Regulatory Framework and Legal Issues in Business

Module 2

MODULE 2

Financial Rehabilitation
and Insolvency
(Republic Act No. 10142)

Accountancy Department
College of Business Administration and Accountancy
De La Salle University – Dasmariñas
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COURSE LEARNING OUTCOMES:

By the end of this course, students are expected to:

CLO1. Discuss the applicable Philippine laws covering various business

transactions, specifically on consumer protection, financial rehabilitation,
competition, government procurement, banking, insurance, and labor or
employment.
CLO2. Resolve the problems and conflicts arising from business transactions
through the application of pertinent Philippine laws.
CLO3. Explain the rights, duties, and obligations of the stakeholders as well as
the role of the government in handling the issues on business regulations.
CLO4. Identify the procedural requirements observed by the government
regulatory bodies in resolving conflicts or cases involving business transactions.
CLO5. Correlate the Philippine regulatory laws on business transactions with
the work-related areas of the accountancy profession.

Financial Rehabilitation and Insolvency Act

(FRIA) of 2010
Republic Act No. 10142

Declaration of Policy

It is the policy of the State to encourage debtors, both juridical and natural
persons, and their creditors to collectively and realistically resolve and adjust
competing claims and property rights.
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In furtherance thereof, the State shall ensure a timely, fair, transparent,

effective and efficient rehabilitation or liquidation of debtors.

The rehabilitation or liquidation shall be made with a view 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. When rehabilitation is not feasible, it is in the interest of the
State to facilities a speedy and orderly liquidation of these debtor's assets and
the settlement of their obligations.

Definition of Terms.

Affiliate - shall refer to a corporation that directly or indirectly, through one or

more intermediaries, is controlled by, or is under the common control of another
corporation.

Claim - shall 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; (1) all claims of the government,
whether national or local, including taxes, tariffs and customs duties; and (2)
claims against directors and officers of the debtor arising from acts done in the
discharge of their functions falling within the scope of their
authority: Provided, That, this inclusion does not prohibit the creditors or third
parties from filing cases against the directors and officers acting in their personal
capacities.

Commencement date - shall refer to the date on which the court issues the
Commencement Order, which shall be retroactive to the date of filing of the
petition for voluntary or involuntary proceedings.

Commencement Order - shall refer to the order issued by the court under Section
16 of this Act.

Control - shall refer to the power of a parent corporation to direct or govern the
financial and operating policies of an enterprise so as to obtain benefits from its
activities. Control is presumed to exist when the parent owns, directly or
indirectly through subsidiaries or affiliates, more than one-half (1/2) of the
voting power of an enterprise unless, in exceptional circumstances, it can clearly
be demonstrated that such ownership does not constitute control. Control also
exists even when the parent owns one-half (1/2) or less of the voting power of an
enterprise when there is power:
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(1) over more than one-half (1/2) of the voting rights by virtue of an
agreement with investors;
(2) to direct or govern the financial and operating policies of the enterprise
under a statute or an agreement;
(3) to appoint or remove the majority of the members of the board of
directors or equivalent governing body; or
(4) to cast the majority votes at meetings of the board of directors or
equivalent governing body.

Creditor - shall refer to a natural or juridical person which has a claim against
the debtor that arose on or before the commencement date.

Date of liquidation - shall refer to the date on which the court issues the
Liquidation Order.

Days - shall refer to calendar days unless otherwise specifically stated in this
Act.

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.

BUT the term debtor does not include the following:

Banks - shall refer to any duly licensed bank or quasi-bank that is

potentially or actually subject to conservatorship, receivership or
liquidation proceedings under the New Central Bank Act (Republic Act No.
7653) or successor legislation;

insurance companies - shall refer to those companies that are potentially

or actually subject to insolvency proceedings under the Insurance Code
(Presidential Decree No. 1460) or successor legislation

pre-need companies - shall refer to any corporation authorized/licensed

to sell or offer to sell pre-need plans

national and local government agencies or units.

Encumbered property - shall refer to real or personal property of the debtor upon
which a lien attaches.

General unsecured creditor - shall refer to a creditor whose claim or a portion

thereof its neither secured, preferred nor subordinated under this Act.
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Group of debtors - shall refer to and can cover only:

(1) corporations that are financially related to one another as parent

corporations, subsidiaries or affiliates;
(2) partnerships that are owned more than fifty percent (50%) by the same
person; and
(3) single proprietorships that are owned by the same person. When the
petition covers a group of debtors, all reference under these rules to debtor
shall include and apply to the group of debtors.

