Financial Rehabilitation and
Insolvency Act of 2010
The section numbers hereinafter generally
pertain to RA 10142 or the Financial
Rehabilitation and Insolvency Act (FRIA),
unless otherwise indicated.
Definition of Insolvency
Insolvency refers to the financial condition of
a debtor that is:
a. Generally unable to pay liabilities as they
fall due on the ordinary course of business
(hence illiquid); or
b. Has liabilities that are greater than its or his
assets (balance sheet insolvent). [Sec.
4(p)]
Liabilities refer to money claims against the
debtor. [Sec. 4(s)]
Debtors Under The FRIA
Includes:
a. Sole proprietorship registered with DTI;
b. Partnership registered with SEC;
c. Corporation duly registered and existing
under Philippine laws; or
d. Individual debtor, who is a natural person
that is a resident citizen, that has become
insolvent. [Sec. 4(k)]
Note: Under the FRIA, the rules on debtors also
include and apply to groups of debtors:
a. Corporations financially related to one
another as parent corporations,
subsidiaries or affiliates;
b. Partnerships owned more than 50% by the
same person; and
c. Single proprietorships owned by the same
person.
Excludes:
a. Banks
b. Insurance companies
c. Pre-need companies
d. National and local government agencies or units
[Sec. 5]
Suspension of Payments
Suspension of Payments – A remedy where an
individual debtor who, possessing sufficient property
to cover all his debts but foreseeing the impossibility
of meeting them when they respectively fall due, may
file a verified petition that he be declared in the state
of suspension of payments by the court of the province
or city in which he has resided for six (6) months prior
to the filing of his petition. He shall attach to his
petition, as a minimum:
(a) a schedule of debts and liabilities; (b) an
FINANCIAL REHABILITATION AND INSOLVENCY ACT NOTES by CMPoserio-Pascual Page 1 of 11
inventory of assess; and (c) a proposed
agreement with his creditors. [Sec. 94]
Definition
Suspension of payments is a judicial
insolvency proceeding by which an individual
debtor submits, for approval by his debtors, a
proposed agreement, containing
propositions delaying or extending the time
of payment of his debts.
Who Can Avail – An illiquid debtor
An individual debtor (natural person) who, possesses
sufficient property to cover all his debts but foresees
the impossibility of meeting them when they
respectively fall due.
Purpose
Debt moratorium: To delay or extend the time of
payment of one’s debts.
Allows distressed debtor to defer payment of his
debts by presenting a plan.
a. Must relate to a schedule of payments
b. No haircut (reduction of debts), only a
grace period to pay the debts
How Initiated
Illiquid debtor files a duly verified petition that he be
declared in the state of suspension of payments by the
court of the province/city in which he has resided for 6
months prior to the filing of the petition
Minimum Requirements for Petition
(1) Schedule of debts and liabilities
(2) Inventory of assets
(3) Proposed agreement with his creditors
Suspension of Payments Order
When Issued
Within 5 working days if the court finds the petition
sufficient in form and substance
Remains effective from the time of the filing of the
petition until the termination of the proceedings
Most Important Elements
Automatic Stay: No creditor except those exempt
shall institute proceedings to collect its claim from the
time of filing until the termination of the proceedings
o Exempt from stay order:
(1) Claims for personal labor,
(2) Expense of last illness and funeral,
(3) Secured creditors
Injunction against debtor: The individual
debtor is subjected to an injunction against:
(1) Disposing of his property except those
used in the ordinary operations of
commerce or industry in which he is
engaged
(2) Making any payment outside of the
necessary or legitimate expenses of
his business
Approval of Proposed Agreement
Once a majority vote is reached in the creditors
meeting, the court shall issue an
Order that the agreement be carried out and all parties
bound thereby with its terms
Order shall be binding upon all creditors.
whose claims are included in the
schedule of debts and liabilities submitted
by the individual debtor, and who were
properly summoned.
Rehabilitation
Rehabilitation refers to the restoration of the debtor
to a condition of successful operation and solvency, if
it is shown that:
a. Its continuance of operation is
economically feasible; and
b. Its creditors can recover more, by way of
the present value of payments projected in
the plan, if the debtor continues as a going
concern than if it is immediately liquidated.
[Sec. 4(gg)]
Rehabilitation proceedings are
In Rem: Jurisdiction over all persons
affected is considered as acquired upon
publication of the notice of proceedings.
