FINANCIAL REHABILITATION AND
2. Registered (Recorded) Partnership
INSOLVENCY ACT (FRIA) OF 2010
Republic Act No. 10142
DEFINITION OF TERMS:
Insolvent:
The classic definition of an insolvent is one whose liabilities are
more than his or her assets. So, the assets are not sufficient to
pay off the liabilities. But, under the FRIA:
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
An insolvent is a debtor who 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. [Sec. 4
(p)]
‘Unable to pay its or his liabilities as they fall due in the
ordinary course of business’. Meaning, liquidity problems. The
debtor has sufficient assets but could not meet his or her or its
obligations as they mature because those assets are not liquid.
OR
‘Liabilities are greater than its or his assets’. Classic definition
of an insolvent.
Rehabilitation:
The restoration of the debtor to condition of successful
operation and solvency, if it is shown that its continuance or
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. [Sec. 4 (gg)]
In other words, in rehabilitation there is a possibility of restoring
the distressed entity to enable it to meet its obligations,
because if it is not rehabilitated, chances are, the creditors
would not be able to recover the full amount of their credits.
So, we allow rehabilitation, so that, later on, if the entity is fully
rehabilitated, then there is a big chance that the creditors can
recover the full amounts of their credits.
“DEBTORS”
General
1. Sole Proprietorship
-must be registered in DTI.
3. Corporation
● Individual:
o Resident and Citizen
o Became Insolvent
● Group:
1. Parent and subsidiaries
2. Partnerships with more than 50% ownership by
same person
3. Sole Proprietorships owned by the same person
Exclusions to Debtors:
1. Banks
2. Insurance companies
3. Pre-need companies
4. NGAs and LGUs
Reason: they are governed by their own Laws/Codes
NATURE OF PROCEEDINGS
1. In Rem
a. Lucas vs. Lucas: “An action in personam is
lodged against a person based on personal
liability; an action in rem is directed against
the thing itself instead of the person; while
an action quasi in rem names a person as
defendant, but its object is to subject that
person's interest in a property to a
corresponding lien or obligation. A petition
directed against the "thing" itself or the res,
which concerns the status of a person, like a
petition for adoption, annulment of marriage,
or correction of entries in the birth certificate,
is an action in rem.”
- Directed upon the thing itself (the
solvency) rather than the person of the
debtor.
2. Notice by publication in a newspaper of general
circulation in the Philippines.
● Jurisdiction over the person is acquired upon
notice of publication, not upon the issuance of
summons.
3. Summary and Non-adversarial.
● Non-adversarial: the defendant is the first person
who the judge speaks to. It is a system where
the complete power of the proceedings rests
with the judge.

COURT-SUPERVISED REHABILITATION
A. Voluntary Rehabilitation:
a. Initiated by:
1. Owner of a DTI-Registered Sole
Proprietorship
2. [Approved by at least] Majority of
Partners of a Registered (Recorded)
Partnership
3. [Approved by at least] Majority of the
following in a Corporation:
● Board of Directors + 2/3
stockholders (Stock Corp)
● Board of Trustees + 2/3 members
(Non-Stock)
Note: Group of Debtors –when one or more
of its members foresee the impossibility of
meeting their debts when they fall due may also
file a Voluntary Petition for Rehabilitation.
b. Requisites to File Voluntary Petition for
Rehabilitation:
i. Insolvency of debtor; and
ii. Viability of rehabilitation
B. Involuntary Rehabilitation
a. Initiated by: (Juridical Entities only.)
1. Creditor or Group of Creditor with at
least P1 Million or 25% of Subscribed
Capital Stock or Partner’s Contribution,
whichever is higher:
● If stock corporation, whichever
is higher between: P1 Million
OR 25% of the SCS.
● If partnership, whichever is
higher between: P1 Million OR
25% of Partner’s Contributions.
b. Requisites (Sec. 13):
i. No genuine issue of fact on law on
the claims; and
ii. Due and demandable liabilities:
1. Have not been paid for at
least 60 days; or
2. Are generally not met by
the debtor as they fall due;
or
3. Are prevented from being
paid because of another
creditor (other than the
petitioner/s) initiating a
foreclosure proceeding
against the debtor (or that
the same proceeding will
render the debtor
insolvent).
iii. Substantial likelihood of debtor’s
rehabilitation (Sec 14)
VOLUNTARY AND INVOLUNTARY PROCEEDINGS
Filing of Verified Petition
It is initiated by filing a verified petition, either by the distressed
debtor (voluntary) or creditors (involuntary).
Issuance of Commencement Order
Within five (5) working days from the filing of the original or
amended petition, the court shall issue the commencement
order.
Is the court mandated to automatically issue a commencement
order? No, the court shall determine within five (5) working
days whether the petition is sufficient in form and substance. If
the court finds that the petition is sufficient in form and
substance, then it will issue the commencement order within
five (5) days from filing of the petition.
Hearing
There is nothing in the law that prohibits the court from
conducting a hearing within the five-day period.
Issuance of
Filing of Verified Commencement
Hearing
Petition
Order
Either by distressed Not prohibited by Within 5 working days
debtor (voluntary) or law for Courts to from filing petition,
creditors conduct a hearing ONLY IF sufficient in
(involuntary) form & substance
EFFECTS OF COMMENCEMENT ORDER:
Rehabilitation proceedings commence upon the issuance of
the Commencement Order
A. Section 16:
(a) identify the debtor, its principal business or
activity/ies and its principal place of business;
(b) summarize the ground/s for initiating the
proceedings;
(c) state the relief sought under this Act and any
requirement or procedure particular to the relief
sought;
(d) state the legal effects of the Commencement
Order, including those mentioned in Section 17
hereof;
(e) declare that the debtor is under rehabilitation;
(f) direct the publication of the Commencement
Order 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;
(g) If the petitioner is the debtor direct the service
by personal delivery of a copy of the petition on
each creditor holding at least ten percent (10%) of
the total liabilities of the debtor as determined from
the schedule attached to the petition within five (5)
days; if the petitioner/s is/are creditor/s, direct the
service by personal delivery of a copy of the
petition on the debtor within five (5) days;
(h) appoint a rehabilitation receiver who may or not
be from among the nominees of the petitioner/s
and who shall exercise such powers and duties
defined in this Act as well as the procedural rules
that the Supreme Court will promulgate;
(i) summarize the requirements and deadlines for
creditors to establish their claims against the
debtor and direct all creditors to their claims with
the court at least five (5) days before the initial
hearing;
(j) direct Bureau of internal Revenue (BIR) to file
and serve on the debtor its comment on or
opposition to the petition or its claim/s against the
debtor under such procedures as the Supreme
Court provide;
(k) prohibit the debtor's suppliers of goods or
services from withholding the supply of goods and
services in the ordinary course of business for as
long as the debtor makes payments for the
services or goods supplied after the issuance of
the Commencement Order;
(l) authorize the payment of administrative
expenses as they become due;
(m) set the case for initial hearing, which shall not
be more than forty (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;
(n) make available copies of the petition and
rehabilitation plan for examination and copying by
any interested party;
(o) indicate the location or locations at which
documents regarding the debtor and the
proceedings under Act may be reviewed and
copied;
(p) state that any creditor or debtor who is not the
petitioner, may submit the name or nominate any
other qualified person to the position of
rehabilitation receiver at least five (5) days before
the initial hearing;
(q) includes Stay or Suspension Order which shall:
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 except as may
be provided herein.
*Commencement Date retroacts to the
date of filing.
B. Section 17 (In addition to a Stay or Suspension
Order):
(a) Vest power upon the receiver. vest the
rehabilitation with all the powers and functions
provided for this Act, such as the right to review
and obtain records to which the debtor's
management and directors have access, including
bank accounts or whatever nature of the debtor
subject to the approval by the court of the
performance bond filed by the rehabilitation
receiver;
(b) Prohibits extrajudicial activities. prohibit or
otherwise serve as the legal basis rendering null
 and void the results of any extrajudicial activity or
process to seize property, sell encumbered
property, or otherwise attempt to collection or
enforce a claim against the debtor after
commencement date unless otherwise allowed in
this Act, subject to the provisions of Section 50
hereof;
(c) Renders null and void any set-off. serve as the
legal basis for rendering null and void any setoff
after the commencement date of any debt owed to
the debtor by any of the debtor's creditors;
(d) Renders null and void the perfection of any lien.
serve as the legal basis for rendering null and void
the perfection of any lien against the debtor's
property after the commencement date; and
(e) Consolidates resolution of any legal
proceedings. consolidate the resolution of all legal
proceedings by and against the debtor to the court
Provided. However, That the court may allow the
continuation of cases on other courts where the
debtor had initiated the suit.
C. Section 19: Waiver of taxes and fees due to the
national government and to local government units
Upon issuance of the Commencement Order by
the court, and until the approval of the
Rehabilitation Plan or dismissal of the petition,
whichever is earlier, the imposition of all taxes and
fees including penalties, interests and charges
thereof due to the national government or to LGUs
shall be considered waived, in furtherance of the
objectives of rehabilitation.
EFFECTIVITY OF COMMENCEMENT ORDER:
Section 21: For the duration of the rehabilitation proceedings
for as long as there is substantial likelihood of success.
Requirements in determining whether there is substantial
likelihood for the debtor to be successfully rehabilitated:
a. Proposed Rehabilitation Plan complies to the minimum
contents prescribed
b. Sufficient monitoring of the debtor’s business by the
rehabilitation receiver for the protection of the creditors
c. Attempts by the debtor and creditor to reach a
reasonably possible consensus on the proposed
Rehabilitation Plan
i. If petitioner is:
● Debtor → met with creditors of at least
¾ of the total obligations
● Creditor → met with the debtor/s
d. Rehabilitation receiver submitting a report, stating the
substantial likelihood of successful rehabilitation,
among others:
i. Sufficient assets
ii. Sufficient cash flow to maintain operations
iii. Debtor acted in good faith and due diligence
iv. Petition not intended to delay enforcement of
creditor’s rights
v. Debtor likely to pursue a viable Rehabilitation Plan
e. Petition/Rehabilitation Plan/ Attachments do not contain
materially false or misleading statements
f. Debtor/s not committed fraud or misrepresentation
EXCEPTIONS TO STAY OR SUSPENSION ORDER
Section 18. Stay or Suspension Order shall not apply:
(a) to cases already pending appeal in the Supreme Court
as of commencement date Provided, That any final and
executory judgment arising from such appeal shall be
referred to the court for appropriate action;
(b) subject to the discretion of the court, to cases pending or
filed at a specialized court or quasi-judicial agency which,
upon determination by the court is capable of resolving the
claim more quickly, fairly and efficiently than the
court: Provided, That any final and executory judgment of
such court or agency shall be referred to the court and shall
be treated as a non-disputed claim;
(c) to the enforcement of claims against sureties and other
persons solidarily liable with the debtor, and third party or
accommodation mortgagors as well as issuers of letters of
credit, unless the property subject of the third party or
accommodation mortgage is necessary for the rehabilitation
of the debtor as determined by the court upon
recommendation by the rehabilitation receiver;
(d) to any form of action of customers or clients of a
securities market participant to recover or otherwise claim
moneys 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;
(e) to the actions of a licensed broker or dealer to sell
pledged securities of a debtor pursuant to a securities
pledge or margin agreement for the settlement of securities
transactions in accordance with the provisions of the
 Securities Regulation Code and its implementing rules and o Give due course to the petition,
regulations; o Dismiss, or
▪ When debtor is not really insolvent
(f) the clearing and settlement of financial transactions
▪ Sham proceeding, intended to
through the facilities of a clearing agency or similar entities
delay the enforcement of rights or
duly authorized, registered and/or recognized by the
the creditors (esp. in voluntary)
appropriate regulatory agency like the Bangko Sentral ng
▪ Petition/Rehabilitation
Pilipinas (BSP) and the SEC as well as any form of actions
plan/attachments contain materially
of such agencies or entities to reimburse themselves for any
false or misleading statements
transactions settled for the debtor; and
▪ Fraud/misrepresentation
(g) any criminal action against individual debtor or owner, o Convert to Liquidation proceeding
partner, director or officer of a debtor shall not be affected
by any proceeding commend under this Act. Substantial Give
Insolvent? Yes Likelihood of Yes Due
Rehabilitation? Course

