THE FINANCIAL

REHABILITATION AND
INSOLVENCYACTOF2010
Introduction
The FinancialRehabilitationandInsolvencyActof2010(FRIA)tookeffecton31August 2010
which repealed the Insolvency Law. FRIA contains three main parts: (i) rehabilitation, for
the purpose of restoring the financial health of insolvent debtors; (ii)
liquidation,whichprovidesfortheorderlyliquidationofthedebtor’sassetsandliabilities, once it
has been determinedthatoperationscannolongerbesuccessfullyrestored;(iii) cross-border
insolvency, whose purpose is to address insolvency-related matters involving foreign
companies with Philippine-based assets or foreign-based assets of Philippine
companies.

In 2013, the Supreme Court approved the Financial Rehabilitation Rules of Procedure
(2013), otherwise known as the FR Rules. Unlike theInsolvencyActof1909,FRIAand the
FR Rules do not limit insolvency to a situation where the debtor’s assets are less than
its liabilities. It now covers a situation where the debtor is unable to meet its obligations
as they fall due even if its assets are more than its liabilities.

ConstitutionalityofInsolvencyLaws
The Supreme Court ruled that the restructuring of the debt of the debtor pursuant to
rehabilitation plan does not constitute a violation of the non-impairment clause. Even
assuming that the non-impairment clause may be invoked, the non-impairment clause
must yield to the police power as the constitutional guaranty of non-impairment of
obligations is limited by the exercise of the police power of the State for the common
good of the general public.

Policyof FRIA
The FRIA states that it is the policy of the State:

1) To encourage debtors, both juridical and natural persons, and their creditors to
collectively and realistically resolve and adjust competing claims and property
rights.

2) To ensure a timely, fair, transparent, effective and efficient rehabilitation or

liquidation of debtors.

3) To ensure or maintain certainly and predictability in commercial affairs,preserve

and maximize the value of the assets of these debtors, recognize creditor rights
and respect priority of claims, and ensure equitable treatment of creditors who
are similarly situated.

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 4) When rehabilitation is notfeasible,tofacilitateaspeedyandorderlyliquidationof
these debtor's assets and the settlement of their obligation

ConceptofInsolvency
Under the FRIA, the term “insolvent” refers to the financial condition of a debtor that is
generally unable to pay its or his liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or his assets. Thus, the term
“insolvent” covers both bankruptcy and illiquidity.

In determining whether the debtor’s liabilities are greater than his assets, referencemust
be made to the fair valuation of his assets. The debtor’s assets must not, at fair
valuation, be sufficient to pay his debts.

Debtorscoveredbythe FRIA
Under FRIA, a debtor may be:

1) A sole proprietorship duly registered with the Department of Trade and Industry
(DTI)

2) ApartnershipdulyregisteredwiththeSecuritiesandExchangeCommission (SEC)

3) A corporation duly organized and existing under Philippines laws

4) An individual debtor who has become insolvent as defined in the law

5) Remedies from FRIA

For a partnership or association to be considered a “debtor” under theFRIA,itmustbe

duly registered with the SEC. Government financial institutions other than banks and
government owned or controlled corporations (GOCCs) are covered by the FRIA,unless
their specific charter provides otherwise.

Claimscoveredbythe FRIA
Under the FRIA, the term “claim” refer 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:

- Allclaimsofthegovernment,whethernationalorlocal,includingtaxes,tariffs and
customs duties; and

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 - Claims against directors or officersofthedebtorarisingfromtheactsdoneinthe
discharge of their functions falling within the scope of their authority; however,
this inclusion does not prohibit the creditors or third parties from filing cases
against the directors and officers acting in their personal capacities.

The FRIA covers claims of whatever nature or character. It covers both monetary and
non-monetary claims.

RemediesundertheFRIA
The remedies availabletoaninsolventdebtormayeitherbejudicialorextrajudicial.The FRIA
provides the following remedies in the event a debtor is insolvent:
- Rehabilitation, which may be voluntary, involuntary, or pre-negotiated

- Out of court restructuring

- Liquidation, which may be voluntary or involuntary

The FRIA also provides the remedy of filing a petition for suspension of payment for
individual debtors.

NatureofproceedingsundertheFRIA
Proceedings under the FRIA are proceedings in rem. Under the FRIA, the
courtacquiresjurisdictionoverallpersons affected by the proceedings upon publication of
the notice of the commencement of the proceedings in any newspaper of general
circulation in the Philippines (in the manner prescribed by the rules of procedure to be
promulgated by the Supreme Court).

TheFRIAmandatesthatproceedingswillbeconductedinasummaryand non-adversarial
manner. The court may decide matters on the basis of the pleadings and other
documentary evidence, and conduct clarificatory hearings when necessary.

Any order issued by the court under the procedural rules is immediately executory.
Review of any order of the court will be in accordance with the procedural rules. The
reliefs ordered by the trial or appellate courts must take into account the need for
resolution of the proceedings in a just, equitable, and speedy manner.

The procedural rules must be liberally construed to promote a timely, fair, transparent,
effective, and efficient liquidation and suspension of payments of debtors.

Advantagesofjudicialremedies
Retention of management

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 - Unless otherwise provided by the court, the management of the juridical debtor
will remain with the existing management subject to the applicable law/s and
agreement/s, if any, on the election or appointment of directors, managers, or
managing partner.

Non-withholding of supply

- After the issuance of the Commencement Order, the debtor’s suppliersofgoods

or services are prohibited from withholding the supply of goods and services in
the ordinarycourseofbusinessforaslongasthedebtormakespaymentsforthe
services or goods supplied after the issuance of the Commencement Order.
Thus, the debtor will have the resources to continue operations.

