Republic Act No.

10142
FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010

Prepared by: Atty. Narciso G. Reyes, Jr., Ll.M.

Declaration of Policy – Sec. 2:

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.
4. When rehabilitation is not feasible, to facilitate a speedy and orderly liquidation of
these debtor's assets and the settlement of their obligations.

Nature of Proceedings – Sec. 3:

1. In Rem: The proceedings under this Act shall be in rem. Jurisdiction
over all persons affected by the proceedings shall be considered as
acquired 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.
Nature of Proceedings – Sec. 3:
1. In Rem: The proceedings under this Act shall be in rem. Jurisdiction
over all persons affected by the proceedings shall be considered as
acquired 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.
In Rem: The proceedings under this Act shall be in rem. Jurisdiction
over all persons affected by the proceedings shall be considered as
acquired 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.
When rehabilitation is not feasible, to facilitate a speedy and orderly
liquidation of these debtor's assets and the settlement of their
obligations.
When rehabilitation is not feasible, to facilitate a speedy and orderly
liquidation of these debtor's assets and the settlement of their
obligations.
 Under this law, rehabilitation refers to the restoration of the debtor to a condition of
successful operation and solvency. When rehabilitation is not feasible, it is in the interest of the
State to facilitate a speedy and orderly liquidation of these debtor’s assets and the settlement of
their obligations. 

Insolvent – Sec. 4(p): Insolvent shall refer 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.

The definition of a debtor is important to be able to determine if the parties may avail of
the proceedings provided by FRIA. The term debtor covers a sole proprietorship duly
registered with the Department of Trade and Industry (DTI ), a partnership duly registered
with the Securities and Exchange Commission (SEC), a corporation duly organized and
existing under Philippine laws, or an individual debtor who has become insolvent.

However, the term debtor does not include banks, insurance companies, pre-need
companies, and national and local government agencies or units.

There are three types of rehabilitation, namely:

1. Court-supervised rehabilitation
2. Pre-negotiated rehabilitation; and
3. Out-of-court/Formal Restructuring

A. REHABILITATION

1. COURT-SUPERVISED REHABILITATION

Court-supervised rehabilitation may be initiated through voluntary proceedings or

involuntary proceedings.

1.1. Voluntary Proceedings

Voluntary Proceedings may be initiated by an insolvent debtor through filing a petition

for rehabilitation with the court and on the grounds provided under the FRIA.

The filing of the petition for rehabilitation must be approved by the owner in case of
a sole proprietorship, or by a majority of the partners in case of a partnership, or in case of a
corporation, by a majority vote of the board of directors or trustees and authorized by the vote of
the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case
of nonstock corporation, by the vote of at least two-thirds (2/3) of the members, in a
stockholder’s or member’s meeting duly called for the purpose.

A group of debtors may jointly file a petition for rehabilitation when one or more of its
members foresee the impossibility of meeting debts when they respectively fall due, and the
financial distress would likely adversely affect the financial condition and/or operations of

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the other members of the group and/or the participation of the other members of the group is
essential under the terms and conditions of the proposed Rehabilitation Plan.

Rehabilitation Plan shall refer to a plan by which the financial well-being and viability
of an insolvent debtor can be restored using various means including, but not limited to, debt
forgiveness, debt rescheduling, reorganization or quasi-reorganization, dacion en pago,
debt-equity conversion and sale of the business (or parts of it) as a going concern, or setting-
up of new business entity, or other similar arrangements as may be approved by the court or
creditors.

1.2. Involuntary Proceedings

Any creditor or group of creditors with a claim of, or the aggregate of whose claims is,
at least One Million Pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the
subscribed capital stock or partners’ contributions, whichever is higher, may initiate
involuntary proceedings against the debtor by filing a petition for rehabilitation with the court if:

(a) there is no genuine issue of fact or law on the claim/s of the petitioner/s, and that the
due and demandable payments thereon have not been made for at least sixty (60) days or
that the debtor has failed generally to meet its liabilities as they fall due; or

(b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings against
the debtor that will prevent the debtor from paying its debts as they become due or will
render it insolvent.

Who is a rehabilitation receiver and what are his or her qualifications?

A rehabilitation receiver shall refer to the person or persons, natural or juridical,

appointed as such by the court and which shall be entrusted with such powers and duties.

