Financial Rehabilitation and Insolvency Act of 2010 (RA 10142)

§ The law was enacted on August 31, 2010

§ The FRIA governs rehabilitation of covered debtors and insolvency insofar as its
provisions are not inconsistent with the Civil Code.
◦ Article 2237- Insolvency shall be governed by special laws insofar as they are not
inconsistent with this Code
§ The law primarily deals with the discharging of debts and rehabilitation of the debtor.

Policy of the Law

1. The FRIA aims to encourage debtors and their creditors to collectively and realistically
resolve and adjust claims and property rights.
2. To ensure a timely, fair, transparent, effective, and efficient rehabilitation or liquidation
of debtors
3. To ensure or maintain certainty or predictability in commercial affairs, and preserve
and maximize the value of assets of these debtors,
4. To recognize creditors rights and respect priority of claims, and ensure equitable
treatment of creditors who are similarly situated
5. When rehabilitation is not feasible, to facilitate a speedy and orderly liquidation of
these debtor’s assets and the settlement of their obligations

History of Insolvency Laws

1. Insolvency Law (Act 1956)
◦ Covered suspension of payments (for a debtor who was solvent but illiquid) and
voluntary or involuntary insolvency proceedings (for a debtor who was insolvent)
2. SEC Reorganization Act (PD 902-A)
◦ Introduced the concept of rehabilitation
◦ SEC jurisdiction over suspension of payments, rehabilitation, and insolvency.
3. Securities Regulations Code (RA 8799)
◦ Transferred jurisdiction of the SEC to the Courts.
◦ Supreme Court issued its Interim Rules of Procedure on Corporate Recovery
4. Financial Rehabilitation and Insolvency Act
◦ Repealed the Insolvency Law and all other laws and rules inconsistent with the
FRIA

Two Main Proceedings Under the FRIA

1. Rehabilitation
◦ 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 way of the present value of payments projected in the plan.
2. Liquidation
◦ The proceeding where claims are filed and the assets of the insolvent debtor are
disposed of and the proceeds are divided among the creditors.
◦ Taken up usually when rehabilitation is not feasible or when rehabilitation of the
debtor fails.

Concept of Insolvency
1. The Balance Sheet Test
◦ “Insolvency” is the state of a person whose liabilities are more than its assets.
◦ The relative condition of a man’s assets and liabilities that the former, if all made
immediately available, would not be sufficient to cover the latter.
◦ “Insolvency” = “Bankruptcy”
◦ Illustration:Owner’s Equity=Assets-Liabilities
1. Assets= 100; Liabilities= 50.
◦ OE= 50
◦ Not Insolvent
2. Assets= 100; Liabilities= 200
▪ OE= -100
▪ Insolvent

2. Equity Test
◦ The inability of a person to pay his debts as they become due in the ordinary course
of business.
◦ The debtor may be insolvent although he may be able to pay his debts at some
future time
◦ “Insolvency” = “Illiquidity”
◦ Here, the debtor is illiquid but NOT bankrupt.
▪ He is unable to pay his debts, but his assets are not less than his liabilities.

Insolvency under the FRIA

Covers both Balance Sheet and Equity Tests, meaning that “insolvency” under the FRIA
refers to:
◦ The financial condition of a debtor that is generally unable to pay his liabilities as
they fall due in the ordinary course of business; or
◦ Has liabilities that are greater than his assets.
• In determining the value of a debtor's assets, reference must be made to its fair
valuation.

Debtors Covered by the FRIA

1. Sole Proprietorship duly registered with the Department of Trade and Industry;
2. Partnership duly registered with the Securities and Exchange Commission;
3. Corporation duly organized and existing under Philippine laws; and
4. Individual debtor who has become insolvent as defined in the FRIA.

Debtors NOT covered by the FRIA

1. Banks
◦ Governed by the New Central Bank Act (RA 7653)
2. Insurance Companies
◦ Governed by the Insurance Code (PD 612)
3. Pre-Need Companies
◦ Governed by the Pre-Need Code (RA 9829)
4. National and local government agencies or units
5. Government financial institutions when their specific charter so provides

Claims covered by the FRIA

All claims or demands of whatever nature or character against the debtor or its
property, whether:
• Monetary or non-monetary
• Liquidated or unliquidated
• Fixed of contingent
• Mature or unmatured
• Disputed or undisputed

The rehabilitation court only has jurisdiction over claims against the debtor that is
under rehabilitation.
• Claims by the debtor against its own debtor or against third parties are not covered.
• These must be filed separately by the insolvent debtor.

Steel Corporation vs. Mapre Insurance Corporation

Steel Corp. was placed under corporate rehabilitation. It insured its assets against
material damage and business interruption. Later, a fire broke out in its plant damaging its
mill and other machineries
 Steel Corp. filed with the rehabilitation court a motion to direct Mapre Insurance Corp.
to pay insurance proceeds. Mapre Insurance entered a special appearance solely to question
the court’s jurisdiction over the insurance claim.
Issue: WON the rehabilitation court has jurisdiction over the insurance claim of Steel Corp.
against Mapre Insurance
Held: NO. The rehabilitation court has no jurisdiction over the insurance claim by the
insolvent debtor, Steel Corp.
• It only has jurisdiction over claims against the debtor that is under rehabilitation
• Steel Corp. must file a separate action against Mapre Insurance to recover whatever
claim it may have against them

Nature of Proceedings
1. In Rem
◦ The court acquires jurisdiction over all affected person upon publication of the
notice of the commencement of proceedings.
2. Summary and non-adversarial
◦ The court may decide on the basis of the pleadings and other documentary
evidence
◦ It may conduct clarificatory hearings when necessary

Kinds of Remedies Available to an Insolvent Debtor

1. Judicial remedies
◦ Rehabilitation
◦ Suspension of payments
2. Extra-judicial remedies
◦ Ex. Bringing in a “white knight” who will infuse additional equity
◦ Selling core assets or portions of its business to raise funds
◦ Debt-to-equity conversion
◦ Transferring assets as payment of its debt (dacion en pago)

Remedies under the FRIA

1. Rehabilitation
◦ Voluntary- initiated by the debtor
◦ Involuntary- initiated by the creditor
◦ Pre-negotiated
2. Out of court restructuring
3. Liquidation
◦ Voluntary
◦ Involuntary
- The FRIA also provides for suspension of payments for individual debtors.

Advantages of Judicial Remedies

1. Retention of management
◦ The management of the juridical debtor will remain with the existing management
2. Non-withholding of supply
◦ The debtor’s supplier of goods or services are prohibited from withholding the
supply for as long as the debtor makes payments for such good or services supplied after the
issuance of the Commencement Order
3. Protection from certain actions and processes
◦ Upon issuance of the Commencement Order, Stay Order, or the Suspension order:
i. No attempts can be made by creditors to enforce a claim against the debtor or
to seize his property.
ii. No lien may be perfected against the debtor’s properties
iii. Suspend all proceedings for the enforcement of claims against the debtor.
iv. Prohibit the debtor from making any payment of its outstanding liabilities.
4. Exemption from, or waiver of, taxes
◦ From the issuance of the Commencement Order up until the approval of the
Rehabilitation Plan or its dismissal, the imposition of all taxes and fees due to the government
are considered waived
◦ Amounts of debts reduced or forgiven in connection with the Plan are not subject
to taxes.
5. Compromises binding
◦ Any compromises by the debtor will be binding on creditors regardless of whether
or not the Rehabilitation Plan is successfully implemented
6. Cram-down power
◦ The court has the power to approve or implement the Rehabilitation Plan despite
the lack of approval, or objection from the insolvent debtor, provided that the terms are
necessary to restore the financial well-being and viability of the insolvent debtor
7. Binding effect of rehabilitation plan
◦ The rehabilitation Plan will be binding upon the debtor and all persons who may be
affected by it, including the creditors, whether or not they participated in the proceedings.

