, individual]
the difference between the two items, . . . Y claim ansmg ou~ of any of the foregoing; and any transaction or
. . d h" h to be pai· din connection with the transaction but series of transact10ns having a similar purpose or effect. 346
1tem1ze , w 1c are • h 1
which are not incident to the extension of credit; e)_ t e tota amount
to be financed; f) the finance charges expressed m terms of pesos 201. What are the legal effects of non-compliance with the obligation
and centavos· g) the percentage that the finance charges bear to the to disclose credit charges?
total amount 'to be financed expressed as a simple annual rate on the
Even if prior disclosure is not made pursuant to the law, the
outstanding unpaid balance of the obligation." '
contract or the transaction is not rendered void or unenforceable.'"
The creditor can still compel the debtor to perform the principal
199. Cite example of charges that are deemed as finance charges,
obligation and the debtor is obliged to comply with the agreement,
Penalty charges, which are liquidated damages resulting from less undisclosed charges.'" In other words, charges not properly
a breach of contract, are considered as finance charges.'" disclosed need not be paid and if paid, can be recovered. This is,
Handling charges are also deemed as part of the finance however, without prejudice to the applicable criminal, civil, and
administrative penalties that may be imposed against the erring
charges that must be disclosed under the law."'
creditor.
200. What are the covered and excluded transactions under the The offender is liable to pay a penalty for an amount equal
law? to twice the finance charge required by such creditor but not to
The Jaw does not apply to transaction on cash basis but only exceed P2,000.00 on any credit transaction. The action to recover
where there is a credit component. It is also applicable only to a the penalty should be brought within one (1) year from the date of
creditor as defined by law, that is, a person engaged in the business the occurrence of the violation.
of extending credit (including any person who as a regular business In case of willful violation of the law, the offender shall be liable
practice make Joans or sells or rents property or services on a time, to pay a fine or imprisonment or both at the option of the court.'..
credit, or installment basis, either as principal or as agent) who
requires as an incident to the extension of credit, the payment of a
finance charge.,.,
"Credit" means any Joan, mortgage, deed of trust, advance, or
discount; any conditional sales contract; any contract to sell, or sale
or contract of sale of property or services, either for present or future
delivery, under which part or all of the price is payable subsequent
to the making of such sale or contract; any rental-purchase contract;
any contract or arrangement for the hire, bailment, or leasing of
property; any option, demand, lien, pledge, or other claim against,
"'Section 4, R.A. No. 3765.
"'Section 3, R.A. No. 3765.
348
Barbasa v. Tuquero, G.R. No. 163898, December 23, 2008; Bank of the 347
Section 6, R.A. No. 3765; Development Bank of the Philippines v. Arcilla,
Philippine Islands v. Spouses Yu, G.R. No. 184122, January 20, 2010.
344
Jr., G.R. No. 161397, June 30, 2005.
Consolidated Bank and Trust Corporation v. Court of Appeals, G.R. No.
91494, July 14, 1995. '"New Sampaguita Builders Construction v. Philippine National Bank, G.R.
No. 148743, July 30, 2004.
'"Section 3(4), R.A. No. 3765.
"'Section 6, R.A. No. 3765 .
..., L
 REVIEWER ON coMM£RCIAC"LAW PAR'I' V CREDIT TRANSACTIONS
C. Letters of Credit 487
486
of persons because the Jaw covers · wareho The bank i_ssuing the letter of credit known as "issuing
goods for: (a) storage, (b) milling, and (c) couses_ that0 b) '' ban k,,
, which .undertakes
d to pay the seller
. upon receipt of
10 1th draft and proper ocuments of title and to surrender
obligation to ,etwn ,Ju, ""'" quantity llllningI; Ir""'•
pay the· gVa.J
o,
(1974 Bar). . WitJi
lie th: documents to the buyer upon reimbursement; and
The seller, who in compliance with the contract of sale
c. LETTERS OF GREplT c) hi s the goods to the buyer and delivers the documents
~f Ktle and draft to the issuing bank to recover payment
1. LETTERS OF CREDIT (Ibid.).
a A letter of credit is an engagement by a bank or o The number of the parties may be increased and
) made at the request of a customer that th . ther may include:
person e 1ssu
.11 honor drafts or other demands for payment er
wi liance with the conditions specified in the upon i) An advising (notifying) bank which may be utilized
comp erect· to convey to the seller the existence of the credit -
(Prudential Bank v. JAC, 216 SCRA 257 [1992)). It
the notifying bank is not liable under the Letter of
The use of Jetter of credit serve~ to reduce the risk of Credit (2003 Bar);
b) · m· a sal e tr ansaction. I t also rednon•
ayment of the pnce
P . fth d(2 • Uces ii) A confirming bank which will lend credence to
the risk of non-delivery o e g00 s 012 Bar).
the Jetter of credit issued by a lesser known issuing
barik; the confirming bank is directly liable to pay
2. GOVERNING LAWS the seller-beneficiary (1994 Bar);
a) Code of Commerce on Letters of Credit. '
iii) A paying bank which undertakes to encash the
Article 568 provides that a letter of credit shall be: drafts drawn by the exporter/ seller;
1) Issued in favor of a definite person and not to order· Further, instead of going to the place of the
and ' issuing bank to claim payment, the buyer may
2) Limited to a fixed and specified amount or to one approach another bank, termed the negotiating
or more undetermined amount but with maximum bank to have the draft discounted (Ibid.; see also
limit stated exactly. Charles Lee v. CA, G.R. No. 117913, February 1, 2002).
b) Customs, primarily those embodied in the Uniform Note: Unless the contrary is expressly provided
Customs and Practice for Documentary Credits (UCP for for, the liability of the issuing bank is solidary with
short) which was adopted by the International Chamber the buyer-applicant (MWSS v. Daway, G.R. No.
of Commerce (Bank of America, NT & SA v. CA, 228 SCRA 160732, June 21, 2004) .
357 [1993)).
4. INDEPENDENT CONTRACTS
3. PARTIES
There are at least three (3) distinct and independent
There are at least three parties in a Letter of Credit contracts involved in a letter of credit namely: (1) the contract
Transaction: · of sale between the buyer and the seller; (2) the contract of the
a) The buyer, who procures the letter of credit and obliges , buyer with the issuing bank; and (3) the letter of credit proper.
In the second contract - between the buyer and the issuing
..
himself to reimburse the issuing barik upon receipt of the
documents of title; ' bank - the barik agrees to issue the letter of credit in favor of

REVIEWER ON COMMERCIAL LAW
488
the seller subject to reimbursement or payment by the b
of whatever is paid to the seller pl~s proper consider u.yer
on by the parties. In the third contract wh·~L _alion
agree d u P ank bli t • i...,, 1s h
1 tt f credit proper, the b o ga es itself to pay th I e
:r : ~e order of the seller (that is, it will_honor the ~tlier
drafts drawn by the seller) after prese~tat10n to the balls or
tender documents stipulated upon, which normally in
the document of title (Keng Hua Paper Products v. CA, 286~~des
257 [1998]) (2002 Bar).