The rehabilitation receiver shall have the following minimum qualifications:

 A citizen of the Philippines or a resident of the Philippines in the six (6) months
immediately preceding his nomination;
 Of good moral character and with acknowledged integrity, impartiality and
independence;
 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
 Has no conflict of interest: Provided, That such conflict of interest may be waived,
expressly or impliedly, by a party who may be prejudiced thereby.

Nature of proceedings- in rem. The proceedings under this Act shall be in rem. Jurisdiction over
all persons affected by the proceedings shall be considered as acquired upon publication of the
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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.

Action on the Petition and Commencement of Proceedings

If the court finds the petition for rehabilitation to be sufficient in form and substance, it shall,
within 5 working days from the filing of the petition, issue a Commencement Order. 

The Commencement Order shall include a Stay or Suspension Order which shall:

(1) suspend all actions or proceedings, in court or otherwise, for the enforcement of
claims against the debtor;

(2) suspend all actions to enforce any judgment, attachment or other provisional
remedies against the debtor;

(3) prohibit the debtor from selling, encumbering, transferring or disposing in any
manner any of its properties except in the ordinary course of business; and

 (4) prohibit the debtor from making any payment of its liabilities outstanding as of
the commencement date except as may be provided herein.
 Liability of Individual Debtor, Owner of a Sole Proprietorship, Partners in a
Partnership, or Directors and Officers – Sec. 10: Individual debtor, owner of a sole
proprietorship, partners in a partnership, or directors and officers of a debtor shall be
liable for double the value of the property sold, embezzled or disposed of or double
the amount of the transaction involved, whichever is higher to be recovered for benefit
of the debtor and the creditors, if they, having notice of the commencement of the
proceedings, or having reason to believe that proceedings are about to be commenced, or
in contemplation of the proceedings, willfully commit the following acts:
 1. Dispose or cause to be disposed of any property of the debtor other than in the
ordinary course of business or authorize or approve any transaction in fraud of creditors
or in a manner grossly disadvantageous to the debtor and/or creditors; or
 2. Conceal or authorize or approve the concealment, from the creditors, or embezzles
or misappropriates, any property of the debtor.

The court shall determine the extent of the liability of an owner, partner, director or
officer under this section. In this connection, in case of partnerships and corporations, the
court shall consider the amount of the shareholding or partnership or equity interest of
such partner, director or officer, the degree of control of such partner, director or officer
over the debtor, and the extent of the involvement of such partner, director or debtor in
the actual management of the operations of the debtor.

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EXCEPTIONS TO THE STAY OR SUSPENSION ORDER

The Stay or Suspension Order shall not apply:

1. To cases already pending appeal in the Supreme Court as of commencement

date. Any final and executory judgment arising from such appeal shall be referred
to the court for appropriate action;

2. Subject to the discretion of the court, to cases pending or filed at a specialized

court or quasi-judicial agency which, upon determination by the court, is
capable of resolving the claim more quickly, fairly and efficiently than the
court. Any final and executory judgment of such court or agency shall be referred
to the court and shall be treated as a non-disputed claim;

3. 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, unless the property subject of the third party or
accommodation mortgage is necessary for the rehabilitation of the debtor as
determined by the court upon recommendation by the rehabilitation receiver; 

4. To any form of action of customers or clients of a securities market participant to

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

5. To the actions of a licensed broker or dealer to sell pledged securities of a debtor

pursuant to a securities pledge or margin agreement for the settlement of
securities transactions in accordance with the provisions of the Securities
Regulation Code and its implementing rules and regulations;

6. The clearing and settlement of financial transactions through the facilities of a

clearing agency or similar entities duly authorized, registered and/or recognized
by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (BSP)
and the SEC as well as any form of actions of such agencies or entities to
reimburse themselves for any transactions settled for the debtor; and

7. Any criminal action against the individual debtor or owner, partner, director or

officer of a debtor shall not be affected by any proceeding commenced under RA
10142. 

2. PRE-NEGOTIATED REHABILITATION

Initiation of Proceedings – Sec. 76

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 1. Who May Initiate: An insolvent debtor, by itself or jointly with any of its
creditors, may file a verified petition with the court for the approval of a pre-
negotiated Rehabilitation Plan which has been endorsed or approved by:

a. creditors holding at least 2/3 of the total liabilities of the debtor,

b. including secured creditors holding more than 50% of the total secured claims of
the debtor and
c. unsecured creditors holding more than 50% of the total unsecured claims of the
debtor.