REHABILITATION IN GENERAL
Concept
Refers to the restoration of the debtor to a condition of successful operation and
solvency, if it is shown that its continuance is economically feasible and that the creditors can
recover payment more by what is projected in the plan than when it is immediately liquidated.
The concept of corporate rehabilitation was first introduced in Philippine jurisdiction
through P.D. No. 902-A (SEC Reorganization Act)
NOTE: At that time, petitions and matters concerning rehabilitation were within the
jurisdiction of SEC. It was then transferred to the regular courts through R.A. No. 8799.

Types
1. Court supervised
◦ Voluntary (Sec. 12)
◦ Involuntary (Sec. 13)
2. Pre-negotiated (Sec. 76)
3. Out of court/informal (Sec. 83)

Purpose
Rehabilitation is given as a remedy in an effort to restore and reinstate the corporation
to its former position of successful operation and solvency.
• Two pronged purpose
◦ Efficient and equitable distribution of insolvent debtor’s assets to its creditors.
◦ Clean slate or providing a fresh start to the debtor
• “a new lease on life”

Likelihood
The rehabilitation must be viable or likely. In other words, there must be a substantial
likelihood that the debtor can properly rehabilitate itself.
Otherwise, the court shall order the speedy and orderly liquidation of debtor’s assets
and the settlement of the obligations.
In determining substantial likelihood, the court must ensure that the minimum
requirements are met, among others:
1. Sufficient assets to rehabilitate
2. Sufficient cash flow to maintain operations
3. Good faith and due diligence
4. Not a sham filing intended for delay
5. Likely be able to pursue a viable RP
• Receiver’s report declaring the financial goals stated in the RP are realistic, feasible,
and reasonable, or there is a possibility for the debtor to be successfully rehabilitated
Court Supervised Rehabilitation
1. Voluntary
◦ Insolvent debtor initiates the petition.
◦ Filed by the owner, majority of partners, or the majority vote of the board and the
vote of stockholders holding at least 2/3 of stock.
2. Involuntary
◦ Creditor initiates the petition.
◦ Filed by a creditor or group of creditors with aggregate claims of at least 1 million
PHP or at least 25% of subscribed capital or partner’s contribution, whichever is higher.

Venue for Petition

The petition must be filed in the Regional Trial Court which has jurisdiction over the
principal office of the debtor alleged insolvent.
• Where the principal office of the SEC registered corporation, partnership, or association
is in Metro Manila, action must be filed on the city or municipality where the head office is
located.
• If it involves a group, it gets filed over the principal office of any of them.

ACTION ON THE PETITION AND COMMENCEMENT PROCEEDINGS

I. Action on Petition
If the court finds the petition for rehabilitation to be sufficient in form and substance,
it within five (5) working days from the filing of the petition, issue a Commencement Order.

II. Commencement Order

(1) Contents of the commencement order- The Commencement Order will:
a) declare that the debtor is under rehabilitation;
b) appoint a rehabilitation receiver;
c) prohibit the debtor’s suppliers of goods or services from withholding the supply of
goods and services in the ordinary course of business;
d) authorize the payment of administrative expenses as they become due;
e) include Stay or Suspension Order;
f) set the case for initial hearing (FRIA, Sec. 16)

(2) Effects of the Commencement Order- Unless otherwise provided in the FRIA, the court’s
issuance of a Commencement Order will:
a) vest the rehabilitation with all the powers and functions provided to the approval by
the court of the performance bond filed by the rehabilitation receiver;
b) prohibit or serve as the legal basis rendering null and void the results of any
extrajudicial activity after commencement date unless otherwise allowed in FRIA;
c) serve as the legal basis for rendering null and void any set-off after the commencement
date;
d) serve as the legal basis for rendering null and void the perfection of any lien against
the debtor's property; and
e) consolidate the resolution of all legal proceedings by and against the debtor to the
court (FRIA, Sec.17)

(3) Effectivity and Duration of Commencement Order- The Commencement Order is effective
for the duration of the rehabilitation proceedings, unless (a) earlier lifted by the Court, (b)
the rehabilitation plan is seasonably confirmed or approved, or (c) the rehabilitation
proceedings are ordered terminated by the court (FRIA, Sec. 20)

III. Suspension Order

(1) Contents of Suspension Order- The Suspension Order will:
a) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims
against the debtor;
b) suspend all actions to enforce any judgment, attachment or other provisional remedies
against the debtor;
c) prohibit the debtor from selling, encumbering, transferring or disposing in any manner
any of its properties except in the ordinary course of business; and
d) prohibit the debtor from making any payment of its liabilities outstanding as of the
commencement date except as may be provided herein. (FRIA, Sec.16)

(2) Exceptions to the Stay or Suspension Order- The Stay or Suspension Order does not
apply:
a) to cases already pending appeal in the Supreme Court as of commencement date.
b) subject to the discretion of the court, to cases pending or filed at a specialized court
or quasi-judicial agency;
c) to the 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,
d) to the actions of a licensed broker or dealer to sell pledged securities of a debtor;
e) the clearing and settlement of financial transactions through the facilities of a clearing
agency or similar entities duly authorized; and
f) any criminal action against individual debtor or owner, partner, director or officer of a
debtor shall not be affected by any proceeding commenced under FRIA. (FRIA, Sec. 18)

(3) Continuance of stay order- The court, on motion or motu propio, may terminate, modify,
set conditions for the continuance of suspension of payment, or relieve a claim from the
coverage, upon showing that:
a) a creditor does not have adequate protection over property securing its claim; or
b) the value of the claim secured by a lien on property which is not necessary for
rehabilitation of the debtor exceeds the fair market value of the said property.

IV. Rehabilitation Receiver

(1) The Rehabilitation Receiver- is the person, natural or juridical, appointed as such by the
court pursuant to the FRIA and who is entrusted with such powers, duties, and responsibilities
in relation to the rehabilitation of the debtor. Where the rehabilitation receiver is a juridical
entity, the term includes the juridical entity’s designated representative.

(2) Who may Serve as a Rehabilitation Receiver- Any qualified natural or juridical person may
serve as a rehabilitation receiver.

(3) Qualifications of a Rehabilitation Receiver- The rehabilitation receiver must have the
following:
a) A citizen of the Philippines or a resident of the Philippines in the six (6) months
immediately preceding his 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 rehabilitation receiver; and
d) Has no conflict of interest
e) He is willing and able to file a bond in such amount as may be determined by the
Court.
• In addition if in case the person is a juridical person:
a) It must submit the name of the person designated to discharge the responsibilities and
powers of a rehabilitation receiver and the names of the employees and other persons
authorized to assist, together with a sworn certification
b) Submit a sworn undertaking binding itself to be solidarily liable with the persons
designated by it to discharge the functions and responsibilities of a receiver;
(4) Duties and Responsibilities of the Rehabilitation Receiver.- The rehabilitation receiver shall
be deemed an officer of the court with the principal duty of preserving and maximizing the
value of the assets of the debtor during the rehabilitation proceedings, determining the
viability of the rehabilitation of the debtor, preparing and recommending a Rehabilitation Plan
to the court, and implementing the approved Rehabilitation Plan.