4.ol. INDEPENDENCE PRINCIPLE
It is important to emphasize in this connectj
that few things are more clearly settled in law th 0
n part of the bank to waive any requir
the contracts involved in a letter of credit arrant' !hat
are to be maintained in a state of perpetual sep:~ent
The undertaking of the bank to pay, accept, an: on.
drafts or negotiate and/ or fulfill any obligation un~ay
the Credit is not .subject to c~aims o_r defenses by fu;
Applicant resulting from_ ~s relationship with the
issuing bank or the beneficiary. In the same mann
the beneficiary can, in no case, avail himself of Jr,
contractual relationships existing between the b~
or between the applicant and the issuing bank (Keng
Hua Paper Products v. CA, ibid.) (1981, 2010, and 2012
Bar).
4.02. A direct consequence of the "independence principle"
is the rule that banks only deal with documents and not
with goods, services or obligations to which they relate
(BPI v. De Reny Fabric, 35 SCRA256). Example: The bank
has no duty to verify whether what has been described
in the letters of credit or drafts or shipping documents
actually tallies with what was loaded aboard the ship
(See Transfteld Phils. v. Luzon Hydro Corp., 443 SCRA 307
[2004]; Land Bank v. Monet's Export Mfg. Corp., G.R. No.
161865, March 10, 2005).
4.03. Fraud exception
Under the "independence principle," the appli·
cant cannot enjoin the payment of the obligation of
the issuing bank under the Letter of Credit based on
...
PART V - CREDIT TRANSACTIONS
C. Letters of Credit
489
any irregularity or non-pe f0
· . r rmance Of
The exc~ption 1s when there is fr an obligation.
underlying transaction or th t aud or forgery in the
Transfield Phils. v. Luzon Hy;ro e~:er documents (See
[2004]). rp., 443 SCRA 307
_ . Doctrine of strict compliance
of 4 04
The Issuing Bank or the C nfir .
case may be, must examine 1: ming Bank, as the
nd
(including shipping documentst ~ er Documents
that the terms and conditions of~ rust make sure
are strictly complied with There . ed_etter of Credit
· 1s no 15creti th
Thon on e
ement. e tender
documen ts must not only be complet b th
on their faces be in compliance with the ut ey must
. D e terms of the
Cre d 1t. ocuments
. that are not stipuJ ated as tender
do°:1ments w111 not be examined (Art. 13, UCP SOO·
Feat1 Bank & Trust Co. _v. CA, G.R. No. 94209, April 30:
1991; The HSDC v. National Steel Corp., G.R. No. 183486
February 24, 2016) (2012 Bar). '
5, KINDS OF LETTERS OF CREDIT
a) Confirmed LC - whenever the beneficiary stipulates that
the obligation of the opening bank shall also be made
the obligation of another bank (also bank that notifies) to
himself.
b) Irrevocable LC - is a definite undertaking on the part of
the issuing bank and constitutes the engagement of that
bank to the beneficiary and bona fide holders of drafts
drawn and or documents presented thereunder, that
the provisions for payment, acceptance, or negotiation
contained in the credit will be duly fulfilled, provided
that all the terms and conditions of the credit are complied
with.
c) Revolving Letter of Credit - one that provides for _renewed
credit to become available as soon as the operung bank
has advised that the negotiating or paying bank that
the drafts already drawn by the beneficiary have been
reimbursed to the opening bank by the buyer.

REVIEWER ON COMMERCIAL LAW
490
Back-to-Back Letter of Credit - a credit with ·ct
d)
documentary requirements and covering th enlica1
merchandise as another letter of credit except
e fsall\e
• • • I 0 person.
difference m the pnce of the merchandise as sh ra
the invoice and the draft. The second
. own by
letter of credit
be negotiated only after the first 1s negotiated. can
Standby Letter of Credit - a security arrangement f0
e)
performance of certain obligations. It can be draw r_the
only if another business transact.ion is not perfonagainst
may be issued in lieu of a performance bond (20/2m8ed. It
ar).
1) Thus, this should be distinguished from an ord"
commercial credit where the beneficiary will IIlary
if he can show that he performed his ob!:e~o~er
(delivery of the purchased goods). In a Stand; hon
the beneficiary will prove that the obligor _LC, i 2
_ WHAT IS A TRUST RECEIPT?
to perform the secured obligation. Example·ailed
The
contractor failed to construct the building on me. ti
D. TRUST RECEIPTS LAW
(P.D. No. 115)
1. BACKGROUND
A bank that issues a letter of credit has the right to ask
for reimbursement from the applicant-buyer. This obligation
to pay the issuing bank may also be secured by trust receipts.
Under the law, the bank becomes the entruster of the goods
while the buyer-importer is the entrustee. The goods will in
effect be released by the bank to the buyer by the delivery of
the document of title/bill of lading covering the goods. The
buyer as entrustee is obligated to sell the goods and to apply
the proceeds thereof to the payment of the loan extended by
the entruster-bank. The buyer will only get the balance of the
proceeds of the sale after making such application.
a) "Entrustee" shall refer to the person having or taking
possession of goods, documents, or instruments under a
trust receipt transaction, and any successor-in-interest of
such person for the purpose or purposes specified in the
trust receipt agreement.
PART V - CREDIT TRANSACTIONS
D. Trust Receipts Law 491
(P.D. No. 115)
"Entruster" shall refer to ~e person holding title over
b) 1th goods, documents, or instruments subject of a trust
rece
e ,·pt transaction, and any successor-in-interest of such
"G ads" shall include chattels and personal property
c)
0 ;er than money, things in action, or things so affixed to
Jand as to become a part thereof.
"Security Interest" means a property interest in goods,
d)
documents, or instruments to secure performance of some
bligations of the entrustee or of some third persons to
~e entruster and includes title, whether or not expressed
t0 be absolute, whenever
.
such title is in substance taken
nl
or retained for secunty o y.
A trust receipt is a security transaction intended to aid in
financing im?orte~s or dealers in a merchandise by allowing
them to obtain delivery of goods under certain covenants.
2.01. The sale of goods, documents or instruments by a
person in the business of selling goods, documents
or instruments for profit who, at the outset of the
transaction, has, as against the buyer, general property
rights in such goods, documents or instruments, or
who sells the same to the buyer on credit, retaining
title or other interest as security for the payment of
the purchase price, does not constitute a trust receipt
transaction and is outside the purview and coverage of
the Trust Receipt Law (Sec. 4, Trust Receipts Law or TRL
for short).