Summary and Non-Adversarial [Sec. 3]
Types
Types of Rehabilitation Proceedings
a. Court-Supervised: A judicial proceeding;
may be voluntary or involuntary.
b. Pre-Negotiated: An insolvency proceeding
involving negotiation of terms between the
debtor and the creditor(s). It commences
as an extrajudicial proceeding but
terminates as a judicial proceeding.
c. Out-of-Court: An insolvency proceeding
involving a consensual contract between
the debtor and the creditor(s). Unlike prenegotiation
rehabilitation, no petitions are
filed with the court. [Somera]
(a) Court–Supervised
i.Voluntary [Sec. 12]
Refer to proceedings initiated by the debtor,
which may be:
1. Sole Proprietorship: When approved by
the owner;
2. Partnership: When approved by a majority
of the partners;
3. Stock Corporation: When approved by a
majority vote of the BOD or trustees, and
FINANCIAL REHABILITATION AND INSOLVENCY ACT NOTES by CMPoserio-Pascual Page 2 of 11
authorized by the stockholders
representing 2/3 of the outstanding capital
stock in a meeting called for the purpose;
4. Non-Stock Corporation: When approved
by 2/3 of the members in a meeting called
for the purpose.
A group of debtors may file a petition for
rehabilitation when:
1. One of more of its members foresee the
impossibility of meeting debts when they
respectively fall due; and
2. The financial distress would likely
adversely affect the financial condition
and/or operations of the other members of
the group, and/or the participation of the
other members of the group is essential Rehabilitation
Plan.
The debtor must file a verified petition for
rehabilitation with the court, to establish:
(a) The insolvency of the debtor; and
(b) The viability of the rehabilitation.
ii.Involuntary [Secs. 13 and 14]
Involuntary — Refers to proceedings initiated
by the creditor(s).
Value Requirement for Creditors
The claim(s), or aggregate thereof, must
amount to at least Php 1 million or at least 25%
of the subscribed capital stock or partners’
contributions, whichever is higher.
Circumstances for Involuntary
Rehabilitation
There is no genuine issue of fact or law on the
claims of the creditors; and –
a. That the due and demandable payments
have not been made for at least 60 days;
or
b. The debtor has failed generally to meet its
liabilities as they fall due (illiquidity); or
c. At least one creditor, other than the
petitoner(s), has initiated foreclosure
proceedings against the debtor that will
prevent the debtor from paying its debts as
they become due or will render it insolvent.
(b) Pre–Negotiated
Pre-Negotiated Rehabilitation – An
insolvency proceeding involving a prenegotiated
Rehabilitation Plan between the
debtor and the creditor(s). It commences as an
extrajudicial proceeding but terminates as a
judicial proceeding. [Somera]
Requirements for Petition
An insolvent debtor, either by itself or jointly
with any of its creditors, may file a verified
petition for approval of the Pre-Negotiated
Rehabilitation Plan that complies with the
following:
Approval of creditors holding at least
2/3 of the total liabilities of the debtor,
including –
Secured creditors holding more than
50% of the total secured claims; and
Unsecured creditors holding more than
50% of the total unsecured claims.
[Sec. 76]
Within five working days, and after
determination that the petition is sufficient in
form and substance, the court shall issue an
Order. [Sec. 77]
Objections to the Petition or Rehabilitation
Plan
Any creditor or other interested party may
submit a verified objection to the petition or the
Rehabilitation Plan. 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 is not
categorically declared as a contested claim; or
d. The support of the creditors, or any of them, was
induced by fraud. [Sec. 79]
Approval of the Plan
Within 10 days from the date of the second publication
of the Order, the court shall approve the Rehabilitation
Plan unless an objection is submitted.
The court has a maximum period of 120 days from the
date of the filing of the petition to approve the
Rehabilitation Plan. If the court fails to act within the
same period, the Plan
shall be deemed approved.
Effect of Approval
Approval of a Plan has the same legal effect as
confirmation of a Plan in Court- Supervised
Rehabilitation. It also results in a cram down, as it binds
not only the debtor but also all persons affected by it.
Out–of–Court
Out-of-Court Rehabilitation – An extrajudicial
insolvency proceeding of an Out-of-Court or
Informal Restructuring Agreement (OCRA), or
a restructuring of the claims negotiated
between the debtor and the creditor(s). No
FINANCIAL REHABILITATION AND INSOLVENCY ACT NOTES by CMPoserio-Pascual Page 3 of 11
petitions are filed with the court, though the
debtor and/or the creditor may seek court
assistance in implementation.
