2022 BAR REVIEW COMMERCIAL LAW

FINANCIAL REHABILITATION, INSOLVENCY,

Handout No. 31
LIQUIDATION, AND SUSPENSION OF PAYMENTS

BASIC CONCEPTS

Rehabilitation

Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation
and solvency, if it is shown that its continuance of operation is economically feasible and its
creditors can recover by way of the present value of payments projected in the plan, more if the
debtor continues as a going concern than if it is immediately liquidated. Sec. 4(gg), FRIA

Debtors Covered

Debtor shall refer to, unless specifically excluded by a provision of this Act, 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 as defined herein. Sec.
4(k), FRIA

The term debtor does not include banks, insurance companies, pre-need companies, and
national and local government agencies or units. Sec. 5, FRIA

Republic Act (RA) No. 10142 or the Financial Rehabilitation and Insolvency Act of 2010
statutorily defined “rehabilitation” as 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,
more if the debtor continues as a going concern than if it is immediately liquidated.

Case law explains that rehabilitation is an attempt to conserve and administer the assets of an
insolvent corporation in the hope of its eventual return from financial stress to solvency. A
corporate rehabilitation case is a special proceeding in rem where the basic issues concern the
viability and desirability of continuing the business operations of the distressed corporation. The
purpose is to enable the company to gain a new lease on life and allow its creditors to be paid
their claims out of its earnings. The rationale is to resuscitate businesses in financial distress
because assets are often more valuable when so maintained than they would be when liquidated.
Kaizen Builders, Inc. v. Court of Appeals, G.R. Nos. 226894 & 247647, September 3, 2020

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Case law has defined corporate rehabilitation as an attempt to conserve and administer the
assets of an insolvent corporation in the hope of its eventual return from financial stress to
solvency.

It contemplates the continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and liquidity. Bureau of
Internal Revenue vs. Lepanto Ceramics, Inc., 824 SCRA 125, G.R. No. 224764 April 24, 2017

The inherent purpose of rehabilitation is to find ways and means to minimize the expenses of
the distressed corporation during the rehabilitation period by providing the best possible
framework for the corporation to gradually regain or achieve a sustainable operating form.

“[It] enable[s] the company to gain a new lease in life and thereby allow creditors to be paid
[t]heir claims from its earnings. Thus, rehabilitation shall be undertaken when it is shown that
the continued operation of the corporation is economically more feasible and its creditors can
recover, by way of the present value of payments projected in the plan, more, if the corporation
continues as a going concern than if it is immediately liquidated.” Bureau of Internal Revenue vs.
Lepanto Ceramics, Inc., 824 SCRA 125, G.R. No. 224764 April 24, 2017

View that the remedy of rehabilitation should be denied to corporations whose insolvency
appears to be irreversible and whose sole purpose is to delay the enforcement of any of the
rights of the creditors

The purpose of rehabilitation proceedings is not only to enable the company to gain a new lease
on life but also to allow creditors to be paid their claims from its earnings, when so rehabilitated.
Therefore, the remedy of rehabilitation should be denied to corporations whose insolvency
appears to be irreversible and whose sole purpose is to delay the enforcement of any of the rights
of the creditors, which is rendered obvious by: (a) the absence of a sound and workable business
plan; (b) baseless and unexplained assumptions, targets and goals; and (c) speculative capital
infusion or complete lack thereof for the execution of the business plan, as in this case. Thus,
Fortuna’s rehabilitation petition should have been dismissed not only due to its failure to comply
with the key requirements under the Interim Rules – i.e., to state any material financial
commitment to support the rehabilitation, as well as to include a proper liquidation analysis –
but also to establish the feasibility and viability of the Rehabilitation Plan. Metropolitan Bank &
Trust Company vs. Fortuna Paper Mill & Packaging Corporation, 884 SCRA 432, G.R. No. 190800
November 7, 2018

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FINANCIAL REHABILITATION, INSOLVENCY,
Handout No. 31
LIQUIDATION, AND SUSPENSION OF PAYMENTS

Actual vs. Technical Insolvency

Actual insolvency – the debtor’s assets are not enough to cover its liabilities; Technical insolvency
the debtor has enough assets but foresees its inability to pay its obligations for more than one
year. Philippine National Bank v. Court of Appeals, G.R. No. 165571, January 20, 2009

When rehabilitation will not result in a better present value recovery for the creditors, the more
appropriate remedy is liquidation.