Individual debtor - shall refer to a natural person who is a resident and citizen of
the Philippines that has become insolvent as defined herein.

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.

Insolvent debtor's estate - shall refer to the estate of the insolvent debtor, which
includes all the property and assets of the debtor as of commencement date, plus
the property and assets acquired by the rehabilitation receiver or liquidator after
that date, as well as all other property and assets in which the debtor has an
ownership interest, whether or not these property and assets are in the debtor's
possession as of commencement date: Provided, That trust assets and bailment,
and other property and assets of a third party that are in the possession of the
debtor as of commencement date, are excluded therefrom.

Involuntary proceedings - shall refer to proceedings initiated by creditors.

Liabilities - shall refer to monetary claims against the debtor, including

stockholder's advances that have been recorded in the debtor's audited financial
statements as advances for future subscriptions.

Lien - shall refer to a statutory or contractual claim or judicial charge on real or

personal property that legality entities a creditor to resort to said property for
payment of the claim or debt secured by such lien.

Liquidation - shall refer to the proceedings under Chapter V of this Act.

Liquidation Order - shall refer to the Order issued by the court under Section 112
of this Act.

Liquidator - shall refer to the natural person or juridical entity appointed as such
by the court and entrusted with such powers and duties as set forth in this
Act: Provided, That, if the liquidator is a juridical entity, it must designated a
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natural person who possesses all the qualifications and none of the
disqualifications as its representative, it being understood that the juridical
entity and the representative are solidarity liable for all obligations and
responsibilities of the liquidator.

Possessory lien - shall refer to a lien on property, the possession of which has
been transferred to a creditor or a representative or agent thereof.

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.

Rehabilitation receiver - shall refer to the person or persons, natural or juridical,

appointed as such by the court pursuant to this Act and which shall be entrusted
with such powers and duties as set forth herein.

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 as
prescribed in Section 62 hereof, or other similar arrangements as may be
approved by the court or creditors.

Secured claim - shall refer to a claim that is secured by a lien.

Secured creditor - shall refer to a creditor with a secured claim.

Secured party - shall refer to a secured creditor or the agent or representative of

such secured creditor.

Unsecured claim - shall refer to a claim that is not secured by a lien.

Unsecured creditor - shall refer to a creditor with an unsecured claim.

Voluntary proceedings - shall refer to proceedings initiated by the debtor.

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 its creditors can recover by way of the present value
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of payments projected in the plan, more if the debtor continues as a going

concern than if it is immediately liquidated.

What is the purpose of rehabilitation proceedings?

(1) Corporate rehabilitation contemplates a continuance of corporate life

and activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency.

(2) Rehabilitation proceedings have a two (2)-pronged purpose, namely:

(a) to efficiently and equitably distribute the assets of the insolvent

debtor to its creditors; and

(b) to provide the debtor with a fresh start.

On the one hand, they attempt to provide for the efficient and equitable
distribution of an insolvent debtor’s remaining assets to its creditors;
and on the other, to provide debtors with a “fresh start” by relieving
them of the weight of their outstanding debts and permitting them to
reorganize their affairs. (Asiatrust Development Bank vs. First Aikka
Development. Inc., 650 SCRA 172 [2011].)

What are the types of rehabilitation proceedings?

(1) Court supervised

a. voluntary - initiated by the debtor (Sec. 12)

b. involuntary - initiated by creditors (Sec. 13)

(2) Pre-negotiated (Sec. 76)

(3) Out of court or informal (Sec. 83)

COURT SUPERVISED REHABILITATION

A. VOLUNTARY REHABILITATION

What is voluntary rehabilitation?

It is one which is initiated by the debtor.

Who initiates: Insolvent debtor

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1. owner in case of a sole proprietorship

2. majority of the partners in case of a partnership

3. 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

How initiated: filing a petition for rehabilitation with the court

Contents of the petition: It shall establish the insolvency of the debtor and the
viability of its rehabilitation, and include the following:

(a) Identification of the debtor, its principal activities and its addresses;
(b) Statement of the fact of and the cause of the debtor's insolvency or
inability to pay its obligations as they become due;
(c) The specific relief sought pursuant to this Act;
(d) The grounds upon which the petition is based;
(e) Other information that may be required under this Act depending on
the form of relief requested;
(f) Schedule of the debtor's debts and liabilities including a list of creditors
with their addresses, amounts of claims and collaterals, or securities, if
any;
(g) An inventory of all its assets including receivables and claims against
third parties;
(h) A Rehabilitation Plan;
(i) The names of at least three (3) nominees to the position of rehabilitation
receiver; and
(j) Other documents required to be filed with the petition pursuant to this
Act and the rules of procedure as may be promulgated by the Supreme
Court.