(5) Removal of the Rehabilitation Receiver– The rehabilitation receiver may be removed at by
the court motu proprio or upon motion by any creditor/s holding more than fifty percent
(50%) of the total obligations of the debtor, on such but are not limited to, the following:
a) Incompetence, gross negligence, failure to perform or failure to exercise the proper
degree of care in the performance of his duties and powers;
b) Lack of a particular or specialized competency required by the specific case;
c) Illegal acts or conduct in the performance of his duties and powers;
d) Lack of qualification or presence of any disqualification;
e) Conflict of interest that arises after his appointment; and
f) Manifest lack of independence that is detrimental to the general body of the
stakeholders.

THE REHABILITATION PLAN

Rehabilitation
Rehabilitation refers to the restoration of the debtor to a condition of successful
operation and solvency for the following reasons:
a) To efficiently and equitably distribute the assets of the insolvent debtor to its creditors
b) To provide the debtor with a fresh start. Rehabilitation allows the debtor to reorganize
their affairs, while also relieving them of their outstanding debts
However, rehabilitation is only done if it is viable or likely to succeed.

Rehabilitation Plan
The Rehabilitation Plan refers to a plan by which the financial well-being and viability
of an insolvent debtor can be restored using various means such as debt forgiveness, debt
rescheduling, reorganization or quasi-reorganization, dacion en pago, debt-equity conversion
and sale of the business (or parts of it), or setting-up of new business entity as prescribed in
Section 62 hereof, or other similar arrangements as may be approved by the court or
creditors.

Contents of a Rehabilitation Plan

The Rehabilitation Plan as a minimum shall:
a) Specify the financial goals and the procedures proposed
b) Compare the amounts expected to be received by the creditors if they choose the
Rehabilitation Plan instead of liquidation. It should also contain information sufficient for
creditors to determine whether supporting the Rehabilitation Plan will benefit them in
comparison to choosing liquidation
c) Establish classes and subclasses for voting creditors
d) Indicate how the insolvent debtor will be rehabilitated and which of the methods will
be employed to facilitate the rehabilitation
e) Specify the treatment of each class or subclass
f) Provide for equal treatment of all claims within the same class or subclass, unless a
particular creditor voluntarily agrees to less favorable treatment
g) Ensure that the payments made under the plan follow the priority established under
the provisions of the Civil Code
h) Maintain the security interest of secured creditors and preserve the liquidation value
of the security unless such has been waived
i) Disclose all payments to creditors for pre-commencement debts made during the
proceedings and the justifications thereof
j) Describe the disputed claims and the provisioning of funds to account for appropriate
payments should the claim be ruled valid or its amount adjusted
k) (k) Identify the debtor's role in the implementation of the Plan
l) State any rehabilitation covenants of the debtor, the breach of which shall be
considered a material breach of the Plan
m) Identify those responsible for the future management of the debtor and the
supervision and implementation of the Plan
n) Address the treatment of claims arising after the confirmation of the Rehabilitation
Plan
o) Require the debtor and its counter-parties to adhere to the terms of all contracts that
the debtor has chosen to confirm
p) Arrange for the payment of all outstanding administrative expenses as a condition to
the Plan's approval unless such condition has been waived in writing by the creditors
concerned
q) Arrange for the payment of all outstanding taxes and assessments, or an adjusted
amount pursuant to a compromise settlement with the BIR or other applicable tax authorities
r) Include a certified copy of a certificate of tax clearance or evidence of a compromise
settlement with the BIR
s) Include a valid and binding solution of a meeting of the debtor's stockholders to
increase the shares by the required amount in cases where the Plan contemplates an
additional issuance of shares by the debtor
t) State the compensation and status, if any, of the rehabilitation receiver after the
approval of the Plan
u) Contain provisions for conciliation and/or mediation as a prerequisite to court
assistance or intervention in the event of any disagreement in the interpretation or
implementation of the Rehabilitation Plan

Cram-down Power
The power of the court to “cram down” the rehabilitation plan, and the power to
approve or implement the rehabilitation plan despite the lack of approval or objection from
the owners, partners, stockholders, or creditors of the insolvent debtor, provided that the
terms thereof are necessary to restore the financial well-being and viability of the insolvent
debtor.
Even if the creditors reject the rehabilitation plan, the court may confirm it if all the
following circumstances are present:
(a) The Rehabilitation Plan complies with the requirements in the FRIA
(b) The rehabilitation receiver recommends the confirmation of the plan
(c) The shareholders, owners, or parties of the juridical debtor lose at least their
controlling interest as a result of the Rehabilitation Plan
(d) The Rehabilitation Plan would likely provide the objecting creditors with
compensation greater than which they would receive if the debtor was under liquidation

The Cram-down Power of the court is necessary to curb the majority creditors’ natural
tendency to dictate their own terms and conditions to the rehabilitation, absent due regard
to the greater long-term benefit of all stakeholders.
Otherwise stated, it forces the creditors to accept the terms and conditions of the
rehabilitation plan, preferring long-term viability over immediate but incomplete recovery. Its
ultimate goal is to ensure that both the creditors and the debtor manage to recover.

Submission of the Plan to the Court

If the Rehabilitation Plan is approved, the rehabilitation receiver shall submit the same
to the court for confirmation.
Within five (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.

Filing of Objections to the Plan

 A creditor may file an objection to the Rehabilitation Plan within twenty (20) days from
receipt of notice from the court that the Rehabilitation Plan has been submitted for
confirmation. Objections to a Rehabilitation Plan shall be limited to the following:
(a) The creditors' support was induced by fraud
(b)The documents or data relied upon in the Rehabilitation Plan are materially false or
misleading; or
(c)The Rehabilitation Plan is in fact not supported by the voting creditors.
Confirmation of the Plan
If no objections are filed within the relevant period, or if objections are filed but the
court finds them lacking in merit, or determines that the basis for the objection has been
cured, the court shall issue an order confirming the Rehabilitation Plan.
• The court may confirm the Rehabilitation Plan notwithstanding unresolved disputes
over claims if the Rehabilitation Plan has made adequate provisions for paying such claims.
• 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.

Effect of Confirmation of the Rehabilitation Plan

The confirmation of the Rehabilitation Plan by the court shall result in the following:
(a) The Rehabilitation Plan and its provisions shall be binding upon the debtor and all
persons who may be affected by it, including the creditors, whether or not such persons have
participated in the proceedings or opposed the Rehabilitation Plan or whether or not their
claims have been scheduled
(b) The debtor shall comply with the provisions of the Rehabilitation Plan and shall
take all actions necessary to carry out the Plan
(c) Payments shall be made to the creditors in accordance with the provisions of the
Rehabilitation Plan
(d) 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
(e) Any compromises on amounts or rescheduling of timing of payments by the debtor
shall be binding on creditors regardless of whether or not the Plan is successfully implemented
(f) Claims arising after approval of the Plan that are otherwise not treated by the Plan
are not subject to any Suspension Order

Management of the Company Under Rehabilitation

As a rule, the management remains with the existing management. Usually, the
rehabilitation receiver will not take over the management and control of the business.
The concept of preserving the corporation’s business while it is undergoing
rehabilitation is called debtor-in-possession or debtor-in-place. This means that the debtor
corporation, through its board of directors, remains in control of its business and properties
subject to the monitoring of the appointed rehabilitation receiver.
The rehabilitation receiver has the power to take possession, custody, and control of
the debtor’s property but will generally not do so on a day-to-day basis.