2.02. Usually the entruster releases the goods to the entrustee
so that the latter may sell the goods. However, the
purpose is not limited to sale (DBP v. Prudential Bank,
475 .SCRA 623 [2005]; Ching v. Secretary of Justice, 481
SCRA 601 [2006]). Hence, the goods may_ also be
released for other purposes sub5tantially eqmvalent to
the following:
1) Their sale or the procurement of their sale;

REVIEWER ON coMMERCIAL LAW
520
(R. ·
I. FINANCIAL REHABILITATION AND INSOLVE
ACT OF 2010 (R.A. No. 10142) AND CONCURR Ney
ENC(:
AND PREFERENCE OF CREDITS
(Arts. 2241-2244, NCC)
1. POLICIES
The Financial Rehabilitation and Insolvency A
for short) of 2010, which lapsed into law on July (FR.II\
expressly repealed the Insolvency Law. ' 2010,
a) FRIA expresses the policy of the S
encourage debtors, both juridical and tate to
persons, and their creditors to collecti natural
realistically resolve and adjust compe~ely ~nd
and property rights (Sec. 2, FRIA) . g clauns
b) The State
. shall ensure
.. a timely;' fair, transpa
effective, and efficient rehabilitation or Ii . r~nt,
of debtors (Sec. 2, FRIA). qmdation
c) The rehabilitation or liquidation shall be made
with the following factors in mind: (1) to ensure
or maintain certainty and predictability in
commercial affairs; (2) preserve and maximize the
value of the assets of these debtors; (3) recognize
creditor rights; (4) respect priority of claims; and
(5) ensure equitable treatment of creditors who
are similarly situated (Sec. 2, FRIA).
d) When rehabilitation is not feasible, it is in the
interest of the State to facilitate a speedy and
orderly liquidation of the debtors' assets and the
settlement of their obligations (Sec. 2, FRIA).
1.01. KEY DEFINITIONS (Sec. 3, FRIA)
a) Debtor shall refer to a sole proprietorship duly
registered with the Department of Trade and
Industry (DTI), a partnership duly registered
with the Securities and Exchange Commission
(SEC), a corporation duly organized and existing
under Philippine laws, or an individual debtor
who has become insolvent.
PART V -. ~REDIT TRANSACTIONS
I FJjl
. ancial Rehab1hlation and Insolvency A 52!
. ) dC ctof20JO
A No. 10142 an oncurrence and Preferen ce of Credits
,°' 1) Individual debtor shall ref
person w ho 1s er lo'ti a natural
. a resident and
Philippmes• that has become a 1zen of the
so vent.
m·
2) Group of debtors shall refer to and can
cover only: (1) corporations th
. II y re Iated to one anothe at are
fi nanc1a
. r as parent
corporati~ns, subsidiaries or affiliates; (2)
partnerships that are owned more than fifty
p_ercent (SO~) by the same person; and ( )
3
single proprietorships that are owned by the
same person.
b) Insolvent shal~ refer to the financial condition of
a debtor that 1s 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.
1) Liabilities shall refer to monetary claims
against the debtor, including stockholder's
advances that have been recorded in the
debtor's audited financial statements as
advances for future subscriptions.
2) Ordinary course of business shall refer to
transactions in the pursuit of the individual
debtor's or debtors' business operations
prior to rehabilitation _or insolv_ency
proceedings and on ordinary business
terms.
c) Creditor shall refer to a natural or juridical person
which has a claim against the debtor that arose on
or before the commencement date.
1) Commencement Date refers to the date on
which the court issues the Commencement
Order, which shall be retroactive to the
date of filing of the petition for voluntary
or involuntary proceedings (See Note 3.03
below).
d) General unsecured creditor shall refer to a creditor
whose claim or a portion thereof is neither
 :'Ill!
PART V - CREDIT l°RANSAcnoNs
. ancial Rehabilitation and Insolvency Act of 2010
REVIEWER ON coMMERCIAL LAW A No. l Ol42) and
•I.Fin
(It. - Concurrence and Preference of
523
522
-
·and- ~r---- --"""
secured, preferred nor subordinated und Corporation
FRIA- ·' er the claim . hose
,, PI 00 s IS, at least
' 0,000.00 or
e) Secured creditor shall refer to a creditor w·1 at least 25% ofU,
secured claim. th a subscribed capita~
1) Secured claim shall refer to a clai th stock or partners'
secured by a lien. m at is contributions
' wh·ichever is hi' h
2) Lien shall refer to a statutory or contractu _ ec. 13, FRJA)
· or JU
claim · d"1cia
. I ch arge on rea l or pers al Sole . Pre-Negotiated .
. onal Propnetorship, Rehabilit ti The Insolvent
property that legally entitles a creditor to
resort to said property for payment of th Partnership, (Petition~ on debtor and the
claim or debt secured by such lien. e an d Approval orof Reh a_bT11tation
Corporation Pre-Negoti t d Plan IS endorsed
· a e or app
1.02. PROCEEDINGS COVERED BY FRIA AND Rehabilitation b tved
PERSONS WHO WILL FILE AND/OR APPROVE Pl ) Yere 1tors
an holding at least
Type of Type of Who Will Approv; 2.1.3 of the tQtal
Business Proceeding or File Petition liabiliti§ of ti;
Organization debtor including
Voluntary secured creditors
Sole Owner/ Proprietor
Rehabilitation holding more than
Proprietorship (Sec. 12, FRIA).
SOT;i of the total
Partnership Voluntary Majority of secured claim and
Rehabilitation Partners (Sec. 12, unsecured creditors
FRIA). holding more than
SOT;i of unsecured
Corporation Voluntary (1) Majority of the
claims (Sec. 76,
Rehabilitation Directors or
FRJA)
Trustees; and
(2) Stockholders Sole Voluntary Insolvent debtor
representing Proprietorship, Liquidation
2/3of Partnership, (Sec. 90, FRIA)
Outstanding.
and
Capital/ 2/3
Corporation
of Members
Involuntary a) Three (3) or
of Non-Stock Sole
Liquidation more creditors, and
Corp. (Sec. 12, Proprietorship,
FRIA) Partnership, (Sec. 91, FRIA) b) The aggregate
of whose claims
Sole Involuntary Creditor or group and
is at least either
Proprietorship, Rehabilitation of creditors with a Corporation
Pl, 000,000.00
..
Partnership, claim of, or the
:, '!
PART V - CREDIT TRANSACTJoNs
(R;·
REVIEWER ON coMMEROAL LAW Financial Rehabilitation and insolvency Act of
525
52~ No. I 0142) and Concurrence and Preference of2010
Credits
tCLU OED DEBTORS
or at least 257,
th
e subscribed
o of z. E xcluded from the operation of the FRIA are debtors
capital stock E re (1) banks, (2) pre-need companies, (3) insurance
1 and (4) national and Ioca] government agencies
which \s,
or partner's
contributions of coJ11P~
un1ts. Rehabilitation
· · oftill
banks, pre-need companies, and
debtor,~e or ranee companies 1s(Ss governed by their respective
. h' h vr iJlSU • g special laws ec. 5, FRIA; see Insurance Code, New
gaverni;;ank Act and Pre-Need Code).
central
Individual Suspension of Individual~
Payment (Sec. G OF REHABILITATION
Debtor EANI N .