B. INVOLUNTARY REHABILITATION

What is involuntary rehabilitation?

It is one which is initiated by the creditor

Who initiates: 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
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twenty-five percent (25%) of the subscribed capital stock or partners'

contributions, whichever is higher

How initiated: filing a petition for rehabilitation with the court if:

(a) there is no genuine issue of fact on 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.

Contents of the petition: It shall establish the substantial likelihood that the
debtor may be rehabilitated, and include:

(a) identification of the debtor its principal activities and its address;
(b) the circumstances sufficient to support a petition to initiate involuntary
rehabilitation proceedings under Section 13 of this Act;
(c) the specific relief sought under this Act;
(d) a Rehabilitation Plan;
(e) the names of at least three (3) nominees to the position of rehabilitation
receiver;
(f) other information that may be required under this Act depending on the
form of relief requested; and
(g) other documents required to be filed with the petition pursuant to this
Act and the rules of procedure as may be promulgated by the Supreme
Court.

PROVISIONS COMMON TO BOTH VOLUNTARY AND INVOLUNTARY

REHABILITATION

When does rehabilitation proceeding commences?

It shall commence upon the issuance of the Commencement Order.

What is a commencement order and its contents?

It is an order issued by the court which after it finds the petition to be

sufficient in form and substance and shall include the following:

(a) identify the debtor, its principal business or activity/ies and its
principal place of business;
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(b) summarize the ground/s for initiating the proceedings;

(c) state the relief sought under this Act and any requirement or procedure
particular to the relief sought;

(d) state the legal effects of the Commencement Order, including those
mentioned in Section 17 hereof;

(e) declare that the debtor is under rehabilitation;

(f) direct the publication of the Commencement Order in a newspaper of

general circulation in the Philippines once a week for at least two (2)
consecutive weeks, with the first publication to be made within seven (7)
days from the time of its issuance;

(g) If the petitioner is the debtor direct the service by personal delivery of a
copy of the petition on each creditor holding at least ten percent (10%) of
the total liabilities of the debtor as determined from the schedule attached
to the petition within five (5) days; if the petitioner/s is/are creditor/s,
direct the service by personal delivery of a copy of the petition on the debtor
within five (5) days;

(h) appoint a rehabilitation receiver who may or not be from among the
nominees of the petitioner/s and who shall exercise such powers and
duties defined in this Act as well as the procedural rules that the Supreme
Court will promulgate;

(i) summarize the requirements and deadlines for creditors to establish

their claims against the debtor and direct all creditors to their claims with
the court at least five (5) days before the initial hearing;

(j) direct Bureau of internal Revenue (BIR) to file and serve on the debtor
its comment on or opposition to the petition or its claim/s against the
debtor under such procedures as the Supreme Court provide;

(k) prohibit the debtor's suppliers of goods or services from withholding

the supply of goods and services in the ordinary course of business for as
long as the debtor makes payments for the services or goods supplied after
the issuance of the Commencement Order;

(l) authorize the payment of administrative expenses as they become due;

(m) set the case for initial hearing, which shall not be more than forty (40)
days from the date of filing of the petition for the purpose of determining
whether there is substantial likelihood for the debtor to be rehabilitated;
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(n) make available copies of the petition and rehabilitation plan for
examination and copying by any interested party;

(o) indicate the location or locations at which documents regarding the

debtor and the proceedings under Act may be reviewed and copied;

(p) state that any creditor or debtor who is not the petitioner, may submit
the name or nominate any other qualified person to the position of
rehabilitation receiver at least five (5) days before the initial hearing;

(q) includes Stay or Suspension Order

What are the effects of a Commencement Order?

1. The effects of a Stay or Suspension Order:

(a) suspend all actions or proceedings, in court or otherwise, for the

enforcement of claims against the debtor;
(b) suspend all actions to enforce any judgment, attachment or other
provisional remedies against the debtor;
(c) prohibit the debtor from selling, encumbering, transferring or
disposing in any manner any of its properties except in the ordinary
course of business; and
(d) prohibit the debtor from making any payment of its liabilities
outstanding as of the commencement date except as may be
provided herein.