As against the sureties (item c): N N

JA: “If the court issues an order declaring an entity or a o o
distressed corporation to be in a state of suspension of
payment, there should be no actions against the guarantor Convert to Liquidation Proceeding
Dismiss
because the guarantor is subsidiarily liable only. The guarantor
is the insurer of the solvency of the debtor. You first have to Section 24. Report of the Rehabilitation Receiver
prove the insolvency of the debtor, if the guarantor invokes the
benefit of exhaustion. ⮚ Within 40 days from initial hearing

The surety binds himself or herself solidarily liable with the ⮚ Report made by Rehabilitation Receiver
principal debtor, so the liability of the surety is direct and
⮚ Stating his preliminary findings and recommendations
primary. Therefore, an action against the surety will proceed
on:
regardless of the pendency of the proceedings for
rehabilitation. a. Debtor’s insolvency and its cause/s, including any
unlawful or irregular acts that contributed to it,
Judge Adviento’s Case:
b. Whether the Underlying Assumptions, Financial
A case for collection of sum of money filed against a
Goals and Procedures to achieve them as
corporation and against the sureties in the same complaint.
contained in the Rehabilitation Plan are realistic,
However, the corporation was declared insolvent by the
feasible and reasonable.
commercial court.
c. Substantial likelihood for the debtor to be
Dropped the corporation as defendant because the claim by
successfully rehabilitated,
the creditor against the distressed corporation must be filed
before the liquidator. But, the action continued as against the d. Petition to be dismissed;
sureties.”
e. The debtor should be dissolved and/or liquidated

EFFECT OF FAILURE TO FILE NOTICE OF CLAIM

⮚ Not entitled to participate, but still entitled to receive THE REHABILITATION RECEIVER
distribution.
As defined
a. Natural or Juridical Person (as represented)
THE REHABILITATION COURT (Sec. 25) Note: Juridical Entity + Representative are solidarily
liable for fraud.
⮚ Filed in Special Commercial Court (RTC)
⮚ Within 10 days from receipt of Receiver’s Report, the
b. Qualifications (Section 29)
Court may:
 Minimum Qualifications:
a. Citizen of the Philippines or Resident 6
months immediately preceding the
nomination
b. Good Moral Character and with
acknowledged integrity, impartiality and
independence
c. Requisite knowledge of insolvency and other
relevant Commercial Laws, Rules and
Procedures
d. Has no conflict of interest unless expressly or
impliedly waived by prejudiced party
c. Reports to court his/its preliminary findings and
recommendation within 40 days from initial hearing
d. Powers, Duties and Responsibilities (Section 31)
⮚ 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
a. To verify the accuracy of the factual allegations
in the petition and its annexes;
b. To verify and correct, if necessary, the
inventory of all of the assets of the debtor, and
their valuation;
c. To verify and correct, if necessary, the
schedule of debts and liabilities of the debtor;
d. To evaluate the validity, genuineness and true
amount of all the claims against the debtor;
e. To take possession, custody and control, and
to preserve the value of all the property of the
debtor;
f. To sue and recover, with the approval of the
court, all amounts owed to, and all properties
pertaining to the debtor;
g. To have access to all information necessary,
proper or relevant to the operations and
business of the debtor and for its rehabilitation;
h. To sue and recover, with the. approval of the
court, all property or money of the debtor paid,
transferred or disbursed in fraud of the debtor
or its creditors, or which constitute undue
preference of creditor/s;
i. To monitor the operations and the business of
the debtor to ensure that no payments or
transfers of property are made other than in the
ordinary course of business;
j. With the court's approval, to engage the
services of or to employ persons or entities to
assist him in the discharge of his functions;
k. To determine the manner by which the debtor
may be best rehabilitated, to review) revise
and/or recommend action on the Rehabilitation
Plan and submit the same or a new one to the
court for approval;
l. To implement the Rehabilitation Plan as
approved by the court, if 80 provided under the
Rehabilitation Plan;
m. To assume and exercise the powers of
management of the debtor, if directed by the
court pursuant to Section 36 hereof;
n. To exercise such other powers as may, from
time to time, be conferred upon him by the
court; and
o. To submit a status report on the rehabilitation
proceedings every quarter or as may be
required by the court motu proprio. or upon
motion of any creditor. or as may be provided,
in the Rehabilitation Plan.
e. Removal (Section 32)
⮚ May be removed any time
⮚ Motu proprio or upon motion of creditor/s
holding more than 50% of the total obligations
⮚ On the following grounds:
a. Incompetence, gross negligence, failure to
perform or failure to exercise the proper
degree of care in the performance of duties
and powers;
b. Lack of particular or specialized
 competency required;
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 after appointment;
f. Manifest lack of independence that is
detrimental to general body of the
stakeholders
THE REHABILITATION PLAN
*Assisted/prepared by CPA
A. Contents (Section 62)
a) specify the underlying assumptions, the
financial goals and the procedures proposed to
accomplish such goals;
b) compare the amounts expected to be received
by the creditors under the Rehabilitation Plan
with those that they will receive if liquidation
ensues within the next one hundred twenty
(120) days;
c) contain information sufficient to give the
various classes of creditors a reasonable basis
for determining whether supporting the Plan is
in their financial interest when compared to the
immediate liquidation of the debtor, including
any reduction of principal interest and penalties
payable to the creditors;
d) establish classes of voting creditors;
e) establish subclasses of voting creditors if prior
approval has been granted by the court;
f) indicate how the insolvent debtor will be
rehabilitated 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 of
a new business entity or other similar
arrangements as may be necessary to restore
the financial well-being and visibility of the
insolvent debtor;
g) specify the treatment of each class or subclass
described in subsections (d) and (e);
h) provide for equal treatment of all claims within
the same class or subclass, unless a particular
creditor voluntarily agrees to less favorable
treatment;
i) ensure that the payments made under the plan
follow the priority established under the
provisions of the Civil Code on concurrence
and preference of credits and other applicable
laws;
j) maintain the security interest of secured
creditors and preserve the liquidation value of
the security unless such has been waived or
modified voluntarily;
k) disclose all payments to creditors for pre-
commencement debts made during the
proceedings and the justifications thereof;
i) describe the disputed claims and the
provisioning of funds to account for appropriate
payments should the claim be ruled valid or its
amount adjusted;
l) identify the debtor's role in the implementation
of the Plan;
m) state any rehabilitation covenants of the debtor,
the breach of which shall be considered a
material breach of the Plan;
n) identify those responsible for the future
management of the debtor and the supervision
and implementation of the Plan, their affiliation
with the debtor and their remuneration;
o) address the treatment of claims arising after
the confirmation of the Rehabilitation Plan;
p) require the debtor and its counter-parties to
adhere to the terms of all contracts that the
debtor has chosen to confirm;
q) 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;
r) arrange for the payment" of all outstanding
taxes and assessments, or an adjusted amount
pursuant to a compromise settlement with the
BlR Or other applicable tax authorities;
s) include a certified copy of a certificate of tax
 clearance or evidence of a compromise
settlement with the BIR;
t) include a valid and binding r(,solution of a
meeting of the debtor's stockholders to
increase the shares by the required amount in
cases where the Plan contemplates an
additional issuance of shares by the debtor;
u) state the compensation and status, if any, of
the rehabilitation receiver after the approval of
the Plan; and
v) contain provisions for conciliation and/or
mediation as a prerequisite to court assistance
or intervention in the event of any
disagreement in the interpretation or
implementation of the Rehabilitation Plan
B. Creditor Approval (Section 64) –by both classes:
secured and unsecured creditors
Deemed approved: when, in one class, creditors
holding more than 50% of total claims voted in favor
of the plan
C. Cram Down Rule
Note: Most of the time, majority of creditors would
vote against the Plan, for wanting to be prioritized or
paid in full regardless of the liabilities of the debtor
being more than its assets.
The Court will still approve a Rehabilitation Plan in
spite of the opposition of majority of the creditors:
● Rehabilitation is feasible, and
● Opposition is manifestly unreasonable
D. Period to Confirm (Section 72)
⮚ court shall have a maximum period of 1 year from
the date of the filing of the petition to confirm a
Rehabilitation Plan.
E. Effects of Confirmation (Section 69). Rehabilitation
Plan:
a. shall be binding upon the debtor and all person
who may be affected by it, including creditors –
whether or not they participated in the
proceedings or opposed the Rehabilitation Plan
b. Debtor shall comply to the provisions thereof
c. Payments shall be made in accordance with such
d. Contracts and arrangements between the parties
shall be interpreted as continuing to apply as not
to have conflict to such.
e. Compromises on amounts or rescheduling of
payments shall be binding regardless of whether
or not such is successfully implemented.
f. Claims after approval/not treated by such are not
subject to Suspension Order.
ECONOMIC FEASIBILITY OF A REHABILITATION PLAN
a. That the debtor has assets that can generate more
cash is used in its daily operations rather than if sold.
b. Liquidity issued can be addressed by a practicable
business plan that will generate enough cash to
sustain daily operations.
c. The debtor has a definite source of financing for the
proper and full implementation of a Rehabilitation
Plan that is anchored on realistic assumptions and
goals.
CHARACTERISTIC OF A REHABILITATION PLAN THAT IS
NOT FEASIBLE:
a. Absence of a sound and workable business plan, or
b. Baseless and Unexplained assumptions, targets and
goals
c. Speculative capital infusion or complete lack of capital
infusion for the execution of business plan, or
d. Cash flow cannot sustain daily operations, or
e. Negative net worth where assets are near full or are
fully depreciated.
TERMINATION OF THE PROCEEDINGS
A. Success or Failure
● Terminated upon motion of any stakeholder or by the
receiver
● Court will issue order declaring either Success or Failure
of the Rehabilitation Plan
Instances of Failure of Rehabilitation (Section 74):
a. Dismissal of the petition
b. Debtor’s failure to submit a Rehabilitation Plan
c. Under the plan, there is no substantial
likelihood of successful rehabilitation with a
reasonable period
d. In the implementation, there is failure to
perform the obligations, or failure to realize the
targets set forth
e. Fraud in securing the approval of the R. Plan
f. Other analogous circumstances
B. Effects of Termination (Section 75)
a. Discharge of Rehabilitation Receiver subject to
 his submission of a final accounting; and Remember in a Court-Supervised Rehabilitation:
b. Lifting of the Stay/Suspension Order and any
court order holding in abeyance any action for
the enforcement of a claim against the debtor
Filing of Verified Issuance of
Hearing Commencement Order
Petition