Restrictions:
Management of the company remains with the existing board of directors and officers
but all disbursements, payments, sales, disposals, assignment, transfers, or encumbrance of
property and all acts affecting title will be subject to the court’s approval

Displacement of Existing Management

The rehabilitation receiver may recommend the appointment of a management
committee over the debtor, or the court may appoint the rehabilitation receiver to assume the
powers of management or appoint the management committee under the following
circumstances:
 (a)Actual or imminent danger of dissipation, loss, wastage, or destruction of the
debtor’s assets
(b)Paralyzation of the business operations of the debtor
(c)Gross mismanagement of the debtor or fraud or other wrongful conduct on the part
of or gross or wilful violation of the FRIA by existing management of the debtor

The Management Committee

Composition: Persons, natural or juridical appointed by the court
1. Nominated by the debtor, if debtor fails to choose court will choose
2. Nominated by the creditor/s holding more than 50% of the total obligations of the
debtor, if they fail court will choose
3. The third member acts as chairman, they are nominated by the first and 2nd members
within 10 days from their appointment. If they disagree, the court will choose

Purpose: The management committee will take the place of the management and the
governing body of the debtor. They will also assume their rights. They have a right to take
custody and control of all assets and properties owned or possessed by the debtor.

Employment of Professionals
Upon court approval, and after notice and hearing, the rehabilitation receiver or
management committee may employ specialized professionals and other experts to assist in
the performance of their duties.
The professionals and experts will be considered either employees or independent
contractors of the rehabilitation receiver or the management committee.

Conflict of Interest
No person may be appointed as rehabilitation receiver or member of a management
committee if there is a conflict of interest
An individual is deemed to have a conflict of interest if he is situated to be materially
influenced in the exercise of his judgment for or against any party to the proceedings

A conflict of interests exists in the following circumstances:

(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

Conflict of interest should be disclosed at all times throughout the proceedings to the
court and to the creditors. Same rule applies to persons who assist the rehabilitation receiver
or the management committee as professionals. They must file their disclosure within 10 days
from the date they are contracted or employed.

Objections to the Conflict of Interest

Within 10 days from the receipt of disclosure of a conflict of interest, any party
adversely affected may file his objection to the appointment of the rehabilitation receiver or
member of the management committee or employment of the professional / expert
• Court may disregard the conflict of interest if it finds that it will not be detrimental to
the general interest of the stakeholders
• If the court decides that the objection has merit, the rehabilitation receiver or
management committee will be dismissed and employ a new one in their place

Creditor’s Committees
Creditors belonging to a class may formally organize a committee among themselves.
In addition, the creditors may, as a body, agree to form a creditor’s committee composed of
a representative from each class of creditors. The following are the different classes:
1. Secured creditors
2. Unsecured creditors
3. Trade creditors and suppliers
4. Employees of the debtor

Election of Representatives for the Creditor’s Committee

Creditors from each class are entitled to elect their representative. Once the
representatives from each class are elected, the representatives will elect a chairman for the
creditor’s committee. Ties will be resolved by drawing lots.
The chairman is responsible for convening the creditors committee whenever
necessary to discuss, deliberate, and confer with the rehabilitation receiver on any view or
proposal in preparation or revision of the rehabilitation plan
The role of the Creditor’s Committee is to assist the rehabilitation receiver in
communicating with the creditors. They are the primary liaison between the rehabilitation
receiver and the creditors. However, they cannot waive any right or give consent on behalf of
the creditors

Sale or Disposition of Assets After Commencement Date

Except as otherwise provided herein, no funds or property of the debtor shall he used
or disposed of except in the ordinary course of business of the debtor, or unless necessary to
finance the administrative expenses of the rehabilitation proceedings.

However, the following are the exceptions to the general rule:

1. Sale or disposition is in the ordinary course of business
2. Sale or disposition is necessary to finance the administrative expenses of rehabilitation
proceedings
3. Sale or disposition is made with the approval of the court and upon application of the
rehabilitation receiver
4. The sale, disposition, or encumbrance of unencumbered property is made with the
authority of the court and after notice and hearing

Victorio-Aquino vs. Pacific Plans

Respondent Pacific Plans, Inc. (now “APEC”) was engaged in the business of selling
educational plans, including traditional open-ended educational plans (PEPTrads). PEPTrads
are educational plans where the respondent guarantees to pay the plan holder, without regard
to the actual cost at the time of enrolment, the full amount of tuition and other school fees of
a designated beneficiary.
Victorio-Aquino was a holder of two (2) units of respondent’s PEPTrads.
On April 7, 2005, foreseeing the impossibility of meeting its obligations to the availing
plan holders as they fall due, Pacific Plans filed a Petition for Corporate Rehabilitation with the
Regional Trial Court, praying that it be placed under rehabilitation and suspension of
payments. At the time of filing of the Petition for Corporate Rehabilitation, respondent had
more or less 34,000 outstanding PEPTrads.
On April 12, 2005, the Rehabilitation Court issued a Stay Order, directing the
suspension of payments of the obligations of respondent and ordering all creditors and
interested parties to file their comments/oppositions, respectively, to the Petition for
Corporate Rehabilitation. The same Order also appointed respondent Marcelo as the
rehabilitation receiver.
 Pacific Plans submitted to the Rehabilitation Court its proposed rehabilitation plan.
Pacific Plans proposed the implementation of a “Swap,” which would essentially give the plan
holder a means to exit from the PEPTrads at terms and conditions relative to a termination
value that is more advantageous than those provided under the educational plan in case of
voluntary termination.
For petitioner, she is entitled to receive an aggregate amount consisting of: (a) the
value of her total contributions plus interest at the rate of seven percent (7%) from the date
of full payment until December 31, 2005 (Net Translated Value); and (b) interest on the Net
Translated Value at the annual rate of seven percent (7%) from January 1, 2006 until 2010.
The ARP also provided for tuition support for each enrolment period until SY 2009-
2010 depending on the prevailing market rate of the NAPOCOR Bonds and Peso-Dollar
exchange rate.
The rehabilitation receiver submitted an Alternative Rehabilitation Plan and was
approved by the Court. However due to the fact that the value of the Philippine Peso
strengthened and appreciated, the rehabilitation receiver submitted a Modified Rehabilitation
Plan.
The MRP reduces the original claim of the petitioner and even the original amount
petitioner was to receive under the ARP. Victorio-Aquino did not accept the new terms of the
MRP but the court approved it despite petitioner’s opposition.
Issue: WON the MRP is ultra vires insofar as it reduces the original claim and even the original
amount that the petitioner was to receive under the ARP.
Held: NO. Under the Interim Rules, the rehabilitation plan may be approved even over
opposition of the creditors if there is showing that rehabilitation is feasible and the opposition
of the creditors is manifestly unreasonable

Section 64 of the FRIA states that the court may confirm the Rehabilitation Plan if all
the following circumstances are present: X X X
In the case at bar, there is a substantial likelihood for the respondent to be successfully
rehabilitated considering that its business remains viable and is operating on a going-concern
premise.