2. West the rehabilitation with all the powers and functions provided for
this Act, such as the right to review and obtain records to which the
debtor's management and directors have access, including bank accounts
or whatever nature of the debtor subject to the approval by the court of
the performance bond filed by the rehabilitation receiver;

3. Prohibit or otherwise serve as the legal basis rendering null and void
the results of any extrajudicial activity or process to seize property, sell
encumbered property, or otherwise attempt to collection or enforce a claim
against the debtor after commencement date unless otherwise allowed in
this Act, subject to the provisions of Section 50 hereof;

4. Serve as the legal basis for rendering null and void any setoff after the
commencement date of any debt owed to the debtor by any of the debtor's
creditors;
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5. 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

6. Consolidate the resolution of all legal proceedings by and against the

debtor to the court Provided. However, That the court may allow the
continuation of cases on other courts where the debtor had initiated the
suit.

Exceptions to the Stay or Suspension Order.

The Stay or Suspension Order shall not apply:

(a) to cases already pending appeal in the Supreme Court as of

commencement date Provided, That any final and executory judgment
arising from such appeal shall be referred to the court for appropriate
action;

(b) 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: Provided, That 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;

(c) to the enforcement of claims against sureties and other persons

solidarily liable with the debtor, and third party or accommodation
mortgagors as well as issuers of letters of credit, 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;

(d) 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;

(e) 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;
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(f) 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

(g) any criminal action against individual debtor or owner, partner, director
or officer of a debtor shall not be affected by any proceeding commend
under this Act.

Effectivity of Commencement Order.

Unless lifted by the court, the Commencement Order shall be for the
effective for the duration of the rehabilitation proceedings for as long as there is
a substantial likelihood that the debtor will be successfully rehabilitated.

Who may be a rehabilitation receiver?

1. Natural, or
2. Juridical person - it must designate a natural person/s who possess/es
all the qualifications and none of the disqualification’s as its representative

What are the Powers, Duties and Responsibilities of the Rehabilitation

Receiver?

The rehabilitation receiver shall be deemed an officer of the court with the
principal duty of preserving and maximizing the value of the assets of the debtor
during the rehabilitation proceedings, determining the viability of the
rehabilitation of the debtor, preparing and recommending a Rehabilitation Plan
to the court, and implementing the approved Rehabilitation Plan,

The rehabilitation receiver shall have the following powers, duties and
responsibilities:

(a)To verify the accuracy of the factual allegations in the petition and its
annexes;
(b)To verify and correct, if necessary, the inventory of all of the assets of
the debtor, and their valuation;
(c)To verify and correct, if necessary, the schedule of debts and liabilities
of the debtor;
(d)To evaluate the validity, genuineness and true amount of all the claims
against the debtor;
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(e)To take possession, custody and control, and to preserve the value of all
the property of the debtor;
(f)To sue and recover, with the approval of the court, all amounts owed to,
and all properties pertaining to the debtor;
(g)To have access to all information necessary, proper or relevant to the
operations and business of the debtor and for its rehabilitation;
(h) To sue and recover, with the. approval of the court, all
property or money of the debtor paid, transferred or disbursed in fraud of
the debtor or its creditors, or which constitute undue preference of
creditor/s;
(i) To monitor the operations and the business of the debtor to ensure that
no payments or transfers of property are made other than in the ordinary
course of business;
(j) With the court's approval, to engage the services of or to employ persons
or entities to assist him in the discharge of his functions;
(k) To determine the manner by which the debtor may be best
rehabilitated, to review) revise and/or recommend action on the
Rehabilitation Plan and submit the same or a new one to the court for
approval;
(l) To implement the Rehabilitation Plan as approved by the court, if 80
provided under the Rehabilitation Plan;
(m) To assume and exercise the powers of management of the debtor, if
directed by the court pursuant to Section 36 hereof;
(n) To exercise such other powers as may, from time to time, be conferred
upon him by the court; and
(o) To submit a status report on the rehabilitation proceedings every
quarter or as may be required by the court motu proprio. or upon motion
of any creditor. or as may be provided, in the Rehabilitation Plan.
Unless appointed by the court, the rehabilitation receiver shall not take
over the management and control of the debtor but may recommend the
appointment of a management committee.

May a rehabilitation receiver be removed?

Yes. The rehabilitation receiver may be removed at any time by the court
either motu proprio or upon motion by any creditor/s holding more than fifty
percent (50%) of the total obligations of the debtor, on such grounds as the rules
of procedure may provide which shall 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;
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(e) Conflict of interest that arises after his appointment; and

(f) Manifest lack of independence that is detrimental to the general body of
the stakeholders.