94, FRIA)
3, NI h bilitation shall refer to the restoration of the debtor to
Individual Voluntary Individual De-;- R~ _a of successful operation and solvency, if it is shown
Liquidation .h or
Debtor wit at least a con~iti~:ntinuance of operation is economically feasible
(Sec.103, PS00,000.00 debts that _its ditors can recover by way of the present value of
FRIA) who does not have and its ere rojected in the plan, more if the debtor continues as
sufficient assets to
payments
ag p em than if it is immediately liquidated (Sec. 4[gg],
oing cone
cover his liabilities
Individual Involuntary
Liquidation
Any creditor or - FRIA).
REHABILITATION OF SOLE PROPRIETORSHIP,
Debtor group of creditors 3,01.
(Petition with a claim of, PARTNERSHIP AND CORPORATION
for Acts of or with claims
Insolvency) aggregating at least The grounds for rehabilitation of any of the three
(Sec. 105, PS00,000.00 business organizations are:
FRIA) a) VOLUNTARY REHABILITATION. The follow-
ing must be alleged (in the verified Petition)
[
a) Group of Debtors can file. A group of and established: (1) the insolvency of the debtor;
debtors may jointly file a petition for and (2) the viability of its rehabilitation (Sec. 12,
(voluntary) rehabilitation under the FRIA; Sec. 12 likewise enumerates the contents and
FRIA when one or more of its members attachments to the Petition).
foresee the impossibility of meeting
debts when they respectively fall b) INVOLUNTARY REHABILITATION. Acreditor
due, and the financial distress would or group of creditors may initiate involuntary
likely adversely affect the financial proceedings against the debtor by filing a petition
condition and/or operations of the for rehabilitation with the court if:
other members of the group and/ or There is no genuine issue of fact or law on
1)
the participation of the other members the claim / s of the petitioner / s, and that
of the group is essential under the the due and demandable payments thereon
terms and conditions of the proposed have not been made for at least sixty (60)
Rehabilitation Plan (Sec. 12, FRIA).
days or that the debtor has failed generally
to meet its liabilities as they fall due; or

REVIEWER ON coMMEROAL LAW
526
2) A creditor, other than the petitioner/
initiated foreclosure proceedings as, _has
the debtor that will prevent the debt galilst
paying its debts as they beco~e du eororwil
frorn
render it insolvent (Sec. 13, FR/A). I
3.02. REHABILITATION PLAN
Rehabilitation Plan shall r~fer_ ~o a plan by which
the financial well-being and v1ab1hty of an insolvent
debtor can be restored usin¥ various means including,
but not limited to, debt_forg1ven~ss, _debt re~cheduling,
reorganization or quas1-reorgaruzation, daczon en pago,
debt-equity conversion and sale of the business (or
parts of it) as a going concern, or setting up of new
business entity, or other similar arrangements as may
be approved by the court or creditors (See Sec. 62, FRIA
for contents of the Rehabilitation Plan).
a) A Rehabilitation Plan is attached to the Petition
for Rehabilitation. It is indispensable.
b) The Rehabilitation Plan: (1) may be approved by
the creditors (50% of the total claims) (Sec. 64,
FRIA); (2) confirmed by the court after approval
of the creditors or even without such approval or
even over the objection of the creditors (Sec. 68,
FRIA).
c) Cram Down Rule. The Rehabilitation Plan
(including pre-negotiated plans) confirmed by
the Court shall be binding upon the debtor and
all persons who may be affected by it, including
creditors, whether or not such persons have
participated in the proceedings, opposed the
Plan or whether or not their claims have been
scheduled (Secs. 69, 82, and 86, FRIA; BPI v. Sarabia
Manor Hotel, GR. No. 175844, July 29, 2013).
3.03. STAY ORDER
. The court having j1,1Iisdiction over the rehabilita·
hon case shall issue a Commencement Order which
PART V - CREDIT TRANSACTIONS 527
1 Financial Rehabilitation and Insolvency Act of 2010
(R.A.· No . 10142) and Concurrence and Preference of Credits
,shall include a Stay Order (Sec. 16, FRIA). The Stay or
,,Suspension Order shall:
n
I
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 except as may be provided herein (Sec. 16,
FRIA).
The Commencement Order and conse-
quently the Stay Order shal! _be ~ffective for_ the
entire duration of the rehabilitation proceedings
(Sec. 21, FRIA; PAL v. Spouses Kurongking, C.R.
No. 146698, September 24, 2002). The order may be
lifted if there is no substantial likelihood for the
debtor to be successfully rehabilitated.
3.04. SUSPENDED CLAIMS
Claim shall refer to all claims or demands of
whatever nature or character against the debtor or its
property, whether for money or otherwise. liquidated
or unliquidated. fixed or contingent. matured or
urunatured. disputed or undisputed, including, but not
limited to: (1) all claims of the government, whether
national or local, including taxes, tariffs, and customs
duties; and (2) claims against directors and officers
of the debtor arising from acts done in the discharge
of their functions falling within the scope of their
authority (Sec. 3, FRIA).
The creditors or third parties are not prohibited
from filing cases against the directors and officers
acting in their personal capacities (Sec. 3, FRIA).
 ""
REVIEWER ON coMMEROAL LAW
528
a)
Examples of Claims. . Claims include
,[
ct.aims or otherwi~ which means even those th
· . I at
are not purely monetary cIaims are me uded.
1) The claim of passengers against a comm
carrier (airline) for missing luggages i on
' Id
money claim or fi nanc1a emand that th
sa
Jaw requires to be su~pended pending the
rehabilitation proceedings (PAL v. Sps. Sadi~
and Aisha Kurangking, et al., supra, p. 428).
2) The suspension also ~overs employees'
claims (Rubberworld [Phils.], Inc. v. NLRC
305 SCRA 721 [19991). ' cases pending or filed at a specialized
3) Cases for revocation of a contract of sale
and restitution of the price filed before the
HLURB. Under the Interim Rules (A.M. No.
00-8-10-SC), the claim is suspended even if
the case involves claim that is not purely for
money (Sps. Sobrejuanite v. ASB Dev. Corp.,
G.R. No. 165675, September 30, 2005).
Rationale of Suspension of Claims: (1) To
b)
enable the rehabilitation receiver to effectively
exercise its/his powers free from or unburdened
by any judicial or extrajudicial interference that
might unduly hinder or prevent the "rescue" of
the debtor company (time, resources, and effort
will be used to litigate); and (2) To enable the
management committee or the rehabilitation
receiver to substitute the defendant in any pending
action against it before any court, tribunal, board,
or body (Philippine Airlines v. Spouses Sadie and
Aisha Kurangking, et al., ibid., citing BF Homes, Inc.
v. CA, 190 SCRA 262).
c) Secured Credits. The Stay Order covers all
creditors, secured or unsecured (RCBC v. IAC,
213 SCRA 830 [19921). The preferred status over
the unsecured creditors relative to the mortgage
liens is retained, but the enforcement of such
preference is suspended (See Note 7.03 below;
__..
PART V - CREDIT °fRANSACJ1oNs
inancial Rehabilitation and Insolvency Act of 2010
(RA.No, 529
I. F l0142) and Concurrence and Preference of Credits
1 Metrobank v. ASB Holdings, Inc., et al., G.R. No.
•
',, 166197, February 27, 2007).