Protection from certain action and processes

- The court’s Commencement Order (i) generally prohibits, or otherwise serve as

thelegalbasis for rendering null and void the results of any extrajudicial activity or
process to seizeproperty,orotherwiseattempttocollectonorenforceaclaim
againstthe debtor, (ii) 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 ofthe
debtor’s creditors; (iii) serve as the legal basisforrenderingnullandvoidthe
perfection of any lien against the debtor’s property after the commencement date

- The court’s Stay Order or Suspension Order generally (i) suspend all actions or
proceedings for the enforcement of claims against the debtor; (ii) suspend all
actions to enforce any judgment, attachment, or other provisional remedies
against the debtor; and (iii) prohibit the debtor from making any payment of its
liabilities outstanding as of the commencement date except as may be provided
herein

Exemption from, or waiver of, taxes

- Upon issuance of Commencement Order by the court, and until the approval of
the Rehabilitation Plan or dismissal of petition, the imposition of all taxes andfees
due to the nationalgovernmentareconsideredwaived,infurtheranceofthe
objectives of rehabilitation.

Compromises binding

- Any compromises on amounts or rescheduling of timing of payments by the

debtor will be binding on creditorsregardlessofwhetherornottheRehabilitation Plan
is successfully implemented

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Cram-down power

- The court has the power toapproveorimplementtheRehabilitationPlandespite the

lack of approval, or objection from the owners, partners, or stockholders of the
insolvent debtor, provided that thetermsthereofarenecessarytorestorethe
financial well-being and viability of the insolvent debtor

Binding effect of rehabilitation plan

- The Rehabilitation Plan and its provisions will be binding uponthedebtorandall

persons who may be affected by it, including the creditors, whether or not such
persons have participated in the proceedings or opposed theRehabilitationPlan
or whether or not their claims have been scheduled

Suspensionofpayment
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.

Under the FRIA, an individual debtorwho,possessingsufficientpropertytocoverallhis

debts but foreseeing the impossibility of meeting them when they respectively fall due,
may file a verified petition that he be declared in the state of suspension of payments.
The creditors cannot file the said petition against the debtor.

The petition is filed in the court having jurisdiction over the province or city where the
debtor has resided for six months prior to the filing of the petition.

Basic Procedure in Suspension of Payment

1) Filing of petition

2) Action on petition

3) Notification through publication and sending of notices

4) Holding of creditor’s meeting and voting by creditors

5) Objections to proposal

6) Hearing and issuance of court order

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TheCommissioner
The commissioner, who will preside over the creditors’ meeting in connection with the
proceedings, must be a natural person who will have the following minimum
qualifications:

(a) AcitizenofthePhilippinesoraresidentthereofforsixmonthsimmediately preceding

his appointment;

(b) Ofgoodmoralcharacterandwithacknowledgedintegrity,impartiality,andindepende
nce;

(c) Has the requisite knowledge of insolvency laws, rules and procedures; and

(d) Has no conflict of interest

The debtor or anycreditormayfileawrittenobjectiontothecommissionerappointedby the

court on the ground that he does not meet the foregoing minimum requirements. If the
court finds merit in the objection, it will appoint a new commissioner.

Rights of secured creditors in suspension of payment

proceedingsThepetitionforsuspensionofpaymentswillgenerallynotaffecttherights of
secured creditors.Thus,notwithstandingthefilingofthepetitionandduringthependencyof
proceedings,securedcreditorscansueorinstituteproceedingstocollecttheirclaims.
Securedcreditorscanalsoproceedwithanypendingexecutionagainstanindividual debtor,
as a court order suspending pending execution will not be applicable to them.

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. Should the
secured creditor vote,then the order confirming the agreement will be binding upon him.

Prohibitedtransactions
Thefollowingtransactionsareprohibitedupontheissuance of the Order, and so long as the
proceedings relative to the suspension of payments are pending:

(1) Prohibition against sale or encumbrance of assets

The order prohibits the sale, transfer, encumbrance or disposition by the

individual debtor of his property, except those used in the ordinary operations of
commerce or of industry in which the individual debtor is engaged.

(2) Prohibition against payment

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 The order prohibits the individual debtorfrommakinganypaymentoutsideofthe
necessary or legitimate expenses of his business or industry.

Rehabilitation
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 itscreditorscanrecoverbywayofthepresentvalueofpaymentsprojected in the
plan, more if the debtor continues as a going concern than if it is immediately liquidated.

Rehabilitation proceedings have two-pronged purpose: (a) to efficiently and equitably

distribute the assets of theinsolventdebtortoitscreditors;and(b)toprovidethedebtor with a
fresh start by relieving them of the weight of their outstanding debts and permitting them
to reorganize their affairs.

The rehabilitation must be viable or likely. If the rehabilitation is not feasible, the FRIA
states that is in the interest of the State to facilitate a speedy and orderly liquidation of
the debtor’s assets and the settlement of the obligations.

Types of Rehabilitation Proceedings:

- Court supervised, which may be voluntary or involuntary;

- Pre-Negotiated; and
- Out of court or informal.

Court-supervisedrehabilitation
Voluntary Court-Supervised Rehabilitation

- Who initiates the proceedings? The insolvent debtor

- Who may file the petition?
(1) The owner in case of single proprietorship;

(2) The majority of partners in case of partnership; and

(3) The majority vote of the board and the vote of stockholders representingat
least ⅓ of capital stock. However, if the articles of partnership or the
articles of incorporation impose a higher vote requirement for instituting
voluntary proceedings, then that vote requirement shall prevail.

Involuntary Court-Supervised Rehabilitation

- Who initiates the proceedings? A creditor or a group of creditors

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 - Who may file the petition? A creditor or group of creditors with aggregateclaims
of at least P1,000,000 or at least 25% of subscribed capital or partners’
contribution, whichever is higher, if:
(a) There is no genuine issue of fact or lawontheclaimofthepetitioner,and that
the due and demandable payments thereon have not been made for at
least 60 days; or

(b) The debtor failed generally to meet its liabilities as they fall due; or

(c) A creditor, other than the petitioner, has initiated foreclosure proceedings
against the debtor that will prevent the debtor from paying its debts asthey
become due or will render it insolvent.