The public’s interest lies in the court’s ability to effectively ensure that the obligations of the
debtor, who has experienced severe economic difficulties, are fairly and equitably served. The
alternative might be a chaotic rush by all creditors to file separate cases with the possibility of
different trial courts issuing various writs competing for the same assets. Rehabilitation is a
means to temper the effect of a business downturn experienced for whatever reason. In the
process, it gives entrepreneurs a second chance. Not only is it a humane and equitable relief, it
encourages efficiency and maximizes welfare in the economy. Clearly then, there are instances
when corporate rehabilitation can no longer be achieved. When rehabilitation will not result in a
better present value recovery for the creditors, the more appropriate remedy is liquidation. Viva
Shipping Lines, Inc. vs. Keppel Philippines Marine, Inc., 784 SCRA 173, G.R. No. 177382 February
17, 2016

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.

It does not make sense to hold, suspend, or continue to devalue outstanding credits of a business
that has no chance of recovery. In such cases, the optimum economic welfare will be achieved if
the corporation is allowed to wind up its affairs in an orderly manner. Liquidation allows the
corporation to wind up its affairs and equitably distribute its assets among its creditors.
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. Without these assets, business operations are effectively discontinued. The proceeds of
the sale are distributed equitably among creditors, and surplus is divided or losses are
reallocated. Viva Shipping Lines, Inc. vs. Keppel Philippines Marine, Inc., 784 SCRA 173, G.R. No.
177382 February 17, 2016

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Handout No. 31
LIQUIDATION, AND SUSPENSION OF PAYMENTS

Claims suspended

Upon motion filed by the individual debtor, the court may issue an order suspending any pending
execution against the individual debtor. Provided, that properties held as security by secured
creditors shall not be the subject of such suspension order. The suspension order shall lapse when
three (3) months shall have passed without the proposed agreement being accepted by the
creditors or as soon as such agreement is denied. xxx Sec. 96, FRIA

MODES OF REHABILITATION

Voluntary rehabilitation

When 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,
an insolvent debtor may initiate voluntary proceedings under this Act by filing a petition for
rehabilitation with the court and on the grounds hereinafter specifically provided. Sec. 12, FRIA

A group of debtors may file a petition for rehabilitation under this Rule when (1) one or more of
its members foresee the impossibility of meeting debts when they respectively fall due, and (2)
the financial distress would likely adversely affect the financial condition and/or operations of
the other members of the group or the participation of the other members of the group is
essential under the terms and conditions of the proposed Rehabilitation Plan. Sec. 1, Rule 2, A.M.
12-12-11-SC

Involuntary rehabilitation

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

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(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. Sec. 13, FRIA

For cases where the commencement order is issued after the effectivity of the FR Rules, the
order must be properly designated as a “commencement order.”

Here, after the rehabilitation court had found the Petition to be sufficient in form and substance,
it issued a Stay Order which provided for, among others, the appointment of Atty. Elamparo as
rehabilitation receiver, the suspension of all claims against Interco, et al., and the date of the
initial hearing. Its denomination as “Stay Order” is immaterial, since it provided the basic
requirements of a commencement order required by FRIA.

To clarify, the liberality in the nomenclature of the commencement order should apply only in
cases where such order was issued before the FR Rules' promulgation. This is an aspect of equity;
otherwise, strict adherence to procedural niceties would prevent substantive relief. However, for
cases where the commencement order is issued after the effectivity of the FR Rules, the order
must be properly designated as a “commencement order.” Banco De Oro Unibank, Inc. v.
International Copra Export Corp., G.R. Nos. 218485-86, 218493-97, 218487, 218498-503,
218488-90, 218504-07, 218491, 218508-13 & 218523-29, April 28, 2021

Stay Order

To achieve these objectives, Sections 16 and 17 of RA No. 10142 authorizes the rehabilitation
court to issue a Commencement Order that includes a Stay Order, which have the effects of
suspending all actions for the enforcement of claims against the debtor and consolidating the
resolution of all legal proceedings by and against it, to wit:

SECTION 16. Commencement of Proceedings and Issuance of a Commencement Order. — The

rehabilitation proceedings shall commence upon the issuance of the Commencement Order,
which shall: x x x (q) 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; xxx Kaizen
Builders, Inc. v. Court of Appeals, G.R. Nos. 226894 & 247647, September 3, 2020

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The Commencement Order shall direct all creditors to file their claims with the rehabilitation
court at least five days before the initial hearing.