,) Exceptions to the Stay or Suspension Order (Sec.
d lB, FRIA). The Stay or Suspension Order shall not
apply:
1)
To cases already pending appeal in the
Supre~e Court as of commencement date.
Any final and executory judgment arising
from such appeal shall be referred t th
rehabilitation court for appropriate aC:on; e
2) Subject to the discretion of the court to
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. Any final and
executory judgment of such court or agency
shall be referred to the rehabilitation court
and shall be treated as a non-disputed claim;
3) To the enforcement of claims against sureties
and other persons solidarily liable with the
debtor, and third party or accommodation
mortgagors as well as issuers of letters of
credit, unless the property subject of the
third party or accommodation mortgage
is necessary for the rehabilitation of the
debtor as determined by the co~. u~on
recommendation by the rehabilitation
receiver;
4) 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;
r 1 ...... ---------
PART V - CREDIT 'fRANSAc-noNs
REVIEWER ON COMMERCIAL LAW 1 Financial Rehabilitation and Insolvency Act of 1
530
(R.A.· No. 10142) and Concurrence
. and Preference of2010
Credits 53
J, ..., director, officer, or , representative/s in the
To the actions of a licensed broker or d
5) .. f ealer ·1-Jl' , , · ,•1I
' ' , . . management of the debtor (Sec. 36, FRJA).
to sell pledged secunties o a debtor pu
.. Id rsu.
ant to a secunhes p e ge or margin agr ,,, , ''~ ()URTACTION ON l'ETITJoN FOR REIIABIU,
., .
ment for the sett Iemen tof se~rities tr
ee. •·:;.06, ":TATION (Sec. '25, FRIA)
actions in accordance with . the provis'.1118·
Ions
of the Securities ReguIation Code and . ·:' ;' The Court may either: (1) give due course to
implementing· ru Ies and reguIa tions; Its ' ,th. etition; (2) dismiss the petition; or (3) convert the
· •'' ·p,wcee
e' p dings to liquidation proceedings
6) The clearing and settlement of financial
transactions through the facilities of COURT ACTION
' REQUIRED COURT
clearing agency or similar entities du! a /"''t _ FINDINGS
authorized, registered and/ or recognize~ -"?\1•
•a) · Give DUE
by the appropriate regulatory agency like l) The debtor 15·
COURSE to the and lllSolvent;
the Bangko Sentral ng Pilipinas (BSP) and the ii petition.
SEC as well as any form of actions of such l~!'ili"··,
fy<-f~, I ,, 2) There is a substantial
agencies or entities to reimburse themselves likelihood for the debtor
for any transactions settled for the debtor; to be successfully
and rehabilitated.
7) Any criminal action against individual I
l,;r,;r. b) DISMISS the 1) The debtor is NOT
debtor or owner, partner, director, or officer petition. insolvent;
of a debtor shall not be affected by any 2) The petition is a sham filing
proceeding commenced under the FRIA. intended only to delay the
enforcement of the rights
3.05. WHO WILL MANAGE of the creditor/ s or of any
The existing Board and/ or Management of the .ilt l, group of creditors;
debtor shall continue. ~) The petition, the Rehabiii-
,, talion Plan and the attach-
Management can be replaced. Upon motion, the
court may appoint either the Rehabilitation Receiver ments thereto contain any
materially false or mis-
or a Management Committee to undertake the ',itl
leading statements; or
management of the debtor in the following cases:
4) The debtor has committed
1) Actual or eminent danger of dissipation, loss, acts of misrepresentation
wastage, or destruction of the debtor's assets or )'.J or in fraud of creditor/s or
properties; a group of creditors.
2) Paralyzation of the business operations of the i;,
l 1) The debtor is insolvent;
debtor; or c) CONVERT the
proceedings and
3) Gross mismanagement of the debtor, or fraud
or other wrongful conduct on the part of, or i'\'
into Liquidation 2) There is no substantial like-
Proceedings lihood for the debtor to be
gross or willful violation of the FRIA by existing 1,lrJH.,- successfully rehabilitated.
management of the debtor, owner, partner,
......
 '
PART V - CREDIT 'fRANSACTioNs 533
REVIEWER ON coMMERCIAL LAW inancial Rehabilitation and Insolvency Act of 2010
532 I. FN o. l0142) and Concunence and Preference of Credits
(R.A.
NSION OF PAYMENTS
4. OUT-Of-COURT REHABILITATION ! 5USPE an IND!VIDUAL DEBTQR m,y fil, a P,tifu>o fo,
Rehabilitation is not neces~arily court supervised. An
. On~Y of payment.
0 5
ens1on
of-court or informal restructuring
. . agreement
. or rehab·i·
I 1tatj_
u0t.
plan at meets the minimum requrrements is reco . n st1 f' ) The debtor has sufficient properties to cover al]
th a his debts but he foresees the impossibility of
under the FRIA. gruzed
meeting his debts when they respectively fall due
a) Minimum Requirements of Out-of-Court or Inf0 (Sec. 94, FRIA).
Restructuring Agreements and Rehabilitation Pl rntaJ
84, FRIA): ans (Sec. b) The purpose is to suspend or delay the payment
of debts.
1) The debtor must agree to the out-of-court Ormonn
· f
restructuring/workout agreement or rehabilit . al c) The amount of indebtedness is not affected (not
plan; ation reduced or discharged).
d) The number of creditors is immaterial.
2) It must be. approved by creditors rep resentin
at least s1Xty-seven percent (67%) of the g
5.01. DISTINCTIONS
obligations of the debtor; secured
It must be approved by creditors representing at SUSPENSION OF
3) PAYMENTS LIQUIDATION
least seventy-five percent (75%) of the unsecured
obligations of the debtor; and 1. Debtor is not insolvent 1. Debtor is insolvent
4) It must be approved by creditors holding at least
- The debtor has - His assets are
sufficient assets to insufficient to cover
eighty-five percent (85%) of the total liabilities,
cover its liabilities. the debtor's liabilities.
secured and unsecured, of the debtor.
b) Standstill Period (Sec. 85, FRIA). An agreement on 2. Payment of obliga- 2. The obligations are
lions is stayed. discharged.
standstill period may be binding if the following requisites
are present: 3. Applies only to 3. Proceedings can cover
1) Agreement is approved by creditors representing individual debtor. juridical persons and
more than fifty percent (50%) of the total liabilities individual debtors.
of the debtor;
4. May be filed by the 4. May be initiated by
2) Notice thereof is published in a newspaper of debtor. the debtor (voluntary
general circulation in the Philippines once a week insolvency) or by the
for two (2) consecutive weeks; and creditors (involuntary
insolvency).
3) The standstill period does not exceed one hundred
twenty (120) days from the date of effectivity. 5. There is no minimum 5. It is required that the
amount of liabilities debt of the individual
c) The Cram Down Rule applies upon publication of the debtor is not less than
prescribed.
notice of the out-of-court approved rehabilitation plan PS00,000.00.