Pending negotiation and finalization of the
OCRA, there may be a standstill period that
allows the debtor not to pay liabilities as they
fall due and prevents creditors from enforcing
their claims. [Somera]
Requirements for OCRA
i. The debtor must agree to the out-of-court
or informal restructuring/workout
agreement or Rehabilitation Plan;
ii. It must be approved by creditors
representing at least 67% of the secured
obligations;
iii. It must be approved by creditors
representing at least 75% of the unsecured
obligations;
iv. It must be approved by creditors holding at
least 85% of the total liabilities, secured or
unsecured, of the debtor. [Sec. 84]
Standstill Period/Agreement
This refers to the period agreed upon by the
debtor and its creditors to enable them to
negotiate and enter into an out-of-court or
informal restructuring/workout agreement or
rehabilitation plan. It may include provisions
identical with or similar to the legal effects of a
commencement order. [Financial
Rehabilitation Rules, Rule 1, Sec. 5(q)]
The standstill period/agreement is effective
and enforceable not only against contracting
parties but also against other creditors,
provided that:
(a) Such agreement is approved by creditors
representing more than 50% of the total liabilities of the
debtor;
(b) Notice of the standstill agreement is published in a
newspaper of general circulation in the Philippines
once a week for two consecutive weeks;
(c) The standstill period does not exceed 120 days from
the date of effectivity. The notice must invite creditors
to participate in the negotiation for the OCRA and
inform them that the agreement would bind all
creditors if the minimum vote requirements were met.
[Sec. 85]
Effects of the OCRA
a. Results in a cram down, binding not only
the debtor but also all persons affected;
b. Any proceedings arising or relating to the
OCRA shall not stay its implementation,
unless the relevant party secures a TRO or
injunctive relief from the Court of Appeals.
Annulment of the OCRA/Standstill
Agreement
The debtor or creditor may file a petition to annul
based only on the following grounds:
a. Non-compliance with the requirements for a
standstill agreement or an OCRA under the FRIA or the
implementing rules; or
b. Vitiation of consent due to fraud, intimidation or
violence if committed against such number of creditors
required
to approve the OCRA or the standstill agreement. [FR
Rules, Rule 4, Sec. 11]
Commencement order
If the petition for rehabilitation is deficient in form and
substance, the court may give a reasonable period to
amend or supplement the petition. If such deficiency is
not complied with, the court may dismiss the petition.
If the petition for rehabilitation is sufficient in form and
substance, it shall issue a Commencement Order within
five (5) working days from the filing of the petition.
The rehabilitation proceedings shall commence upon
the issuance of the Commencement Order.
Contents of the Commencement Order
1. Identifies the debtor, its principal business and
principal place of business;
2. Summarize the grounds for initiating proceedings;
3. States the legal effects of the Order;
4. Declares the debtor is under rehabilitation;
5. Directs the publication of the Commencement
Order;
6. Directs service by personal delivery of a copy of the
petition to the creditor or to the debtor (not the
petitioner);
7. Appoints a rehabilitation receiver;
8. Summarizes the requirements and deadlines for
creditors to establish their claims against the debtor;
9. Directs the BIR to file and serve its comment or
opposition;
10. Prohibits the debtor’s suppliers from withholding
the supply of goods and services in the ordinary course
of business for as long as the debtor makes payments
for services/goods supplied after issuance of the Order;
11. Authorizes the payment of administrative
expenses;
12. Sets the case for initial hearing;
13. Makes available copies of the petition and
Rehabilitation Plan for examination and copying by any
interested party;
14. Indicates the location(s) at which documents may
be reviewed and copied;
FINANCIAL REHABILITATION AND INSOLVENCY ACT NOTES by CMPoserio-Pascual Page 4 of 11
15. States that any creditor or debtor, not the
petitioner, may submit the name or nominate any
other qualified person to the position of rehabilitation
receiver;
16. Includes a Stay or Suspension Order. [Sec. 16]
Effects of the Commencement Order
In addition to the effects of a Stay or
Suspension Order:
1. Vests the rehabilitation receiver with all the powers
and functions provided for this Act, subject to the
approval by the court of the performance bond filed by
the rehabilitation receiver;
2. Prohibits or otherwise serves as the legal basis
rendering null and void the results of any attempt to
collect or enforce a claim against the debtor after the
commencement date, unless otherwise allowed under
the FRIA;
3. Serves 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;
4. Serves as the legal basis for rendering null and void
the perfection of any lien against the debtor's
property, after the commencement date; and
5. Consolidates the resolution of all legal proceedings
by and against the debtor to the court; however, the
court may allow the continuation of cases on other
courts where the debtor had initiated the suit. [Sec. 17]
Effectivity and Duration of the
Commencement Order
Unless lifted by the court, the Commencement Order
shall be effective for the duration of the rehabilitation
proceedings for as long as there
is a substantial likelihood that the debtor will be
successfully rehabilitated. [Sec. 21]
Minimum Requirements for Substantial
Likelihood
a. The proposed Rehabilitation Plan complies
with the minimum contents prescribed by
the FRIA;
b. There is sufficient monitoring by the rehabilitation
receiver of the debtor's business for the protection of
creditors;
c. The debtor has met with its creditors to the extent
reasonably possible in attempts to reach consensus on
the proposed
Rehabilitation Plan;
d. The rehabilitation receiver submits a report, based
on preliminary evaluation, stating that the underlying
assumptions and the goals stated in the petitioner's
Rehabilitation Plan are realistic, feasible and
reasonable or if not, there is, in any case, a substantial
likelihood for the debtor to be successfully
rehabilitated because, among others:
(1) There are sufficient assets with/which to
rehabilitate the debtor;
(2) There is sufficient cash flow to maintain the
operations of the debtor;
(3) The debtor's, partners, stockholders, directors and
officers have been acting in good faith and which due
diligence;
(4) The petition is not a sham filing intended only to
delay the enforcement of the rights of the creditor’s or
of any group of creditors; and
(5) The debtor would likely be able to pursue a viable
Rehabilitation Plan;
e. The petition, the Rehabilitation Plan and the
attachments thereto do not contain any materially
false or misleading statement;
f. If the petitioner is the debtor, that the debtor has
met with its creditor/s representing at least three-
fourths (3/4) of its total obligations to the extent
reasonably possible and made a good faith effort to
reach a consensus on the proposed Rehabilitation
Plan; or if the petitioner/s is/are a creditor or group of
creditors, that/ the petitioner/s has/have met with the
debtor and made a good faith effort to reach a
consensus on the proposed Rehabilitation Plan; and
g. The debtor has not committed acts of
misrepresentation or in fraud of its
creditor/s or a group of creditors.
