FINANCIAL REHABILITATION AND
INSOLVENCY ACT
FRIA’s Declared Policies
• Expresses the policy of the State to
encourage debtors, both juridical and
natural persons, and their creditors to
collectively and realistically resolve and
adjust competing claims and property
rights.
• The State ensures a timely, fair and
transparent, effective, and efficient
rehabilitation or liquidation of debtors.
• Main Factors: (a) ensure or maintain
certainty and predictability in
commercial affairs; (b) preserve and
maximize the value of the assets of these
debtors; (c) recognize creditor rights; (d)
respect priority claims; and (e) ensure
equitable treatment of creditors who are
similarly situated
• When rehabilitation is not feasible, it is
in the interest of the State to facilitate a
speedy and orderly liquidation of the
debtor’s assets and the settlement of
their obligations.
KEY DEFINITIONS – DEBTOR
refers to:
(a) sole proprietorship duly registered with the
DTI;
(b) partnership duly registered by the SEC
(c) corporation duly organized and existing
under Philippine Laws
(d) individual debtor who has become insolvent
INDIVIDUAL DEBTOR
 Refers to a natural person who is a
resident and citizen of the Philippines
that shall become insolvent.
GROUP OF DEBTORS
 Refer to and can cover ONLY:
(1) Corporations that are financially related to
one another as parent corporations, subsidiaries
and affiliates;
(2) Partnerships that are owned more than fifty
percent (50%) by the s ame person; and
(3) Single proprietorships that are owned by the
same person
KEY DEFINITIONS – INSOLVENT
• INSOLVENT – refers to 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
• his liabilities are greater than his assets.
LIABILITIES
• Refer to monetary claims against a
debtor, including stockholder’s
advances that have been recorded in the
debtor’s audited financial statements as
advances for future subscriptions
ORDINARY COURSE OF BUSINESS
• Refer to transactions in the pursuit of the
individual debtor’s or debtor’s business
operations prior to rehabilitation OR
insolvency proceedings and on ordinary
business terms.
KEY DEFINITION – CREDITOR
-Refer to a natural or juridical person which has
a claim against the debtor that rose on or before
the commencement date.
COMMENCEMENT DATE
-Refers to the date on which the court issues the
Commencement Order, which shall be
retroactive to the date of the filing of the petition
for voluntary or involuntary proceedings.
COMMENCEMENT ORDER
• Among others, appoints the
rehabilitation receiver, and includes a
stay order which shall suspend all
actions or proceedings for the
enforcement of claims against the
debtor, as well as actions to enforce any
judgment or attachment or provisional
remedy against the debtor; prohibits
disposition or encumbrance of property
except in the ordinary course of business
and prohibit debtor from making any
payment except when authorized by the
rules. The rationale of the stay order is
to enable the rehabilitation receiver to
focus on the rehabilitation of the debtor
unhampered by court suits.
KEY DEFINITIONS – SECURED
CREDITOR-refers to a creditor with a secured
claim
1) Secured Claim – claim that is secured by
a lien.
 2) Lien – refers to a statutory or contractual
claim or judicial charge on real or
personal property that legally entitles a
creditor to resort to said property for
payment of the claim or debt secured by
such lien.
KEY DEFINITIONS –
GENERAL UNSECURED CREDITOR
 Refer to a creditor whose claim or a
portion thereof is neither secured,
preferred nor subordinated under the
FRIA.
EXCLUDED DEBTORS
1. Banks
2. Pre-Need Companies
3. Insurance Companies
4. National and Local Government Agencies or
Units
REHABILITATION
- Refers to the restoration of the debtor to
a condition of successful operation and
solvency, if it is shown that its
continuance of operation is
economically feasible, and its creditor
can recover by way of the present value
of payments projected in the plan.
Rehabilitation of SOLE PROPRIETORSHIP,
PARTNERSHIP and CORPORATION –
thru a petition
A. Voluntary Rehabilitation – must
establish the insolvency of the debtor
and the viability of its rehabilitation
B. Involuntary Rehabilitation – a creditor
or group of creditors may initiate
voluntary proceedings against the debtor
with the court if:
(a) no genuine issue of fact or law on the
claim/s of the petitioner/s and that the due
and demandable payments have not been
made for at least 60 days OR that the
debtor has failed generally to meet its
liabilities as they fall due; OR
(b) A creditor, other than the petitioner/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
REHABILITATION PLAN
- Refers to 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 debt
forgiveness, debt rescheduling,
reorganization or quasi-reorganization,
dacion en pago, debt-equity conversion
and sale of the business, or setting up of
a new business entity or other similar
arrangements as may be approved by the
court or creditors.
