FINANCIAL REHABILITATION

AND
INSOLVENCY ACT OF 2010
 Financial Rehabilitation and Insolvency Act
(FRIA):
 Governs all petitions filed after it has taken effect.
 Governs all further proceedings in insolvency, suspension of
payments and rehabilitation cases pending at the time it became
effective ( except if the application of FRIA would not be feasible or
would work injustice)
Policy of the State

 Encourage debtors, both natural and juridical persons, and their

creditors to collectively and realistically resolve and adjust
competing claims and property rights.

Specifically:
1. Ensure a timely, fair, transparent, effective, and efficient
rehabilitation or liquidation of debtors;
2. Ensure or maintain certainty and predictability in commercial
affairs;
Policy of the State

3. Preserve and maximize the value of the assets of debtors;

4. Recognize creditor rights;
5. Respect priority of claims;
6. Ensure equitable treatment of creditors who are similarly situated;
and
7. Facilitate a speedy and orderly liquidation of these debtors' assets
and the settlement of their obligations.
Insolvency

 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 has liabilities that are greater
than its or his assets.
Balance Sheet Test

 Denotes the state of a person whose liabilities are more than

his assets.
 It is that relative condition of a man’s assets and liabilities
that the former if all made immediately available, would not
be sufficient to discharge the latter.

*In this sense, insolvency is similar to bankruptcy.

Equity Test

 The inability of a person to pay his debts as they become

due in the ordinary course of his business.
 The person may be insolvent although he may be able to
pay his debts at some future time on a settlement and
winding up of his affairs.

*In this sense, the debtor is said to be illiquid not bankrupt.

Fair Evaluation

 Means what a willing owner, not compelled to sell, would

take, and a willing purchaser would pay, when not compelled
to buy.

*In determining whether the debtor’s liabilities are greater than his assets,
reference must be made to the fair valuation of his assets. The debtor’s
assets must not, at fair valuation, be sufficient to pay his debts.
 Insolvency Law vs. Bankruptcy Law
 Insolvency laws operated on the petition of an insolvent debtor to
discharge him from his debts.
 Bankruptcy laws operated on petition of a debtor’s creditors for
the purpose of applying his property to the payment of his debts.

*both bankruptcy and insolvency statures may be initiated by either creditor

or debtor and may be used for either purpose.
Debtors covered by FRIA

1. Sole proprietorship duly registered with the Department of

Trade and Industry (DTI)
2. Partnership duly registered with the Securities and Exchange
Commission (SEC)
3. Corporation duly organized and existing under Philippine laws
4. Individual debtor who has become insolvent as defined in the
law (FRIA).
Debtors not covered by FRIA

1. Banks
2. Insurance company
3. Pre-need companies
4. National and Local government agencies or units
5. Unincorporated company
6. Joint venture (not registered as partnership with the SEC)
7. Estate of deceased person
8. Trust
 Claim
 Refers to all claims or demands 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, disputed or undisputed,
including but not limited to:
• All claims of the government (whether national or local)
including taxes, tariffs and custom duties
• Claims against directors and officers of the debtor
arising from the acts done in the discharge of their
functions falling within the scope of their authority
 The claim must be against the debtor or its property. Rehabilitation Court has no
jurisdiction over claims of a debtor against his own debtors or against third parties.
Remedies of Insolvent Debtor:

1. Judicial (e.g., rehabilitation and suspension of payment

under FRIA)

2. Extrajudicial (e.g., dacion en pago)

Remedies under FRIA:
 Rehabilitation
- voluntary
- involuntary
- Pre-negotiated
• Out-of-Court restructuring
• Liquidation
- Voluntary
- Involuntary
• Petition for suspension of payments (for individual
debtors)
Nature of Proceedings under FRIA

 The proceedings under FRIA are proceedings in rem. In rem

actions are against the thing itself and they are binding upon the
whole world.
 The court need not acquire jurisdiction over the person of the
defendant in actions in rem because they are not directed
against any person. The court need only to acquire jurisdiction
over the res.
Acquisition of Jurisdiction (FRIA)