USE, PRESERVATION AND DISPOSAL OF ASSETS AND TREATMENT OF ASSETS AND

CLAIMS AFTER COMMENCEMENT DATE

Use or Disposition of Assets

No funds or property of the debtor shall he used or disposed of except:
1. in the ordinary course of business of the debtor; and
2. necessary to finance the administrative expenses of the rehabilitation proceedings.
Except as otherwise provided

Sale of Assets
The court, upon application of the rehabilitation receiver, may authorize the sale of
unencumbered property of the debtor if:
1. by its nature; or
2. because of other circumstance
is perishable, costly to maintain, susceptible to devaluation or otherwise in jeopardy.

Sale or Disposal of Encumbered Property of the Debtor and Assets of Third Parties
Held by Debtor
The sale, transfer, conveyance or disposal of encumbered property may be authorized
by the court.

Application of the rehabilitation receiver and with the consent of:

1. Affected owners of the property; or
2. Secured creditor/s
and after notice and hearing of the court
1. necessary for the continued operation of the debtor's business; and
2. the debtor has made arrangements to provide a substitute lien or ownership right that
provides an equal level of security for the counter-party's claim or right.
• Provided: Property of others held by the debtor, there is a security interest pertaining
to third parties under a financial, credit or other similar transactions.
• Provided further: That properties held by the debtor where the debtor has authority to
sell such as trust receipt or consignment arrangements may be sold or disposed of by the
debtor.

Assets of Debtor Held by Third Parties

Third parties who have in their possession or control property of the debtor shall not
transfer, conveyor otherwise dispose of the same to persons other than the debtor, unless
there is prior approval of the rehabilitation receiver.
The rehabilitation receiver may also:
1. demand the surrender or the transfer of the possession or control of such property to
the rehabilitation receiver or any other person, subject to payment of the claims secured by
any possessory Iien/s thereon;
2. allow said third parties to retain possession or control, if such an arrangement would
more likely preserve or increase the value of the property in question or the total value of the
assets of the debtor; or
3. undertake any other disposition of the said property as may be beneficial for the
rehabilitation of the debtor, after notice and hearing, and approval of the court.

Unencumbered property or encumbering property

The court may rescind or declare as null and void any sale, payment, transfer or
conveyance of the debtor's unencumbered property or any encumbering thereof by the debtor
or its agents or representatives after the commencement date which are not in the ordinary
course of the business of the debtor.
Provided, however, That the unencumbered property may be sold, encumbered or
otherwise disposed of upon order of the court after notice and hearing:
1. if such are in the interest of administering the debtor and facilitating the preparation
and implementation of a Rehabilitation Plan;
2. in order to provide a substitute lien, mortgage or pledge of property under this Act;
3. for payments made to meet administrative expenses as they arise;
4. for payments to victims of quasi delicts upon a showing that the claim is valid and the
debtor has insurance to reimburse the debtor for the payments made;
5. for payments made to repurchase property of the debtor that is auctioned off in a
judicial or extrajudicial sale under. This Act; or
6. for payments made to reclaim property of the debtor held pursuant to a possessory
lien.

PAYMENT OF LIABILITIES AND CLAIMS OUTSTANDING AS OF COMMENCEMENT

DATE
Pre-commencement claim
a claim that is outstanding as of the commencement date. It includes:
1. Claims of separation pay for months worked prior to the commencement date;
2. Claims for actual damages, as a result of the election to terminate a contract.

Payments
The stay or suspension order generally prohibits the debtor from making any payment
of its liabilities.

Pre-commencement contracts and obligations

Pre-commencement contracts – will still continue to enforce, however:
 1. the rehabilitation court may cancel the contract at any time after the issuance of
the Commencement Order;
2. contracts not confirmed by the debtor will be considered terminated.

Pre-commencement transactions
May be rescinded or declared null and void on the ground that the same was executed
with intent to defraud a creditor/s which constitute undue preference of the creditors.

Treatment of secured creditors in the rehabilitation proceedings

The FRIA gives preferential treatment to secured creditors, who are creditors whose
claim are secured by a lien such as a pledge or mortgage. Thus:
1. There shall be no diminution of secured creditors rights; and
2. Maintenance of security interest.

PRE-NEGOTIATED REHABILITATION
Who may file: Insolvent debtor, by itself or jointly with any of its creditors, for the approval
of a pre-negotiated rehabilitation Plan.

Venue: Regional Trial Court

Basic Procedure
1. Filing of the petition
2. Within 5 working days the court will issue the Court Order
3. Publication of order and notification of creditors
4. Not later than 8 days from the date of the second publication, any creditor or interested
party may submit to the court a verified objection
5. Any creditor or interested party may submit his comments
6. Hearing of the objections
7. Approval of the Plan
◦ 10 days from the date of the second publication, unless there is an objection
◦ It will not be implemented until after the lapse of 20 days from the date of the
second publication

Out-of-Court or Informal Restructuring Agreements or Rehabilitation Plan (OCRA)

Agreed upon by the debtor and the required number of creditors.
• this is not submitted to the court for approval.

Minimum Requirements
1. The debtor must agree to the OCRA;
2. It must be approved by creditors representing at least 67% of the secured obligations
of the debtor;
3. It must be approved by the creditors representing at least 75% of the unsecured
obligations of the debtor; and
4. It must be approved by the creditors holding at least 85% of the total liabilities,
secured and unsecured, of the debtor.

Publication of the OCRA

It must be published once a week for at least three (3) consecutive weeks in a
newspaper of general circulation in the Philippines and shall take effect upon the lapse of
fifteen (15) days from the date of the last publication of the notice.

Amendment or modification
It must be made in accordance with the terms of the OCRA and with due notice of all
creditors.
The amendment must be approved by the debtor and the required number of creditors
and shall take effect upon the lapse of 15 days from the date of the last publication of the
required notice.
Standstill Period
It refers to the period agreed upon by the debtor and its creditor to enable them to
negotiate and enter into an OCRA.
May include provisions identical with or similar to the legal effects of a Commencement
Order

Requirements of Standstill
1. Approved by creditors representing more than 50% of the total liabilities of the debtor;
2. Notice is published in a newspaper of general circulation in the Philippines once a week
for two(2) consecutive weeks; and
3. It does not exceed 120 days from the date of effectivity.

Effectivity
The standstill period will expire upon:
1. Lapse of 120 days from the effectivity;
2. The effectivity of the OCRA;
3. Terminations of the negotiations for the OCRA as declared by creditors representing
more than 50% of the total liabilities of the debtor, whichever comes first.

Court Assistance
The insolvent debtor or a creditor may file an application for court assistance to
execute or implement a standstill agreement or an OCRA.

Venue: Regional Trial Court who has jurisdiction over the place in which the insolvent debtor
resides or has its principal place of business.

Forms of assistance: issuing a writ of execution to enforce its terms.

Petition for annulment of OCRA

The debtor or creditor may file a petition to annul the standstill agreement or the OCRA
based on the ground of non-compliance with the requirements.
Grounds for annulment of OCRA
1. Fraud;
2. Intimidation; and
3. Violence.