Stay or suspension order
Stay And Suspension Order – An order
included in the Commencement Order that has
the following effects:
1. Suspending all actions or proceedings, in
court or otherwise, for the enforcement of
claims against the debtor;
2. Suspending all actions to enforce any
judgment, attachment or provisional
remedies against the debtor;
3. Prohibiting the debtor from selling,
encumbering, transferring or disposing in
any manner any of its properties except in
the ordinary course of business; and
4. Prohibiting the debtor from making any
payment of its liabilities outstanding as of
the commencement date except as may be
provided herein [Sec. 16]
Exceptions to the Stay or Suspension Order
a. Cases already pending appeal in the
Supreme Court as of commencement
date Provided, That any final and
executory judgment arising from such
FINANCIAL REHABILITATION AND INSOLVENCY ACT NOTES by CMPoserio-Pascual Page 5 of 11
appeal shall be referred to the court for
appropriate action;
b. Subject to the discretion of the court, 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 nondisputed
claim;
c. 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. 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. Actions of a licensed broker or dealer to sell pledged
securities of a debtor pursuant to
a securities pledge or margin agreement
for the settlement of securities transactions
in accordance with the provisions of the
Securities Regulation Code and its
implementing rules and regulations;
f. Clearing and settlement of financial
transactions through the facilities of a
clearing agency or similar entities duly
authorized, registered and/or recognized
by the appropriate regulatory agency like the BSP and
the SEC as well as any form
of actions of such agencies or entities to
reimburse themselves for any transactions
settled for the debtor; and
g. Criminal action against individual debtor or
owner, partner, director or officer of a
debtor. [Sec. 18]
Rehabilitation receiver
REHABILATION RECEIVER – Any qualified
person, natural or juridical, may serve as a
receiver. [Sec. 28]
If the receiver is a juridical entity, he must
designate a natural person as a representative.
Such representative must possess all the
qualifications and none of the disqualifications.
Qualifications
a. Citizen or resident for at least six (6)
months immediately prior to nomination;
b. Of good moral character and with
acknowledged integrity, impartiality and
independence;
c. Has the requisite knowledge of insolvency
and other relevant commercial laws, rules
and procedures, as well as the relevant
training and/or experience that may be
necessary to enable him to properly
discharge the duties and obligations of a
receiver; and
d. Has no conflict of interest. [Sec. 29]
Conflicts of Interest
Test: An individual is deemed to have a conflict
of interest if he is so situated as to be materially
influenced in the exercise of his judgment for or
against any party to the proceedings. [Sec. 40]
An individual may have a conflict of interest if:
a. He is a creditor, owner, partner or
stockholder of the debtor;
b. He is engaged in a line of business which
competes with that of the debtor;
c. He is, or was, within five (5) years from the
filing of the petition, a director, officer,
owner, partner or employee of the debtor
or any of the creditors, or the auditor or
accountant of the debtor;
d. He is, or was, within two (2) years from the
filing of the petition, an underwriter of the
outstanding securities of the debtor;
e. He is related by consanguinity or affinity
within the fourth civil degree to any
individual creditor, owners of a sale
proprietorship-debtor, partners of a
partnership- debtor or to any stockholder,
director, officer, employee or underwriter of
a corporation-debtor; or
f. He has any other direct or indirect material
interest in the debtor or any of the creditors.