(Sec. 86, FRIA).
534
REVIEWER ON coMMERCIAL LAW
6. The rules on concur- 6. The rul~~ on concur-
rence and preference rence and preference
of credits under the of credits under Ar-
New Civil Code do ticles 2236 and 2251
of the New Civil Code
not apply.
-
apply.
SUSPENSION OF REHABILITATION
·PAYMENTS
I) Applies to Individual
I) Applies to Busines-;
Organizations
Debtor.
Single Proprietorship
.
.Partnership, . and
Corporation.
2) The debtor is insolvent.
2) The debtor has suf-
ficient assets to cover
its liabilities. ·
3) Secured debtors are
3) Secured debtors are
not affected. affected by stay order.
4) May be initiated by
4) Filed by the debtor.
the debtor (voluntary
rehabilitation) or by the
creditors (involuntary
rehabilitation).
. '
The claim of, or the
5) There is no minimum 5)
requirement for the · aggregate of claims
amount of the claims. against the debtor is
at least Pl,000,000.00
or at least twenty-five
percent (25%) of the
subscribed capital
stock or partners' con-
tributions, whichever
is higher.
5.02. SUSPENSION .ORDER
Upon motion filed by the individual debtor, the
court may issue an order suspending any pending
execution against the individual debtor (Sec. 96, FRIA).
(R.A-
PART V - CREDIT TRANSACTJONs
financial Rehabilitation and Insolvency Act of
I. No. 10142) and Concurrence and Preference of2010
Cred'ts
1
535
I
a) Properties held as ~ecurity by
, shall not be the sub~ of such suspension order
,,, (Sec. 96, FRIA).
•• 1 ""
. 'b) The suspension order shall lapse when three (3)
months shall ~ave passed without the proposed
agreement being accepted by the creditors or as
soon as such agreement is denied (Sec. 96, FRIA) .
, ), NO creditor shall sue or institute proceedings to
c collect his claim from the debtor from the time
0 the filing of the petition for suspension of
f
,r ''' ayments and for as long as proceedings remain
'l"'
_. L ~ending (Sec. 96, FRIA).
(!fl
d) ExceJJtions (Sec. 96' FRIA) · The fallow· •
are not affected by the Stay Order. mg creditors
1) Those creditors having cl . f
labor, maintenance, expe=~f or pe~nal
and funeral of the wife or child ast i~:s
0
~ebtor . incurred in the sixty : ) da :
muned1ately
.. prior to the fil'mg of thye
petition;and
2) Secured creditors.
Note: These excepted creditors are not
affected by the proposed agreement with the
debtor unless they participated and voted in
the creditors meeting (Sec. 98, FRIA).
5.03. PROHIBITED ACTS
The Individual Debtor is prohibited (in the Order
to be issued by the court after the filing of the Petition
for Suspension of Payments) from:
a) Selling, transferring, encumbering, or disposing
in any manner of his property, those
used in the ordinary operations of commerce or
of industry in which the petitioning indivi~ual
debtor is engaged, so long as the proceedings
relative to the suspension of payments are
pending (Sec. 95, FRIA); and
~ - ...... "II
536
REVIEWER ON coMMEROAL LAW (R.A.
·VOL-:-UN-

PART V - CREDIT 'fRANSAcnoNs

inancial Rehabilitation and Insolvency Act of 2010
I. FN o. 10142) and Coneurrence and Preference of Credits
I 11

537 I
b) Making any payment outside of the neces UIDATIONOF INVOLUNTARY
legitimate expenses of his business or indusary or , LIQ !DUAL DEBTOR LIQUIDAnoN OF
1:NDIV -
long as the proceedings relative to the susp:t;;'. so INDIVIDUAL DEBTOR
of payments are pending (Sec. 95, ~RIA). sion . Debtor is insolvent.
1 I. Debtor is insolvent.
5.04. CREDITORS' MEETING z. Acts of insolvency need
not be alleged and 2. Creditors must prove acts of
The Individual Debtor shall attach to the Peti . insolvency.
proved.
for Suspension of Payment a proposed agreement ti~n
the creditors (Sec. 97, FRIA). With 3 The debts must be at 3. The debts must be at least
· least psoo,000.00. Psoo,000.00.
a) The proposed agreement shall be approved 0
rejected in the Creditors' Meeting. The presenc: 4 The individual debtor 4. A creditor or group of
of creditors holding claims amounting to at least · files the Petition. creditors files the Petition.
3 / 5 of the liabilities of the debtor is necessary for
the meeting. 5, The debtor is not absent I 5. pp lies even in the case of
A
as he files the Petition. Absent Debtor (Debtor re-
Note: A creditor has no right to vote if he sides outside or has departed
incurred his credit within 90 days prior to the from the Philippines, cannot
filing of the petition for suspension (Sec. 97, be found or conceals himself
FRIA). [Sec. 108, FRIAJ).
b) Double Majority is necessary for the approval of 6. Posting of Bond by 16. Posting of Bond by creditors
proposed agreement with the creditors, to wit: creditors not required. is required (Sec. 105, FRIA).
1) Two-thirds (2/3) of the creditors voting 7. Liquidatio~ Order .is 17. Liquid~tion Order is issued
unite upon the same proposition; and issued without trial after trial (Sec. 107, FRIA).
(Sec. 104, FRIA).
2) The claims represented by said majority
vote amount to at least three-fifths (3/5) of
the total liabilities of the debtor mentioned
a. Involuntary Liquidation of Individual Debtors
in the petition (Sec. 97, FRIA).
distinguished from Involuntary Liquidation of Business
c) Effect of Disapproval by Creditors. If there is no Organizations.
approval of the double majority, the suspension
I
of payments proceedings will be terminated and Involuntary Involuntary Liquidation
the creditors shall be at liberty to enforce their 1: Liquidation of of Business Organizations
rights which correspond to them (Sec. 90, FRIA). Individual Debtor - Sole Proprietorship,
Partnership, and Corporation
6. PETITION FOR LIQUIDATION There can be one (1) or more
1. At least three 1.
Liquidation of Individual Debtors may be (1) voluntary (3) creditors are creditors.
or (2) involuntary. Their similarities and distinctions are as required.
follows:
L
 PART V -:~REDIT TRANSACTioNs
REVffiWERONCOMMEROALLAW I. Financial Rehabilitation and Insolvency Act of 20J0
538 539
(R.A. No. 10142) and ~oncurrence and Preference of Credits
execution, shall be deemed vested the . .d
m·
2. The debt or a . hi s election
. or appointment,11qu1
2. The debts must of debts must b ggregate '~1 or, pendmg withator
the
e at I court;
be at least Pl,000,000.00 or e 1. east
'l
PS00,000.00. to 25% of the sJ~ V~lent 3)'. All contracts of the debtor shall be deemed
capital or partner , scribed
b . h' s conlrj tei:mmated and/ or breached, unless the
ution w ichever is hi h . ;· liquidator, within ninety (90) days from the date
g er.