A creditor whose claim is not listed in the schedule of debts and liabilities and who fails to file a
notice of claim in accordance with the Commencement Order but subsequently files a belated
claim shall not be entitled to participate in the rehabilitation proceedings but shall be entitled to
receive distributions arising therefrom. Kaizen Builders, Inc. v. Court of Appeals, G.R. Nos.
226894 & 247647, September 3, 2020

Section 18(c) of the Financial Rehabilitation and Insolvency Act (FRIA) explicitly states that a
stay order shall not apply 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.

In addition, under Rule 4, Section 6 of A.M. No. 00-8-10-SC or the Interim Rules of Procedure on
Corporate Rehabilitation, a stay order has the effect of staying enforcement only with respect to
claims made against the debtor, its guarantors and persons not solidarily liable with the debtor:
Section 6. Stay Order.—If the court finds the petition to be sufficient in form and substance, it
shall, not later than five (5) working days from the filing of the petition, issue an order: (a)
appointing a rehabilitation receiver and fixing his bond; (b) staying enforcement of all claims,
whether for money or otherwise and whether such enforcement is by court action or otherwise,
against the debtor, its guarantors and persons not solidarily liable with the debtor. Trade and
Investment Development Corporation of the Philippines also known as Philippine Export-Import
Credit Agency vs. Philippine Veterans Bank, 907 SCRA 66, G.R. No. 233850 July 1, 2019

The rehabilitation proceedings shall be deemed to have commenced from the date of filing of
the petition, which is also termed the commencement date.

On 27 August 2013, however, the Court enacted A.M. No. 12-12-11-SC, or the Financial
Rehabilitation Rules of Procedure (Rehabilitation Rules), which amended and revised the Interim
Rules and the subsequent 2008 Rules of Procedure on Corporate Rehabilitation (2008 Rules), in
order to incorporate the significant changes brought about by Republic Act No. 10142 (R.A. No.
10142), otherwise known as the Financial Rehabilitation and Insolvency Act of 2010 (FRIA). The
Rehabilitation Rules provides that the court shall issue a commencement order once it finds the
petition for rehabilitation sufficient in form and substance. This commencement order primarily
contains: a declaration that the debtor is under rehabilitation, the appointment of a
rehabilitation receiver, a directive for all creditors to file their verified notices of claim, and an

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order staying claims against the debtor. The rehabilitation proceedings shall be deemed to have
commenced from the date of filing of the petition, which is also termed the commencement
date. Under the same Rules, the effects of such commencement order shall retroact to the date
that the petition was filed, and renders void any attempt to collect on or enforce a claim against
the debtor or to set off any debt by the debtor’s creditors, after the commencement date. Allied
Banking Corporation vs. Equitable PCI Bank, Inc., 858 SCRA 627, G.R. No. 191939 March 14,
2018

When a petition for rehabilitation is filed and subsequently granted by the court, its purpose
will be defeated if the debtors are still allowed to arbitrarily dispose of their property and pay
their liabilities, outside of the ordinary course of business and what is allowed by the court,
after the filing of the said petition.