[Sec. 40]
Principal Duties
Preserving and maximizing the value of the
assets of the debtor during the
rehabilitation proceedings;
FINANCIAL REHABILITATION AND INSOLVENCY ACT NOTES by CMPoserio-Pascual Page 6 of 11
Determining the viability of the
rehabilitation of the debtor;
Preparing and recommending a
Rehabilitation Plan; and
Implementing the approved Rehabilitation
Plan [Sec. 31]
Management
Unless otherwise provided, the management of
the debtor remains with the existing
management, subject to laws and agreements,
if any, on election or appointment of directors,
managers, or managing partner. [Sec. 47]
The debtor retains control of its business and
properties, subject only to monitoring by the
receiver. This is referred to as the principle of
debtor–in–possession or debtor–in–place.
[Umale v ASB Realty, G.R. No. 181126 (2011)]
Exception: The following are subject to the
approval of the receiver or the court:
1. Disbursements affecting title or interest in
the property;
2. Payments affecting title or interest in
property;
3. Sale, disposal, assignment, transfer or
encumbrance of property; or
4. Any other act affecting title or interest in
property. [Sec. 47]
Report of the Receiver
Within 40 days from the initial hearing, the
receiver shall submit a report to the court on
whether:
1. The debtor is insolvent, and if so, the
causes thereof; and
2. There is any unlawful or irregular act(s)
committed by the management of the
debtor in contemplation of the insolvency
or which may have contributed to the
insolvency;
3. The assumptions, goals and procedures of
the Rehabilitation Plan are realistic,
feasible and reasonable;
4. There is a substantial likelihood of
successful rehabilitation;
5. The petition should be dismissed; and
6. The debtor should be dissolved and/or
liquidated.
Removal
The receiver may be removed at any time by
the court, either by (1) motu propio or (2)
motion by any creditor(s) holding more than
50% of the total obligations of the creditor, on
the following grounds:
1. Incompetence, gross negligence, failure to
perform or failure to exercise the proper
degree of care in the performance of his
duties and powers;
2. Lack of particular or specialized
competency required by the specific case;
3. Illegal acts or conduct in the performance
of his duties and powers;
4. Lack or qualification or presence of any
disqualification;
5. Conflict of interest that arises after his
appointment; and
6. Manifest lack of independence that is
detrimental to the general body of the
stakeholders. [Sec. 32]
The Implementing Rules add the following
grounds for removal:
1. Failure, without just cause, to perform any
of the powers and functions under the
Rules; or
2. Any of the grounds for removing a trustee
under the general principles for trusts [FR
Rules, Rule 2, Sec. 27]
Management committee
Management Commiittee – Upon motion of
any interested party, the court may appoint
either (1) the rehabilitation receiver or (2) a
management committee to assume the
management of the debtor. [Sec. 36]
Grounds
1. There must be clear and convincing
evidence of any of the following
circumstances:
2. Actual or imminent danger of dissipation,
loss, waste or destruction of the debtor’s
assets or other properties;
3. Paralyzation of the business operations of
the debtor; or
4. Gross mismanagement of the debtor, or
fraud or other wrongful conduct, or gross or
willful violation of the FRIA. [Sec. 36]
Composition of the Committee
Three qualified members appointed as follows:
1. The first member shall be appointed by the
debtor;
2. The second member shall be appointed by
the creditor(s) holding more than 50% of
the total obligations of the debtor; and
3. The third member shall be appointed by the
first and second members within 10 from
the appointment.
In case of failure to nominate, the court shall
FINANCIAL REHABILITATION AND INSOLVENCY ACT NOTES by CMPoserio-Pascual Page 7 of 11
appoint the member(s) concerned. In case the
decision to appoint a management committee
is due to the third ground (mismanagement,
etc.), the court shall appoint the first member.
Rehabilitation plan
Rehabilitation Plan
Refers to a plan by which the financial wellbeing
and viability of an insolvent debtor can
restored using various means including, but not
limited to:
1. Debt Forgiveness: Condoning and/or
waiving the claims;
2. Debt Rescheduling: Extending the time to
pay the claim;
3. Reorganization or Quasi-
Reorganization: Changing the equity,
corporate or operating structure of the
debtor;
4. Dacion en Pago: Assigning property and
assets as payment for certain claims;
5. Debt to Equity Conversion: The issuance
of equity and/or ownership interests as
payment for certain claims;
6. Sale of the Business (or parts of it) as a
going concern;
7. Setting up of new business entities; or
8. Other similar arrangements as may be
approved by the court or the creditors.