Either by distressed Within 5 working days Not prohibited by

debtor (voluntary) or from filing petition, law for Courts to
C. Section 75: If the termination of the proceedings is creditors (involuntary) ONLY IF sufficient in conduct a hearing
due to failure of rehabilitation or dismissal of petition form & substance

for reasons other than technical grounds, the

proceedings shall be immediately converted to
liquidation.
Then in a Pre-Negotiated Rehabilitation:

PRE-NEGOTIATED REHABILITATION

*creditor and debtor have not gone to court yet, but have met Issuance of
and agreed on a rehabilitation plan out-of-court Court Approval of
Commencement Publication
Rehabilitation Plan
Order
A. Filing of Verified Petition Including Order Published once WITHOUT objection:
*may be done by debtor alone or jointly with the for Publication a week for 2 Within 10 days from 2nd
and consecutive publication
creditors (Sec. 76) Stay/Suspension weeks in a WITH objection:
Order newspaper of -120 days max for Court to
B. Endorsed by creditors holding at least 2/3 of the *Same with Court- general approve/disapprove
Supervised circulation in -No Action of Court within
obligation (Sec. 76)
the PH the 120 days = approved
*including secured creditors holding majority (more
than 50%) of the total secured credits and unsecured
creditors holding majority of the total unsecured
credits

Initial Order, pursuant to Sec. 77

JA: The court will issue an initial order within five (5) *Note: Verified Objection is submitted to court not later than 8
working days if it finds that the petition is sufficient in days from the 2nd publication.
form and substance.

This initial order will also include an order for the

publication or a directive for the publication of the
initial order. It also includes a stay or suspension
order.
After publication, because the initial order must be
published once a week for 2 consecutive weeks in a
newspaper of general circulation in the Philippines,
within ten (10) days from the 2nd publication of the
order, if there are no objections filed in court, then the
court will approve the rehabilitation plan. If there are
objections, then the court has a maximum period of
120 days to approve or disapprove the rehabilitation
plan. If the court does not or if no action is taken
within 120 days, the rehabilitation plan is deemed
approved.”
C. Approval or Objection:
a. Approved
Section 78. Approval of the Plan. - Within ten
(10) days from the date of the second
publication of the Order, the court shall
approve the Rehabilitation Plan unless a
creditor or other interested party submits an
objection to it in accordance with the next
succeeding section.
Section 81. Period for Approval of
Rehabilitation Plan. - The court shall have a
maximum period of one hundred twenty (120)
days from the date of the filing of the petition
 to approve the Rehabilitation Plan. If the court
fails to act within the said period, the
Rehabilitation Plan shall be deemed approved.
b. Objected
Section 79. Objection to the Petition or
Rehabilitation Plan. - Any creditor or other
interested party may submit to the court a
verified objection to the petition or the
Rehabilitation Plan not later than eight (8)
days from the date of the second publication
of the Order mentioned in Section 77 hereof.
The objections shall be limited to the following:
a. The allegations in the petition or the
Rehabilitation Plan or the attachments
thereto are materially false or
misleading;
b. The majority of any class of creditors do
not in fact support the Rehabilitation
Plan;
c. The Rehabilitation Plan fails to
accurately account for a claim against
the debtor and the claim in not
categorically declared as a contested
claim; or
d. The support of the creditors, or any of
them was induced by fraud.
Copies of any objection to the petition of the
Rehabilitation Plan shall be served on the
debtor, the rehabilitation receiver (if
applicable), the secured creditor with the
largest claim and who supports the
Rehabilitation Plan, and the unsecured
creditor with the largest claim and who
supports the Rehabilitation Plan.
OUT OF COURT OR INFORMAL REHABILITATION
A. Minimum Requirements
Section 84. Minimum Requirements of Out-of-
Court or Informal Restructuring Agreements and
Rehabilitation Plans. – 
(1) Debtor must agree to the out-of-court or
informal restructuring/workout agreement or
Rehabilitation Plan;
(2) Approved by creditors:
(a) Secured: representing at least sixty-
seven (67%) or 2/3 of the secured
obligations of the debtor;
(b) Unsecured: representing at least
seventy-five percent (75%) or ¾ of the
unsecured obligations of the debtor; and
(c) Total: holding at least eighty-five
percent (85%) of the total liabilities.
B. Standstill Period
Section 85.
The standstill period is agreed by the parties
pending the negotiation and finalization of the
agreement. This should not last for more than 120
days.
Requirements for standstill period
(1) Must be approved by the creditors
representing more than 50% of the
liabilities,
(2) Notice is published in a newspaper of
general circulation in the Philippines,
once a week for 2 consecutive
weeks, and
(3) Shall not exceed 120 days.
C. Cram Down Effect
Section 86.
The rehabilitation or restructuring plan that is
approved pursuant to an informal rehabilitation
plan should have the same legal effect as
confirmation of a rehabilitation plan under Section
69 (court-supervised rehabilitation).
LIQUIDATION OF INSOLVENT JURIDICAL DEBTORS
A. Voluntary Liquidation
1. Filing of Verified Petition
*Voluntary Liquidation initiated by the debtor
2. RTC designated as Special Commercial Court
3. Petition must contain at least 3 nominees as
liquidator
Note:
- In rehabilitation, we have nominees as the
receiver; in liquidation, we have nominees as
liquidator.
If there is a pending proceeding for rehabilitation or
pre-negotiated rehabilitation proceeding, the debtor
may file in the same proceeding a verified motion for
liquidation.
If there is no pending rehabilitation proceeding, then
file a new action for liquidation.
If the petition is sufficient in form and substance, the
court will issue a liquidation order.
B. Involuntary Liquidation
1. Verified Petition by 3 or more Creditors
*Involuntary Liquidation initiated by 3 or more
creditors of the insolvent juridical debtor:
- Stock Corporation: aggregate claim of creditors
must be the higher between: P1Million or 25% of
the subscribed capital stock
- Partnership: aggregate claim of creditors must
be the higher between: P1Million or 25% of the
Partner’s Contributions
If there is a pending rehabilitation proceeding,
the creditors may also file a verified motion for
liquidation during the pendency of the
rehabilitation proceeding.
If there is no pending rehabilitation proceeding,
then they may file a separate verified petition for
liquidation.
If the Court finds that the motion or petition is
sufficient in form and substance, it shall issue an
order directing the publication of the motion or
the petition. It shall direct the debtor and all the
creditors, not just the petitioning creditors, to file
their comment. After filing of the comment by the
debtor and the creditors, if the court finds the
petition to be meritorious, it will issue the
liquidation order.
2. RTC designated as Special Commercial Court
3. 3 nominees as liquidator
*Petition for Involuntary Liquidation already
contains the names of the nominees, just like in
the voluntary liquidation.
4. Bond
Section 105 (last paragraph)– The petitioning
creditor/s shall post a bond in such as the court
shall direct, conditioned that:
- if the petition for liquidation is dismissed
by the court, or
- if withdrawn by the petitioner , or
- if the debtor shall not be declared an
insolvent,
the petitioners will pay to the debtor all costs,
expenses, damages occasioned by the
proceedings, and attorney’s fees. [from the
bond]
THE LIQUIDATION ORDER
Section 112. Liquidation Order shall:
(a) declare the debtor insolvent;
(b) order the liquidation of the debtor and, in the case
of a juridical debtor, declare it as dissolved;
(c) order the sheriff to take possession and control of
all the property of the debtor, except those that
may be exempt from execution;
(d) order the publication of the petition or motion in a
newspaper of general circulation once a week for
two (2) consecutive weeks;
(e) direct payments of any claims and conveyance of
any property due the debtor to the liquidator;
(f) prohibit payments by the debtor and the transfer of
any property by the debtor;
(g) direct all creditors to file their claims with the
liquidator within the period set by the rules of
procedure;
(h) authorize the payment of administrative expenses
as they become due;
 (i) state that the debtor and creditors who are not
petitioner/s may submit the names of other
nominees to the position of liquidator; and
(j) set the case for hearing for the election and
appointment of the liquidator, which date shall not
be less than thirty (30) days nor more than forty-
five (45) days from the date of the last publication.
Section 113. Effects of the Liquidation Order:
(a) the juridical debtor shall be deemed dissolved and
its corporate or juridical existence terminated;
(b) legal title to and control of all the assets of the
debtor, except those that may be exempt from
execution, shall be deemed vested in the liquidator
or, pending his election or appointment, with the
court;
(c) all contracts of the debtor shall be deemed
terminated and/or breached, unless the liquidator,
within ninety (90) days from the date of his
assumption of office, declares otherwise and the
contracting party agrees;
(d) [Secured creditors are not affected but they may
waive their lien] no separate action for the
collection of an unsecured claim shall be allowed.
Such actions already pending will be transferred to
the Liquidator for him to accept and settle or
contest. If the liquidator contests or disputes the
claim, the court shall allow, hear and resolve such
contest except when the case is already on appeal.
In such a case, the suit may proceed to judgment,
and any final and executor judgment therein for a
claim against the debtor shall be filed and allowed
in court; and
*If a secured creditor does not waive their lien,
then they may foreclose the security or they can
agree with the liquidator that his particular amount
is the value of the property and ask the liquidator
to deliver to them the property and they will
condone the obligation; or they can agree with the
liquidator for the liquidator to sell the property and
that from the proceeds, they will be paid.
(e) no foreclosure proceeding shall be allowed for a
period of one hundred eighty (180) days.
THE LIQUIDATION PLAN
A. Period of Submission by Liquidator
Section 129. The Liquidation Plan. - Within three
(3) months from his assumption into office, the
Liquidator shall submit a Liquidation Plan to the
court. The Liquidation Plan shall, as a minimum
enumerate all the assets of the debtor and a
schedule of liquidation of the assets and payment
of the claims.
The Liquidator will prepare a liquidation plan which
will be submitted to Court within 3 months from his
assumption of office.
The Liquidation Plan shall observe the provisions
under the Civil Code on the concurrence and
preference of credits. (The discussions under these
provisions are material only when we have insolvent
debtors)
B. Concurrence and Preference of Credits (Section 133,
referring to the Civil Code)
The Liquidation Plan and its implementation shall
ensure that the concurrence and preference of credits
as enumerated in the Civil Code of the Philippines
and other relevant laws shall be observed, unless a
preferred creditor voluntarily waives his preferred
right.
SUSPENSION OF PAYMENT (FOR INDIVIDUAL DEBTORS)
The law does not provide for the rehabilitation of individual
debtors. You cannot rehabilitate an individual debtor; you can
only rehabilitate a juridical debtor.
An individual debtor, who is a resident and citizen of the
Philippines and has become insolvent, however, can file a
verified petition for suspension of payment.
A. Liquidity Issue (Sufficient, but Solid Assets)
A petition for suspension of payment is filed only if the
debtor has liquidity problems –the individual debtor
has sufficient property to cover all the debts but could
not meet or pay these debts when they fall due
because this debtor has liquidity problems (the debtor
has solid assets, like real properties that cannot easily
be disposed of)