Contents of Petition: The petition shall include as a minimum:

a. a schedule of the debtor's debts and liabilities;
b. an inventory of the debtor's assets;
c. the pre-negotiated Rehabilitation Plan, including the names of at least 3
qualified nominees for rehabilitation receiver; and
d. a summary of disputed claims against the debtor and a report on the provisioning
of funds to account for appropriate payments should any such claims be ruled
valid or their amounts adjusted.

Approval of the Plan – Sec. 78: Within 10 days from the date of the second publication of the
Order, the court shall approve the Rehabilitation Plan unless a creditor or other interested party
submits an objection to it in accordance with the next succeeding section.

Period for Approval of Rehabilitation Plan – Sec. 81: The court shall have a maximum period
of 120 days from the date of the filing of the petition to approve the Rehabilitation Plan.
If the court fails to act within the said period, the Rehabilitation Plan shall be deemed
approved.

3. OUT-OF-COURT OR INFORMAL RESTRUCTURING

AGREEMENTS OR REHABILITATION PLANS

Consistent with FRIA if it meets the following minimum requirements:

1. The debtor must agree to the out-of-court or informal restructuring/workout
agreement or Rehabilitation Plan;
2. It must be approved by creditors representing at least 67% of the secured obligations
of the debtor;
3. It must be approved by creditors representing at least 75% of the unsecured
obligations of the debtor; and
4. It must be approved by creditors holding at least 85% of the total liabilities, secured
and unsecured, of the debtor.

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Standstill Period – Sec. 85: A standstill period that may be agreed upon by the parties pending
negotiation and finalization of the out-of-court or informal restructuring/workout
agreement or Rehabilitation Plan contemplated herein shall be effective and enforceable
not only against the contracting parties but also against the other creditors: Provided,
That:
1. such agreement is approved by creditors representing more than 50% of the total
liabilities of the debtor;
2. notice thereof is publishing in a newspaper of general circulation in the Philippines
once a week for 2 consecutive weeks; and
3. the standstill period does not exceed 120 days from the date of effectivity.
Note: The notice must invite creditors to participate in the negotiation for out-of-court
rehabilitation or restructuring agreement and notify them that said agreement will be
binding on all creditors if the required majority votes prescribed in Section 84 are met.

Cram Down Effect – Sec. 86: A restructuring/workout agreement or Rehabilitation Plan that is
approved pursuant to an informal workout framework referred to in this chapter shall have the
same legal effect as confirmation of a Plan under Section 69. The notice of the Rehabilitation
Plan or restructuring agreement or Plan shall be published once a week for at least 3 consecutive
weeks in a newspaper of general circulation in the Philippines. The Rehabilitation Plan or
restructuring agreement shall take effect upon the lapse of 15 days from the date of the last
publication of the notice thereof.

Effect of Court Action or Other Proceedings – Sec. 88: Any court action or other proceedings
arising from, or relating to, the out-of-court or informal restructuring/workout agreement or
Rehabilitation Plan shall not stay its implementation, unless the relevant party is able to secure a
temporary restraining order or injunctive relief from the Court of Appeals.

Court Assistance – Sec. 89: The insolvent debtor and/or creditor may seek court assistance for
the execution or implementation of a Rehabilitation Plan under this Chapter, under such rules of
procedure as may be promulgated by the Supreme Court.

B. LIQUIDATION

Involuntary Liquidation of Insolvent Juridical Debtors– Sec. 91

1. Petition for Liquidation: Three (3) or more creditors the aggregate of whose
claims is at least either One million pesos or at least 25% of the subscribed
capital stock or partner's contributions of the debtor, whichever is higher, may apply
for and seek the liquidation of an insolvent debtor by filing a petition for liquidation
of the debtor with the court. The petition shall show that:

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 a. there is no genuine issue of fact or law on the claims/s of the petitioner/s, and that
the due and demandable payments thereon have not been made for at least 180
days or that the debtor has failed generally to meet its liabilities as they fall due;
and
b. there is no substantial likelihood that the debtor may be rehabilitated.