[Sec. 4(ii); Somera]
Important Requirements of A Rehabilitation
Plan
(a) Concept of Feasibility
Rehabilitation, otherwise referred to as the
restoration of the debtor to a condition of
successful operation and solvency, is resorted
to when it is shown that the continuance of its
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)]
Hence, the Rehabilitation Plan must contain
such relevant information to enable a
reasonable investor to make an informed
decision on the feasibility of the Plan. [FR
Rules, Rule 2, Sec. 61(BB)]
Note: Findings as to whether the assumptions,
goals and procedures of the Rehabilitation
Plan are realistic, feasible and reasonable are
also part of the Report of the Rehabilitation
Receiver. [Sec. 24]
(b) It must comply with the required
contents under FRIA and FR
Rules. Aside from the above, this
includes, among others:
i. Material Financial Commitments
The Rehabilitation Plan, shall “include
material financial undertakings or
commitments to support [it].” [FR Rules,
Rule 2, Sec.61 (Y)]
A material financial commitment becomes
significant in gauging the resolve,
determination, earnestness and good faith
of the distressed corporation in financing
the proposed rehabilitation plan.
This commitment may include the
voluntary undertakings of the
stockholders or the would-be investors of
the debtor-corporation indicating their
readiness, willingness and ability to
contribute funds or property to guarantee
the continued successful operation of
the debtor corporation during the
period of rehabilitation. [Philippine Bank
of Communications v. Basic Polyprinters
and Packaging Corporation, G.R. No.
187581 (2014
Liquidation Analysis
As one of the required contents of a
Rehabilitation Plan, a liquidation analysis
sets out for each creditor or each class of
creditor, as applicable, the amounts they
expect to receive under the Rehabilitation
Plan and those that they will receive if
liquidation ensues within one hundred
twenty (120) days after the filing of the
petition. [FR Rules, Rule 2, Sec. 61 (B)]
The total liquidation assets and the
estimated liquidation return to the creditors,
as well as the fair market value vis-a-vis the
forced liquidation value of the fixed assets
were not shown. As such, the Court could
not ascertain if the petitioning debtor's
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.
[Philippine Asset Growth Two, Inc. v.
Fastech Synergy Phils. Inc., G.R. 206528
(2016)]
Note:
Effect: The failure of the Rehabilitation Plan
to state any material financial commitment
to support rehabilitation, as well as to
FINANCIAL REHABILITATION AND INSOLVENCY ACT NOTES by CMPoserio-Pascual Page 8 of 11
include a liquidation analysis, renders the
CA's considerations for approving the
same as actually unsubstantiated, and
hence, insufficient to decree the feasibility
of respondents' rehabilitation. It is well to
emphasize that the remedy of rehabilitation
should be denied to corporations that do
not qualify under the Rules. Neither should
it be allowed to corporations whose sole
purpose is to delay the enforcement of any
of the rights of the creditors. [Ibid]
Approval of the Rehabilitation Plan
The receiver shall notify the stakeholders that
the Plan is ready for examination. Within 20
days from notification, the receiver shall
convene the creditors to vote on the Plan.
The Plan must be approved by all classes of
creditors whose rights are adversely modified
or affected. Otherwise, it is deemed rejected.
The Plan is approved by a class of creditors if
members of the said class holding more than
50% of the total claims of the class vote in favor
of the Plan. [Sec. 64]
If the Plan is approved, the receiver shall
submit the same to the court for confirmation.
Objections to Rehabilitation Plan
The creditor may file an objection to the Plan
with 20 days from receipt of notice that it has
been submitted for confirmation.
Objections are limited to the following:
1. The creditors’ support was induced by
fraud;
2. The documents or data relied upon in the
Plan are materially false or misleading;
3. The Plan is in fact not supported by the
voting creditors. [Sec. 66]
If upon hearing, the court finds merit in the
objections, it should order the curing of the
defect.
If the court determines the debtor acted in bad
faith, or that it is not possible to cure the defect,
the court shall convert the proceedings into one
for liquidation.
Confirmation of the Rehabilitation Plan
The court has a maximum period of one year
from the date of filing to confirm a
Rehabilitation Plan.
If no Rehabilitation Plan is confirmed, the
proceedings may be converted into one for
liquidation. [Sec. 72]
Confirmation has the following effects:
1. The Plan and its provisions shall be binding
upon the debtor and all persons who may
be affected by it;
2. The debtor shall comply with the provisions
of the Plan and shall take all actions
necessary to carry out the Plan;
3. Payments shall be made to the creditors in
accordance with the provisions of the Plan;
4. Contracts and other arrangements
between the debtor and its creditors shall
be interpreted as continuing to apply to the
extent that they do not conflict with the
provisions of the Rehabilitation Plan;
5. Any compromises on amounts or rescheduling of
timing of payments by the debtor shall be binding on
creditors regardless of whether the Plan is
successfully implemented; and
6. Claims arising after approval of the Plan that are
otherwise not treated by the Plan are not subject to
any Suspension Order.