CRAM DOWN RULE
• The Rehabilitation Plan confirmed by
the court shall be binding upon the
debtor and all persons who may be
affected by it, including creditors,
whether or not such persons have
participated in the proceedings, opposed
the Plan or whether or not their claims
have been scheduled.
STAY ORDER
- Suspends all actions and proceedings,
including the enforcement of claims
against the debtor;
- Suspends the enforcement of any
judgement and other remedies against
the debtor;
- Prohibit the selling, encumbering,
transferring or disposing any of its
properties;
- Prohibit the debtor from making any
payment of its liabilities outstanding
“as of the commencement date”
SUSPENDED CLAIMS – includes, but not
limited to:
1. All claims of the government (national
or local)
2. Claims against directors and officers of
the debtor arising from acts done in the
discharge of their functions falling
within the scope of their authority
WHO WILL MANAGE:
General Rule: The existing BOARD and/or
MANAGEMENT of the debtor shall continue.
Exception: Management can be replaced. Upon
Motion, the court may appoint either
“Rehabilitation Receiver” or a “Management
Committee” to undertake the management of the
debtor in the following cases:
Can’t:
1. Actual or imminent danger of
dissipation, loss, ow wastage of debtor’s
assets or properties
2. Paralyzation of the business operations
of the debtor
3. Gross mismanagement by the debtor, or
fraud or other wrongful conduct or
violation of the FRIA Law and Court
Orders
COURT ACTION ON PETITION FOR
REHABILITATION
• The Court may either: DISTINCTIONS:
Suspension of Payment v. Rehabilitation
1. Give due course to the petition
2. Dismiss the petition
3. Convert the proceedings to liquidation
proceedings
SUSPENSION OF PAYMENTS
• Only an individual debtor may file a
petition for suspension of payment.
1) The debtor has sufficient properties to
cover all his debts but foresees the
impossibility of meeting his debts when
they respectively fall due
2) The purpose is to suspend or delay the
payment of debts
3) The amount of indebtedness is not
affected (not reduced or discharged)
4) The number of creditors is immaterial
DISTINCTIONS:
Suspension of Payment v. Liquidation

SUSPENSION ORDER
• Upon motion filed by the individual
debtor, the Court may issue an order
suspending any pending execution
against the individual debtor.
a) Properties held as security be secured
creditors shall not be the subject of the
suspension order
b) The suspension order shall lapse when 3
months shall have passed WITHOUT
the proposed agreement being accepted
by the creditors or as soon as such
agreement is denied
 c) Creditors cannot sue or institute
proceedings to collect his claim from
from the debtor from the time of the
filing of the petition for suspension of
payments and as long as the proceedings
remain pending.
EXCEPTIONS:
1) Creditors having claim for personal labor,
maintenance, expense of last illness and funeral
of the wife or children of the debtor incurred in
the 6o days immediately prior to the filing of the
petition
Involuntary Liquidation of Individual
2) Secured Creditors Debtors vs. Involuntary Liquidation Business
Organizations

Instances when rehabilitation proceedings

may be converted into liquidation
proceedings:
1. The debtor is insolvent
2. No substantial likelihood for the debtor
to be successfully rehabilitated;
3. It no rehabilitation plain is confirmed
within 1 year from the date of the filing
of the petition for rehabilitation
4. If the termination of the rehabilitation
proceedings was due to failure of the
rehabilitation or dismissal of the petition
for reasons other than technical grounds
5. If the court determines that the debtor or
creditor supporting the Rehabilitation
Plan acted in bad faith, or that the
objection is not curable
6. AT any time pending the court-
supervised or pre-negotiated
rehabilitation proceedings, the debtor
may file a motion in the same court
where the rehabilitation proceedings are
pending to covert the proceedings into LIQUIDATION PROCESS
one for liquidation
• This is the proceeding where claims are
7. Upon recommendation by the filed and the assets of the insolvent
rehabilitation receiver debtor are disposed and the proceeds are
divided among the creditors.