Service of Summons: Upon filing of the petition, the court will immediately issue and cause
to be served the summons to the respondents within 5 days from receipt of the petition.
• Comment or opposition by the respondent (within 5 days from the receipt of the
summons)
• The court will determine the existence of a genuine issue of material facts or whether
the petition will be granted. If no comment is filed, a clarificatory hearing may be conducted
• Upon a determination of genuine issue of material facts, the court shall conduct a
summary hearing not later than 20-days from the filing of the petition
• A judgment shall be rendered not later than 60-days from filing of the petition and
shall be final within 10-days from receipt of the decision and is immediately executory.
• Judgment of the court may be elevated to the Court of Appeals under Rule 65 of the
Rules of Court
• A final judgement is without prejudice to the parties availing of the other modes of
rehabilitation

LIQUIDATION
I. LIQUIDATION IN GENERAL
a. Types
i. Voluntary – Filed by debtor
 ii. Involuntary – Filed by Creditor
b. Who May File
i. VOLUNTARY
1. Individual Debtor
a. Liabilities > Assets
b. Debts exceed PHP 500,000
c. File at:
i. Court with jurisdiction over the province or city where he has resided for 6
months prior to the filing of the petition.
2. Insolvent Juridical Debtor
a. FILE AT:
i. RTC with jurisdiction over its principal office
ii. If principal office registered with SEC is in Metro Manila, it must be filed in
the RTC of the city or municipality where the head office is located.
ii. INVOLUNTARY
1. Individual Debtor
a. Any creditor/s with a claim of, or the aggregate of whose claims is at lease
PHP 500,000.
b. File at: court of the province or city where the debtor resides.
2. Insolvent Juridical Debtor
a. 3 or more creditors the aggregate of whose claims is at least either: 1 million
pesos or 25% of the subscribed capital stock or partner’s contributions of the debtor
(whichever is higher)
b. File at:
i. RTC with jurisdiction over its principal office
ii. If principal office registered with SEC is in Metro Manila, it must be filed in
the RTC of the city or municipality where the head office is located.

II. CONVERSION INTO LIQUIDATION PROCEEDINGS

A. 9 instances where rehabilitation proceedings may be converted into liquidation
proceedings:
i. Finding of insolvency and no substantial likelihood for successful rehabilitation
ii. Merit in objection of creditor
iii. Non confirmation of the rehabilitation plan
iv. iBreach or failure of the rehabilitation plan
v. Termination of the rehabilitation proceedings due to failure of rehabilitation or
dismissal
vi. Creditor/ debtor supporting the rehabilitation plan in bad faith
vii. Debtor initiated
viii. Pending court-supervised rehabilitation (1m/25%)
ix. Rehabilitation no longer feasible

B. Basic Procedure in Liquidation

i. 17 STEPS
1. Filing of the petition
2. Issuance of the court order
3. Publication of the petition and notification of parties
4. Filing of comments
5. Hearing on the petition or motion
6. Issuance of liquidation order
7. Publication of liquidation order
8. Hearing
9. Appointment of liquidator
10. Registry of claims
11. Opposition or challenge to claims
12. Submission of disputed claims to court
13. Submission of liquidation plan
14. Implementation of the liquidation plan
15. Complete implementation of the plan
16. 16. Termination of proceedings
17. 17. Discharge of liquidator

ii. “Filing of the Petition”

1. Insolvent debtor
a) Schedule of debts and liabilities, list of creditors and amount of addresses, claims,
collaterals, securities if any.
b) Inventory of all its assets including receivables and claims against third parties
c) Names of at least 3 nominees to the position of liquidator

2. Involuntary Liquidation of an insolvent juridical debtor

a) No genuine issue of fact or law
b) Due and demandable payments have not been made for at least 180 days
c) No substantial likelihood that debtor may be rehabilitated

3. Involuntary Liquidation of an insolvent individual debtor

a) Must state the particulars of at least one of 13 the acts of insolvency under sec.105
of the fria
b) b. “13 acts of insolvency”
i. That such person is about to depart or has departed from the Republic of the
Philippines, with intent to defraud his creditors;
ii. That being absent from the Republic of the Philippines, with intent to defraud
his creditors, he remains absent;
iii. 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;
iv. That he conceals, or is removing, any of his property to avoid its being attached
or taken on legal process;
v. 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;
vi. 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;
vii. 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;
viii. 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;
ix. 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;
x. That he has, in contemplation of insolvency, made any payment, gift, grant,
sale, conveyance or transfer of his estate, property, rights or credits;
xi. That being a merchant or tradesman, he has generally defaulted in the payment
of his current obligations for a period of thirty (30) days;
xii. 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
xiii. 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.

III. THE LIQUIDATION ORDER

a. Effects of Liquidation order
i. Juridical debtor deemed dissolved
ii. Corporate or juridical existence terminated
iii. Legal title to and control of all assets of the debtor deemed vested in the liquidator
iv. All contracts of debtor deemed terminated or breached unless liquidator declares
otherwise
v. No separate action for the collection of an unsecured claim is allowed.
vi. No foreclosure proceeding allowed for 180 days

b. May be reviewed via rule 65 within 15 days from notice of decision or order

c. Rights of secured creditors under the liquidation order

i. Liquidation order will not affect right of a secured creditor to enforce his lien in
accordance with the applicable contract or law
ii. ii. At any time prior to the election of the liquidator, must manifest in writing to the
court whether he:
1. Waive his rights under the security or lien
2. Prove his claim in the liquidation proceedings
3. Share in the distribution of the assets of the debtor
4. Maintain his rights under his security or lien
iii. If he fails to manifest, he is deemed to have opted to maintain his right under the
security or lien
iv. If he waives his right, he will be entitled to participate in the liquidation proceedings
as an unsecured creditor
v. If secured creditor maintains his rights under the security or lien :
1. Value of property may be fixed upon agreement by creditor and liquidator
2. Value of property less than claim it secures:
a) 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
3. Value of property EXCEEDS THE claim it secures:
a) Liquidator may convey the property to the secured creditor and waive the
debtor’s right of redemption upon receiving the excess from the creditor
4. The liquidator may sell the property
5. Satisfy the creditor’s claim from the proceeds of the sale
6. Secured creditor may enforce the lien or foreclose on the property pursuant to
applicable laws

Yngson v. PNB
i. Doctrine:
1. “the secured creditor can foreclose during liquidation proceedings”
ii. FACTS:
1. ARCAM obtained a loan from pnb secured by a real estate mortgage and chattel
mortgage.
2. ARCAM defaulted.
3. PNB initiated extra-judicial foreclosure proceedings
4. Before the scheduled public auction, ARCAM filed with sec a petition for suspension
of payments, appointment of rehabilitation receiver, approval of rehabilitation plan
5. With application for TRO and injunction
6. Sec issued the TRO and injunction on the foreclosure
7. 7 years later, SEC ruled that ARCAM can no longer be rehabilitated
8. SEC decreed ARCAM be dissolved and liquidated
9. PNB revived the foreclosure case
10. Requested RTC to reschedule public auction
11. ARCAM contends that foreclosure during liquidation is improper.
12. Files motion for TRO and injunction.
13. SEC issued a 72 hour TRO which lapsed without injunction
14. Extra judicial foreclosure sale proceeded and PNB was highest bidder
15. ARCAM filed to nullify auction sale. Sec denies it. Ca dismissed petition
iii. ISSUE:
1. WON PNB, as a secured creditor, can foreclose on the mortgaged properties of a
corporation under liquidation without the knowledge and prior approval of the liquidator or
the SEC?
iv. HELD:
1. YES.
a) In Consuela metal, Supreme court upheld the right of the secured creditor to
foreclose the mortgage in its favor during the liquidation of a debtor corporation.
b) b. Under sec. 114 of the fria, if the secured creditor maintains his rights under
the security or lien, the secured creditor may enforce the lien on the property pursuant to
applicable laws.