 Rehabilitation Proceedings
The court acquires jurisdiction over all persons
affected by the proceedings upon publication of the
notice of the commencement of the proceedings and the
Commencement Order in any newspaper of
general circulation in the Philippines for two (2)
consecutive weeks.
Acquisition of Jurisdiction (FRIA)

 Voluntary Liquidation Proceedings

Both juridical and individual debtors, jurisdiction over
all persons affected by the proceedings is acquired upon
publication of the Liquidation Order as provided in
the Financial Liquidation and Suspension of Payment
Rules of Procedures for Insolvent Debtors (FLSP Rules).
Acquisition of Jurisdiction (FRIA)

 Involuntary Liquidation Proceedings

For juridical debtors, jurisdiction over all persons
affected by the proceedings is acquired upon
publication of the petition or motion under Section &,
Rule 2(B) of the FLSP Rules.

• for individual debtors, jurisdiction over the person of the debtor is

acquired upon service of summons in accordance with Section 15, Rule 3
(C).
Acquisition of Jurisdiction (FRIA)

 Suspension of Payment Proceedings

Jurisdiction over all persons affected by the
proceedings is acquired upon the publication of
Suspension of Payments Order.

* Any order issued by the court is under the procedural rules is

immediately executory.
Advantages of Judicial Remedies ( FRIA)

1. Retention of Management
2. Non-withholding of Supply
3. Protection from certain actions and processes
4. Exemption from taxes
5. Compromise binding
6. Cram- down Power
7. Binding effect of Rehabilitation Plan
 Suspension of Payment

 A petition for suspension of payment is a remedy available to an

individual debtor who seeks to suspend the payments outside of the
necessary or legitimate expenses of his business while the proceedings
are pending.

*An individual debtor is a natural person who is a resident and a citizen of the
Philippines who has become insolvent.
 Suspension of Payment

Who Can File: Only individual debtors can file a petition for
suspension of payment.

Who Cannot File:

 Creditors cannot file a petition for suspension of payment against the
debtor
 Corporations and other juridical persons
 Non- Philippine citizen
Venue
 The petition is filed in the court having jurisdiction over the province or
city where the debtor has resided for six (6) months before the filing of the
petition.

BASIC PROCEDURE:

 Filing of Petition- the debtor files his verified petition for suspension of
payment and must attach the following:

 Schedule of debts and liabilities

 Inventory of assets
 Proposed agreement with the creditors
 Venue
*The petition must indicate the names of at least three (3) nominees
to the position of commissioner.

GENERAL RULE:
From the time of filing the petition and for as long as proceedings
remain pending, no creditor can sue or institute proceedings to collect
his claim.
Venue

EXCEPTION:

 Creditors having claims for personal labor, maintenance,

expense of last illness, etc., incurred within 60 days
immediately before filing.
 Secured creditors
Venue

BASIC PROCEDURE:

 Action on Petition
If the court finds the petition sufficient in form and substance,
it will, within five (5) working days from the filing the petition,
issue the Suspension Order.
 Venue

BASIC PROCEDURE:

Notification through Publication and Notices

 The Order is published in a newspaper of general circulation in the

province or city in which the petition is filed once a week or two (2)
consecutive weeks.
 The first publication should be made within seven (7) days from the
time of the issuance of the Order.
 Venue
BASIC PROCEDURE:

 Creditor's Meeting and Voting by Creditors

 The creditors will meet on the time, date and place designated by the court in the
Order.

*The presence of creditors holding claims at least 3/5 of the liabilities is necessary in holding
the meeting.

 The creditors and the individual debtor will discuss the propositions in the proposed
agreement and put them to a vote.
BASIC PROCEDURE:

Creditor's Meeting and Voting by Creditors

To form a majority, it is necessary that ;

• (i) 2/3 of the creditors voting unite upon the same proposition
• (ii) claims represented by the majority vote amount at least 3/5 of
the total liabilities of the debtor mentioned in the petition

* A creditor who incurred his credit within 90 days prior to the

filing of the petition is not entitled to vote.
 Venue
BASIC PROCEDURE:

 Objections to Proposal

 If any creditor has dissented from and protested against the vote of
the majority ( proposal and amendments approved by majority of the
creditors during the creditor’s meeting), may file an objection with
the court within 10 days from the date of the last creditor’s meeting.
Objections to Proposal

GROUNDS:
• Defects in the call for the meeting, in the holding thereof and in
the deliberations has which prejudiced the rights of the
creditors;
• Fraudulent connivance between one or more creditors and the
individual debtor to vote in favor of the proposed agreement;
• Fraudulent conveyance of claims for the purpose of obtaining a
majority.
 Venue
BASIC PROCEDURE:
 Hearing and Issuance of Order
 The court must hear and pass upon such objection within 30 days from the date
of filing and in a summary manner.