Venue for Petition

ThepetitionforrehabilitationmustbefiledintheRegionalTrialCourtwhichhas jurisdiction over

the principal office of the debtor alleged to be insolvent.

CommencementOrder
Contents of the Order:

The Order will, among others,:

(a) Declare that the debtor is under rehabilitation;

(b) Appoint a rehabilitation receiver who may or may not be from among the
nominees of the petitioner;

(c) Prohibit thedebtor’ssuppliersofgoodsorservicesfromwithholdingthesupplyof goods

and services in the ordinary course of business for as long as the debtor makes
payments for those supplied after the issuance of the order;

(d) Authorize the payment of administrative expenses as they become due; and

(e) Set the caseforinitialhearing,whichwillnotbemorethan40daysfromthefiling of the

petition for the purpose of determining whether there is substantial likelihood for
the debtor to be rehabilitated.

Effects of the Order:

The issuance of the Order will:

(a) Vest the rehabilitation receiver with all the powers and functions provided for in
the FRIA;

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 (b) Prohibit, or otherwise serve as the legal basis for rendering null and void the
results of any extrajudicial activity or process to seize the property, sell
encumbered property, or otherwise attempt to collect on or enforce a claim
against the debtor after the commencementdateunlessotherwiseallowedinthe
FRIA;

(c) 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 debtor’s
creditors;

(d) Serve as the legal basis for rendering null and void the perfection of any lien
against the debtor’s property after the commencement date; and

(e) Consolidate the resolution of all legal proceedings by and against the debtor to
the court.

Effectivity and Duration of the Order

The Order is effective for the duration of the rehabilitation proceedings, unless

● Earlier lifted by the court;

● The rehabilitation plan is seasonable confirmed or approved; or

● The rehabilitation proceedings are ordered terminated by the court.

SuspensionOrder
Contents of Order:

The Suspension Order will:

(a) Suspend all actions or proceedings, in court or otherwise,fortheenforcementof

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) Prohibitthedebtorfrommakinganypaymentofitsliabilitiesoutstandingasofthe
commencement date except as may be provided herein.

Exceptions to the Stay or Suspension Order:

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The Order does not apply:

● to cases already pending appeal in the Supreme Court as of commencement

date;

● to cases pending or filed at specialized court or quasi-judicial agency which is

capable of resolving the claim more quickly, fairly and efficiently that the
rehabilitation court, subject to the discretion of the rehabilitation court;

● to enforcement of claims against sureties and other persons solidarily liablewith

the debtor, and third parties oraccommodationmortgagorsaswellasinsurersof
letters of credit;

● to any form of action of customers or clients of a securities market participantto

recover or otherwise claim moneys and securities entrusted to the latter in the
ordinary court of the latter’s business as well as anybaction of such securities
market participant or the appropriate regulatory agency or self-regulatory
organization to pay or settle such claims or liabilities;

● to the actions or a licensed broker or dealer to sell pledged securities of a debtor;

● Clearing and settlement of financial transactions through the facilities of a

clearing agency or similar entities; and

● To any criminal action against the individual debtor or owner,partner,directoror

officer of a debtor will not be affected by any proceeding commenced under the
FRIA

TheRehabilitationReceiver
The rehabilitation receiver is the person appointed as such by the court, who is
entrusted with suchpowers,duties,andresponsibilitiesinrelationtotherehabilitationof the
debtor. Any qualified natural or juridicalpersonmayserveasrehabilitationreceiver. If the
receiver is a juridical entity, it must designate a natural personwhopossessesall the
qualifications and none of the disqualifications as its representative.

Qualifications of a Rehabilitation Receiver:

(a) He is a citizen of the Philippines or a resident of the Philippines for at least six
months immediately preceding his nomination;

(b) He is of good moral character and with acknowledged integrity, impartiality, and
independence;

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 (c) As far as practicable, he has expertise and acumen to manage and operate a
business similar in size and complexity to that of the debtor;

(d) He has an operating knowledge in management, finance, and rehabilitation of

distressed companies;

(e) He has a general familiarity with the rights of creditors subject to suspension of
payments or rehabilitation and general understanding of the duties and
obligations of a rehabilitation receiver;

(f) He has not been earlier dismissed as a rehabilitation receiver;

(g) He has no conflict of interest; and

(h) He is willing and able to file a bond in such amount as may be determined by
court

Oath and Bond of the Receiver

- Prior to entering upon his powers, duties and responsibilities, the receiver must
take an oath and fileabond,insuchamounttobefixedbythecourt,conditioned upon
the faithful and proper discharge of his powers, duties and responsibilities.

Removal of the Receiver:

- A Receiver may be removed at any time by the court on such grounds as the
rules of procedure may provide which will include, 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

stakeholders

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TheRehabilitationPlan
The Rehabilitation Plan is the plan by which the financial well-being and viability of an
insolvent debtor can be restored using various means including, but notlimitedto,debt
forgiveness, debtrescheduling,reorganizationofquash-reorganization,dacionenpago,
debt-equity conversion and sale of the business as a going concern, or setting-up of
new business entity, or other similar arrangements as may be approvedbythecourtor
creditors.