The filing of a petition for the rehabilitation of a debtor, when the court finds that it is sufficient
in form and substance, is both (1) an acknowledgment that the debtor is presently financially
distressed; and (2) an attempt to conserve and administer its assets in the hope that it will
eventually return to its former state of successful financial operation and liquidity. xxx Certainly,
when a petition for rehabilitation is filed and subsequently granted by the court, its purpose will
be defeated if the debtors are still allowed to arbitrarily dispose of their property and pay their
liabilities, outside of the ordinary course of business and what is allowed by the court, after the
filing of the said petition. Such a scenario does not promote an environment where the debtor
could regain its operational footing, contrary to the dictates of rehabilitation. Allied Banking
Corporation vs. Equitable PCI Bank, Inc., 858 SCRA 627, G.R. No. 191939 March 14, 2018

The immediate effectivity of the stay order means that the Regional Trial Court (RTC), through
an order commencing rehabilitation and staying claims against the debtor, acknowledges that
the debtor requires rehabilitation immediately and therefore it can not only prohibit but also
nullify acts made after its effectivity, when such acts are violative of the stay order, to prevent
any irreparable detriment to the debtor’s successful restoration.

The question posed herein is whether the immediate effectivity of the stay order is inconsistent
with the publication requirement under the Rules, such that the rehabilitation court cannot
invalidate acts made after its issuance but prior to its publication. The Court rules in the negative.
Taking into consideration the laudable objectives of rehabilitation proceedings, the immediate
effectivity of the stay order means that the RTC, through an order commencing rehabilitation and
staying claims against the debtor, acknowledges that the debtor requires rehabilitation
immediately and therefore it can not only prohibit but also nullify acts made after its effectivity,

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when such acts are violative of the stay order, to prevent any irreparable detriment to the
debtor’s successful restoration. The foregoing is validated by the Interim Rules, where the court
can declare void any transaction made in violation of the stay order. xxx The publication
requirement only means that all affected persons must, to satisfy the requirements of due
process, be notified that as of a particular date, the debtor in question requires rehabilitation
and should temporarily be exempt from paying its obligations, unless allowed by the court. Once
due notice is made, the rehabilitation court may nullify actions inconsistent with the stay order
but which may have been taken prior to publication, precisely because prior to publication,
creditors may not yet be aware that they are to desist from pursuing claims against the insolvent
debtor. Allied Banking Corporation vs. Equitable PCI Bank, Inc., 858 SCRA 627, G.R. No. 191939
March 14, 2018

Properties merely owned by stockholders cannot be included in the inventory of assets of a

corporation under rehabilitation.

In rehabilitation proceedings, claims of creditors are limited to demands of whatever nature or

character against a debtor or its property, whether for money or otherwise. In several cases, we
have already held that stay orders should only cover those claims directed against corporations
or their properties, against their guarantors, or their sureties who are not solidarily liable with
them, to the exclusion of accommodation mortgagors. To repeat, properties merely owned by
stockholders cannot be included in the inventory of assets of a corporation under rehabilitation.
Given that the true owner the subject property is not the corporation, petitioner cannot be
considered a creditor of MSI but a holder of a claim against respondent spouses. Bustos vs.
Millians Shoe, Inc., 824 SCRA 67, G.R. No. 185024 April 24, 2017

Stay order covers BIR claim for deficiency taxes

In sum, it was improper for Misajon, et al. to collect, or even attempt to collect, deficiency taxes
from LCI outside of the rehabilitation proceedings concerning the latter, and in the process,
willfully disregard the Commencement Order lawfully issued by the Rehabilitation Court. Hence,
the RTC Br. 35 correctly cited them for indirect contempt. Bureau of Internal Revenue vs.
Lepanto Ceramics, Inc., 824 SCRA 125, G.R. No. 224764 April 24, 2017

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Any order issued by the trial court in rehabilitation proceedings is immediately executory. Rule
3, Section 5 makes no distinction as to the kinds of orders (e.g., final or interlocutory and stay
orders) that may be issued by a trial court.

Nowhere from its text can it be gleaned that it does not cover orders such as those issued by the
trial court on October 1, 2003. If at all, its second sentence, which explicitly makes reference to
orders on appeal, affirms that it is equally applicable to final orders. We entertain no doubt that
Rule 3, Section 5 of the Interim Rules covered the trial court's October 1, 2003 Order dismissing
the Petition for Rehabilitation and lifting the Stay Order. The same Order was thus immediately
executory. Home Guaranty Corporation vs. La Savoie Development Corporation, G.R. No.
168616, January 28, 2015

Liability under a Letter of Credit not suspended

The stay order issued by the rehabilitation court does not apply to the beneficiary of the letter of
credit against the banks that issued it because the prohibition on the enforcement of claims
against the debtor, guarantors, or sureties of the debtors does not extend to the claims against
the issuing bank in a letter of credit. Letters of credit are primary obligations and not accessory
contracts and while they are security arrangements, they are not thereby converted into
contracts of guaranty. MWSS v. Daway, G.R. No. 160732, June 21, 2004

The interim rules define a claim as referring to all claims or demands, of whatever nature or
character against a debtor or its property, whether for money or otherwise.