2. Motion for Liquidation: At any time during the pendency of or after a

rehabilitation court-supervised or pre-negotiated rehabilitation proceedings,
three (3) or more creditors whose claims is at least either One million pesos or at least
25% of the subscribed capital or partner's contributions of the debtor, whichever is
higher, may also initiate liquidation proceedings by filing a motion in the same court
where the rehabilitation proceedings are pending to convert the rehabilitation
proceedings into liquidation proceedings. The motion:
a. shall be verified;
b. shall contain or set forth the same matters required in the preceding paragraph;
and
c. state that the movants are seeking the immediate liquidation of the debtor.

3. Action on Petition and Motion: If the petition or motion is sufficient in form and
substance, the court shall issue an Order:
a. directing the publication of the petition or motion in a newspaper of general
circulation once a week for two (2) consecutive weeks; and
b. directing the debtor and all creditors who are not the petitioners to file their
comment on the petition or motion within fifteen (15) days from the date of last
publication.
If, after considering the comments filed, the court determines that the petition or
motion is meritorious, it shall issue the Liquidation Order mentioned in Section 112.

Involuntary Liquidation of Insolvent Individual Debtors– Sec. 94

A. Suspension of Payments.
1. Petition – Sec. 94: An individual debtor who, possessing sufficient property to cover
all his 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 by the court of the province or city in which he has resides
for 6 months prior to the filing of his petition. He shall attach to his petition, as a
minimum:
a. a schedule of debts and liabilities;
b. an inventory of assets; and
c. a proposed agreement with his creditors.
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 Note: The properties held as security by secured creditors shall not be the subject of
such suspension order.

No creditor shall sue or institute proceedings to collect his claim from the debtor from the
time of the filing of the petition for suspension of payments and for as long as proceedings
remain pending except:
a. those creditors having claims for personal labor, maintenance, expense of last illness and
funeral of the wife or children of the debtor incurred in the 60 days immediately prior to
the filing of the petition; and
b. secured creditors.

B. Voluntary Liquidation.
1. Petition – Sec. 103: An individual debtor whose properties are not sufficient to cover
his liabilities, and owing debts exceeding Five hundred thousand pesos, may apply to
be discharged from his debts and liabilities by filing a verified petition with the court
of the province or city in which he has resided for 6 months prior to the filing of such
petition. He shall attach to his petition a schedule of debts and liabilities and an
inventory of assets. The filing of such petition shall be an act of insolvency.
2. Liquidation Order – Sec. 104: If the court finds the petition sufficient in form and
substance it shall, within 5 working days issue the Liquidation Order mentioned in
Section 112.

C. Involuntary Liquidation.
1. Petition – Sec. 105: Any creditor or group of creditors with a claim of, or with claims
aggregating at least Five hundred thousand pesos may file a verified petition for
liquidation with the court of the province or city in which the individual debtor
resides. The following shall be considered acts of insolvency, and the petition for
liquidation shall set forth or allege at least one of such acts: (Important: See Sec. 105
for enumeration of acts of insolvency)

PROVISIONS COMMON TO LIQUIDATION IN INSOLVENCY

Effects of the Liquidation Order – Sec. 113: Upon the issuance of the Liquidation Order:
a. the juridical debtor shall be deemed dissolved and its corporate or juridical
existence terminated;
b. legal title to and control of all the assets of the debtor, except those that may be
exempt from execution, shall be deemed vested in the liquidator or, pending
his election or appointment, with the court;
c. all contracts of the debtor shall be deemed terminated and/or breached, unless
the liquidator, within ninety (90) days from the date of his assumption of office,
declares otherwise and the contracting party agrees;

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 d. no separate action for the collection of an unsecured claim shall be allowed.
Such actions already pending will be transferred to the Liquidator for him to
accept and settle or contest. If the liquidator contests or disputes the claim, the
court shall allow, hear and resolve such contest except when the case is already on
appeal. In such a case, the suit may proceed to judgment, and any final and
executor judgment therein for a claim against the debtor shall be filed and allowed
in court; and
e. no foreclosure proceeding shall be allowed for a period of 180 days.

3. Rights of Secured Creditors – Sec. 114: The Liquidation Order shall not affect the
right of a secured creditor to enforce his lien in accordance with the applicable
contract or law. (See Sec. 114 for rights of secured creditor)

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