May the rehabilitation receiver assume the management of the debtor

under receivership?

Yes. Upon motion of any interested party when there is:

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

of the debtor’s assets or other properties;
(b) Paralyzation of the business operations of the debtor; or
(c) Gross mismanagement of the debtor or fraud or other wrongful conduct
on the part of, or gross or willful violation of this Act by existing
management of the debtor Or the owner, partner, director, officer or
representative/s in management of the debtor.

In the alternative the court may appoint a management committee that

will undertake the management of the debtor instead of appointing the
rehabilitation receiver.

What is a 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
as prescribed in Section 62 hereof, or other similar arrangements as may be
approved by the court or creditors.

What are the contents of a Rehabilitation Plan?

The Rehabilitation Plan shall contain, as a minimum:

(a) specify the underlying assumptions, the financial goals and the
procedures proposed to accomplish such goals;
(b) compare the amounts expected to be received by the creditors under
the Rehabilitation Plan with those that they will receive if liquidation
ensues within the next one hundred twenty (120) days;
(c) contain information sufficient to give the various classes of creditors a
reasonable basis for determining whether supporting the Plan is in their
financial interest when compared to the immediate liquidation of the
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debtor, including any reduction of principal interest and penalties payable

to the creditors;
(d) establish classes of voting creditors;
(e) establish subclasses of voting creditors if prior approval has been
granted by the court;
(f) indicate how the insolvent debtor will be rehabilitated 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 a new business
entity or other similar arrangements as may be necessary to restore the
financial well-being and visibility of the insolvent debtor;
(g) specify the treatment of each class or subclass described in subsections
(d) and (e);
(h) provide for equal treatment of all claims within the same class or
subclass, unless a particular creditor voluntarily agrees to less favorable
treatment;
(i) ensure that the payments made under the plan follow the priority
established under the provisions of the Civil Code on concurrence and
preference of credits and other applicable laws;
(j) maintain the security interest of secured creditors and preserve the
liquidation value of the security unless such has been waived or modified
voluntarily;
(k) disclose all payments to creditors for pre-commencement debts made
during the proceedings and the justifications thereof;
(1) describe the disputed claims and the provisioning of funds to account
for appropriate payments should the claim be ruled valid or its amount
adjusted;
(m) identify the debtor's role in the implementation of the Plan;
(n) state any rehabilitation covenants of the debtor, the breach of which
shall be considered a material breach of the Plan;
(o) identify those responsible for the future management of the debtor and
the supervision and implementation of the Plan, their affiliation with the
debtor and their remuneration;
(p) address the treatment of claims arising after the confirmation of the
Rehabilitation Plan;
(q) require the debtor and its counter-parties to adhere to the terms of all
contracts that the debtor has chosen to confirm;
(r) arrange for the payment of all outstanding administrative expenses as
a condition to the Plan's approval unless such condition has been waived
in writing by the creditors concerned;
(s) arrange for the payment" of all outstanding taxes and assessments, or
an adjusted amount pursuant to a compromise settlement with the BlR
Or other applicable tax authorities;
(t) include a certified copy of a certificate of tax clearance or evidence of a
compromise settlement with the BIR;
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(u) include a valid and binding r(,solution of a meeting of the debtor's

stockholders to increase the shares by the required amount in cases where
the Plan contemplates an additional issuance of shares by the debtor;
(v) state the compensation and status, if any, of the rehabilitation receiver
after the approval of the Plan; and
(w) contain provisions for conciliation and/or mediation as a prerequisite
to court assistance or intervention in the event of any disagreement in the
interpretation or implementation of the Rehabilitation Plan.

What is the period for Confirmation of the Rehabilitation Plan?

The court shall have a maximum period of one (1) year from the date of
the filing of the petition to confirm a Rehabilitation Plan.

May rehabilitation be converted to liquidation proceedings?

Yes. During the pendency of court-supervised or pre-negotiated

rehabilitation proceedings, the court may order the conversion of rehabilitation
proceedings to liquidation proceedings pursuant to

(a) Section 25(c)

(c) convert the proceedings into one for the liquidation of the debtor
upon a finding that:

(1) the debtor is insolvent; and

(2) there is no substantial likelihood for the debtor to be
successfully rehabilitated as determined in accordance with
the rules to be promulgated by the Supreme Court.

(b) Section 72

If no Rehabilitation Plan is confirmed within the period of one (1)

year from the date of the filing of the petition for rehabilitation, the
proceedings may upon motion or motu propio, be converted into one for
the liquidation of the debtor.