B. Verified Petition
The insolvent debtor may file a verified petition in the
province or city where he or she has resided for at
least 6 months prior to the filing of the petition.
Attached to the petition is:
(1) a schedule of debts and liabilities,
(2) an inventory of assets, and
(3) a proposed agreement with his/her creditors
C. 3 Nominees for Commissioner
Also included in the petition are the names of the
nominees as commissioner. It would be the job of the
commissioner to receive the written evidence of the
creditors.
There is no commissioner for juridical debtors
because the suspension order is included in the
petition for rehabilitation, and it already contains the
names of the nominees for receiver. The
commencement order also already includes a stay or
suspension order, but there is a separate petition for
suspension or payment for individual debtors.
SUSPENSION OF PAYMENT ORDER
A. When issued
If the court finds the petition to be sufficient in form
and substance within 5 working days from the filing of
the petition, then it will issue an order pursuant to
Section 95. The petition includes the appointment of a
commissioner who will preside in the creditor’s
meeting.
B. Prohibition on Unsecured Creditors
Unsecured creditors are prohibited from instituting
proceedings for collection.
Why are we focusing on unsecured creditors and not
the secured creditors? Because secured creditors can
still proceed against the securities attached to the
obligation. So, if you are a mortgagee, you can
proceed to foreclosure of the mortgage, unless you
waive your preference over the specific property.
C. Creditors’ Meeting
During the creditors’ meeting, which is presided by
the appointed commissioner, the creditors will present
the written evidence of their claims.
Example of written evidence of claims: official
receipts, statement of accounts.
Quorum Requirement: There must be presence of
creditors holding at least 3/5 of the total liabilities.
Voting Requirement: (for the approval of a proposed
agreement*): at least 2/3 of the number of creditors
holding the Quorum (at least 3/5 of the liabilities).
*Remember that in filing the petition for suspension of
payment, there is already proposed agreements
attached to the petition. These will be subjected to the
approval of the creditors during the creditors’
meeting.
VOLUNTARY LIQUIDATION (INDIVIDUAL DEBTORS)
Just like a juridical person, an individual debtor can file a
petition for voluntary liquidation.
(a) Application
- Insolvency issue with debts exceeding P500,000.00
- Filing of verified petition
In suspension for payment, the debtor has liquidity issue.
Whereas, in voluntary liquidation, there is an insolvency
issue, which means that the assets of the debtor are not
sufficient to pay off the liabilities.
Can any debtor whose assets are less than his liabilities
file a petition for voluntary liquidation?
NO, because there is a minimum amount of debt before
you can file a petition. For individual debtors, the debts
must exceed P500,000.00.
An insolvent individual debtor with assets less than his
liabilities and the amount of debt exceeds P500,000.00,
may file a verified petition for voluntary liquidation.
Attached to the petition is:
(1) A schedule of debts and liabilities and
(2) An inventory of the assets.
TN: In suspension of payments, the debtor also submits
the names of 3 nominees for commissioner. In Voluntary
Liquidation, there is no such requirement.
The act itself of the insolvent individual debtor of filing a
petition for voluntary liquidation is an act of insolvency.
So, it is already an admission of the debtor being
insolvent.

(b) Liquidation Order
- Issued if petition is sufficient in form and substance
- Within 5 working days from filing
What will the court do with the petition?
Within 5 working days from filing of the petition, if the
court finds that the petition is sufficient in form and
substance, it will issue a liquidation order immediately,
because, again, the act of the debtor of filing such petition
is already an admission of insolvency. There is no more
need to determine whether the debtor is in fact insolvent.
INVOLUNTARY LIQUIDATION (INDIVIDUAL DEBTORS)
This is filed by a creditor or group of creditor of an individual
debtor whose claim amount to at least P500,000.00
A. Application
- Creditors with at least P500,000.00 claim
- Verified petition
Note: For Voluntary Liquidation, debts must exceed
P500,000.00, for Involuntary Liquidation, debts must
be at least P500,000.00.
The creditor or group of creditors may file a petition
for involuntary liquidation in the special commercial
court in the province or city where the debtor resides.
The petition must allege at least one act of insolvency
enumerated in Section 105:
Section 105. Acts of insolvency which the petition
for liquidation must allege (at least one):
a) That such person is about to depart or has
departed from the Republic of the Philippines,
with intent to defraud his creditors;
b) That being absent from the Republic of the
Philippines, with intent to defraud his
creditors, he remains absent;
c) That he conceals himself to avoid the service
of legal process for the purpose of hindering
or delaying the liquidation or of defrauding his
creditors;
d) That he conceals, or is removing, any of his
B. Show Cause
property to avoid its being attached or taken
- Why debtors should not be adjudged an insolvent
on legal process;
- Forbids payment of debts and transfer of assets
e) That he has suffered his property to remain
under attachment or legal process for three
(3) days for the purpose of hindering or
delaying the liquidation or of defrauding his
creditors;
f) That he has confessed or offered to allow
judgment in favor of any creditor or claimant
for the purpose of hindering or delaying the
liquidation or of defrauding any creditors or
claimant;
g) That he has willfully suffered judgment to be
taken against him by default for the purpose
of hindering or delaying the liquidation or of
defrauding his creditors;
h) That he has suffered or procured his property
to be taken on legal process with intent to
give a preference to one or more of his
creditors and thereby hinder or delay the
liquidation or defraud any one of his creditors;
i) That 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;
j) That he has, in contemplation of insolvency,
made any payment, gift, grant, sale,
conveyance or transfer of his estate,
property, rights or credits;
k) That being a merchant or tradesman, he has
generally defaulted in the payment of his
current obligations for a period of thirty (30)
days;
l) That for a period of thirty (30) days, he has
failed, after demand, to pay any moneys
deposited with him or received by him in a
fiduciary; and
m) 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.
 Upon filing of the petition by the creditor/s, the court
will issue an order requiring the debtor to show cause
why he or she should not be adjudged an insolvent.
Remember that in voluntary liquidation, the filing of
the debtor is already an act of insolvency, hence the
court immediately issues a liquidation order; however,
in involuntary liquidation, it is the creditors that allege
the insolvency of the debtor. Thus, the court issued a
Show Cause Order to allow the debtor to show-cause
why he/she should not be adjudged or declared
insolvent.
The Court may also issue an order forbidding debtor
from making payments (in effect, suspension of
payments), and from transferring any property
belonging to him.
C. Liquidation Order
- Default of Debtor, or
- Finding in favor of petitioning creditors
If the debtor defaults (does not file his comment to the
petition) or if after trial, and the issues were found in
favor of the creditors, then the court will issue a
liquidation order.
CONCURRENCE AND PREFERENCE OF
CREDITS
Civil Code Articles 2236 – 2251
CHAPTER 1 General Provisions
Article 2236. The debtor is liable with all his property,
present and future, for the fulfillment of his obligations,
subject to the exemptions provided by law. (1911a)
Article 2237. Insolvency shall be governed by special laws
insofar as they are not inconsistent with this Code. (n)
Article 2238. So long as the conjugal partnership or
absolute community subsists, its property shall not be
among the assets to be taken possession of by the
assignee for the payment of the insolvent debtor's
obligations, except insofar as the latter have redounded to
the benefit of the family. If it is the husband who is insolvent,
the administration of the conjugal partnership or absolute
community may, by order of the court, be transferred to the
wife or to a third person other than the assignee. (n)
Article 2239. If there is property, other than that mentioned
in the preceding article, owned by two or more persons, one
of whom is the insolvent debtor, his undivided share or
interest therein shall be among the assets to be taken
possession of by the assignee for the payment of the
insolvent debtor's obligations. (n)
Article 2240. Property held by the insolvent debtor as a
trustee of an express or implied trust, shall be excluded
from the insolvency proceedings. (n)
CHAPTER 2 Classification of Credits
Article 2241. With reference to specific movable property of
the debtor, the following claims or liens shall be preferred:
(1) Duties, taxes and fees due thereon to the State or any
subdivision thereof;
(2) Claims arising from misappropriation, breach of trust, or
malfeasance by public officials committed in the
performance of their duties, on the movables, money or
securities obtained by them;
(3) Claims for the unpaid price of movables sold, on said
movables, so long as they are in the possession of the
debtor, up 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
immobilization 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 with a pledge so long as the things
pledged are in the hands of the creditor, or those
guaranteed by a chattel mortgage, upon 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;
(6) Claims for laborers' wages, on the goods manufactured
or the work done;
(7) For expenses of salvage, upon the goods salvaged;
(8) Credits between the landlord and the tenant, arising from
the contract of tenancy on shares, on the share of each in
the fruits or harvest;
(9) Credits for transportation, upon the goods carried, for the
price of the contract and incidental expenses, until their
delivery and for thirty days thereafter;
(10) Credits for lodging and supplies usually furnished to
travellers by hotel keepers, on the movables belonging to
the guest as long as such movables are in the hotel, but not
for money loaned to the guests;
(11) Credits for seeds and expenses for cultivation and
harvest advanced to the debtor, upon the fruits harvested;
(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. (1922a)
Article 2242. With reference to specific immovable property
and real rights of the debtor, the following claims,
mortgages and liens shall be preferred, and shall constitute
an encumbrance on the immovable or real right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon the
immovable sold;
(3) Claims of laborers, masons, mechanics and other
workmen, as well as of architects, engineers and
contractors, 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 in the
construction, reconstruction, or repair of buildings, canals or
other works, upon said buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of Property,
upon the real estate mortgaged;
(6) Expenses for the preservation or improvement of real
property when the law authorizes reimbursement, upon the
immovable preserved or improved;
(7) Credits annotated in the Registry of Property, in virtue of
a judicial order, by attachments or executions, upon the
property affected, and only as to later credits;
(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 upon the donee, upon the
immovable donated;
(10) Credits of insurers, upon the property insured, for the
insurance premium for two years. (1923a)
Article 2243. The claims or credits enumerated in the two
preceding articles shall be considered as mortgages or
pledges of real or personal property, or liens within the
purview of legal provisions governing insolvency. Taxes
mentioned in No. 1, article 2241, and No. 1, article 2242,
shall first be satisfied. (n)
Article 2244. With reference to other property, real and
personal, of the debtor, the following claims or credits shall
be preferred in the order named:
(1) Proper funeral expenses for the debtor, or children under
his or her parental authority who have no property of their
own, when approved by the court;
(2) Credits for services rendered the insolvent by
employees, laborers, or household helpers for one year
preceding the commencement of the proceedings in
insolvency;
(3) Expenses during the last illness of the debtor or of his or
her spouse and children under his or her parental authority,
if they have no property of their own;
(4) Compensation due the laborers or their dependents
under laws providing for indemnity for damages in cases of
labor accident, or illness resulting from the nature of the
employment;
(5) Credits and advancements made to the debtor for
support of himself or herself, and family, during the last year
preceding the insolvency;
(6) Support during the insolvency proceedings, and for three
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 government,
other than those mentioned in articles 2241, No. 1, and
2242, No. 1;
(10) Taxes and assessments due any province, other than
those referred to in articles 2241, No. 1, and 2242, No. 1;
(11) Taxes and assessments due any city or municipality,
other than those indicated in articles 2241, No. 1, and 2242,
No. 1;
(12) Damages for death or personal injuries caused by a
quasi-delict;
(13) Gifts due to public and private institutions of charity or
beneficence;
(14) Credits which, without special privilege, appear in (a) a
public instrument; or (b) in a final judgment, if they have
been the subject of litigation. These credits shall have
preference among themselves in the order of priority of the
dates of the instruments and of the judgments, respectively.
(1924a)
Article 2245. Credits of any other kind or class, or by any
other right or title not comprised in the four preceding
articles, shall enjoy no preference. (1925)
CHAPTER 3 Order of Preference of Credits
Article 2246. Those credits which enjoy preference with
respect to specific movables, exclude all others to the extent
of the value of the personal property to which the preference
refers.
Article 2247. If there are two or more credits with respect to
the same specific movable property, they shall be satisfied
pro rata, after the payment of duties, taxes and fees due the
State or any subdivision thereof. (1926a)
Article 2248. Those credits which enjoy preference in
relation to specific real property or real rights, exclude all
others to the extent of the value of the immovable or real
right to which the preference refers.
Article 2249. If there are two or more credits with respect to
the same specific real property or real rights, they shall be
satisfied pro rata, after the payment of the taxes and
assessments upon the immovable property or real right.
(1927a)
Article 2250. The excess, if any, after the payment of the
credits which enjoy preference with respect to specific
property, real or personal, shall be added to the free
property which the debtor may have, for the payment of the
other credits. (1928a)
Article 2251. Those credits which do not enjoy any
preference with respect to specific property, and those
which enjoy preference, as to the amount not paid, shall be
satisfied according to the following rules:
(1) In the order established in article 2244;
(2) Common credits referred to in article 2245 shall be paid
pro rata regardless of dates.
CONCURRENCE OF CREDITS
Concurrence of credits occurs when the same specific property
of the debtor or all of his properties are subject to the claims of
several creditors.
For example, Mr. A bought a car, and he has not yet fully paid
the price. Security interest was created over that car in order to
secure the payment. However, the car figured in an accident
and so work was done to repair the car. Mr. A was also not
able to pay the mechanic, and so there was a mechanic’s lien
on the car. The seller and the mechanic have credits over the
particular car that concur. These are credits with respect to the
car.
Concurrence of credits implies the possession by 2 or more
creditors of equal rights or privileges over the same property or
all of the properties of the debtor.
*According to Tolentino, there must be an insolvency or other
type of in rem litigation proceeding of the debtor’s estate.
*The rules on concurrence and preference of credits become
significant only if there is an insolvent debtor.
PREFERENCE OF CREDITS
Preference of Credits is the right held by a creditor to be
preferred in the payment of his claims above the others; IOW,
the right to be paid first.
CLASSIFICATION OF CREDITS
1. Absolutely Preferred Credits (No. 1 Arts, 2241, 2242, &
No. 2, Art. 2244):
a. Duties, taxes and fees due thereon to the State or
any subdivision [Article 2241 (1)]; with reference to
specific movable property.
b. Taxes due upon the land or building [Article 2242
(1)]; with reference to specific immovable property
and real rights.
 c. Credits for services rendered the insolvent by FIRST. Absolutely Preferred over Specific Movable or
employees, laborers, or household helpers for one Immovable
year preceding the commencement of the
proceedings in insolvency [Article 2244 (2)]; with SECOND. Specially Preferred Credits
reference to other property, real or personal.
These must be paid first over the others listed in the THIRD. Ordinary Preferred Credits
articles.
LAST. Common Credits
2. Specifically Preferred Credits (Arts. 2241 & 2242, except
the State)