Cram-downpower
The court has the power to approve or implement the Rehabilitation Plan despite the
lack of approval, or objection fromtheowners,partners,stockholdersorcreditorsofthe
insolvent debtor, provided that the terms thereof are necessary to restore the financial
well-being and viability of the insolvent debtor. However, the following circumstances
must be present:

(a) The Rehabilitation Plan complies with the requirements specified in the FRIA;

(b) The rehabilitation receiver recommends the confirmation of the Plan;

(c) The shareholders, owners or partners of the juridical debtor lose at least their
controlling interest as a result of the Plan; and

(d) The Plan would likely provide the objecting class of creditors with compensation
which has a net present value greater than that which they would havereceivedif
the debtor were under liquidation

Managementofthecompanyunderrehabilitation
As arule,themanagementofthejuridicaldebtorremainswiththeexistingmanagement
subject to the applicable laws and agreements on the election or appointment of
directors, managers or managing partner. The rehabilitation receiver will not generally
take over the management and control of the debtor. However, the rehabilitation
receiver may recommend the appointment ofamanagementcommitteeoverthedebtor
under the following circumstances:

(a) Actual or imminent danger of dissipation, loss, wastage, or destruction of the

debtor’s assets or other properties;

(b) Palayzation of the business operations of the debtor; or

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 (c) Gross mismanagement of the debtor, or fraud or other wrongful conduct on the
part of, or gross or willful violation of the FRIA by existing management, or the
owner, partner, director, officer or representatives in management of the debtor

TheManagementCommittee
Role:

- The Committee will take theplaceofthemanagementandthegoverningbodyof the

debtor and assume their rights and responsibilities. It has the power to take
custody of and control of all assets and properties owned or possessed by the
debtor. It may overrule or revoke the actions of the previousmanagementorthe
governing body of the debtor.

Composition:

- Unless the court otherwise provides, the management committee will be

composed of three qualified members appointed by the court as follows:
(a) First member - nominated by the debtor

(b) Second member - nominated by the creditor/s holding more than 50% of
the total obligations of the debtor;

(c) Third member - acts as the chairman of the committee; nominated by the
first and second members within ten days from appointment

- The court will appoint the first member in case the decision to appoint a
management committee is due to:
(1) Gross mismanagement of the debtor;

(2) Fraud or other wrongful conduct on the part of, or grossorwillfulviolation of

the FRIA by existing management, or the owner, partner, director, officer
or representatives in management of the debtor

Creditor’sCommittees
Organization

- Afterthecreditors’meetingcalled,thecreditorsbelongingtoaclassmayformally
organize a committee among themselves which may be composed of:
1) Secured creditors
2) Unsecured creditors
3) Trade Creditors and Suppliers
4) Employees of the debtor

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 - Creditors, representing at least majority of all the claims as reflected in the
registry of claims, must cast their vote for its creation

Election of Representatives to the Creditors’ Committee

- Each creditor will vote in proportion to his interest vis-a-vis the total claims of all
the creditors within the same class as determined by the rehabilitation receiver
- Voting may be done personally, by mail or by proxy accompanied by the
necessary authority to cast the vote

Election of Chairman of the Creditors’ Committee

- The rehabilitation receiver will convene the chosen representatives to elect the
chairman of the committee
- Eachclassof creditors are entitled to only one vote and any tie will be resolved by
drawing of lots
- The chairman will be responsible for convening the creditors’ committee,
whenever necessary, to discuss, eliberate, and confer with the rehabilitation
receiver, on any view or proposal in the preparation, review or revision of a
Rehabilitation Plan for the debtor

Role of Creditors’ Committee

- To assist the rehabilitation receiver in communicating with the creditors and will
be the primary liaison between the rehabilitation receiver and the creditors

Saleordispositionofassetsaftercommencementdate
Use or Disposition of Assets by Debtor

- GENERAL RULE: No funds or property of the debtor can be used or disposed of

- EXCEPTIONS:
a. Sale or disposition is in the ordinary course of business of the debtor

b. Sale or disposition is necessary to finance the administrative expensesof

the rehabilitation proceedings

c. The sale or disposition is made, with approval of the court and upon
application of the rehabilitation receiver, of unencumbered property of tje
debtor outside the ordinary course of business upon showing that the
property, by its nature or because of other circumstances, is perishable,
costly to maintain, susceptible to devaluation or otherwise in jeopardy.

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d. The sale, disposition or encumbrance of unencumbered property is mae
with authority of the court and after notice and hearing if:

i. The transaction is in the interest of administering the debtor and

facilitating the preparation and implementation of rehabilitation plan

ii. Transaction is necessary in order to provide a substitute lien,

mortgage, or pledge of property

iii. The proceeds will be usedtomeetadministrativeexpensesasthey

arise

iv. The proceeds will be used to pay victims of quasi delicts upon
showing a valid claim and the debtor has insurance

v. The proceeds will beusedtorepurchasepropertyofthedebtorthat is

auctioned off

vi. The proceeds will be used to reclaim property of the debtor held
pursuant to a possessory lien

e. Upon application by secured creditor holdingalienagainstaholderofan

ownership interest in property held by debtor that is subject to potentially
rapid obsolescence, depreciation, or diminution, in value and with the
approval of the court, if depreciation cannot be avoided and such
depreciation is jeopardizing thesecurityorpropertyinterestofthesecured or
owner, in which case the court will:

i. Allow the encumbered property to be foreclosed provided that the

proceeds will be distributed with the order prescribed under the
rules

ii. Order the conveyance of a lien against or ownership interest in

substitute propertyofthedebtortothesecureddebtorprovidedthat other
creditors holding liens do not object

iii. Order the conveyance to the secured creditor or holder of an

ownership interest of a lien on the residual funds from the sale

iv. Allow the sale or disposition of property, provided that it will

maximize the value of the property for the benefit of the secured
creditor and debtor and the proceeds will be distributed accordingly

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 v. The sale or disposition is made of encumbered property where
there is a security interestpertainingtothirdpartiesunderfinancial,
credit or other similar transactions, should the court determine that:

