FINANCIAL

REHABILITATION AND
INSOLVENCY ACT (FRIA) OF
2010

MIA-M
 NATURE; PURPOSE OF
FRIA
 To encourage debtors and their creditors to collectively
and realistically resolve and adjust competing claims
and property rights
 Equality in Equity – once the corporation threatened
by bankruptcy is taken over by a receiver, all the
creditors ought to stand in equal footing. Not anyone of
them should be paid ahead of the others.
--- reason for suspending all pending claims against the
corporation under receivership.

 If rehabilitation is not feasible, there should be a speedy

and orderly liquidation of debtor’s assets and settlement
of obligations
 EXCLUDED DEBTORS
Because they are governed by separate rules
 BANKS
 PRE-NEED COMPANIES
 INSURANCE COMPANIES
 THREE TYPES OF
PROCEEDINGS
 SUSPENSION OF PAYMENTS
 REHABILITATION
 Court Supervised
Voluntary
Involuntary
 Pre-Negotiated
 Out-of Court
 LIQUIDATION
 Voluntary
 involuntary
 SUSPENSION OF
PAYMENTS
 WHO? Individual debtor (juridical persons not allowed; creditors
not allowed)
 WHY? Technical insolvency or illiquidity (sufficient assets to
cover liabilities but foresees difficulty in paying them as they fall
due
 WHERE? RTC of the province / city in which he resides for six (6)
months prior to the filing of petition
 HOW? (1) File a verified petition.
 (2) Creditors Meeting – Approval by 2/3 (#) and 3/5 (P)
 If no approval by creditors? Cram Down rule? NO. Proceedings
terminated. Creditors can enforce their claims at will.
 BAR QUESTION
Hortencio owned a modest grocery business in Laguna. Because
of the economic downturn, he incurred huge financial liabilities.
He remained afloat only because of the properties inherited from
his parents who had both come from landed families in Laguna.
His main creditor was Puresilver Company (Puresilver), the
principal supplier of the merchandise sold in his store. To secure
his credit with Puresilver, he executed a real estate mortgage
with a dragnet clause involving his family's assets worth several
millions of pesos.

Nonetheless, Hortencio, while generally in the black, now faces a

situation where he is unable to pay his liabilities as they fall due
in the ordinary course of business. What will you advise him to do
to resolve his dire financial condition? Explain your answer. (5%)
(2017 BAR EXAM)
 REHABILITATION
 WHAT? 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 that creditors can recover more if
the corporation survives than if liquidated.
 WHY? Insolvency – assets are less than liabilities
 HOW?
 Court-Supervised (Voluntary / Involuntary)
 Pre- Negotiated
 Out of Court
 REHABILITATION; COURT
SUPERVISED
 WHERE? RTC (Special Commercial Court) with
jurisdiction over principal office of the debtor
 WHO?
IF VOLUNTARY -
 SOLE PROPRIETORSHIP – Owner / Proprietor
(Sole Proprietor is one registered with the DTI;
individual debtor is not allowed)
 PARTNERSHIP – Majority of the partners
 CORPORATION – Majority of the directors / trustees
+ 2/3 OCS
 BAR QUESTIONS
Wyatt, an internet entrepreneur, engaged in a sideline
business of creating computer programs for selected
clients on a per project basis and for servicing basic
computer problems of his friends and family members. His
main job was being an IT consultant at Futurex Co., a local
computer company.

Because of his ill-advised investments in the stock market

and the fraud perpetrated against him by his trusted
confidante, Wyatt was already drowning in debt, that is, he
had far more liabilities than his entire assets.

What legal recourse remained available to Wyatt? Explain

your answer. (5%) (2017 BAR EXAM)
 BAR QUESTIONS
Under the Financial Rehabilitation and Insolvency Act (FRIA), the filing of a
petition for voluntary rehabilitation must be approved by:

(A) a majority vote of the Board of Directors and authorized by the vote of
the stockholders representing at least a majority of the outstanding
capital stock

(B) a majority vote of the Board of Directors and authorized by the vote of
the stockholders representing at least two-thirds of the outstanding
capital stock

(C) two-thirds vote of the Board of Directors and authorized by the vote of
the stockholders representing at least a majority of the outstanding
capital stock

(D) two-thirds vote of the Board of Directors and authorized by the vote of
the stockholders representing at least two-thirds of the outstanding
capital stock (1%) (2014 BAR EXAM)
 REHABILITATION; COURT
SUPERVISED
 WHO?
IF INVOLUNTARY -
 CREDITORS with an aggregate claim of at least
P 1Million or at least 25% SCS or partner’s
contributions, whichever is higher
 REHABILITATION; COURT-
SUPERVISED
HOW?