The definition is all-encompassing as it refers to all actions whether for money or otherwise.
There are no distinctions or exemptions. Sobrejuanite vs. ASB Development Corporation, 471
SCRA 763, G.R. No. 165675 September 30, 2005

As between creditors, the key phrase is “equality is equity.”

When a corporation threatened by bankruptcy is taken over by a receiver, all the creditors should
stand on equal footing. Not anyone of them should be given any preference by paying one or
some of them ahead of the others. This is precisely the reason for the suspension of all pending
claims against the corporation under receivership. Instead of creditors vexing the courts with
suits against the distressed firm, they are directed to file their claims with the receiver who is a

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duly appointed officer of the SEC. Sobrejuanite vs. ASB Development Corporation, 471 SCRA 763,
G.R. No. 165675 September 30, 2005

Rehabilitation Receiver

Rehabilitation receiver shall refer to the person or persons, natural or juridical, appointed as such
by the court pursuant to the Act and which shall be entrusted with such powers, duties, and
responsibilities as set forth herein. Where the rehabilitation receiver is a juridical entity, the term
includes the juridical entity’s designated representative. Sec. 5 [p], Rule 1, A.M. 12-12-11-SC

The rehabilitation receiver is tasked only to monitor the successful implementation of the
rehabilitation plan. There is nothing in the concept of corporate rehabilitation that would ipso
facto deprive the Board of Directors and corporate officers of a debtor corporation, of control,
such that it can no longer enforce its right to recover its property from an errant lessee.

The Rules enumerate the prohibited corporate actions and transactions during the pendency of
the rehabilitation proceedings but none of which touch on the debtor corporation’s right to sue.
The implication, therefore, is that our concept of rehabilitation does not restrict this particular
power, save for the caveat that all its actions are monitored closely by the receiver, who can seek
an annulment of any prohibited or anomalous transaction or agreement entered into by the
officers of the debtor corporation. Umale v. ASB Realty Corp., 652 SCRA 215, G.R. No. 181126,
June 15, 2011

What is essential in case of rehabilitation is the inability of the debtor corporation to pay its
dues as they fall due.

This Court need not distinguish whether the claim has already matured or not. What is essential
in case of rehabilitation is the inability of the debtor corporation to pay its dues as they fall due.
In the case herein, accepting MBTC’s proposition that debtor companies already in default are
unqualified to file a petition for corporate rehabilitation not only contradicts the purpose of the
law, as stated, but also advocates a limiting bar that is not found under the pertinent provisions.
A better and more sound interpretation adheres to the very purpose of corporate rehabilitation,
which is to allow the debtor-corporation to be restored “to a position 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.” Metropolitan Bank

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& Trust Company vs. Fortuna Paper Mill & Packaging Corporation, 884 SCRA 432, G.R. No.
190800 November 7, 2018

The creditors must ventilate their claims before the rehabilitation court, and any “[a]ttempts
to seek legal or other resource against the distressed corporation shall be sufficient to support
a finding of indirect contempt of court.”

To clarify, however, creditors of the distressed corporation are not without remedy as they may
still submit their claims to the rehabilitation court for proper consideration so that they may
participate in the proceedings, keeping in mind the general policy of the law “to ensure or
maintain certainty 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.” In other words, the creditors must
ventilate their claims before the rehabilitation court, and any “[a]ttempts to seek legal or other
resource against the distressed corporation shall be sufficient to support a finding of indirect
contempt of court.” Bureau of Internal Revenue vs. Lepanto Ceramics, Inc., 824 SCRA 125, G.R.
No. 224764 April 24, 2017

Factors for a Successful Corporate Rehabilitation.