[Sec. 69]
Cram down effect
Cram Down Effect – Notwithstanding the rejection of
the creditors of the Rehabilitation Plan, the court may
nonetheless confirm the Rehabilitation Plan in what is
known as a cram down.
The effect of the cram down is to bind the debtor and
all persons who may be affected, whether or not they
participated in the proceedings or opposed the plan.
A cram down is permitted only if all of the following
circumstances are present:
1. The Rehabilitation Plan complies with the
requirements specified in the FRIA;
2. The receiver recommends confirmation of
the Rehabilitation Plan;
3. The shareholders, owners or partners of the debtor
lost at least their controlling interest as a result of the debtor is insolvent and there is no
Rehabilitation Plan; and
4. The Rehabilitation Plan would likely provide the
objecting class or creditors with compensation which
has a net present value greater than that which they
would have received if the debtor were under
liquidation. [Sec. 64]
Liquidation
Liquidation is a judicial insolvency proceeding by
which the debtor’s assets are reduced and converted
to cash in order to discharge the claims against the
debtor. [Somera]
Types
Types of Liquidation
Liquidation may be:
1. Voluntary: Instituted by the debtor; or
2. Involuntary: Instituted by a creditor or a
FINANCIAL REHABILITATION AND INSOLVENCY ACT NOTES by CMPoserio-Pascual Page 9 of 11
group of creditors; or
3. Conversion: When the court-supervised
or pre-negotiated rehabilitation proceeding
is converted by the court into liquidation
proceedings
Conversion of
rehabilitation to
The Liquidation Order shall:
1. Declare the debtor insolvent;
2. Order the liquidation of the debtor and, in
the case of a juridical debtor, declare it as
dissolved;
3. Order the sheriff to take possession and
control of all the property of the debtor,
except those that may be exempt from
execution;
4. Order the publication of the petition or
motion in a newspaper of general
circulation once a week for two (2)
consecutive weeks;
5. Direct payments of any claims and
conveyance of any property due the debtor
to the liquidator;
6. Prohibit payments by the debtor and the
transfer of any property by the debtor;
7. Direct all creditors to file their claims with
the liquidator within the period set by the
rules of procedure;
8. Authorize the payment of administrative
liquidation proceedings
Under the FRIA, court-supervised or prenegotiated
rehabilitation proceedings may be
converted in the following instances:
1. Within 10 days from receipt of the
receiver’s report, a court finding that the
substantial likelihood of substantial
rehabilitation; [Sec. 25(c)]
2. If no Rehabilitation Plan is confirmed within
1 year from filing the petition to confirm the
Plan; [Sec. 72]
3. If termination is due to failure or
rehabilitation or dismissal of the petition for
reasons other than technical grounds [Sec.
75]; or
4. Motion filed by the insolvent debtor for
conversion into liquidation proceedings.
[Sec. 90]
Liquidation order
Liquidation Order – Such order results in the
dissolution of a juridical debtor, however, the
expenses as they become due;
9. State that the debtor and creditors who are
not petitioner/s may submit the names of
other nominees to the position of liquidator;
and
10. 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. [Sec. 112]
Effects of the Liquidation Order:
1. The juridical debtor shall be deemed
dissolved and its corporate or juridical
existence terminated;
2. 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;
3. 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
4. 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
5. No foreclosure proceeding shall be allowed
for a period of one hundred eighty (180)
days.
Rights of secured creditors
Creditor refers to natural or juridical persons
which have claims against the debtor that
arose on or before the commencement date.
[Sec. 4]
General Unsecured Creditor refers to a
creditor whose claim or a portion thereof is
neither secured, preferred nor subordinated
under the FRIA.
Secured Creditor refers to a claim secured by
a lien, which is a statutory or contractual claim
or juridical charge on real or personal property
that legally entitles a creditor to resort to said
property for payment of the debt or claim
FINANCIAL REHABILITATION AND INSOLVENCY ACT NOTES by CMPoserio-Pascual Page 10 of 11
secured.
General Rule: Upon issuance of the
Liquidation Order, no foreclosure proceeding
shall be allowed for 180 days. [Sec. 113]
Exception: However, the Liquidation Order
shall not affect the right of a secured
creditor to enforce his lien.
During the proceedings, a secured creditor
may:
a. Waive his right under the security or lien,
prove his claim in the liquidation
proceedings and share in the distribution of
the assets of the debtor; or
b. Maintain his rights under the security or
lien.
If the secured creditor maintains his rights
under the security or lien:
a. The value of the property may be fixed in a
manner agreed upon by the creditor and the
liquidator.
If the value of the property is less than the claim, the
liquidator may convey the property to the secured
creditor and the latter will be admitted in the
liquidation proceedings as a creditor for the balance.