Note: For those enumerated under Art. 2241, this has

been effectively modified by the PPSA, because there is
no more chattel mortgage and pledge.

With respect to specific movable property in 2241, after

paying No.1, then the other credits listed there which
concur among themselves, will be paid proportionately.

There is no preference of credits here. Not anyone of the

credits listed are to be paid first, all of them will be paid
proportionately.
This also applies to Art. 2242, in that after paying No.1,
the other creditors listed will be paid proportionately.
BANKING LAWS
3. Ordinary Preferred Credits (Art. 2244, except No. 2 –
employment claims) A. New Central Bank Act
Note: This has been modified – No. 2 (employment B. The General Banking Law of 2000
claims) is the No.1 of the list now. C. Secrecy of Bank Deposits Act
D. Anti-Money Laundering Act
Under the PDIC Charter, in case of dissolution of a bank,
the secured portion under the PDIC is P500,000.00. The
unsecured portion of the bank deposit, which is NEW CENTRAL BANK ACT (RA 7653, as amended by
considered as a simple loan or mutuum, on the other RA 11211)
hand, is considered a preferred credit under No. 9 of Art.
2244. State Policy:
To maintain an independent central monetary authority
Before the new PDIC Charter took effect, the unsecured responsible for money, banking and credit concerns
portion of bank deposits were considered ordinary credits
and do not enjoy any preference. Now, the new PDIC Independent Central Monetary Authority - a GOCC which
Charter (RA 10846), provides that the uninsured portion enjoys fiscal and administrative autonomy
of bank deposits is considered preferred credit which fall
under No. 9 of Art. 2244.
BANGKO SENTRAL NG PILIPINAS (BSP)
4. Common Credits; not preferred (Art. 2245)
Bangko Sentral ng Pilipinas is the independent central
These credits do not enjoy any preference at all. monetary authority in the Philippines.

It has a capital of P200 Billion, fully subscribed by the

ORDER OF PAYMENT Government. It is only the Government that is the shareholder,
so to speak, of BSP.