1. It be necessary for the continued operation of business

2. Debtor has made arrangements to provide a substitute lien

or ownership right providing an equal level of security

Use Or Disposition Of Assets Of Debtor Held By Third Parties

- Third parties will not transfer, convey, or otherwise dispose of possessory

pledges, mechanic’s liens or similar claims, to persons other than the debtor
unless upon prior approval of the rehabilitation receiver. The rehabilitation
receiver may also:
a. Demand the surrender or the transfer of thepossessionorcontrolofsuch
propertysubjecttopaymentoftheclaimssecuredbyanypossessoryliens

b. Allow said third parties to retain possession or control if such an

arrangement would more likely preserve or increase the value of the
property

c. Undertakeanyotherdispositionofthesaidpropertyasmaybebeneficial

Rescission Or Nullity Of Sale, Payment, Transfer, Or Conveyance Of Assets

- GENERAL RULE: the court may rescind or declare as null and void any sale,
payment, transfer or conveyance of the debtor’s unencumbered property or any
unencumbering thereof which are not in the ordinary course of the business of
the debtor
- EXCEPTION: May not be nullified if made for the following purposes:
a. To administer the debtor andfacilitatethepreparationandimplementation of
a Rehabilitation Plan

b. To provide a substitute lien, mortgage, or pledge of property

c. To pay or meet administrative expenses as they arise

d. To psyvictimsofquasi-delictsuponshowingthattheclaimisvalidandthe debtor
has insurance to reimburse the debtor for the payments made

e. To repurchase property of the debtor that is auctioned off in a judicial or

extrajudicial sale

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 f. Toreclaimorredeempropertyofthedebtorheldpursuanttoapossessory lien

Credit arrangements and encumbrance of property after

commencement date
Credit Arrangements

- GENERALRULE:Thedebtorcannotenterintocreditarrangementsafter
commencement date.
- EXCEPTION:Withtheapprovalofthecourtupontherecommendationofthe
rehabilitation receiver, the debtor, in order to enhance its rehabilitation, may:
a. Enter into credit arrangements

b. Enter into credit arrangements secured by mortgages of itunencumbered

property or secondary mortgages with the approval of senior secured
parties with regard to the encumbered property

c. Incurotherobligationsasmaybeessentialforrehabilitation

Encumbrance Of Property

- GENERAL RULE: The debtor cannot encumber property

- EXCEPTIONS:
a. When done in the ordinary course of business

b. When authorized by the court

Paymentofliabilitiesandclaimsoutstandingasofcommencement date
Pre-commencement Claim

- A claim that is outstanding as of the commencement date. It includes:

- Claims of separation pay for months worked prior to the

commencement date

- Claims for actual damages, if any,arisingasaresultoftheelection to

terminate a contract

Payment

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 - Generally, the debtor is prohibited by theStayorSuspensionOrderfrommaking any
payment of its liabilities outstanding as of the commencement date

- The Rehabilitation Plan must disclose all payments to creditors for

pre-commencement debts made during the proceedings and its justifications

Post-commencement Interest

- Therateandtermofinterest.Ifany,onsecuredandunsecuredclaimswillbe determined
and provided for in the approved Rehabilitation Plan

Paymentofadministrativeexpenses
Concept

- Administrative expenses refer to those reasonable and necessary expenses:

a) Incurred from filing a petition under the FRIA;

b) Arising from the conduct of proceedings under the FRIA;

c) Incurredintheordinarycourseofbusinessofthedebtorafterthe
commencement date;

d) For the payment of new obligations obtained after the commencement

date to finance rehabilitation of the debtor;

e) Incurredforthefeesoftherehabilitationreceiverorliquidatorandofthe
professionals engaged by them; and

f) ThatareotherwiseauthorizedormandatedbytheFRIAorthe Supreme
Court in its rules.

- The FRIA also considers the following as administrative expenses:

a) Compensation of employees required to carry on the business;

b) Claimsforsalaryandseparationpayforworkperformedafterthe
commencement date; and

c) Contractualobligationsofthedebtorperformedduringthe90-dayperiod for
confirmation, and afterwards for confirmed contracts.

Payment

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 - The Commencement Order authorizes the payment of administrative
expensesas they fall due.
- TheRehabilitationPlanwillalsoarrangeforthepaymentofadministrative expenses as
a condition to the Plan’s approval
- Exception:Unlesssuchconditionhasbeenwaivedbythecreditors concerned

Pre-commencementcontractandobligations
Pre-commencement contracts

- Rule: All valid and subsisting contracts of the debtor with the creditorsandother
third parties at the commencement date remain in force.
- Exceptions:

a) The rehabilitation court may cancel the contract at any time after the
issuance of the Commencement Order;

b) Contracts not confirmed by the debtor will be considered terminated.

Pre-commencement transactions

- Anytransactionoccurringpriortocommencementdateenteredintobythedebtor or
involving its fundsorassetsmayberescindedordeclarednullandvoidonthe ground
that the same was executed with intent to defraud a creditor or creditors or which
constituted undue preference of creditors.
- A disputable presumption of such design will arise if the transaction:

a) Provides unreasonably inadequate consideration to the debtor and is

executed within 90 days prior to the commencement date;

b) Involves an accelerated payment of a claimtoacreditorwithin90days

prior to the commencement date;

c) Provides security or additional security executed within90dayspriorto

the commencement date;

d) Involves creditors, where a creditor obtained more than its pro rata
share in the assets of the debtor, executedatatimewhenthedebtorwas
insolvent; or

e) Is intended to defeat, delay or hinder the ability of the creditors to

collectclaimswheretheeffectofthetransactionsistoputassetsofthe

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 debtor beyond the reach of creditors or to otherwiseprejudicetheinterest of
the creditors.

- Nothing in the FRIA prevents the court fromrescindingordeclaringnullandvoid a

transaction on other grounds provided by law or jurisprudence.