If its value exceeds the claim secured, the liquidator
may convey the property to the creditor and waive
the debtor's right of redemption upon receiving the
excess from the creditor.
b. The liquidator may sell the property and satisfy the
secured creditor's entire claim from the proceeds of
the sale; or
c. The secure creditor may enforce the lien or
foreclose on the property pursuant to applicable laws.
[Sec. 114]
Cf. Rights of Unsecured Creditors
General Rule: No separate action for the collection of
an unsecured claim shall be allowed. Actions already
pending will be transferred to the liquidator.
Exception: When the action is already on appeal, the
suit may proceed to judgment, and any final and
executory judgment shall be filed and allowed. [Sec.
113]
Liquidator
Liquidator – Any qualified person, natural or juridical,
may serve as a receiver. If the receiver is a juridical
entity, he must designate a natural person as a
representative. Such representative must possess all
the qualifications and none of the disqualifications.
Qualifications
The liquidator shall have the same qualifications as
that of rehabilitator, thus:
1. Citizen or resident for at least six (6)
months immediately prior to nomination;
2. Of good moral character and with acknowledged
integrity, impartiality and independence;
3. Has the requisite knowledge of insolvency and
other relevant commercial laws, rules and procedures,
as well as the relevant training and/or experience that
may be necessary to enable him to properly discharge
the duties and obligations of a receiver; and
4. Has no conflict of interest, which may be waived by
a party who may be prejudiced. [Sec. 29]
Powers, Duties and Responsibilities
The principal duty of the liquidator is to
preserve and maximize the value and recover
the assets of the debtor, with the end of
liquidating them and discharging all the claims
against the debtor.
The powers, duties and responsibilities
include:
1. To sue and recover all the assets, debts and claims,
belonging or due to the debtor;
2. To take possession of all the property of the debtor
except property exempt by law from execution;
3. To sell, with the approval of the court, any property
of the debtor which has come into his possession or
control;
4. To redeem all mortgages and pledges, and so
satisfy any judgement which may be an encumbrance
on any property sold by him;
5. To settle all accounts between the debtor and his
creditors, subject to the approval of the court;
6. To recover any property or its value, fraudulently
conveyed by the debtor;
7. To recommend to the court the creation of a
creditors' committee which will assist him in the
discharge of the functions and which shall have
powers as the court deems just, reasonable and
necessary; and
8. Upon approval of the court, to engage such
professional as may be necessary and reasonable to
assist him in the discharge of his duties.
Determination of claims
Determination of Claims
The rules on the determination of claims are as
follows:
1. Within 20 days from assuming office, the
liquidator shall prepare a preliminary
registry of claims.
2. Secured creditors who have waived their
security or have fixed the value of the
property subject of the security shall be
considered unsecured.
FINANCIAL REHABILITATION AND INSOLVENCY ACT NOTES by CMPoserio-Pascual Page 11 of 11
3. The registry shall be available for public
inspection and publication notice shall be
provided to stakeholders. [Sec. 123]
4. The debtor and the creditor have the right
to set off their debts against each other;
only the balance, if any, shall be allowed in
the proceedings. [Sec. 124]
5. Within 30 days from expiration of the period for
filing of applications for recognition of claims,
interested parties may challenge claims to the court.
6. Upon the expiration of the 30-day period, the
liquidator shall submit the registry of claims
containing the claims not subject to challenge. Such
claims shall become final upon filing of the register.
7. Claims that have become final may be set aside only
on grounds of fraud, accident, mistake or inexcusable
neglect. [Sec. 125]
8. The liquidator shall submit disputed claims to court
for final approval. [Sec. 126]
Treatment of Contracts
General Rule: All contracts are deemed terminated
and/or breached.
Exception: When the liquidator, within 90 days from
assumption of office, declares otherwise and the
contracting party agrees. [Sec. 113]
Liquidation Plan
Liquidation Plan – Within three months from
assuming office, the liquidator shall submit a
Liquidation Plan enumerating the assets,
claims and a schedule of liquidation and
payment. [Sec. 129]
Properties exempted by law shall be set apart
from liquidation for the use and benefit of the
insolvent. [Sec. 130]
The Plan and its implementation shall observe
the concurrence and preference of credits
under the Civil Code. [Sec. 133]
Sale of Assets in Liquidation
The liquidator may sell the unencumbered assets of
the debtor and convert the same into money.
General Rule: The sale shall be made at public auction.
Exception: A private sale may be allowed with
the approval of the court if:
1. The goods are of perishable nature;
2. The goods are likely to quickly deteriorate in value;
3. The goods are disproportionately expensive to keep
or maintain; or
4. The private sale is for the best interest of
the debtor and creditors