IF APPROVED PROPOSED AGREEMENT IS ANNULLED BY THE COURT: The

court will declare the proceedings terminated and the creditors will be at
liberality to exercise their rights which may correspond to them .
IF APPROVED PROPOSED AGREEMENT IS UPHELD OR NO OPPOSITION:
The court will order that the agreement be carried out and all parties bound
thereby to comply with its terms.
Commissioner- Will preside the creditor’s meeting in connection with the proceedings.

QUALIFICATIONS:

1. Must be a natural person

2. Citizen of the Philippines or a resident in the Philippines for six (6) months
immediately preceding his appointment
3. Of good moral character and with acknowledged integrity, impartiality and
independence
4. Has the requisite knowledge of insolvency laws, rules and procedures
5. Has no conflict of interest
 Prohibited Transactions

The following are prohibited upon the issuance of the Order and while the
so long as the proceedings relative to the suspension of payments are
pending:

1. Sale transfer, encumbrance or disposition by the individual debtor of

his property

a. EXCEPT: Those used in the ordinary operations of commerce or

industry in which the petitioning individual debtor is engaged.
 Prohibited Transactions

2. Individual debtor is prohibited from making any payments

outside of the necessary or legitimate expenses of his business or
industry .
 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 creditors can recover by the way of the present value of payments projected
in the Rehabilitation Plan.

TYPES:
 Court- supervised : Voluntary
 Court- supervised : Involuntary
 Pre-negotiated
 Out-of-court of Informal
 REHABILITATION

PURPOSE:
1. To efficiently and equitably distribute the assets of the insolvent
debtor to its creditors
2. To provide the debtor with a fresh start

*If rehabilitation is not feasible, the appropriate proceeding would be

a liquidation proceeding instead of a rehabilitation proceeding .
 Economically Feasible Rehabilitation Plan
Characteristics:

1. Debtor has assets that can generate more cash if used in its daily
operations than if sold
2. Liquidity issues can be addressed by a practicable business plan that
will generate enough cash to sustain daily operations
3. Debtor has a definite source of financing for the proper and full
implementation of the Rehabilitation Plan that is anchored on
realistic assumptions and goals.
 Infeasible Rehabilitation Plan:

1. Absence of a sound workable business plan

2. Baseless and unexplained assumptions, targets and goals
3. Speculative capital infusion or complete lack thereof for the
execution of the business plan
4. Cash flow cannot sustain daily operations
5. Negative net worth and the assets are near full depreciation or fully
depreciated.
 Court- supervised Rehabilitation

 Voluntary- if an insolvent debtor initiates the rehabilitation

proceedings

To file the petition, there must be approval form:

(i) Owner incase of single proprietorship

(ii) Majority of the partners in case of partnership
(iii) Majority of vote of the board and vote of stockholders
representing at least 2/3 of capital stock in case of corporations
Court- supervised Rehabilitation

 Involuntary- if a creditor or group of creditors (with

aggregate claims of at least P1 million or at least 25% of
subscribed capital or partners’ contribution) initiates the
rehabilitation proceedings.
 Venue for Petition

 Sole Proprietorship
- The petition must be filed in the RTC which has jurisdiction over the
principal office of the debtor

 Corporation, Partnership or Association (principal office in Metro Manila)

- The petition must be filed in the RTC of the city or municipality where
the hear office is located

*If the petition involves a group of debtors, the same must be filed in the RTC which has
jurisdiction over the principal office of any of the debtors alleged to be insolvent.
 Requirements and Contents