Actions for rescission or nullity of pre-commencement transactions

- The rehabilitation receiver or, with his conformity, any creditor may initiate and
prosecute any action torescind,ordeclarenullandvoidanypre-commencement
transaction.
- If the rehabilitation receiver doesnotconsenttothefilingorprosecutionof such
action, any creditor may seek leave of the court to commence such action.
- If leave of court is granted, the rehabilitation receiver will assign and
transfer to the creditor all rights, title and interest in the chose inactionor
subject matter of the proceeding, including any document in support
thereof.
- Anybenefitderivedfromaproceedingundertakenbythecreditor,totheextentof his
claim and the costs, belongs exclusively to the creditor instituting the proceeding,
and the surplus, if any, belongs to the estate.
- Where, before an order is made by the court, the rehabilitation receiver (or
liquidator) signifies to the court his readiness to institute the proceeding for the
benefitofthecreditors,theorderwillfixthetimewithinwhichhewilldosoand,in that case,
the benefit derived from the proceeding, if instituted within the time limits so fixed,
belongs to the estate.

Treatmentifsecuredcreditorsinrehabilitationproceedings
TheFRIAgivespreferentialtreatmenttosecuredcreditors,whoarecreditorswhose claims are
secured by liens such as a pledge or mortgage.

No diminution of secured creditor rights

- Rule: The issuance of the Commencement Order and the Suspension or Stay
Order, and any other provision of the FRIA, will not be deemed in any way to
diminish orimpairthesecurityorlienofasecuredcreditor,orthevalueofhislien or
security.
- Exception: His right to enforce the saidsecurityorlienmaybesuspended
during the term of the Stay Order.
- The court, upon motion or recommendation of the rehabilitation receiver, may
allowasecuredcreditortoenforcehissecurityorlien,orforecloseuponthe

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 property of the debtor securing his claim, ifthesaidpropertyisnotnecessaryfor the
rehabilitation of the debtor.
- The secured creditor and/or other lien holders will be admitted to therehabilitation
proceedings only for the balance of his claim, if any.
- In suspension of payments (unlike rehabilitation proceedings), secured creditors
may institute proceedings to collect claims even after the filing of the petition for
suspension of payment.
- Section 96: Except for secured creditors, no creditor will sue or institute
proceedings to collect his claim from the time of the filing of the petition for
suspension of payments and for as long as proceedings remain pending.
- Similarly, in a petition for involuntary insolvency, the FRIA provides that“nothing
contained herein will affect or impair the rights of a secured creditor to enforcehis
lien in accordance with the terms.”
- The FRIAlikewiseprovidesthatthe“LiquidationOrderwillnotaffecttherightofa
secured creditor to enforce his lien in accordance with the applicable contractor
law.”

Sale of encumbered property

- The court may authorize the sale, transfer, conveyance or disposal of

encumbered property of the debtor with the consent of the secured creditors.
- Upon the application of a secured creditor holding a lien property held by the
debtor that is subject to potentially rapid obsolescence, depreciation ordiminution
in value, the court may take various steps for the protection of the secured
creditors.

Maintenance of security interest

- The rehabilitation plan must maintain the security interest of secured creditors
and preserve the liquidation value of the security.
- Exception: Unless such has been waived or modified voluntarily.
- Similarly, the Liquidation Plan and its implementation must ensure that the
concurrence and preferenceofcreditsasenumeratedintheCivilCodeandother
relevant laws will be observed.
- Exception: Unless a preferred creditor voluntarily waives his preferred
right.

Pre-negotiatedrehabilitation
Concept

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 - In pre-negotiated rehabilitation, the debtor and the required number of creditors
agree in the rehabilitation plan beforethefilingofapetitionwiththerehabilitation
court.

Who may file petition

- An insolvent debtor, by itself or jointly with any of its creditors,mayfileaverified

position with the court for the approval of a pre-negotiated Rehabilitation Plan.

a) With respect to the debtor, the filing of the petition must be authorized
by:

i. the owner, in case of a sole proprietorship;

ii. the majority of partners in a partnership; or

iii. the majority vote of the Board of Directors/Trustees and by the

vote of stockholders representing 2/3 of the outstanding capital
stock or members

b) The pre-negotiated Rehabilitation Plan must have been approved by

creditors holding at least 2/3 of the total liabilities of the debtor, including
secured creditorsholdingmorethan50%ofthetotalsecuredclaimsofthe debtor
and secured creditors holding more than 50% of the total unsecured
claims of the debtor.

Venue for petition

- Filed in the RTC which has jurisdiction over the principal office of the debtor
alleged to be insolvent as specified in its articles of incorporation or partnershipor
in its registration papers with the DTI in cases of sole proprietorship, as the case
may be.
- Where the principal office of the corporation, partnership or association as
registered in the SEC is in Metro Manila, filed in the RTC of the city or
municipality where the head office is located.

OutofCourtRestructuringAgreements
Out of Court Restructuring Agreements(OCRA)orRehabilitationPlanisarehabilitation plan
agreed upon by the debtor and the required number of creditors. OCRA need not be
submitted to the court for approval.

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Minimum requirements:

1. The debtor must agree to the OCRA.

2. Itmustbeapprovedbythecreditorsrepresentingatleast67%ofthesecured
and 75% of the unsecured obligations of the debtor.

3. It must be approved by the creditorsbyholdingatleast85%ofthetotalliabilities of the

debtor.

Publication of notice of OCRA: Once a week for at least 3 consecutive weeks in a

newspaper of general circulation in the Philippines. It will take effect after 15daysfrom
the date of last publication.

Standstill
Standstill period refers to the period agreed upon by the debtor and its creditors to
enable them to negotiate and enter into an OCRA.

Requirements:

A. Suchagreementisapprovedbycreditorsrepresentingmorethan50%ofthe total
liabilities of the debtor.

B. NoticethereofispublishedinanewspaperofgeneralcirculationinthePhilippines once
a week for 2 consecutive weeks.

C. Perioddoes not exceed 120 days from effectivity.

Minimum requirements of notice of Standstill agreements:

A. The identity of the debtor, its principal business and its principal business place.

B. Total amount of the liabilities, classified into secured and unsecured.

C. That a contact person is identified, together with his contact details.

D. Creditors are invited to participate in the negotiationsforanOCRAbycontacting the

person specified in the notice.