PRIMARY OBJECTIVE OF BSP:
To maintain price stability conducive to a balanced and
sustainable growth of the economy.
To promote and maintain monetary stability and the
convertibility of the peso.
FUNCTIONS OF BSP
1. Financial Supervision (Sec. 3)
It supervises the operations of banks and exercises
regulatory powers over institutions performing quasi-
banking functions and institutions performing similar
functions.
2. Liquidity Management
It formulates and implements monetary policy aimed
at influencing money-supply consistent with its
primary objective to maintain price stability.
3. Lender of Last Resort (Sec. 82 and 83)
It lends money to banks through commercial credits,
production credits and other credits and advances.
There are also instances when it extends loans with
the maturity of just 7 days without collateral to banks,
especially when banks have urgent need for cash in
order to maintain its liquidity.
4. Currency Issuance (Sec. 50)
Its most important function is the power and authority
to issue currency within Philippine territory. Only BSP
can print the currency of the Philippines.
5. Management of Foreign Currency Reserves (Sec. 65
and 71)
BSP is tasked to maintain international reserves
adequate to meet any foreseeable net demand for
foreign currencies.
Section 71 requires that BSP shall endeavor to
maintain a net positive foreign asset position so that
its gross foreign exchange will always exceed its
gross foreign liabilities.
6. Determination of Foreign Exchange Rate (Sec. 74)
It determines through the Monetary Board the
exchange rate policy of the country.
7. Financial Advisor and Official Depository of the
Government (Sec. 113)
Before the Government undertakes any credit
operation abroad, the Government through the
Secretary of Finance, requests an opinion from the
BSP on the monetary implication of a contemplated
action.
MONETARY BOARD
Since BSP is a corporate body, it needs a governing body just
like in any corporation. In a stock corporation, the governing
body is called the Board of Directors, in a non-stock
corporation, Board of Trustees. In BSP, the governing body is
the Monetary Board.
Composition (Section 6)
It is composed of 7 members:
1. Chairman – Governor of the BSP
2. Cabinet of the President, one who is appointed by the
President.
3. 5 members from the private sector who shall serve
full-time as Members of the Monetary Board.
No member of the Monetary Board may be reappointed more
than once.
Term (Section 6)
The term shall be 6 years. Of the 5 members in Item 3, there
shall be 3 members who shall have a term of 6 years, and 2
who have 3 years.
Vacancy created by death, resignation or removal shall by
filled by appointment of a new member to complete the
unexpired period of the term.
FINANCIAL SUPERVISION
BSP exercises supervision over, and conducts examination of
banks and quasi-banks, including subsidiaries and affiliates.
One of the functions of the BSP is financial supervision of
banks, so BSP has departments tasked to supervise and
examine banks. There is a separate department to supervise
and examine commercial banks, there is also a separate
department for rural banks. Not just banks, but also
subsidiaries and affiliates.
Subsidiary –more than 50% of its voting stock owned or
controlled by bank or quasi-bank
Affiliates –50% or less of its voting stock owned or controlled
by bank or quasi-bank
CONSERVATORSHIP (Section 29)
SEC. 29. Appointment of Conservator. – Whenever, on the
basis of a report submitted by the appropriate supervising or
examining department, the Monetary Board finds that a
bank or a quasi-bank is in a state of continuing inability or
unwillingness to maintain a condition of liquidity deemed
adequate to protect the interest of depositors and creditors,
the Monetary Board may appoint a conservator with such
powers as the Monetary Board shall deem necessary to
take charge of the assets, liabilities, and the management
thereof, reorganize the management, collect all monies and
debts due said institution, and exercise all powers
necessary to restore its viability. The conservator shall
report and be responsible to the Monetary Board and shall
have the power to overrule or revoke the actions of the
previous management and board of directors of the bank or
quasi-bank.
The conservator should be competent and knowledgeable
in bank operations and management. The conservatorship
shall not exceed one (1) year. The conservator shall receive
remuneration to be fixed by the Monetary Board in an
amount not to exceed two-thirds (2/3) of the salary of the
president of the institution in one (1) year, payable in twelve
(12) equal monthly payments: Provided, That, if at any time
within the one-year period, the conservatorship is
terminated on the ground that the institution can operate on
its own, the conservator shall receive the balance of the
remuneration which he would have received up to the end
of the year; but if the conservatorship is terminated on other
grounds, the conservator shall not be entitled to such
remaining balance. The Monetary Board may appoint a
conservator connected with the Bangko Sentral, in which
case he shall not be entitled to receive any remuneration or
emolument from the Bangko Sentral during the
conservatorship. The expenses attendant to the
conservatorship shall be borne by the bank or quasi-bank
concerned.
The Monetary Board shall terminate the conservatorship
when it is satisfied that the institution can continue to
operate on its own and the conservatorship is no longer
necessary. The conservatorship shall likewise be terminated
should the Monetary Board, on the basis of the report of the
conservator or of its own findings, determine that the
continuance in business of the institution would involve
probable loss to its depositors or creditors, in which case
the provisions of Section 30 shall apply.
When we discussed FRIA, we discussed about corporations in
distress, and one of the ways in order to restore the liquidity
problems of a corporation is to have it rehabilitated, so the
corporation or may be the creditors file a petition for
rehabilitation.
With respect to banks, the equivalent of such action is
conservatorship.
Requisites to be placed under Conservatorship
1. A report is submitted by the appropriate department
2. Finding of Liquidity Problem/s
The Monetary Board finds that the bank or quasi-bank
is in a state of continuing inability or unwillingness to
maintain a condition of liquidity deemed adequate to
protect the interest of depositors and creditors.
3. Appointment of conservator
The Monetary Board will then appoint a conservator
Term of Conservatorship: Not more than 1 year.
Note: Action of the Monetary Board is final and executory. It
could only be questioned through a petition for certiorari filed
before the Court of Appeals or the Supreme Court.
COSERVATOR
Qualification: Competence and knowledge in bank operations
and management.
Functions:
1. Take charge of assets, liabilities, and management
thereof
2. Reorganize management
3. Collect all monies and debts due
4. Exercise all powers to restore viability of the bank
Note: Like a Rehabilitation Receiver of a private stock
corporation, the conservator has the power to overrule or
revoke actions of previous management and Board of
Directors of the bank.
TERMINATION OF CONSERVATORSHIP
Grounds:
1. When Monetary Board is satisfied that the institution
can continue to operate on its own; or
2. When Monetary Board determines that continuance of
business would involve probable loss to depositors or
creditors
Probable Loss
It does not require that there be an imminent loss for the
termination of conservatorship, probable loss is sufficient.
In case of the second ground, the Monetary Board may
summarily terminate the conservatorship without prior hearing.
Close the bank. The law says forbid the institution from doing
business in the Philippines and designate the PDIC as
receiver.
The job of a receiver of a bank is to liquidate the bank. So,
don’t be confused by the receiver of a bank and the receiver of
a private corporation. The former is tasked to liquidate the
bank; whereas the latter is tasked to rehabilitate the private
corporation.
The receiver in banks is equivalent to the liquidator under
FRIA.
RECEIVERSHIP (Sec. 30)
SEC. 30. Proceedings in Receivership and Liquidation. –
Whenever, upon report of the head of the supervising or
examining department, the Monetary Board finds that a
bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in
the ordinary course of business: Provided, That this
shall not include inability to pay caused by
extraordinary demands induced by financial panic in
the banking community;
(b) has insufficient realizable assets, as determined by
the Bangko Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable
losses to its depositors or creditors; or
(d) (d) has willfully violated a cease and desist order
under Section 37 that has become final, involving acts
or transactions which amount to fraud or a dissipation
of the assets of the institution; in which cases, the
Monetary Board may summarily and without need for
prior hearing forbid the institution from doing business
in the Philippines and designate the Philippine Deposit
Insurance Corporation as receiver of the banking
institution.
For a quasi-bank, any person of recognized competence in
banking or finance may be designated as receiver.
The receiver shall immediately gather and take charge of
all the assets and liabilities of the institution, administer the
same for the benefit of its creditors, and exercise the
general powers of a receiver under the Revised Rules of
Court but shall not, with the exception of administrative
expenditures, pay or commit any act that will involve the
transfer or disposition of any asset of the institution:
Provided, That the receiver may deposit or place the funds
of the institution in nonspeculative investments. The
receiver shall determine as soon as possible, but not later
than ninety (90) days from take-over, whether the
institution may be rehabilitated or otherwise placed in such
a condition so that it may be permitted to resume business
with safety to its depositors and creditors and the general
public: Provided, That any determination for the
resumption of business of the institution shall be subject to
prior approval of the Monetary Board.
If the receiver determines that the institution cannot be
rehabilitated or permitted to resume business in
accordance with the next preceding paragraph, the
Monetary Board shall notify in writing the board of directors
of its findings and direct the receiver to proceed with the
liquidation of the institution. The receiver shall:
(1) file ex parte with the proper regional trial court, and
without requirement of prior notice or any other action,
a petition for assistance in the liquidation of the
institution pursuant to a liquidation plan adopted by the
Philippine Deposit Insurance Corporation for general
application to all closed banks. In case of quasi-banks,
the liquidation plan shall be adopted by the Monetary
Board. Upon acquiring jurisdiction, the court shall,
upon motion by the receiver after due notice,
adjudicate disputed claims against the institution,
assist the enforcement of individual liabilities of the
stockholders, directors and officers, and decide on
other issues as may be material to implement the
 liquidation plan adopted. The receiver shall pay the
cost of the proceedings from the assets of the
institution.
(2) convert the assets of the institution to money, dispose
of the same to creditors and other parties, for the
purpose of paying the debts of such institution in
accordance with the rules on concurrence and
preference of credit under the Civil Code of the
Philippines and he may, in the name of the institution,
and with the assistance of counsel as he may retain,
institute such actions as may be necessary to collect
and recover accounts and assets of, or defend any
action against, the institution. The assets of an
institution under receivership or liquidation shall be
deemed in custodia legis in the hands of the receiver
and shall, from the moment the institution was placed
under such receivership or liquidation, be exempt from
any order of garnishment, levy, attachment, or
execution.
The actions of the Monetary Board taken under this
section or under Section 29 of this Act shall be final
and executory, and may not be restrained or set aside
by the court except on petition for certiorari on the
ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion as
to amount to lack or excess of jurisdiction. The petition
for certiorari may only be filed by the stockholders of
record representing the majority of the capital stock
within ten (10) days from receipt by the board of
directors of the institution of the order directing
receivership, liquidation or conservatorship.
The designation of a conservator under Section 29 of
this Act or the appointment of a receiver under this
section shall be vested exclusively with the Monetary
Board. Furthermore, the designation of a conservator
is not a precondition to the designation of a receiver.
Grounds
1. Equity Test
Whenever upon report of the Head of the Supervising
or Examining Department of the BSP, the Monetary
Board finds that a bank or quasi-bank has notified the
BSP or has publicly announced a unilateral closure or
has been dormant for at least 60 days or, in any
manner, has suspended the payment of its deposit or
deposit-substitute liabilities or is unable to pay its
liabilities as they become due and demandable in the
ordinary course of business (not about extraordinary
demands induced by financial panic), then the bank
may be placed under receivership.
2. Balance sheet/Insolvency Test
If the Monetary Board finds that the bank has
insufficient realizable assets, as determined by the
BSP to meet its liabilities, then there is insolvency
issues present.
3. Probable Losses
If the Monetary Board finds that the bank or quasi-
bank cannot continue in business without involving
probable loss to its depositors or creditors.
