University of Saint Louis Tuguegarao

School of Accountancy, Business and Hospitality

Accountancy Department
Study Guide

Course Code: LAWS 1043 Topic: RA 10142 – FRIA 2010, Part 2

Course Name: RFLIB II Weeks: 14

RA 10143 – Financial Rehabilitation and Insolvency Act of 2010.

Formal Name (Section 1): AN ACT PROVIDING FOR THE REHABILITATION OR LIQUIDATION OF FINANCIALLY DISTRESSED
ENTERPRISES AND INDIVIDUALS

(discussion on rehabilitation, cont’d)

Who are involved in managing the debtor during the rehabilitation?

During the rehabilitation proceeding, the management shall be done by the:

1. Existing Board and/or management; or
2. Upon motion, the court may appoint:
a. Rehabilitation Receiver; or
b. Management Committee

The appointment of a REHABILITATION RECEIVER or a MANAGEMENT COMMITTEE is necessitated by the following

grounds:
1. Actual or imminent danger of dissipation, loss, wastage or destruction of the debtor's assets or properties;
2. Paralyzation of the business operations of the debtor; or
3. (a) Gross mismanagement of the debtor, or (b) fraud or (c) other wrongful conduct on the part of, or gross or
willful violation of the FRIA by existing management of the debtor, owner, partner, director, officer of
representatives in the management of the debtor.

Duties of a rehabilitation receiver includes:

1. Preserving the value of the assets of the debtor during the rehabilitation proceedings,
2. Determining the viability of the rehabilitation of the debtor,
3. Preparing and recommending a Rehabilitation Plan to the court, and
4. Implementing the approved Rehabilitation Plan.

Qualifications of a rehabilitation receiver(s):

1. Citizen of the Philippines
2. Resident of the Philippines in the 6 months immediately preceding the nomination
3. Has the requisite knowledge of insolvency and commercial laws, and
4. No conflict of interest

The MANAGEMENT COMMITTEE, on the other hand, when appointed by the court, shall take the place of the
management and the governing body of the debtor and assume their rights and responsibilities.

CREDITORS' COMMITTEE: creditors belonging to a class may formally organize a committee, or as a body create a
committee composed of each class of creditors, such as:
1. Secured creditors
2. Unsecured creditors
3. Trade creditors and suppliers; and
4. Employees of the debtor.

The ROLE of the creditors' committee is to assist the rehabilitation receiver in communicating with the creditors and shall
be the primary liaison between the rehabilitation receiver and the creditors.

They cannot exercise or waive any right or give any consent on behalf of any creditor unless specifically authorized in
writing by such creditor.
The Rehabilitation Plan

The rehabilitation plan is a plan by which the financial well-being and viability of an insolvent debtor can be restored using
various means including, but not limited to:
1. Debt forgiveness;
2. Debt rescheduling;
3. Reorganization or quasi-reorganization;
4. Dacion en pago;
5. Debt-equity conversion; and
6. Sale of the business (or parts of it) as a going concern; or
7. Setting up of new business entity; or
8. Other similar arrangements,

Note: Such a plan and its procedures require CREDITOR or COURT APPROVAL, as follows:
1. For CREDITOR APPROVAL - Creditors representing more than 50% of total claims
2. For COURT APPROVAL, when all of these are present:
a. The Rehabilitation Plan complies with the requirements of the FRIA;
b. The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;
c. The shareholders, owners or partners of the juridical debtor lose at least their controlling interest as a result
of the Rehabilitation Plan; and
d. The Rehabilitation Plan would likely provide the objecting class of creditors with compensation which has a
net present value greater than that which they would have received if the debtor were under liquidation.

Submission of the Rehabilitation Plan: If the Rehabilitation Plan is approved, the rehabilitation receiver shall submit the
same to the court for confirmation. Within 5 days from receipt of the Rehabilitation Plan, the court shall notify the creditors
that the Rehabilitation Plan has been submitted for confirmation, that any creditor may obtain copies of the Rehabilitation
Plan and that any creditor may file an objection thereto.

Objection of creditors: may be filed within 20 days from receipt of notice from the court that the Rehabilitation Plan has
been submitted for confirmation, on the following grounds:
1. The creditors' support was induced by fraud;
2. Documents or data relied upon in the plan are materially false or misleading; or
3. The plan is in fact not supported by the voting creditors.

Confirmation of the Rehabilitation Plan: the court shall issue an order confirming the Rehabilitation Plan if:
1. No objections are filed within the relevant period or,
2. If objections are filed, the court finds them lacking in merit, or
3. The court determines that the basis for the objection has been cured, or
4. The court determines that the debtor has complied with an order to cure the objection.

The court may confirm the Rehabilitation Plan notwithstanding unresolved disputes over claims if the Rehabilitation Plan
has made adequate provisions for paying such claims.

