Notes/Intro:

Under the Philippine laws, an entity is considered insolvent if it is generally unable to pay its
liabilities as they fall due in the ordinary course of business or has liabilities that are greater than
its assets[1]

For insolvent entities, the law offers two main reliefs: (1) Rehabilitation and (2) Liquidation.
Both remedies are made available to ensure or maintain certainty and predictability in
commercial affairs, preserve and maximize the value of the assets of debtors, recognize creditor
rights and respect priority of claims and ensure equitable treatment of creditors who are similarly
situated.[2]

For individual insolvent debtors, the law offers an additional relief of Suspension of Payments.
[3]

REHABILITATION
Rehabilitation aims to restore the debtor to a state of solvency or to its former healthy financial
condition through the adaptation of a Rehabilitation Plan showing that the continued operations
is economically feasible and its creditors can recover more if the debtor continues as a going
concern instead of it being immediately liquidated.[4]

There are three main kinds of Rehabilitation Proceedings: (1) Court-Supervised, (2) Pre-

Negotiated, and (3) Out-of-Court or Informal Rehabilitation Proceedings. The main difference
between these different types is the level of involvement of the courts over the rehabilitation
proceedings.

Court-Supervised Rehabilitation
These proceedings are coursed through the regular courts, i.e., the Regional Trial Courts,
(“Court/s”) and is initiated by filing of a Petition for Rehabilitation (“Petition”).  The Petition
must be accompanied by a Rehabilitation Plan that lays down a plan in order to bring back the
entity to a state of solvency or to its former healthy financial condition. If the Court finds the
Petition to be meritorious, it shall issue a Commencement Order,[5] which includes the
appointment of a Rehabilitation Receiver, among others.
The Petition can be initiated or filed by either the debtor or its creditor/s:

 If filed by Debtor (Voluntary Proceedings)

o Debtor must acquire a majority vote of the board of directors and further authorized by the vote
of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock.[6]
o Creditors can file their verified notices of claims with the Courts at least five (5) days before the
initial hearing date, without which they will be barred from participating in the rehabilitation
proceedings.[7]
o Creditors can also file and serve on the debtor a verified comment or opposition to the Petition
no later than fifteen (15) days before the initial hearing.[8]
o
 If filed by Creditor or a Group of Creditors (Involuntary Proceedings)
o The aggregate amount of their claim must be, whichever is higher of: (1) at least One Million
Pesos (Php 1,000,000); or (2) at least 25% of the subscribed capital stock or partners’
contributions.[9]

Pre-Negotiated Rehabilitation

The proceeding involves the confirmation of the Court of a Rehabilitation Plan that was already
pre-negotiated by the debtor and its creditors. A Petition may be filed by the debtor or jointly
with its creditors.

The Petition must be supported by an affidavit showing the written approval or endorsement of
by creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including
secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor
and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of
the debtor.[26]

Out-of-Court or Informal Rehabilitation Agreements (“OCRA”)

This remedy does not involve the use of court processes.  The requirements for OCRAs are as
follows:[33]
1. The debtor must agree to the OCRA;
2. Approval by creditors representing at least sixty-seven (67%) of the secured obligations of the
debtor;
3. Approval by the creditors representing at least seventy-five (75%) of the unsecured obligations
of the debtor; and
4. Approval by creditors holding at least eighty-five (85%) of the total liabilities, secured and
unsecured, of the debtor.

Since the first two kinds of Rehabilitation Proceedings generally involve the Courts, it may
normally take longer, maybe several months or even years, most especially if contested, to
complete compared to the third kind. These timelines should be taken into consideration given
the immediate or otherwise need for relief.

Under certain scenarios provided under the law,[36] Rehabilitation Proceedings may be

converted into Liquidation Proceedings.

LIQUIDATION
The goal of a Liquidation Proceeding is to wind up the affairs of the entity and distribute its
assets among its creditors. It involves either the filing of a Petition for Liquidation or the failure
or conversion of a Rehabilitation Proceeding into a Liquidation Proceeding.

 If filed by the Debtor (Voluntary Liquidation)

o Debtor must show certificates attesting that resolutions for the filing of the Petition for
Liquidation was approved by at least a majority of the members of the board of directors present
and stockholders holding at least two-thirds (2/3) of the outstanding capital stock of the stock
corporation.[37]

 If filed by the creditors (Involuntary Liquidation)

o Applicants must be made up of three (3) or more creditors whose aggregate claims are: (1) at
least One Million Pesos (Php 1,000,000.00); or (2) At least twenty-five percent (25%) of the
subscribed capital stock.[38] 

In both cases, if the Court finds the Petition for Liquidation meritorious, the Court will issue a
Liquidation Order which determines the point when the debtor is deemed dissolved and its
corporate or juridical existence is terminated.[39]

Since Liquidation Proceedings also involve the regular courts, it may take a months or years to
obtain a Liquidation Order from the Court, most especially if contested.