1. File a verified petition (attach a Rehabilitation

Plan, among others)

2. If the court finds the petition sufficient, the

Court will issue a Commencement Order,
which already includes a Stay Order, plus
appointment of a Rehabilitation Receiver,
retroactive to the filing of the petition.
 REHABILITATION; COURT-
SUPERVISED
 COMMENCEMENT ORDER / STAY ORDER
 Suspends all actions or proceedings in court or
otherwise for the enforcement of claims against
the debtor
 Suspends all actions to enforce any judgment,
attachment or other provisional remedies
 Prohibits the debtor from selling, disposing assets
except in the ordinary course of business
 Prohibits the debtor from paying liabilities as of the
commencement date except as provided in the
Order
 REHABILITATION; COURT
SUPERVISED
 WHAT CLAIMS ARE SUSPENDED?
 All claims of whatever nature or character against the
debtor or its property, whether
for money or otherwise,
liquidated or unliquidated
Fixed or contingent
Matured or unmatured,
Secured or unsecured
Disputed or undisputed,
INCLUDING: (1) all claims of the govt, including taxes, etc.
(2) claims against directors and officers arising from acts
done in the discharge of their functions within the scope of
authority
 REHABILITATION; COURT
SUPERVISED
 WHAT CLAIMS ARE NOT STAYED / SUSPENDED
BY THE STAY ORDER?
 Cases pending appeal in the Supreme Court as of
commencement date (when final and executory,
referred to rehabilitation court)
 Pending before specialized court which can resolve
claims more quickly (i.e., small claims court)
 Solidary debtors, accommodation mortgagors, issuers
of letters of credit
 Certain securities transactions
 Criminal actions against owner, partner, director,
officer of debtor
 BAR QUESTIONS
Procopio, a Director and the CEO of Parisian Hotel Co., Inc. (Parisian),
was charged along with other company officials with several counts
of estafa in connection with the non-remittance of SSS premiums the
company had collected from its employees. During the pendency of
the cases, Parisian filed a petition for rehabilitation. The court, finding
the petition to be sufficient in form and substance, issued a
commencement order together with a stay or suspension order.

Citing the commencement order, Procopio and the other officers facing
the criminal charges moved to suspend the proceedings in
the estafa cases.

(a) What is a commencement order, and what is the effect of its

issuance? Explain your answer. (4%)

(b) Suppose you are the trial judge, will you grant the motion to
suspend of Procopio, et al.? Explain your answer. (4%) (2017 BAR)
 BAR QUESTIONS
DMP Corporation (DMP) obtained a loan of P20 million from National Bank (NB)
secured by a real estate mortgage over a 63,380-square-meter land situated in
Cabanatuan City. Due to the Asian Economic Crisis, DMP experienced liquidity
problems disenabling it from paying its loan on time. For that reason, NB sought
the extra judicial foreclosure of the said mortgage by filing a petition for sale on
June 30, 2003. On September 4, 2003, the mortgaged property was sold at
public auction, which was eventually awarded to NBas the highest bidder. That
same day, the Sheriff executed a Certificate of Sale in favor of NB.

On October 21, 2003, DMP filed a Petition for Rehabilitation before the Regional
Trial Court (RTC). Pursuant to this, a Stay Order was issued by the RTC on
October 27, 2003.

On the other hand, NB caused the recording of the Sheriff’s Certificate of Sale
on December 3, 2003 with the Register of Deeds of Cabanatuan City. NB
executed an Affidavit of Consolidation of Ownership and had the same
annotated on the title of DMP. Consequently, the Register of Deeds cancelled
DMP’s title and issued a new title in the name of NB on December 10, 2003.
 BAR QUESTIONS
NB also filed on March 17, 2004 an Ex-Parte
Petition for Issuance of Writ of Possession before
the RTC of Cabanatuan City. After hearing, the RTC
issued on September 6, 2004 an Order directing
the Issuance of the Writ of Possession, which was
issued on October 4, 2004.