IV. THE LIQUIDATOR

a) Qualifications
i. Citizen of the Philippines or a resident for 6 months before nomination
ii. Good moral character with acknowledge integrity, impartiality, and independence
iii. Have requisite knowledge of insolvency and other relevant commercial laws, rules
and procedures
iv. Must have no conflict of interest
1. “Conflict of Interest”
a) He is a creditor, owner, partner, or stockholder of the debtor
b) He is a creditor, owner, partner or stockholder of a creditor of the debtor
c) He is engaged in a line of business which competes with that of the debtor
d) He was, within 5 years from filing, a director, officer, owner, partner,
employee of the debtor or any of the creditors, or acted as legal counsel, auditor, accountant
e) He was, within 2 years from filing, an underwriter of the outstanding
securities of the debtor
f) He is related by consanguinity or affinity within the 4th civil degree to any
of the parties
g) He has any other direct or indirect material interest in the debtor or any of
the creditors
h) He was the receiver or a member of the management committee, when
there was showing that his lack of diligence or foresight resulted in the liquidation
v. Entitled to reasonable compensation
vi. Needs to take an oath and file a bond
vii. Keep a record of all moneys received and all disbursements made
viii. Subject to removal on grounds under FLSP rules, rule 3, sec. 13

V. Cross Border Insolvency

a) Adoption of UNCITRAL Model Law on Cross-Border Insolvency as part of FRIA
(Sec. 139)
i. UNCITRAL – United Nations Center for International Trade and Development
ii. Mandate is to harmonize and unify the national laws regarding international trade.
iii. “Model Law”
1. Purpose is to provide effective mechanisms for dealing with cases of cross-
border insolvency so as to promote the objectives of:
a) Cooperation between courts and other competent authorities of states
involved in cases of cross-border insolvency
b) Greater legal certainty for trade and investment
c) Fair and efficient administration of cross-border insolvencies that protects
the interests of all creditors and other interested parties, including the debtor
d) Protection and maximization of the value of the debtor’s assets
e) Facilitation of the rescue of financially troubled businesses, thereby
protecting investment and preserving employment
b) Initiation of Proceedings:
i. The court shall set a hearing in connection with an insolvency or rehabilitation
proceeding taking place in a foreign jurisdiction, upon the submission of a petition by the
representative of the foreign entity that is the subject of the foreign proceeding. (Sec. 140,
FRIA)

c) Provision of Relief:
i. The court may issue orders:
1. Suspending any action to enforce claims against the entity or otherwise seize
or foreclose on property of the foreign entity located in the Philippines;
2. Requiring the surrender property of the foreign entity to the foreign
representative; or
3. Providing other necessary relief. (Sec. 141, FRIA)

d) Factors in Granting Relief

i. In determining whether to grant relief under this subchapter, the court shall
consider;
1. the protection of creditors in the Philippines and the inconvenience in pursuing
their claim in a foreign proceeding;
2. the just treatment of all creditors through resort to a unified insolvency or
rehabilitation proceedings;
3. whether other jurisdictions have given recognition to the foreign proceeding;
4. the extent that the foreign proceeding recognizes the rights of creditors and
other interested parties in a manner substantially in accordance with the manner prescribed
in this Act; and
5. the extent that the foreign proceeding has recognized and shown deference to
proceedings under this Act and previous legislation. (Sec. 142, FRIA)

INSOLVENCY OF INDIVIDUAL DEBTORS

A. Suspension of Payments
• Remedy available to debtor
• seeks to suspend payments outside of the necessary or legitimate expenses of his
business

To whom available:
• Individual debtors who possess sufficient property to cover all his debts but foreseeing
the impossibility of meeting them when they respectively fall due.
• A natural person who is a resident and citizen of the Philippines

Basic procedure in suspension of payment

1. Filing of petition
◦ Verified petition
◦ attach to his petition:
1. a schedule of debts and liabilities;
2. an inventory of assets
3. a proposed agreement with his creditors.
◦ 3 nominees to the position of commissioner
◦ General Rule: No creditor can sue or institute proceedings to collect his claim
◦ Exceptions: Claims for personal labor, maintenance, expense of last illness and
funeral of the wife or children of the debtor incurred 60 days immediately prior to the filing,
and those Secured creditors
2. Action on petition
◦ If courts finds petition to be sufficient
a) calling a meeting of all the creditors
b) directing such creditors to prepare and present written evidence of their claims
c) publication of the said order in a newspaper of general circulation
d) directing the clerk of court to send a copy of the Order to all creditors
e) forbidding the individual debtor from selling, transferring, encumbering or
disposing in any manner of his property
f) prohibiting the individual debtor from making any payment outside of the
necessary or legitimate expenses
g) appointing a commissioner

Actions suspended
The court may issue an order suspending any pending execution against the individual
debtor
Provided: Properties held as security by secured creditors shall not be the subject of
such suspension order.

3. Notification through publication and sending of notices

◦ Published in a newspaper of general circulation
◦ Must be published once a week for two consecutive weeks
◦ First publication must be made within 7 days from the time of issuance of the order
◦ Clerk of court will also send a copy to all creditors named in the schedule of debts
and liabilities
4. Holding of creditor’s meeting and voting by creditors
◦ meet on the date, time, and place designated by the court in the Order
◦ creditors holding claims amounting to at least 3/5 of the liabilities is necessary for
holding a meeting
◦ The commissioner shall examine the written evidence of the claims.
◦ The creditors and the debtor shall discuss the proposed agreement and any
amendment and put it to a vote
◦ No creditor who incurred his credit within 90 days prior to the filing of the petition
shall be allowed to vote
◦ 2/3 of the creditors voted
◦ After the results have been announced, all the protests against the majority vote
shall be drawn up
◦ debtor and all creditors who took part in the voting shall sign the affirmed
propositions

Rejection of the proposed agreement

1. number of creditors required for holding a meeting do not attend; or
2. if the 2 majorities are not in favor
• terminated without recourse and the parties concerned will be at liberty to enforce the
rights

Persons who may refrain from voting

Creditors who are unaffected by the Suspension Order
• These are secured creditors and creditors having claims for personal labor,
maintenance, expense of last illness and funeral of the wife or children of the debtor incurred
60 days immediately prior to the filing of the petition
◦ Not bound by any agreement
◦ but if they should join in the voting they shall be bound

5. Objections to proposal
• any creditor who attended the meeting and who dissented from and protested
against the vote of the majority may file an objection with the court within 10 days
• Grounds for objections:
a) defects in the calling, holding, and deliberating
b) fraudulent connivance
c) fraudulent conveyance of claims
6. Hearing and issuance of court order
◦ Summary manner
◦ If annulled by the court, the court shall declare the proceedings terminated and
the creditors shall be at liberty to exercise the rights which may correspond to them.
Effects of Approval of Proposed Agreement
• order that the agreement be carried out and all parties bound thereby to comply with
its term
• binding upon all creditors whose claims are included in the schedule of debts and
liabilities and who were properly summoned BUT NOT UPON:
◦ creditors having claims for personal labor, maintenance, expenses of last illness
and funeral of the wife or children of the debtor
◦ secured creditors who failed to attend the meeting or refrained from voting

Failure of Individual Debtor to Perform Agreement

• all the rights which the creditors had against the individual debtor before the
agreement shall revest
• individual debtor may be made subject to the insolvency proceedings

Rights of Secured Creditors in suspension of payment proceedings

• Generally not affect the rights of secured creditors
• Can sue or institute proceedings
• Can also proceed with any pending execution
• The order confirming the approval of the proposed agreement is also not binding on
secured creditors who failed to attend the meeting or refrained from voting.