“A successful rehabilitation usually depends on two factors: (1) a positive change in the business
fortunes of the debtor, and (2) the willingness of the creditors and shareholders to arrive at a
compromise agreement on repayment burdens, extent of dilution, etc. The debtor must
demonstrate by convincing and compelling evidence that these circumstances exist or are likely
to exist by the time the debtor submits his ‘revised or substitute rehabilitation plan for the final
approval of the court.’” San Jose Timber Corporation vs. Securities and Exchange Commission,
667 SCRA 13, G.R. No. 162196 February 27, 2012

Respondent intends to source its funds from internal operations. That the funds are internally
generated does not render the funds insufficient. This arrangement is still a material, voluntary,
and significant financial commitment, in line with respondent’s rehabilitation plan. Metropolitan
Bank and Trust Company vs. Liberty Corrugated Boxes Manufacturing Corporation 815 SCRA
458, G.R. No. 184317 January 25, 2017

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A material financial commitment becomes significant in gauging the resolve, determination,

earnestness and good faith of the distressed corporation in financing the proposed
rehabilitation plan.

This commitment may include the voluntary undertakings of the stockholders or the would-be
investors of the debtor-corporation indicating their readiness, willingness and ability to
contribute funds or property to guarantee the continued successful operation of the debtor
corporation during the period of rehabilitation. Philippine Bank of Communications vs. Basic
Polyprinters and Packaging Corporation, 738 SCRA 561, G.R. No. 187581 October 20, 2014

Creditors of the distressed corporation are not without remedy as they may still submit their
claims to the rehabilitation court for proper consideration so that they may participate in the
proceedings, keeping in mind the general policy of the law to ensure or maintain certainty 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.

In other words, the creditors must ventilate their claims before the rehabilitation court. Any
attempt to seek legal or other resource against the distressed corporation shall be sufficient to
support a finding of indirect contempt of court. Kaizen Builders, Inc. v. Court of Appeals, G.R.
Nos. 226894 & 247647, September 3, 2020

A corporate rehabilitation case cannot be decided without the creditors’ participation.

The court’s role is to balance the interests of the corporation, the creditors, and the general
public. Impleading creditors as respondents on appeal will give them the opportunity to present
their legal arguments before the appellate court. The courts will not be able to balance these
interests if the creditors are not parties to a case. Viva Shipping Lines, Inc. vs. Keppel Philippines
Marine, Inc., 784 SCRA 173, G.R. No. 177382 February 17, 2016

When rehabilitation is not proper

Rehabilitation should be denied to corporations whose insolvency appears to be irreversible and

whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is
rendered obvious by the following: (a) the absence of a sound and workable business plan; (b)

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baseless and unexplained assumptions, targets and goals; (c) speculative capital infusion or
complete lack thereof for the execution of the business plan; (d) cash flow cannot sustain daily
operations; and (e) negative net worth and the assets are near full depreciation or fully
depreciated. Wonder Book Corporation v. Philippine Bank of Communications, G.R. No. 187316,
July 16, 2012, 676 SCRA 489

PRE-NEGOTIATED REHABILITATION

How initiated

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 creditors holding at least two-thirds (2/3) of the total liabilities of the debtor,
including secured creditors holding more than fifty percent (50%) of the total secured claims of
the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured
claims of the debtor. Sec. 76, FRIA

Period and effect of approval

The court shall have a maximum period of one hundred twenty (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. Sec. 81, FRIA

Approval of a Plan under this chapter shall have the same legal effect as confirmation of a Plan
for Court-Supervised Rehabilitation of this Act. Secs. 69 and 82, FRIA

OUT-OF-COURT OR INFORMAL RESTRUCTURING AGREEMENT OR REHABILITATION PLAN

Minimum requirements

For an out-of-court or informal restructuring or workout agreement or rehabilitation plan to

qualify, it must meet the following minimum requirements:

(a) The debtor must agree to the out-of-court or informal restructuring/work¬out

agreement or Rehabilitation Plan;

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(b) It must be approved by creditors representing at least 67% of the secured obligations
of the debtor;

(c) It must be approved by creditors representing at least 75% of the unsecured obligations
of the debtor; and