 By the debtor/s:
1. Petition must be verified
2. Must set forth with sufficient particularity all of the following
materials facts:
a. Name, business, and principal address and other addresses of the
debtor;
b. Nature of the business and principal activities of the debtor, and the
addresses where these activities are conducted;
Requirements and Contents

 By the debtor/s:
c. History of the debtor
d. Fact and cause of debtor’s insolvency
e. Specific relief sought
f. Grounds upon which the petition is based
g. All pending actions or proceedings by or against the debtor
and the courts or tribunal where such are pending;
Requirements and Contents

 By the debtor/s:
h. Threats or demands to enforce claims or liens against the
debtor
i. Manner by which the debtor may be rehabilitated
j. Exact address at which documents regarding the debtor and
the proceedings may be reviewed and copied.
 Requirements and Contents

 By the Creditor/s:
a. Name, business, and principal address and other addresses of the
debtor;
b. Nature of the business and principal activities of the debtor;
c. Circumstances sufficient to support the petition to initiate
involuntary rehabilitation proceedings;
d. Specific relief sought;
e. Rehabilitation Plan;
Requirements and Contents

 By the Creditor/s:
f. Names of at least three (3) nominees to the position of
rehabilitation receiver (with qualifications, office and email
addresses);
g. Exact address at which documents regarding the debtor and the
proceedings may be reviewed and copied
h. Documents showing that there is substantial likelihood that the
debtor may be rehabilitated
 Basic Procedures:

Filing of Petition

 Insolvent Debtor: By filing a petition with the court on the grounds

provided in the FRIA. The petition must be verified to establish the
insolvency of the debtor and the viability of its rehabilitation.

 Creditor/s : By filing a petition for rehabilitation with the court on the

grounds provided in the FRIA. The petition must be verified to establish
the substantial likelihood that the debtor may be rehabilitated.
Basic Procedures:
Action for Petition

 If the court finds the petition for rehabilitation sufficient in form and in
substance, it will, within five (5) working days from filing the petition,
issue a Commencement Order.

 If the court finds the petition deficient in substance and in form, it may,
in its discretion, give the petitioner/s a reasonable period of time within
which to:

• amend or supplement the petition

Basic Procedures:

Action for Petition

• Submit such documents a many as necessary
• Put the petition in proper order

*In this case, the five (5) working days shall be reckoned from the date
of the filing of the amended or supplemental petition or the submission
of such documents.

* If the deficiency is not complied within the extended five-day period,

the court will DISMISS the petition.
WHEN COMMENCEMENT ORDER is issued: The order will set the
case for initial hearing, which will not be more than 40 days from the
date of filing of the petition.

 Publication of Commencement Order and Delivery of

Notices

 The order is published in a newspaper of general circulation in the

province or city in which the petition is filed once a week for two (2)
consecutive weeks.
  Publication of Commencement Order and Delivery of
Notices
 The first publication should be made within seven (7) days from the
time of the issuance of the Order.

HOW NOTICES DELIVERED:

• If petitioner is the debtor: There will be service by personal delivery of
a copy of the petition on each creditor holding at least 10% of the total
liabilities of the debtor within five (5) days.
• If the petitioner is the creditor: Direct the service by personal delivery
of a copy of the petition on the debtor within five (5) days.
 Establishment of Registry of Claims

• Within 20 days from rehabilitation receiver’s assumption of office,

he must establish a preliminary registry of claims.

• Rehabilitation receiver must make registry available for public

inspection and provide publication notice by publishing the place
and date of inspection in a newspaper of general circulation once
every week for two (2) consecutive weeks.

*The period of inspection cannot exceed 15 days from the last publication.
 Filing of Creditor’s Claim

• The creditors must file their claim at least five (5) days before
the initial hearing .

*If a creditor fails to file their claim in accordance with the Commencement
Order and such is not listed in the schedule of debts and liabilities will not
be entitled to participate in the rehabilitation proceedings. However, if he
files a belated claims, he will be entitled to receive distributions arising
from the proceedings although he is not entitled to participate.
  Challenge of Claims

• Within 30 days from the expiration of the period to inspect the

registry of claims, the debtors, creditors and stakeholders may
submit their challenge to claim/s to the court.
• Upon the expiration of the 30-day period, the rehabilitation
receiver must submit to the court the registry of claims.