For the avoidance of doubt, the provisions of other laws to the contrary notwithstanding, the court shall have the power
to approve or implement the Rehabilitation Plan despite the lack of approval, or objection from the owners, partners or
stockholders of the insolvent debtor: Provided, That the terms thereof are necessary to restore the financial well-being
and viability of the insolvent debtor.

Period of Confirmation: must be within 1 year from the date of filing the petition.

If no plan is confirmed within the said period, the proceedings may upon motion, or motu proprio, be converted into one
for the liquidation of the debtor.

Cram Down Effect: the rehabilitation plan approved by the court shall be binding upon the:
1. Debtor and
2. All persons who may be affected by it, including creditors, whether or not such persons:
a. have participated in the proceedings,
b. opposed the plan, or
c. whether or not the claims have been scheduled.
Pre-Negotiated Rehabilitation

REQUIREMENTS:
1. The debtor must agree to the out-of-court or informal restructuring/workout agreement or rehabilitation plan;
2. Approved by creditors:
a. Representing at least 2/3 of the secured obligations;
b. Representing at least 3/4 of the unsecured obligations; and
c. Holding at least 85% of the total liabilities, both secured and unsecured

Standstill Period: A standstill period that may be agreed upon by the parties pending negotiation and finalization of the
out-of-court or informal restructuring/workout agreement or Rehabilitation Plan and it shall be effective and enforceable
not only against the contracting parties but also against the other creditors, if:
1. Such agreement is approved by creditors representing more than fifty percent (50% of the total liabilities of the
debtor;
2. Notice thereof is publishing in a newspaper of general circulation in the Philippines once a week for two (2)
consecutive weeks; and
3. The standstill period does not exceed one hundred twenty (120) days from the date of effectivity.

The notice must invite creditors to participate in the negotiation for out-of-court rehabilitation or restructuring agreement
and notify them that said agreement will be binding on all creditors if the required majority votes are met.

Cram Down Effect: A restructuring/workout agreement or Rehabilitation Plan that is approved pursuant to an informal
workout framework shall have the same legal effect as confirmation of a Plan as earlier discussed.

Publication requirement: The notice of the Rehabilitation Plan or restructuring agreement or Plan shall be published once
a week for at least three (3) consecutive weeks in a newspaper of general circulation in the Philippines.

Effectivity: The Rehabilitation Plan or restructuring agreement shall take effect upon the lapse of fifteen (15) days from the
date of the last publication of the notice thereof.

III. THIRD REMEDY: LIQUIDATION

Liquidation is the proceeding where:

1. Claims are filed; and
2. The assets of the insolvent debtor are disposed; and the
3. Proceeds are divided among the creditors.

LIQUIDATOR: is one appointed by the court who will facilitate the liquidation proceedings. He may likewise be appointed
by the creditors who have filed their claims within the period set by court.

Liquidation proceedings may be:

1. Voluntary – initiated and filed by the insolvent debtor, without a need for trial, and without a need for proving the
existence of acts of insolvency. In this case, the number of creditors is immaterial, and the creditors are not
required to post a bond. Qualifying amount: MORE THAN 500,000
2. Involuntary – initiated by the creditors of the insolvent debtor, upon proving acts of insolvency, and after
confirmation through a trial in court. Involuntary proceedings may be applied for EVEN WHEN the debtor is
ABSENT. In this case, a minimum of three (3) creditors MUST initiate, and the total amount of their claim should
be at least 1 Million (1M) or 25% of the debtor’s capitalization, whichever is HIGHER. Creditors are REQUIRED to
post a bond. Qualifying amount: AT LEAST 500,000

The acts of insolvency includes the following:

1. That such person is about to depart or has departed from the Republic of the Philippines, with intent to defraud
his creditors;
2. That being absent from the Republic of the Philippines, with intent to defraud his creditors, he remains absent;
3. 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;
4. That he conceals, or is removing, any of his property to avoid its being attached or taken on legal process;
5. 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;
 6. 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;
7. 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;
8. 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;
9. 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;
10. That he has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his
estate, property, rights or credits;
11. That being a merchant or tradesman, he has generally defaulted in the payment of his current obligations for a
period of thirty (30) days;
12. 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
13. 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

CONVERSION BY THE COURT INTO LIQUIDATION PROCEEDINGS: During the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the court may order the conversion of rehabilitation proceedings to liquidation
proceedings, in the following cases:
1. When a petition for rehabilitation is filed and it is established that the debtor is indeed insolvent but there is no
substantial likelihood for the debtor to be successfully rehabilitated.
2. If no rehabilitation plan is confirmed within a period of 1 year from the filing of the petition for rehabilitation.
3. Failure of rehabilitation or dismissal of the petition for rehabilitation on technical grounds; or
4. Upon filing of the verified motion of the debtor during the pendency of the court-supervised or pre-negotiated
rehabilitation proceedings.