3. The business orga . . ·o f . his assumption of office, declares otherwise
3. The individual will be dissolved. IlIZation and the contracting party agrees;
can continue his
business. 4) No separate action for the collection of an
Act of insolvency . ' unsecured claim shall be allowed. (Actions
4. There must be an 4. required. is not
act of insolvency. already pending will • be transferred to the
Liquidator for him to accept and settle or contest.)
7. LIQUIDATION PROCESS 5) No foreclosure proceed~g shall be allowed for a
period of one hundred eighty (180) days.
This is the proceeding where claims are filed and the
assets of the insolvent debtor are disposed and the proceeds are 7.03. Rights of secured creditors (Sec. U4, FRIA)
divided among the creditors. These rules apply to individual
debtors, sole proprietorships, partnerships, and corporation. a) The ,Liquidation Order shall n_ot ~ffe_ct the right of
The rules below apply to original liquidation proceedings and a secured creditor to enforce his lien m accordance
proceedings that are originally rehabilitation proceedings but with the applicable contract or law. A secured
converted into liquidation proceedings. creditor may:
7.01. LIQUIDATION ORDER 1) Waive his right under the security or lien,
prove his claim in the liquidation proceed-
The Court that has jurisdiction over the liquidation
ings and share in the distribution of the as-
proceedings shall, in proper cases, issue a Liquidation
sets of the debtor; or
Order which includes, among others: (1) declaring that
the debtor is insolvent; (2) ordering the liquidation of 2) Maintain his rights under the security or
the debtor; (3) in case of juridical person,, declaring it as lien.
dissolved; (4) prohibiting payments and/ or transfer of
property by the debtor; and (5) directing all claims to a) If the secured creditor maintains his
be filed with the liquidator (See Sec. 112, FRIA for other rights under the security or lien:
contents of the Liquidation Order). ' 1) The value of the property may be
7.02. EFFECTS OF LIQUIDATION ORDER (Sec. 113, fixed in a manner agreed upon by
FRIA) the creditor and the liquidator.
When the 'value of the property
1) The juridical debtor shall be deemed dissolved
. is less than the claim it secures,
and its corporate or juridical existence termina·
ted; the liquidator may convey the
property to the secured cre~itor
2) Legal title to and control of all the assets of the the latter will be admitted
debtor, except those that may be exempt froi:n an dthe liquidation proceed'mgs as
in
r 540
REVIEWER ON coMMJiRCIAL LAW
a creditor for the balance. If i
value exceeds the claim secu Is
the liqm'dator may convey red
, . h f
the deb tor s ng t o redempij
th'
property to the creditor and w . e
a1ve
. . th on
upon rece1vmg e excess fro
the creditor; Ill
The liquidator may sell th
2)
property and satisfy the secure~
creditor's entire claim from th
proceeds of the sale; or e NCC asmo difi.ed byArticlellOofthc1eLb
The secured creditor may enforce
3)
the lien or foreclose on the
property pursuant to applicable
laws.
Even if a secured creditor will maintain his rights
b)
over the security or lien, however, the right is
subject to the temporary stay of foreclosure
proceedings for a period of 180 days, upon the
issuance by the court of the Liquidation Order
(Metropolitan Bank and Trust Company v. S.F.
Naguiat Enterprises, Inc., C.R. No. 178407, March
18, 2015).
8. DISTRIBUTION OF ASSETS
The assets of the insolvent debtor shall be divided
among the creditors in accordance with the Liquidation Plan
submitted by the Liquidator and approved by the Court. The
rules on concurrence and preference of credits under the New
Civil Code and other relevant laws shall be observed in the
Liquidation Plan (Sec. 133, FRIA). Thus, the following rules
shall be observed:
a) There is preference with respect to taxes ONLY
under Articles 2241 and 2242 of the New Civil
Code(NCC).
b) As to all the other claims or liens mentioned in
Articles 2241 and 2242 of the NCC, there is NO
ORDER of preference and the balance (after taxes
illlllia......
!' AKI V - . CR~DIT'fRANSA
I finanoal Rehab1htation and Ins CTiONs
I
(R.A- No. 10142) and Concurrence an~ ;ency Act of 2010
reference of Credits
54!
are deducted) of the
. proceeds Of th
movable or immovabl e specific
. may be shall be dividede property, as the case
. . among the cl .
ere d 1tors m proportion to th aunants or
or PRO RATA (Arts. 22 46 _224 ~~i~~tthe claims
c) The excess of the specific pro er .
payment of the credits whi~h ;','f any, after the
shall be added to the fr nioy preference,
debtor may have, for thee~:ro~~~ty which the
credits, and shall be disposed}'.Ill of the other
the ord er of preference under m accordance with
Arti
2244 of the
. e a or Code
an d Section 113 of FRIA (Art. 2250, NCC).
d) If there is excess after salisfym· g th 1 •
. . e c aims or
hens under Article 2244, all other common d. ts
shall be satisfied PRO RATA (Art. 22 51 , NC~~ J;se
Cordova v. Reyes, Daway, et al., G.R. No. 146555,
July 3, 2007).
e) Notes: (1) NO TAX CLEARANCE. BIR CANNOT
REQillRE that a TAX CLEARANCE is first
secured before distribution is made including
for taxes that are not included in Articles 2241 (1]
and 2242 [1] because if such clearance is required,
the tax liabilities (even other than those preferred
under Articles 2241[1] and 2242(1]) will be
erroneously given absolute preference (Philippine
Deposit Insurance Corporation v. BIR, 689 SCRA
311 , 2013);
(2) PRE-NEED COMPANY. The Trust
Fund that is maintained by an insolvent Pre-
Need Company is not part of the estate of th.e
said insolvent. It is maintained for the benefit
of claimant-planholders and is not available to
creditors of the insolvent Pre-Need C?mpany
(Securities and Exchange Commission v. Laigo, G.R.
No. 188638, September 2, 2015).
8.01. PREFERENCE AS TO SPECIFIC PROPERTIES
t of an insolvent
In the settlement of the asse s . . ro erties
debtor the claims with respect to specific p p
I
1111111111
542
REVIEWER ON coMMERGAL LAW
.>.
shall be satisfied first in accordance with Articles 2241
and 2242.