*The aggrieved party may seek the review of the decision of the rehabilitation
receiver by filing a motion with the rehabilitation court within five (5) days
from receipt of rehabilitation receiver’s decision.
 Initial Hearing and Subsequent Hearings

• At the initial hearing, the court will:

 Determine the creditors who have made timely and proper

filing of their notice of claims;
 Hear and determine any objection to the qualifications or the
appointment of the rehabilitation receiver (and if necessary,
appoint one);
 Direct the creditors to comment on the petition and
Rehabilitation Plan;
 Initial Hearing and Subsequent Hearings

• Direct the rehabilitation receiver to evaluate the financial

condition of the debtor and to prepare and submit to the court
within 40 days from the initial hearing a report (provided in Sec.
24 of the FRIA).
• Determine the reasonableness of the rehabilitation receiver’s
fees stated in the Rehabilitation Plan ( which will be presumed
reasonable unless the creditors object on it)

*The court may hold additional hearing as may be necessary to continue the initial hearing
process but these hearing must be concluded no later than 90 days from the first hearing
date fixed in the Commencement Order.
*The court may hold additional hearing as may be necessary to continue the initial
hearing process but these hearing must be concluded no later than 90 days from
the first hearing date fixed in the Commencement Order.

Creditor’s Comment on the Petition and Rehabilitation

Plan

 The creditors will submit their comments to the court and

rehabilitation receiver within 20 days from the initial hearing.
 Submission of Report of Rehabilitation Receiver

 The rehabilitation receiver will submit its report to the court

within 40 days from the initial hearing stating his preliminary
findings and recommendation, whether:

• The debtor is insolvent;

• The underlying assumptions, financial goals and procedures
to accomplish in the Rehabilitation Plan are realistic, feasible
and reasonable;
Submission of Report of Rehabilitation Receiver

• There is substantial likelihood for the debtor to be successfully

rehabilitated;
• The petition should be dismissed;
• The debtor should be dissolved or liquidated
 Grant or Dismissal of Petition or Conversion of
Proceedings
 Within 10 days from receipt of the report of the rehabilitation
receiver, the court may:

• Give due course to the petition

• Dismiss the petition
• Convert the proceedings into one for the liquidation of the
debtor
 Consultation with Debtors and Creditors

 If the court gives due course to the petition, the rehabilitation

receiver must confer with the debtor and all of the creditors, and
may consider their views and proposals in the review, revision
or preparation of a new Rehabilitation Plan.
 Formation of Creditor’s Committee

 If the petition is given due course, the court will issue an order
directing the rehabilitation receiver to call a meeting with the
debtor and all classes of creditors.

*The meeting will take place in not less than 2 weeks nor more
thank 4 weeks from the date of the order to consider the
organization of a creditor’s committee.
 Formation of Creditor’s Committee

 A creditor’s committee may be organized if the creditors,

representing at least a majority of all the claims as reflected in
the registry of claims, cast their votes for its creation.

CREDITORS’ COMMITTEE: Will be composed of a representative

from each of the following classes:
• Secured Creditors
• Unsecured Creditors
• Trade Creditors and Suppliers
• Employees of the debtor
  Creditors’ Meeting to Approve Rehabilitation
Plan

 After the rehabilitation receiver reviews and revises the Rehabilitation

Plan, he will notify the creditors and stakeholders that the plan is ready
for their examination.
 Within 20 days from the notification, he will convene the creditors for
the purposes of voting on the approval of the plan.
 The rehabilitation receiver will notify the court, the creditors or the
creditors committee and the stakeholders of the approval or the
rejection of the Plan within five (5) days from such voting .
 Submission of Rehabilitation Plan to the
Court
 Within five (5) days from the receipt of the Plan submitted by
the rehabilitation receiver, the court will notify the creditors that
the Rehabilitation Plan has been submitted for confirmation.
 Creditors may either obtain a copy of the plan or file an
objection thereto.
  Filing of Objections

 The creditors may file their objection within 20 days form receipt
of notice from the court.
Objections to the Rehabilitation Plan are limited to the following
grounds:
• Creditors’ support was induced by fraud
• Documents or data relied upon in the Rehabilitation Plan are
materially false and misleading
• Rehabilitation Plan is in fact not supported by the voting
creditors
 Hearing on Objections