DMP claims that all subsequent actions pertaining

to the Cabanatuan property should have been held
in abeyance after the Stay Order was issued by the
rehabilitation court. Is DMP correct? (4%) (2014
BAR EXAM)
 BAR QUESTIONS
Yellow Fin Tuna Corporation (Yellow Fin), a domestic corporation, applied for a
credit facility in the amount of PhP 50 million with Yengzi Financial Corporation
(YFC). The application was approved and the Credit Agreement was signed and
took effect. Ysko and Yuan, Yellow Fin Chairman and President, respectively,
executed a Continuing Suretyship Agreement in favor of YFC wherein they
guaranteed the due and full payment and performance of Yellow Fin's
guarantee obligations under the credit facility. YFC soon discovered material
inconsistencies in the financial statements given by Yellow Fin, drawing YFC to
conclude that Yellow Fin committed misrepresentation. Under the Credit
Agreement, any misrepresentation by Yellow Fin or its sureties will constitute an
event of default. YFC thus called an event of default and filed a complaint for
sum of money against Yellow Fin, Ysko, and Yuan. Immediately thereafter,
Yellow Fin filed a petition for rehabilitation. The court suspended the
proceedings in YFC's complaint until the rehabilitation court disposed of the
petition for rehabilitation. YFC posits that the suspension of the proceedings
should only be with respect to Yellow Fin but not with respect to Ysko and Yuan.

Is YFC correct? (2.5%) (2018 BAR)

 BIR v. Lepanto Ceramics,
G.R. No. 224764, 24 April 2017
(Bernabe ponencia)
ABC Corporation filed a petition for corporate rehabilitation
pursuant to RA 10142, alleging that, due to its financial
difficulties, it had entered into a state of insolvency, with its
liabilities exceeding its assets. ABC admitted its liabilities to
the Bureau of Internal Revenue (BIR) for taxes. At that point,
the BIR has not yet commenced assessment and collection
proceedings against ABC Corporation. The Rehabilitation
Court issued a Commencement Order which suspended all
actions or proceedings for the enforcement of claims against
ABC Corporation, and directed its creditors, including the BIR
to submit a comment or opposition to the petition.

Comment on whether or not the collection of taxes may be

stayed by the Commencement Order.
 REHABILITATION; COURT-
SUPERVISED
3. Creditor’s Meeting
4. Approval of Rehabilitation Plan
 Decision Liability: 50% of the total claims
 If decision liability is not reached, resort to Cram
Down Rule
 What happens if Rehabilitation Plan is not
approved within one year?

5. Discharge from Rehabilitation OR Conversion to

Liquidation
REHABILITATION: OTHERS
 PRE-NEGOTIATED
 WHO? Debtor AND at least 2/3 total creditors (with
more than 50% secured [P], 50% unsecured[P])

 OUT-OF COURT
 WHO? Debtor AND at least 85% total liabilities
( comprising of at least 67% secured, 75%
unsecured)
 STANDSTILL PERIOD – Not exceeding 120 days
 CRAM DOWN RULE
 LIQUIDATION
 VOLUNTARY
Individual debtor with at least 500K debt who does
not have sufficient assets to cover liabilities
Insolvent debtor

 INVOLUNTARY
 Individual debtor – 1 or more creditors with total
claim of at least 500K
 Sole Proprietor, partnership, corporation –
3 or more creditors, aggregate claim of at least 1M,
or at least 25% SCS, whichever is higher
 LIQUIDATION
 Claims are filed with the Liquidator;
 the assets of the insolvent debtor are disposed,
 The proceeds are divided among the creditors.
 LIQUIDATION ORDER
 Declares the debtor insolvent
 Declares juridical person as dissolved
 Orders liquidation of the debtor
 Prohibit payments and/or transfers of property
to the debtor
 Direct all claims to be filed with the liquidator