a) Preference of claims or liens as to specifi
MOVA)JLE or PERSONAL p~operty (Art. 224
NCC~ . '
1) Duties, taxes; and fees d·ue thereon to th
State or any subdivision thereof; e for thirty days thereafter; eu dehvery and
2) . Claims arising from . misappropriation
breach of trus~, or ~alfeas~ce by publi~
officials committed m the performance of
their duties1 on the , movables, lllOney or
securities obtained by them;
3) Claims for the unpaid price of ~ovables sold,
on said movabl~s, .so long as they are in the
possession of the debtor, ··u p to the value of
the same; and if.the movable has been resold
by the debtor and the price is still unpaid,
the lien may be enforced on the price; this
right is not lost by the fIIlil\obilization of the
thing by destination, provided it has not lost
its form, substance, and identity; neither is
the right lost by the sale of the thing together
with other property for a lump sum,
when the price thereof can be determined
proportionally;
4) Credits guaranteed ·w ith a pledge so long as
the things pledged are in the hands of the
creditor, or those guaranteed by a chattel
mortgage; •upori the things pledged or
mortgaged, up to the value thereof;
5) . Credits for the making, repair, safekeeping,
or preservation of personal property on
the movable -thus made, repaired, kept, or
possessed; · 1)
6) Claims for laborers' wages, on the goods
manufactured or the work done;
7) For exp~nses of salvage, upon the goods
salvaged;
(R.A,
PART V - CREDIT TRANSACTIONS
inancial Rehabilitation and Insolvency Act of 2010
I. FNo. 10142) and Concurrence and Preference of Credits 543
[
:-, 8) Credits ~e_tween the landlord and the
' tenant, ansmg from the contract of tenancy
;_;( on shares, on the share of each in the fruits
-;,, _-; or harvest;
t 9) Credits for transport ti0
carried, for the pric: ;,i:;pon the goods
incidental expenses, un~ th con~act and
10) Credits for lodging and su .
furnished to travellers by hoie1l t usually
the movables belonging to th eepers, on
e guest as long
as su ch movables are in the h t I b
money 1oaned to the guests;
°
e, utnotfor
.. 11)
Credits for seeds and expenses for cultivation
and harvest
. h advanced to the debtor, upon
the fru1ls arvested;
12) Credits for rent for one year, upon the
personal property of the lessee existing on
the immovable leased and on the fruits of
the same, but not on money or instruments
of credit;
13) Claims in favor of the depositor if the
depositary has wrongfully sold the thing
deposited, upon the price of the sale.
In the foregoing cases, if the movables
to which the lien or preference attaches have
been wrongfully taken, the creditor may
demand them from any possessor, within
thirty days from the unlawful seizure.
Preference with respect to Specific IMMOV•
b)
ABLE OR REAL Property (Art, 2242, Ncci
Taxes due upon the land or building;
2) For the unpaid price of real property sold,
upon the immovable sold;
Claims of laborers, masons, mechanics, and
3)
other workmen, as well as of architects,

REVIEWER ON coMMERCIAL LAW
544
engineers and contractor~, engaged in the
construction, reconstruction, or repair of
buildings, canals, or other works upon Said
buildings, canals or other works;
4)
Claims of furnishers of materials used .
. recons t rue ti'on, or repair II\
the construction, of
buildings, canals, or other works upon Said
buildings, canals or other works;
Mortgage credits recorded in the Registry of
5)
Property, upon the real estate mortgaged;
6) Expenses for the preservation or improve-
ment of real property when the law autho-
rizes reimbursement upon the imrnovabl
. d e their own;
preserved or unprove ;
Credits annot~te~ i~ the Registry of Property,
7)
in virtue of a 1ud1C1al order, by attachments
or executions upon the property affected
and only as to later credits; ' resu1ting om e nature of the emp1oyrnent;
8) Claims of co-heirs for warranty in the
partition of an immovable among them
upon the real property thus divided;
9) Claims of donors or real property for
pecuniary charges or other conditions
imposed on the donee upon the immovable
donated;
10) Credits of insurers, upon the property
insured, for the insurance premium for two
(2) years.
ORDER OF PREFERENCE WITH RESPECT TO
8.02.
OTHER PROPERTIES
With reference to other property, real and personal,
of the debtor, the following claims or credits shall be
preferred IN THE ORDER NAMED (Art. 2244, NCC,
as modified by Art. 110, Labor Code of the Philippines):
1) Credits for services rendered for the insolvent by
employees, laborers, or household helpers prior
......
l'AKl V - crumrr 'TRANSACJ1oNs
Financial Rehabilitation and Insolvency Act of 545
(R.A
I. No, 10142) and Coneurrence and Preference of2010
Credits
to the proceedings in insolvency (As modified b
Art: 11_0, Labor Code Which removed the one [1] yea~
limitatwn under Art. 2244 and elevated these credits
from 2nd to 1st; see also Sec. 133, FRJA Which states
that labor claims enjoy_ preference under Art. 2244 of
2the NCC unless the claims constitute liens under Arts.
241 and 2242, NCC);
2) Proper funeral expenses for the debtor, or children
unde, his o, he, P""'ta! authocity who ha,e no
property of their own, when approved by the
court;
3) E penses during the last illness of the debtor or
; his or her spouse and children under his or her
;arental authority, if they have no property of
4) Compensation due the 1 b
a orers or their
d epend ents under laws provi'd' f .
. mg or indemnity
for damages m cases of labor accident illn
. fr th ,or ess
5) Credits and ~dvancements made to the debtor for
support of himself ~r herself, and family, during
the last year preceding the insolvency;
6) Support during the insolvency proceedings, and
for three (3) months thereafter;
7) Fines and civil indemnification arising from a
criminal offense;
8) Legal expenses, and expenses incurred in the
administration of the insolvent's estate for the
common interest of the creditors, when properly
authorized and approved by the court;
9) Taxes and assessments due the national govern-
ment, other than those mentioned in Articles
2241(1), and 2242(1);
10) Taxes and assessments due any province, other
than those referred to in Articles 2241(1), and
. 2242(1);
 ;!'I
I
'PAAT:V - CREDrr °fRANSAc:noNs
1 Financial Rehabilitation and Insolvency Act of 2010
REVIEWER ON coMMERCIAL LAW RA-· N o. 10142) and Concunence and Preference of Credits 547
546
( · Whethec othe, iUrisdiOion, ha., gi,o, ~-tio,,
3) to the foreign proceeding;
ll) Taxes and assessments ·. ·.due any city
municipality, other than those indicated
Articles 2241(1), and 2242(1);. The extent that the foreign proceeding recognizes
4) the rights of credito,,;. and olhe, in'-t•d partie,
12 ) Damages for death or personal injuries caused b . a manner substantially m accordance with the
a quasi-delict; y :anner prescribed in the FRIA; and
13 ) Gifts due to public and private institutions 0 f The extent that the foreign proceeding has
charity or benefi cence; 5) ognized and shown deference to proceedings
14) Credits which, wi~~ut special privilege, :der the FRIA and previous legislation (Sec. 142,
FRIA).
appear in (a) a pubhc mstrument; or (b) in
final judgment, if the~ have been the subject 0~
litigation. These credits shall have preferenc
among themselves in the order of priority of th:
dates of the instruments and of the judgments
respectively. '
9. 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 thereof (Sec. 139, FRIA).
a) If there is a rehabilitation proceeding filed by a foreign
I
entity in another jurisdiction, a petition may be filed by
the latter's representative and the court may issue orders:
1) Suspending any action to enforce claims against the
entity or otherwise seize or foreclose the 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 (See Secs. 140 and
141, FRIA).
b) In determining whether to grant relief to a foreign entity,
the court shall consider;
1) The protection of creditors in the Philippines and the
inconvenience in pursuing their claim in a foreign
proceeding; -
2) The just treatment of all creditors through resort to a
unified insolvency or rehabilitation proceedings;