Liquidation of INDIVIDUAL DEBTORS may
be (1) Voluntary OR; (2) Involuntary • The rules apply to individual debtors,
sole proprietorship, partnership,
corporation.
• Applies as well to both original
liquidation proceedings and proceedings
that are originally rehabilitation
proceedings but converted into
liquidation proceedings.
LIQUIDATION ORDER contains:
1. Declaring that the debtor is insolvent
2. Ordering the liquidation of the debtor
3. In case of juridical person, declaring it
as dissolved
4. Prohibiting payments and/or transfer of
property by the debtor; and
5. Directing all claims to be filed with the
liquidator
RIGHTS OF SECURED CREDITORS:
• The Liquidation Order shall not affect
the right of a secured creditor to enforce
his lien in accordance with the
applicable contract or law. The 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
b. Maintain his right under the security or
lien
DISTRIBUTION OF ASSETS
• The assets of the insolvent debtor shall
be divided among the creditors in
accordance with the Liquidation Plan
submitted by the Liquidator and
approved by the Court.
• The rules on Concurrence and
Preference of Credit under the New
Civil Code shall be observed in the
Liquidation Plan.
CONCURRENCE AND PREFERENCE OF
CREDIT
• CONCURRENCE OF CREDITS
Implies the possession by two or more
creditors of equal rights or privileges
over the same property or all the
property of a debtor
• PREFERENCE OF CREDIT
Right held by a creditor to be preferred in
the payment of his claim above others out of
the debtor’s assets
NATURE AND EFFECT OF PREFERENCE
1. A preference is an exception to the gene
ral rule. For this reason, the law as to
preferences is strictly construed.
2. Preference doesn’t create an interest
in property. It creates simply a right of one
creditor to be paid first the proceeds of the sale
of property as against another creditor.
3. The law doesn’t give the creditor who has a
preference a right to take the property or sell it
as against another creditor. It is not a question
who takes or sells, it is one of the application of
the proceeds after the sale—of payment of the
debt
4. The right of preference is one which can be
made only by being asserted and maintained.
If the right claimed is not asserted or
maintained, it is lost.
5. Where a creditor released his levy, leaving
the property in possession of the debtor,
thereby indicating that he didn’t
intend to press his claim further as to that specifi
c property, after that act, his claim to preference,
if one had been asserted y him, could not exist
because he had ceased to contest.
WHEN RULE OF PREFERENCE
APPLICABLE
• Apply only where two or more creditors
have separate and
distinct claims against the same debtor
who has an insufficient property
• Is applicable when the debtor is
insolvent—having more liabilities than
his assets
• It is a matter of necessity and log that
the question of preference should arise
only when the debtor’s assets are
insufficient to pay his debts in full
GENERAL PROVISIONS
Art. 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)
GENERAL CATEGORIES OF CREDIT
1. Special preferred credits listed in Articles
2241 and 2242
2. Ordinary preferred credits listed in Article
2244
3. Common credits under Article 2245

NATURE OF CLAIMS OR CREDITS IN
ARTICLES 2241 AND 2242
• Articles 2241 and 2242 apply only when
there is a concurrence of credits when
the same specific property of
the debtor is subjected to the claims of s
everal creditors and the value of such
property is insufficient to pay in full all
the creditors
• In such situation, the question of prefere
nce will arise,
there will be a need to determine which
of the creditors will be paid ahead of the
others
PREFERRED CREDITS WITH RESPECT TO
SPECIFIC MOVABLE PROPERTY
• Articles 2241 and 2242 don’t give the
order of preference or priority of
payment
• They merely enumerate the credits
which enjoy preference with respect to
specific movables or immovable
• With respect to the same specific
movable or immovable, creditors with
the exception of the State, merely
concur
• REMEMBER
that preference is only given to #1 and t
he rest shall be treated equally
Art. 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 travelers 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.
Art. 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 done, upon the immovable
donated;
(10) Credits of insurers, upon the property
insured, for the insurance premium for two
years. (1923a)