Prohibited Transactions
1. Prohibition against sale or encumbrance of assets
◦ except those used in the ordinary operations of commerce or of industry in which
the petitioner is engaged
1. Prohibition against payment:
◦ outside of the necessary or legitimate expenses of his business or industry

B. Voluntary Liquidation
• Properties are not sufficient to cover his liabilities, and owing debts exceeding
Php500,000.00
• The filing of such petition shall be an act of insolvency.

Liquidation Order
If the court finds the petition sufficient in form and substance it shall, within five (5)
working days issue such order

C. Involuntary Liquidation
Any creditor or group of creditors with a claim of, or with claims aggregating at least
Php500, 000.00
• Acts of insolvency:
a) about to depart or has departed
b) absent from the Republic of the Philippines
c) conceals himself
d) conceals, or is removing, any of his property
e) has suffered his property to remain under attachment or legal process for three (3)
days
f) has confessed or offered to allow judgment in favor of any creditor or claimant
g) willfully suffered judgment to be taken against him by default
h) suffered or procured his property to be taken on legal process
i) made any assignment, gift, sale, conveyance or transfer of his estate, property, rights
or credits
j) made any payment, gift, grant, sale, conveyance or transfer
k) Merchant defaulted
l) he has failed, after demand, to pay any moneys deposited with him or received by him
in a fiduciary
m) be without sufficient property

Order to Individual Debtor to Show Cause

• why he should not be adjudged an insolvent
• If good cause shown, forbid the individual debtor from making payments of any of his
debts, and transferring any property belonging to him
• However, it shall not affect or impair the rights of a secured creditor to enforce his lien

Default
• Debtor defaults
• in favor of the petitioning creditors
• court shall issue the Liquidation Order

Absent individual debtor

• Resides out of the Republic of the Philippines; or has departed therefrom; or cannot,
after due diligence, be found therein; or conceals
• petitioning creditors be entitled to an Order of the court directing the sheriff take into
his custody a sufficient amount of property of the individual debtor
• duty of the sheriff to take possession of the property and effects of the individual
debtor, not exempt from execution,
• prepare complete inventory of all the property so taken, and to return it to the court

Sale Under Execution

• interest of the parties to the proceedings will be subserved by a sale thereof,
• the court may order such property to be sold in the same manner as property is sold
under execution

The Commissioner
Qualifications:
1. citizen of the Philippines or a resident for 6 months immediately preceding his
appointment;
2. of good moral character and with acknowledged integrity, impartiality and
independence;
3. has the requisite knowledge of insolvency laws, rules and procedures; and
4. has no conflict of interest;
◦ Provided, that such conflict of interest may be waived, expressly or
impliedly, by a party who may be prejudiced
◦ deemed to have a conflict of interest if he is so situated as to be materially
influenced in the exercise of his judgment

Miscellaneous Provisions
• owner, partner, director, officer or other employee of the debtor
• fine of not more than Php 1, 000,000.00 and imprisonment for not less than 3 months
nor more than 5 years for each offense
• hide or conceal, or destroy or cause to be destroyed or hidden
• make any payment sale, assignment, transfer or conveyance
• having knowledge belief of any person having proved a false or fictitious claim against
the debtor, fail to disclose
• attempt to account for any of the debtors property by fictitious losses or expense
• knowingly violate a prohibition or knowingly fail to undertake an obligation

Application to Pending Insolvency, Suspension of Payments and Rehabilitation

Cases
• govern all petitions filed after it has taken effect.
• All further proceedings in insolvency, suspension of payments and rehabilitation cases
then pending
◦ except those in the opinion of the court their application would not be feasible or
would work injustice

Application to Pending Contracts:

• shall apply to all contracts of the debtor regardless of the date of perfection

Viva Shipping Lines v. Keppel Philippines Mining, Inc.

• filed a Petition for Corporate Rehabilitation
• RTC: DENIED for failure to comply with Rule 4, Sections 2 and 3 of the Interim Rules
of Procedure on Corporate Rehabilitation
• In the Amended Petition: own and operate 19 maritime vessels and Ocean Palace Mall,
a shopping mall, total properties’ assessed value at about ₱45,172,790.00. (contrary to the
attached documents)
• Property inventory list: 2 maritime vessels only and fair market value of all Viva
Shipping Lines’ assets amounted to ₱447,860,000.00 ₱400 million more than what was
alleged
• ₱147,630,000.00 of real property and its vessels were marked as "free assets."
• RTC: Viva Shipping Lines’ Amended Petition is "sufficient in form and substance," and
issued a stay order
• Later on lifted the stay order and dismissed Viva Shipping Lines’ Amended Petition for
failure to show the company’s viability and the feasibility of rehabilitation
• found that Viva Shipping Lines’ assets all appeared to be non-performing
ISSUE: WON THE CORPORATE REHABILITATION IS PROPER.
HELD: NO.
• Corporate rehabilitation is a remedy for corporations, partnerships, and associations
“who [foresee] the impossibility of meeting [their] debts when they respectively fall due.”
• The rationale in corporate rehabilitation is to resuscitate businesses in financial distress
because “assets . . . are often more valuable when so maintained than they would be when
liquidated.”
• Rehabilitation assumes that assets are still serviceable to meet the purposes of the
business
• The corporation receives assistance from the court and a disinterested rehabilitation
receiver to balance the interest to recover and continue ordinary business, all the while
attending to the interest of its creditors to be paid equitably
• When rehabilitation will not result in a better present value recovery for the creditors,
the more appropriate remedy is liquidation.
• Liquidation is diametrically opposed to rehabilitation. Both cannot be undertaken at
the same time. In rehabilitation, corporations have to maintain their assets to continue
business operations. In liquidation, on the other hand, corporations preserve their assets in
order to sell them.
• The dismissal of the Amended Petition did not emanate from petitioner’s failure to
provide complete details on its assets and liabilities but on the trial court’s finding that
rehabilitation is no longer viable for petitioner
• petitioner’s assets are non-performing
• Petitioner’s rehabilitation plan should have shown that petitioner has enough
serviceable assets to be able to continue its business.
• Plans howed that the source of funding would be to sell petitioner’s old vessels.
1. A business primarily engaged as a shipping line cannot operate without its ships
• plan to purchase new vessels sacrifices the corporation’s cash flow
• The plan to buy new vessels after selling the two vessels it currently owns is neither
sound nor workable as a business plan.