JA: Remember, here, the second ground for the
termination of conservatorship, if the continuance of
the bank involves a probable loss.
4. Violation of Cease-and-Desist Order
A violation of CDO which has become final involving
acts or transactions which amount to fraud or
dissipation of the assets of the bank.
Close Now, Hear Later
The Monetary Board may just summarily, without need of prior
hearing, forbid the bank or quasi-bank from doing business in
the Philippines and designate the PDIC as receiver.
So, for banks, PDIC is designated as receiver.
For quasi-banks and non-stock savings and loan associations,
any person of recognized competence in banking, credit, or
finance may be designated as receiver.
The rule here is: Close now, hear later. So, no hearing, no prior
announcement to the public that the bank will be closed. Why?
It will cause panic.
Action of Monetary Board is Final and Executory
If the Monetary Board decides to close the bank, it shall notify
in writing the Board of Director, through the receiver (the
PDIC), the decision to close the bank.
But the closure will not take effect upon notice to BoD, rather,
the closure of the bank shall be deemed effective upon service
of notice.
NOTICE OF CLOSURE, WHEN EFFECTIVE
(1) Upon service of the notice of closure by receiver,
PDIC, to the highest-ranking officer of the bank
present in the bank premises, or
(2) In his absence, by posting the notice of closure in the
bank premises or on its main entrance.
After service of notice, receiver shall takeover the bank and
exercise its powers as such.
LIQUIDATION OF CLOSED BANKS
Procedure
It is the job of the receiver or PDIC to liquidate the bank.
Liquidation of a bank is covered by a separate law, RA 10846
– Resolution and Liquidation Framework for Banks.
THE GENERAL BANKING LAW OF 2000 (RA 8791)
Classification of Banks
1. Universal Banks
Also known as ‘expanded commercial banks’, can
also function as an investment house, and they have
the power to invest in non-aligned enterprises.
2. Commercial Banks
Those that perform ordinary banking functions, like
accepting deposits, extending loans, issuing letters of
credit, discounting deposit instruments.
3. Thrift Banks
Defined under RA 7906, aka ‘Thrift Banks Act’
4. Rural Banks
Defined under RA 7353, aka ‘Rural Banks Act of
1992’
5. Cooperative Banks
Defined under RA 6938, aka ‘Cooperative Code of the
Philippines’
6. Islamic Banks
Defined under RA 6848, aka ‘Carter Al-Amanah
Islamic Investment Bank of the Philippines.
7. Others
What are banks in general?
There are entities in the lending of funds obtained in the form
of deposits.
If we talk of a private stock corporation, initially, the capital of
the corporation comes from the paid-in capital of the
stockholders. Eventually, it will accumulate assets. But, for
banks, the funds lent by the bank come from the deposit of
clients.
QUASI-BANKS
Entities engaged in the borrowing of funds through the
issuance, endorsement or assignment with recourse or
acceptance of deposit substitutes as defined in Section 95 of
Republic Act No. 7653 (hereafter the “New Central Bank Act”)
for purposes of relending or purchasing of receivables and
other obligations.
What are examples of Quasi-Banks?
Lending and financing companies
ORGANIZING OF BANKS AND QUASI-BANKS
Stock Corporation
It must be organized as a stock corporation.
Funds are obtained from the public
Meaning, the funds must have been obtained from more than
20 persons
Minimum capital requirements are satisfied
It must meet the minimum capital requirements as prescribed
by the Monetary Board. It would depend on the classification of
the bank.
Board of Directors:
Since it is a stock corporation, it requires that there must be a
Board of Directors.
Under the General Banking Law, there are two requirements:
● Must have at least 5 but not more than 15 members
● Must have at least 2 independent directors
Independent Director
A person other than an officer or employee of tha bank, its
subsidiaries, or affiliates, or related interests.
The law requires at least 2 independent directors, but in the
Manual of Regulation for Banks (MORB), it says that the
number of independent directors must at least be 1/3 of the
number of members of the BOD, but not less than 2 directors.
So, if there are 5 directors, there must be at least 2
independent directors. If there are 15, at least 5 (1/3 of the 15
directors) must be independent.
Fit and Proper Rule
This provides that the Monetary Board shall prescribe, pass
upon, and review the qualifications and disqualifications of
individuals elected or appointed as bank directors or officers,
and disqualify those unfit.
Meaning, the Monetary Board can remove a director, which is
not how we remove a director of a stock corporation (non-
bank).
NATURE OF BANK FUNDS AND BANK DEPOSITS
Article 1980 of the Civil Code
Article 1980. Fixed, savings, and current deposits of money
in banks and similar institutions shall be governed by the
provisions concerning simple loan.
So, these are loans by the bank from the depositors.
SINGLE BORROWER’S LIMIT (SBL)
General Rule: Not more than 20% of the new worth of the
bank
Exception: Increase by additional 10%, unless otherwise
prescribed by the Monetary Board.
A person or a juridical entity that obtains credit
accommodations from a bank cannot be granted more than
20% of the net worth of the bank, even if the person/juridical
person is a preferred client. This is the Single Borrower’s Limit.
It can, however, be increased by 10% as may be determined
by the Monetary Board. But, as a general rule, it cannot
exceed 20%, at any point in time, of the net worth of the bank.
DOSRI (Directors, Officers, Stockholders, and Other Related
Interests)
Can DOSRI obtain loans from the bank?
Yes. But they must not be given any preferential treatment
than those of other clients of the bank. So, it must be an arms-
length transaction.
Procedural Requirements:
1. Written Approval by Majority of the Board of Directors
There must be a written approval by majority of the
BoD, excluding the director who wishes to take loan
from the bank and also those who wish to act as an
endorser or a guarantor or a surety.
2. A report must be submitted to the BSP.
3. Amount must not exceed the unencumbered deposit
and book value of paid-in contribution.
The amount involved must not exceed the
unencumbered deposit and book value of the paid-in
capital contribution of the concerned director or
officer.
(Amount Involved < Unencumbered Deposit + Book
Value of the Paid-In Capital Contribution of the
person)
Unencumbered Deposit: is the deposit that is not
subject to a lien.
Example: If the unencumbered deposit of a director is
P1M and his PICC is also P1M, the credit
accommodation that can be given to him must not
exceed P2M.
PROHIBITED TRANSACTIONS BY DIRECTORS AND
OFFICERS
1. Make false entries in any bank report
2. Disclose information relative to funds or property of
private individuals
This is covered by Secrecy of Bank Deposits Act
3. Accept gifts, fees or commissions
They cannot accept gifts, fees, or commissions in
connection with the approval of a loan or other credit
accommodation from the bank
4. Overvalue any security
They cannot overvalue or aid in overvaluing in a
security for the purpose of influencing in any way the
actions of the bank.
 For example, increasing the appraised value of a
proposed collateral in order to increase the loanable
amount of the applicant. This is prohibited.
5. Outsource inherent banking functions
They cannot outsource inherent banking functions.
SECRECY OF BANK DEPOSIT ACT (RA 1405)
PURPOSE
To discourage hoarding and to encourage people to deposit
money in banks.
So that the money can be utilized to extend loans in order to
assist in the economic development of the country. Remember
that the funds of the banks come from deposits, so this is
where the banks source the funds to lend to borrowers.
To encourage people who hoard their money in their
respective homes to deposit their money in the bank, so that it
can be used to develop the capital market in the country.
RULE ON SECRECY OF BANK DEPOSITS
What deposits are covered by the law?
All bank deposits, whether in peso account or foreign-currency
denominated accounts.
General Rule: All bank deposits of whatever nature are
considered absolutely confidential (Section 2).
Absolutely Confidential: May not be examined, inquired or
looked into by any person, government official, bureau or
office.
Prohibited Act: Disclosure by any bank official or employee to
any persons of any information concerning the deposits (Sec.
3)
EXCEPTIONS TO ABSOLUTE CONFIDENTIALITY RULE:
1. Upon depositor’s written permission
2. In cases of impeachment (for impeachable public
officials)
3. Upon order of competent court (in cases of bribery,
dereliction of duty by public officials)
4. If subject matter of litigation (the money deposited)
5. Under the AMLA
6. Under the Human Security Act
7. Under the Terrorism Financing Prevention and
Suppression Act
ANTI-MONEY LAUNDERING ACT (RA 9160, as
amended)
POLICY
To protect and preserve the integrity and confidentiality of bank
accounts, and to ensure that the Philippines shall not be used
as a money laundering site for the proceeds of any unlawful
activity.
COVERED TRANSACTION(S)
Any transaction in cash or other equivalent monetary
instrument involving a total amount in excess of P500,000.000
within one banking day.
If you notice, if you transfer money, the most commonly used
vehicle for transferring funds now is GCash. When you transfer
cash to a GCash account, you are also required to fill in the
portion for the purpose of the transfer.
Even when you transfer money from one account to another,
the purpose is also indicated. This is a requirement under
AMLA.
Even when you go to Palawan Money Transfer (or other
money transfer agents), you need to indicate the purpose for
the transfer even if the amount is minimal, because they need
to report this. They have regular reports to be submitted.
COVERED PERSONS/INSTITUTIONS
Under Section 3 of the law, the covered institutions are the
banks, insurance companies and securities dealers.
This was broadened in the IRR dated November 22, 2018. We
have 2 sets now: (1) Financial Institutions under Sec. 3, and
(2) Designated Non-Financial Business and Professions.
 A. Financial Institutions
a. Persons supervised and/or regulated by the
BSP (Sec. 3a[1])
b. Persons supervised or regulated by the
Insurance Commission (Sec. 3a[2])
c. Persons supervised or regulated by the SEC
(Sec. 3a[3])
B. DNFBPs (Designated Non-Financial Business and
Professions) (Sec. 3b)
a. Jewelry Dealers
b. Dealers in Precious Metals
c. Company Service Providers
- acting as formation agent of juridical
persons,
- acting as a director of a corporation,
providing a registered office or business
address, or
- acting as a nominee shareholder for
another person)
d. Persons, including lawyers, accountants and
other professionals those who:
i. manage the money of the clients,
ii. render management services for
banks,
iii. are engaged in the organization of
contributions for the creation,
operation, and management of
companies,
iv. render services in the creation,
operation or management of
juridical persons or arrangements
e. Casinos
We know that dirty money is constantly
being laundered in casinos.
SUSPICIOUS TRANSACTIONS
Transactions with covered persons/institutions, regardless of
the amounts involved, under any of the following
circumstances: (Section 3)
1. No underlying legal or trade obligations
There is no underlying legal or trade obligation,
purpose or economic justification.
2. Client not properly identified
Where the client is not properly identified. In fact,
when you send money through a money transfer
entity, you need to indicate the full name, contact
number, and address of the recipient.
3. Amount involved not commensurate with financial
capacity of client.
4. Client’s transaction is structured to avoid being
subject to reporting requirements
Where it may be perceived that the client’s
transaction is structured in order to avoid being the
subject of reporting requirements under the Act.
5. Any circumstance observed to deviate from the profile
of client or client’s past transactions
6. Transaction is related to an unlawful activity
7. Any similar or analogous transaction
MONEY LAUNDERING AS A CRIME
A crime whereby the proceeds of an unlawful activity are
transacted, thereby making them appear to have originated
from legitimate sources.
Why is it called money laundering?
You launder money. When you launder clothes, you make
them clean, right? So, when you launder money, you make the
money clean. Because it is the fruit of an illegal activity.
HOW MONEY LAUNDERING IS COMMITTED:
A. Section 4, RA 9160, as amended by RA 9194
SEC. 4. Money Laundering Offense. — It is
committed by the following:
(a) Any person knowing that any monetary
instrument or property represents, involves, or
relates to, the proceeds of any unlawful activity,
transacts or attempts to transact said monetary
instrument or property.
(b) Any person knowing that any monetary
instrument or property involves the proceeds of
any unlawful activity, performs or fails to perform
any act as a result of which he facilitates the
offense of money laundering referred to in
paragraph (a) above.
(c) Any person knowing that any monetary
instrument or property is required under this Act to
be disclosed and filed with the Anti-Money
Laundering Council (AMLC), fails to do so.
B. Rule 9, Section 1, 2018 IRR of the AMLA (Nov. 22,
2018)
RULE 9 – MONEY LAUNDERING AND
 TERRORISM FINANCING
Section 1. Money Laundering.
Money laundering is committed by:
(a) Any person who, knowing that any
monetary instrument or property
represents, involves, or relates to the
proceeds of any unlawful activity:
(1) transacts said monetary
instrument or property;
(2) converts, transfers, disposes of,
moves, acquires, possesses or
uses said monetary instrument
or property;
(3) conceals or disguises the true
nature, source, location,
disposition, movement or