E. Creditors representing 50% if the total liabilities agreed with the standstill period.

F. That the terms and conditions be strictly observed during the standstill period.

G. Standstillperiod will be effective after publication.

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 H. TheOCRAwillbebindingonthedebtorandallaffectedpersonsincluding the creditors
upon approval of the parties (debtor and creditors)

The standstill period will expire upon:

- The laps of 120 days from the effectivity of the agreement;

- The effectivity of the OCRA; or
- Termination ofthenegotiationsforOCRAasdeclaredbythecreditors representing
more than 50% of the total liabilities, whichever comes first.

Courtassistance
While the OCRA or standstill agreements is not filed with or approved by thecourt,the
insolvent debtor or a creditor may file an application for court assistance to execute or
implement a standstill agreement or an OCRA.

A petition for court assistance must be accompanied by a copy of the standstill

agreement or the OCRA.

Venue

- RTC having jurisdictions over the place in which the insolvent debtor resides
orhas its principal place of business.

Liquidation
Either voluntary or involuntary. Voluntary when it is filed by the debtor and involuntary
when it is filed by the creditor.

Who may file and where

1. Voluntary

a. An individual who has more than P500,000 debts and such debt exceed
his total assets in the court having jurisdiction over the province or city
where he has resided for 6 months prior to the filing of petition.

b. An insolvent juridicaldebtorinRTCwhichhasjurisdictionoveritsprincipal
office.

2. Involuntary

a. Anycreditororcreditorswithaclaimof,oraggregateofwhoseclaimsisat least
P500,000in the court having jurisdiction over the province or city where
the debtor resides.

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 b. With respect to liquidation of a juridical person,3ormorecreditorswhose
claimsisatleast 1 million or at least 25% of the subscribed capital stock or
partner’s contributions of the debtor, whichever is higher. In the RTC
which has jurisdiction over debtor’s principal office.

Rehabilitationproceedingsmaybeconvertedtoliquidationproceedings.Exampleof such
instances:

- Uponfindingofthecourtthat the debtor is insolvent and there is no substantial

likelihood for the debtor to be successfully rehabilitated.
- Ifthecourtdeterminesthatthedebtoror creditor acted in bad faith, or that it is not
feasible to cure the defect.
- Upon motion or motu proprio when the court does not confirm the Rehabilitation
Plan within 1 year.
- Upon breach or failure of the Rehabilitation Plan
- If the termination of rehabilitation proceedings is due to failure

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LiquidationOrder
TheCourtthathasjurisdictionovertheliquidationproceedingsshall, in proper cases, issue a
Liquidation Order which includes among others:

(1) Declaring that the debtor is insolvent;

(2) Ordering the liquidation of the debtor;

(3) In case of juridical person, declaring it as dissolved;

(4) Prohibiting payments and/or transfer of property by the debtor; and

(5) Directingallclaimstobefiledwiththeliquidator

Effects of the Liquidation Order

Upon the issuance of a Liquidation Order:

(a) The juridical debtor will be deemed dissolved and itscorporateorjuridical

existence terminated;

(b) Legal title to and Control of all the assets of the debtor, except thosethat
may be exempt from execution, will be deemed vested in the liquidator or,
pending his election or appointment, with the court;

(c) All contracts of the debtor will be deemed terminated and/or breached,
unless the liquidator, within 90 days from the date of his assumption of office,
declares otherwise and the contracting party agrees;

(d) No separate action for the collection of an unsecured claim will beallowed.
Such actions already pending will be transferred to the Liquidator forhim to
accept and settle or contest. If the liquidator contests or disputes theclaim, the
courtwillallow,hearandresolvesuchcontestexceptwhenthecaseis already on
appeal. In such a case, the suit may proceed to judgment, and any final
andexecutorjudgmentthereinforaclaimagainstthedebtorwillbefiledand allowed in
court; and

(e) No foreclosure proceeding will be allowed for a period of180days(FRIA,

Sec.113; FLSP Rules, Rule 4, Sec.3)

Review of Liquidation Order

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 - The Liquidation Order, and the order approving or disapproving the Liquidation
Plan can only bereviewedthroughapetitionforcertioraritotheCourtofAppeals under
Rule 65 of Rules of Court within 15 days from notice of the decision or order
(FLSP Rules, Rule 5, Sec.4)

Rightsofsecured creditors under Liquidation Order and Liquidation

Plan
The Liquidation Ordershallnotaffecttherightofasecuredcreditortoenforcehislienin
accordance with the applicable contract or law.

A Secured creditor may:

(1) Waivehisrightunderthesecurityorlien,provehisclaimintheliquidation proceedings

and share in the distribution of the assets of the debtor; or

(2) Maintain his rights under the security or lien

(a) If the Secured Creditor maintains his rights under the security or lien:

(i) The value ofthepropertymaybefixedinamanneragreeduponby the

creditor and the liquidator.

● When the value of the property is less than the claim it

secures, the 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.

● If its value exceeds the claim secured, the liquidator may

convey the property to the creditor and waive the debtor’s
right of redemption upon receiving the excess from the
creditor

(ii) Theliquidatormaysellthepropertyandsatisfythesecured creditor’s

entire claim from the proceeds of the sale; or

(iii) Thesecuredcreditormayenforcethelienorforeclosureonthe property

pursuant to applicable laws

TheLiquidator
Qualifications of the Liquidator

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 (1) Be a citizen of the Philippines or a resident thereof for 6 months immediately
preceding his nomination;

(2) Be of good moral character and with acknowledged integrity, impartiality and
independence;

(3) Have the requisite knowledge of insolvency and other relevantcommerciallaws,

rules and procedures, aswellastherelevanttrainingand/orexperiencethatmay be
necessary to enable him to properly discharge the dutiesandobligationsofa
liquidator; and

(4) Havenoconflictofinterest(butsuchconflictofinterestmaybewaived,expressly or
impliedly, by a party who may be prejudiced thereby)