(d) It must be approved by creditors holding at least 85% of the total liabilities, secured
and unsecured, of the debtor. Sec. 84, FRIA

Standstill Period

Standstill Period is the period agreed upon by the debtor and its creditors to enable them to
negotiate and enter into an out-of-court or informal restructuring/workout agreement or
Rehabilitation Plan pursuant to Rule 4 of these Rules. The standstill agreement may include
provisions identical with or similar to the legal effects of a commencement order under Section
9, Rule 2 of these Rules. Sec. 5 [q], Rule 1, A.M. 12-12-11-SC

Cram down effect

Notably, one of the requirements provided under Section 64 is the rehabilitation receiver's act
of convening the creditors for purposes of voting on the proposed rehabilitation plan. Yet, here,
the rehabilitation court confirmed the rehabilitation plan despite the creditors' failure to vote.
Thus, the Court of Appeals decreed that the confirmation was premature and ordered the
remand of the case to the rehabilitation court to convene the creditors and comply with the
voting requirement.

Here, the Court of Appeals did not definitively conclude whether the rehabilitation plan was
viable. It did not decide the matter on the merits. On the contrary, and as expressly provided in
the dispositive portion of its Decision, the Court of Appeals remanded the matter to the
rehabilitation court, for the rehabilitation receiver to convene the creditors for the purpose of
complying with the voting requirement under FRIA.

In line with the declared policy of FRIA to encourage debtors and creditors to collectively resolve
their competing claims, and considering the potential exigencies that lurk and possibly tide over
financially distressed corporations in the market, the prudent option is for this Court to affirm
the Court of Appeals Decision and direct the rehabilitation court to convene the creditors for

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purposes of complying with the voting requirement. Banco De Oro Unibank, Inc. v. International
Copra Export Corp., G.R. Nos. 218485-86, 218493-97, 218487, 218498-503, 218488-90, 218504-
07, 218491, 218508-13 & 218523-29, April 28, 2021

A rehabilitation plan may be approved even over the opposition of the creditors holding a
majority of the corporation’s total liabilities if there is a showing that rehabilitation is feasible
and the opposition of the creditors is manifestly unreasonable.

Also known as the “cram-down” clause, this provision, which is currently incorporated in the
FRIA, 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. xxx
The cram-down principle consists of two things: (i) approval despite opposition and (ii) binding
effect of the approved plan. Victorio-Aquino v. Pacific Plans, Inc., G.R. No. 193108, December
10, 2014; Bank of the Philippine Islands v. Sarabia Manor Hotel Corporation, G.R. No. 175844,
July 29, 2013

LIQUIDATION

Voluntary Liquidation

An insolvent juridical debtor may file a verified petition for liquidation in the RTC which has
jurisdiction over its principal office as specified in its articles of incorporation or partnership.
Where the principal office of the corporation or partnership as registered with the SEC is in Metro
Manila, the petition must be filed in the Regional Trial Court of the city or municipality where the
head office is located. Sec. 1, Rule 2, A.M. 15-04-06-SC

Involuntary Liquidation

Three (3) or more creditors the aggregate of whose claims is at least either P 1 million or at least
25% of the subscribed capital stock or partners’ contributions of the insolvent juridical debtor,
whichever is higher, may file a petition for the liquidation of an insolvent juridical debtor in the
RTC which has jurisdiction over the principal office of the debtor as specified in its articles of
incorporation or partnership. Sec. 4, Rule 2, A.M. 15-04-06-SC

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Conversion of Rehabilitation Proceedings into Voluntary Liquidation Proceedings

At any time during the pendency of court-supervised or pre-negotiated rehabilitation

proceedings, the debtor 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 shall be verified, shall contain or set forth the same
matters required in the preceding paragraph, and state that the debtor is seeking immediate
dissolution and termination of its corporate existence. Sec. 90, FRIA

Effects of Liquidation Order

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 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 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 executory 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. Sec. 113, FRIA

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SUSPENSION OF PAYMENTS; SUSPENSION OF PAYMENT ORDER

Individual Debtors; Suspension of Payments

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 resided for six (6) months prior to the filing of his petition. xxx Sec. 94, FRIA

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