ownership of or rights with
respect to said monetary
instrument or property;
(4) attempts or conspires to commit
ML offenses referred to in (1),
(2), or (3) above;
(5) aids, abets, assists in, or
counsels the commission of the
ML offenses referred to in (1),
(2), or (3) above; and
(6) performs or fails to perform any
act as a result of which he
facilitates the offense of ML
referred to in items (1), (2), or (3)
above.
(b) Any covered person who, knowing that a
covered or suspicious transaction is
required under the AMLA to be reported
to the AMLC, fails to do so.
UNLAWFUL ACTIVITIES
Rule 3, Section 1 of 2018 IRR of AMLA (Nov. 22, 2018)
RULE 3 – UNLAWFUL ACTIVITIES
Section 1. Unlawful Activities.
Unlawful activities refer to any act or omission, or series or
combination thereof, involving or having direct relation, to
the following:
(a) “Kidnapping for Ransom” under Article 267 of Act
No. 3815, otherwise known as the Revised Penal Code, as
amended;
(b) Sections 4, 5, 6, 8, 9, 10, 11, 12,13, 14, 15 and 16
of Republic Act No. 9165, otherwise known as the
“Comprehensive Dangerous Drugs Act of 2002”;
(c) Section 3 paragraphs b, c, e, g, h and i of Republic
Act No. 3019, as amended, otherwise known as the “Anti-
Graft and Corrupt Practices Act”;
(d) “Plunder” under Republic Act No. 7080, as
amended;
(e) “Robbery” and “Extortion” under Articles 294, 295,
296, 299, 300, 301 and 302 of the Revised Penal Code, as
amended;
(f) “Jueteng” and “Masiao” punished as illegal
gambling under Presidential Decree No. 1602;
(g) “Piracy on the High Seas” under the Revised Penal
Code, as amended, and Presidential Decree No. 532:
(h) “Qualified Theft” under Article 310 of the Revised
Penal Code, as amended;
(i) “Swindling” under Article 315 and “Other Forms of
Swindling” under Article 316 of the Revised Penal Code, as
amended:
(j) “Smuggling” under Republic Act No. 455, and
Republic Act No. 1937, as amended, otherwise known as
the “Tariff and Customs Code of the Philippines”;
(k) Violations under Republic Act No. 8792, otherwise
known as the “Electronic Commerce Act of 2000”; Page 21
of 93
(l) “Hijacking” and other violations under Republic Act
No. 6235, otherwise known as the “AntiHijacking Law”;
“Destructive Arson”; and “Murder”, as defined under the
Revised Penal Code, as amended;
(m) “Terrorism” and “Conspiracy to Commit Terrorism”,
as defined and penalized under Sections 3 and 4 of
Republic Act No. 9372;
(n) “Financing of Terrorism” under Section 4 and
offenses punishable under Sections 5, 6, 7 and 8 of
Republic Act No. 10168, otherwise known as the “Terrorism
Financing Prevention and Suppression Act of 2012”;
(o) “Bribery” under Articles 210, 211 and 211-A of the
Revised Penal Code, as amended, and “Corruption of
Public Officers” under Article 212 of the Revised Penal
Code, as amended;
(p) “Frauds and Illegal Exactions and Transactions”
under Articles 213, 214, 215 and 216 of the Revised Penal
Code, as amended;
(q) “Malversation of Public Funds and Property” under
Articles 217 and 222 of the Revised Penal Code, as
amended;
(r) “Forgeries” and “Counterfeiting” under Articles 163,
166, 167, 168, 169 and 176 of the Revised Penal Code, as
amended;
(s) Violations of Sections 4 to 6 of Republic Act No.
9208, otherwise known as the “Anti Trafficking in Persons
Act of 2003, as amended”;
(t) Violations of Sections 78 to 79 of Chapter IV of
Presidential Decree No. 705, otherwise known as the
“Revised Forestry Code of the Philippines, as amended”;
(u) Violations of Sections 86 to 106 of Chapter IV of
Republic Act No. 8550, otherwise known as the “Philippine
Fisheries Code of 1998”;
(v) Violations of Sections 101 to 107, and 110 of
Republic Act No. 7942, otherwise known as the “Philippine
Mining Act of 1995”;
(w) Violations of Section 27(c), (e), (f), (g) and (i) of
Republic Act No. 9147, otherwise known as the “Wildlife
 Resources Conservation and Protection Act”;
(x) Violations of Section 7(b) of Republic Act No.
9072, otherwise known as the “National Caves and Cave
Resources Management Protection Act”;
(y) Violation of Republic Act No. 6539, otherwise
known as the “Anti-Carnapping Act of 2002, as amended”;
(z) Violation of Sections 1, 3, and 5 of Presidential
Decree No. 1866, as amended, otherwise known as the
decree “Codifying the Laws on Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or Disposition of
Firearms, Ammunition or Explosives”;
(aa) Violation of Presidential Decree No. 1612,
otherwise known as the “Anti-Fencing Law”; Page 22 of 93
(bb) Violation of Section 6 of Republic Act No. 8042,
otherwise known as the “Migrant Workers and Overseas
Filipinos Act of 1995, as amended”;
(cc) Violation of Republic Act No. 8293, otherwise
known as the “Intellectual Property Code of the Philippines,
as amended”;
(dd) Violation of Section 4 of Republic Act No. 9995,
otherwise known as the “Anti-Photo and Video Voyeurism
Act of 2009”;
(ee) Violation of Section 4 of Republic Act No. 9775,
otherwise known as the “Anti-Child Pornography Act of
2009”;
(ff) Violations of Sections 5, 7, 8, 9, 10 (c), (d) and (e),
11, 12 and 14 of Republic Act No. 7610, otherwise known
as the “Special Protection of Children Against Abuse,
Exploitation and Discrimination”;
(gg) Fraudulent practices and other violations under
Republic Act No. 8799, otherwise known as the “Securities
Regulation Code of 2000”;
(hh) Felonies or offenses of a nature similar to the
aforementioned unlawful activities that are punishable under
the penal laws of other countries.
Predicate Offenses
All unlawful activities (as enumerated above) are predicate
offenses to money laundering.
With respect to money laundering, a predicate offense is one
which gives rise to funds that may then be laundered in order
to obscure or cover up the illegal source.
SAFE HARBOR PROVISION (Section 5, IRR)
No administrative, criminal, or civil proceedings against any
person for having made a *CTR or an **STR in the regular
performance of his duties and in good faith, whether or not
such reporting results in any criminal prosecution under the
AMLA or any other Philippine laws.
*CTR - Covered Transaction Report
**STR - Suspicious Transaction Report
RULE 22 – TRANSACTION REPORTING
Section 5. Safe Harbor Provision.
No administrative, criminal or civil proceedings shall lie
against any person for having made a CTR or an STR in the
regular performance of his duties and in good faith, whether
or not such reporting results in any criminal prosecution
under the AMLA or any other Philippine law.
ANTI-MONEY LAUNDERING COUNCIL (AMLC)
Composition:
1. BSP Governor as Chairman
2. Commissioner of IC as Member
3. Chairman of SEC as Member
Functions:
1. Section 7, RA 9160, as amended by RA 9194
The AMLC shall act unanimously in the discharge
of its functions as defined hereunder:
(1) to require and receive covered transaction
reports from covered institutions;
(2) to issue orders addressed to the appropriate
Supervising Authority or the covered institution to
determine the true identity of the owner of any
monetary instrument or property subject of a
covered transaction report or request for
assistance from a foreign State, or believed by the
Council, on the basis of substantial evidence, to
be, in whole or in part, wherever located,
representing, involving, or related to, directly or
indirectly, in any manner or by any means, the
proceeds of an unlawful activity;
(3) to institute civil forfeiture proceedings and all
other remedial proceedings through the Office of
the Solicitor General;
(4) to cause the filing of complaints with the
Department of Justice or the Ombudsman for the
prosecution of money laundering offenses;
(5) to initiate investigations of covered
transactions, money laundering activities and other
violations of this Act;
(6) to freeze any monetary instrument or property
alleged to be proceeds of any unlawful activity;
(7) to implement such measures as may be
necessary and justified under this Act to counteract
money laundering;
(8) to receive and take action in respect of, any
request from foreign states for assistance in their
own anti-money laundering operations provided in
this Act;
 (9) to develop educational programs on the
pernicious effects of money laundering, the
methods and techniques used in money
laundering, the viable means of preventing money
laundering and the effective ways of prosecuting
and punishing offenders; and
(10) to enlist the assistance of any branch,
department, bureau, office, agency or
instrumentality of the government, including
government-owned and -controlled corporations, in
undertaking any and all anti-money laundering
operations, which may include the use of its
personnel, facilities and resources for the more
resolute prevention, detection and investigation of
money laundering offenses and prosecution of
offenders.
Under Secrecy of Bank Deposits Act, one of the
exceptions is AMLA, meaning the bank deposits may
be inquired or examined upon.
A. Authority to Inquire
The Council has the authority to inquire into or
examine any particular bank deposit or investment,
upon court order (not just by its whim, not just for any
reason, not just at any time it wants to, but only upon
court order).
B. Grounds for Probable Cause
Grounds: Probable Cause that the deposits are
related to:
(1) An Unlawful Activity; or
(2) A Money Laundering Offense
The Council will only have the authority to inquire into bank
deposits where the Court finds probable cause and then issues
a court order to that effect.
Exceptions: Where no Court Order is required
No Court Order is required for:
(1) Kidnapping for ransom
(2) Violation of RA 9165 (Comprehensive Dangerous
Drugs Act of 2002)
(3) Hijacking and other violations of RA 6235
FREEZE ORDER
Section 10. Authority to Freeze - Upon determination that
probable cause exists that any deposit or similar account is
in any way related to an unlawful activity, the AMLC may
issue a freeze order, which shall be effective immediately,
on the account for a period not exceeding fifteen (15) days.
Notice to the depositor that his account has been frozen
shall be issued simultaneously with the issuance of the
freeze order. The depositor shall have seventy-two (72)
hours upon receipt of the notice to explain why the freeze
order should be lifted. The AMLC has seventy-two (72)
hours to dispose of the depositor’s explanation. If it fails to
act within seventy-two (72) hours from receipt of the
depositor’s explanation, the freeze order shall automatically
be dissolved. The fifteen (15)-day freeze order of the AMLC
may be extended upon order of the court, provided that the
fifteen (15)-day period shall be tolled pending the court’s
decision to extend the period.
No court shall issue a temporary restraining order or writ of
injunction against any freeze order issued by the AMLC
except the Court of Appeals or the Supreme Court.
To prevent the owner of the deposit from withdrawing his or its
deposit from the bank and to preserve the money instrument,
the Council can apply for a Freeze Order.
A. Applied ex parte before the CA
The application for Freeze Order is not filed in any
court, but is filed in the Court of Appeals.
B. Issued after the determination that the probable cause
exists that any monetary instrument is related to an
unlawful activity.
What’s the purpose of the Freeze Order?
The purpose of a Freeze Order is to temporarily
preserve the monetary instruments that are in any
way related to an unlawful activity or laundering by
preventing the owner of the deposit account from
utilizing them during the duration of the Freeze Order.
Order is effective for 20 days, unless extended
The Freeze Order is effective only for 20 days. It is temporary.
But, it can be extended up to the maximum of 6 months only.
Why? To give time to AMLC to build its case.
Freeze Order cannot be extended for an indefinite
period.
In Ligot v. Republic (GR 176944, March 6, 2013):
“A freeze order is an extraordinary and interim relief issued
by the CA to prevent the dissipation, removal, or disposal of
properties that are suspected to be the proceeds of, or
related to, unlawful activities as defined in Section 3 (i) of
RA No. 9160, as amended. The primary objective of a
freeze order is to temporarily preserve monetary
instruments or property that are in any way related to an
unlawful activity or money laundering, by preventing the
owner from utilizing them during the duration of the freeze
order. The relief is pre-emptive in character, meant to
prevent the owner from disposing his property and thwarting
the State's effort in building its case and eventually filing
civil forfeiture proceedings and/or prosecuting the owner.”

“a freeze order is meant to have a temporary effect; it was

never intended to supplant or replace the actual forfeiture
cases where the provisional remedy — which means, the
remedy is an adjunct of or an incident to the main action —
of asking for the issuance of an asset preservation order
from the court where the petition is filed is precisely
available. For emphasis, a freeze order is both a
preservatory and preemptive remedy.”

“Thus, as a rule, the effectivity of a freeze order may be

extended by the CA for a period not exceeding six months.
Before or upon the lapse of this period, ideally, the Republic
should have already filed a case for civil forfeiture against
the property owner with the proper courts and accordingly
secure an asset preservation order or it should have filed
the necessary information. Otherwise, the property owner
should already be able to fully enjoy his property without
any legal process affecting it. However, should it become
completely necessary for the Republic to further extend the
duration of the freeze order, it should file the necessary
motion before the expiration of the six-month period and
explain the reason or reasons for its failure to file an
appropriate case and justify the period of extension sought.
The freeze order should remain effective prior to the
resolution by the CA, which is hereby directed to resolve
this kind of motion for extension with reasonable dispatch.”