If the liquidator is ajuridicalentity,itmustdesignateanaturalpersonwhopossessesall the

qualifications and none of the disqualifications as its representative, it being understood
that the juridical entity and the representative are solidarily liable for all obligations and
responsibilities of the liquidator (FRIA, Sec. 118; FLSP Rules, Rule 4, Sec. 8)

Conflict of Interest

- An individual will bedeemedtohaveaconflictofinterestifheissosituatedasto be

materiallyinfluencedintheexerciseofhisjudgmentfororagainstanypartyto the
proceedings.
- Without limiting the generality of the foregoing, an individual will be deemed to
have a conflict of interest if:
(a) He is a creditor, owner, partner or stockholder of the debtor;

(b) He is a creditor, owner, partner or stockholder of the debtor;

(c) He is engaged in a line of business which competes with that of thedebtor;

(d) He is, or was, within 5 years from the filing of the petition or motion for
conversion, a director, officer, owner, partneroremployeeofthedebtoror any
of the creditors, or acted as legal counsel or auditor or accountant of the
debtor or any of the creditors;

(e) He is, or was, within 2 years from the filing of the petition or motion for
conversion, an underwriter of the outstanding securities of the debtor;

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 (f) He is related by consanguinity or affinity within the 4th civil degree to any
individual creditor, owner of a sole proprietorship-debtor, partner in a
partnership-debtor or stockholder, director, officer, employee, or
underwriter of a corporate-debtor;

(g) He has any other direct or indirect material interest inthedebtororanyof the
creditors; or

(h) He was the receiver of member of the management committee, the

counsel or an employee of either, when there is a showing that the
financial distress of the debtor was not arrested or its fiscal condition
deterioratedandresultedinitsliquidationbyreasonofhislackofdiligence or
foresight

Compensation of the Liquidator

- He is entitled to Reasonable Compensation

Oath and Bond of the Liquidator

- Prior to entering upon his powers, duties and responsibilities, Liquidator is

required to take an oath and file a bond

Reporting Requirements

- The liquidator will make and keep a record of

(1) all moneys received and

(2) all disbursements made by him or under his authority as liquidator

- He will renderaquarterlyreportthereoftothecourt,whichwillbemadeavailable to all

interested parties
- The liquidator will also submit such reports as mayberequiredbythecourtfrom time
to time as well as a final report at the end of the liquidation proceedings (FRIA,
Sec. 121; FLSP Rules, Sec.4, Rule 15)

RemovalofLiquidatorGrounds:

(a) Hedidnotactuallyreceivethehighestnumberofvotesduringtheelectionfor liquidator;

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 (b) Incompetence, grossnegligence,failuretoperformorexercisetheproperdegree of
care in the performance of his duties and powers;

(c) Lack of a particular or specialized competency required by the specific case;

(d) Illegal acts or conduct in the performance of his duties and powers;

(e) Lack of any of the qualifications or presence of any disqualifications;

(f) Conflict of Interest, unless waived, expresslyorimpliedly,byapartywhomaybe

prejudiced thereby;

(g) Partiality or lack of independence; or

(h) Anyothergroundanalogoustotheforegoing(FLSPRules,Rule3,Sec.13)

Discharge of Liquidator

- In preparation for the final settlement of all the claims against the debtor, the
liquidator will notify all the creditors, either by publication in a newspaper of
general circulation, or such other mode as the court may direct or allow, that he
will apply with the court for the settlement of his account and his dischargefrom
liability as liquidator.
- The liquidator will file a final accounting with the court, with theproofofnoticeto all
creditors. Theaccountingwillbesetforhearing.Ifthecourtsfindsthesamein order, the
court will Discharge the Liquidator (FRIA, Sec. 122;FLSPRules,Sec. 4, Rule 16)

SaleofAssetsinLiquidation
With the approval of the court, the liquidator may sell the encumbered assets of the
debtorandconvertthesameinto money. The sale, transfer or disposition must be made at
a public auction. However, a private sale, transfer or disposition may be allowed with
the approval of the court if:

(a) Thegoodstobesoldareofaperishablenature,orareliabletoquickly deteriorate in

value, or are disproportionately expensive to keep or maintain; or

(b) Theprivatesale,transferordispositionisforthebestinterestedofthedebtor and his

creditors.

With the approval ofthecourt,unencumberedpropertyofthedebtormayalsobe

conveyed to a creditor insatisfactionofhisclaimorpartthereof.(FRIA,Sec.131;FLSP Rules,
Rule 4, Sec. 26.)

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Nullificationoftransactions
AnytransactionoccurringpriortotheissuanceoftheLiquidationOrderor,incaseofthe
conversion of the rehabilitation proceedings to prior to the commencement date,entered
into by the debtororinvolvingitsassets,mayberescindedordeclarednulland void on the
ground that the same was executed with intent to defraud a creditor or creditors or
which constitute undue preference of creditors. The presumptions set forth in Section 58
of the FRIA apply. (FRIA, Sec. 127; FLSP Rules, Rule 4, Sec. 1.)

Cross-borderInsolvency
As part of the United Nations Center for International Trade and Development’s
(UNCITRAL) mandate to harmonize and unify the national laws regarding international
trade, it has developed the Model Law, which was adopted by UNCITRAL on 30 May
1997.

Initiation of Proceedings

- The court will set a hearing in connection with an insolvency or rehabilitation

proceedingtakingplaceinaforeignjurisdiction,uponthesubmissionofapetition by the
representative of the foreign entity that is the subject of the foreign proceeding.
(FRIA, Sec. 140.)
- The court may also issue orders:
(a) Suspending any action to enforce claims against the entity or otherwise
seize or foreclose on property of the foreign entity located in the
Philippines;

(b) Requiring the surrender of property of the foreign entity to the foreign
representative; or

(c) Providing other necessary relief. (FRIA, Sec. 141.)

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