 The court will issue an order setting the time and date for the
hearing/s on the objections.
 If it finds merit in the objection, it will order the rehabilitation
receiver or other party to cure the defect, whenever feasible.
 If its finds that the debtor acted in bad faith or that it is not
feasible to cure the defect, it will convert the proceedings into
one for the liquidation of the debtor.
 Court Action

 If no objections were filed within the period of 20 days, or if

objections lack in merit, the court will issue an order confirming
the Rehabilitation Plan.

*The court has a maximum period of one (1) year from the date
of filing of the petition to confirm a Rehabilitation Plan.
 Amendments to the Approved Rehabilitation
Plan
 After the confirmation of the Rehabilitation Plan, the debtor,
rehabilitation receiver or any creditor may file a verified motion for
leave to amend the Plan.

*The motion must state the reasons warranting the amendment of the Plan
and the proposed amendments, with a copy given to the rehabilitation
receiver.

IF MOTION IS GRANTED: The court will set the proposed

amendments for hearing not later than 15 days from the date of the
order
IF MOTION IS GRANTED: The court will set the proposed amendments for hearing
not later than 15 days from the date of the order

Termination of Proceedings

 The rehabilitation proceedings are, upon motion by any stockholder or

the rehabilitation receiver, terminated by order of the court either
declaring a successful implementation of the Plan or a failure of
rehabilitation.
THERE IS FAILURE OF REHABILITATION
IN THE FOLLOWING CASES:
 Court dismisses the petition
 Debtor fails to submit a Rehabilitation Plan
 No substantial likelihood that the debtor can be rehabilitated
within a reasonable period
 Commission of fraud in securing approval of the Plan or its
amendments
 Court does not confirm the Plan
 Failure of the debtor to comply with the FLSP Rules, Rules of
the Court, or any order of the Court.
Commencement Order Contents:
• Declare that the debtor is under rehabilitation
• Appoint rehabilitation receiver who may or may not be from
among the nominees of the petitioners
• Prohibit the debtor’s suppliers of goods or services from
withholding the supply of goods and services in the ordinary
course of business (as long as debtor pays after the issuance of
the Commencement Order)
 Commencement Order Contents:
• Authorize the payment of administrative expenses as they become
due
• Set the case for initial hearing
EFFECTS:
• Vest the rehabilitation receiver with all the powers and functions provided
for in the FRIA
• Prohibit or otherwise serve as the legal basis for rendering null and void
the results of any extrajudicial activity or process to seize property or
attempt to collect on or enforce a claim against the debtor after the
commencement date
EFFECTS:
• Serve as the legal basis for rendering null and void any set-off
after the commencement date of any debt owed to the debtor
by any of the creditors
• Serve as the legal basis for rendering null and void the
perfection of nay lien against the debtor’s property after the
commencement date
• Consolidate the resolution of all legal proceedings by and
against the debtor to the court
 Effectivity and Duration

The Order is effective for the duration of the rehabilitation

proceedings, unless:

• Earlier lifted by the Court

• Rehabilitation Plan is seasonably confirmed or approved
• Rehabilitation proceedings are ordered terminated by the
Court
  Suspension Order
EFFECTS:
• Suspend all actions or proceedings, in court or otherwise, for
enforcement of claims against the debtor
• Suspends all actions to enforce any judgement, attachment or other
provisional remedies against the debtor
• Prohibit the debtor from selling, encumbering, transferring or disposing
in any manner any of its properties (except in the ordinary course of
business)
• Prohibits the debtor from making any payments of its liabilities
outstanding as of the commencement date (except as may be provided)
 Suspension Order

DOES NOT APPLY TO:

• Cases are already pending appeal in the Supreme Court as of
commencement date
• 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
rehabilitation court.
 Suspension Order
DOES NOT APPLY TO:
• Enforcement of claims against sureties and other persons
solidarily liable with the debtor, and accommodation
mortgagors or issues of letters of credit
• 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 business
• Criminal action against the individual debtor or owner, partner,
director or officer of a debtor