(c) Section 75

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 state that the
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debtor is seeking immediate dissolution and termination of its corporate

existence.

(d) Section 90

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.

(e ) Section 91

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
(Php1,000,000.00) or at least twenty-five percent (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 shall
be verified, shall contain or set forth the same matters required in the
preceding paragraph, and state that the movants are seeking the
immediate liquidation of the debtor.

(f) any other time upon the recommendation of the rehabilitation receiver
that the rehabilitation of the debtor is not feasible.

What are the effects of Confirmation of the Rehabilitation Plan?

The confirmation of the Rehabilitation Plan by the court shall result in the
following:

(a) The Rehabilitation Plan and its provisions shall be binding upon the
debtor and all persons who may be affected by . it, including the creditors,
whether or not such persons have participated in the proceedings or
opposed the Rehabilitation Plan or whether or not their claims have been
scheduled;
(b) The debtor shall comply with the provisions of the Rehabilitation Plan
and shall take all actions necessary to carry out the Plan;
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(c) Payments shall be made to the creditors in accordance with the

provisions of the Rehabilitation Plan;
(d) Contracts and other arrangements between the debtor and its creditors
shall be interpreted as continuing to apply to the extent that they do not
conflict with the provisions of the Rehabilitation Plan;
(e) Any compromises on amounts or rescheduling of timing of payments
by the debtor shall be binding on creditors regardless of whether or not
the Plan is successfully implement; and
(f) Claims arising after approval of the Plan that are otherwise not treated
by the Plan are not subject to any Suspension Order.

PRE-NEGOTIATED REHABILITATION

What is pre-negotiated rehabilitation?

It is one filed by the debtor alone or together with creditor seeking the
approval of a pre-negotiated rehabilitation plan.

Who initiates: 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.

How initiated: filing a petition for rehabilitation

Contents of the 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
three (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.

OUT-OF-COURT OR INFORMAL RESTRUCTURING AGREEMENTS

OR REHABILITATION PLANS
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What is an out-of-court or informal restructuring agreements or

rehabilitation plan?

An out-of-court or informal restructuring agreements or rehabilitation

plan must meet the following requirements in order to be valid:

(a) The debtor must agree to the out-of-court or informal

restructuring/workout agreement or Rehabilitation Plan;
(b) It must be approved by creditors representing at least sixty-seven (67%)
of the secured obligations of the debtor;
(c) It must be approved by creditors representing at least seventy-five
percent (75%) of the unsecured obligations of the debtor; and
(d) It must be approved by creditors holding at least eighty-five percent
(85%) of the total liabilities, secured and unsecured, of the debtor.

What is Cram Down Effect?

Cram-down is the power of the rehabilitation court to approve and implement a

rehabilitation plan notwithstanding the objection of the majority of creditors. As
noted in the case of Bank of the Philippine Islands vs. Sarabia Manor Hotel
Corporation (G.R. No. 175844, 29 July 2013), the “cram-down” clause, which is
currently incorporated in Section 64 of Republic Act No. 10142, also known as
the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, “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.” Section 64 reads:

Section 64. Creditor Approval of Rehabilitation Plan. – The rehabilitation receiver

shall notify the creditors and stakeholders that the Plan is ready for their
examination. Within twenty (2Q) days from the said notification, the
rehabilitation receiver shall convene the creditors, either as a whole or per class,
for purposes of voting on the approval of the Plan. The Plan shall be deemed
rejected unless approved by all classes of creditors w hose rights are adversely
modified or affected by the Plan. For purposes of this section, the Plan is deemed
to have been approved by a class of creditors if members of the said class holding
more than fifty percent (50%) of the total claims of the said class vote in favor of
the Plan. The votes of the creditors shall be based solely on the amount of their
respective claims based on the registry of claims submitted by the rehabilitation
receiver pursuant to Section 44 hereof.
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Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm
the Rehabilitation Plan if all of the following circumstances are present:

(a) The Rehabilitation Plan complies with the requirements specified in this Act.

(b) The rehabilitation receiver recommends the confirmation of the Rehabilitation

Plan;

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

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

READ: Marilyn Victorio-Aquino, Petitioner, vs. Pacific Plans, Inc. and Mamerto
A. Marcelo, Jr. (Court-Appointed Rehabilitation Receiver of Pacific Plans, Inc.),
Respondents; G.R. No. 193108; 10 December 2014

https://lawphil.net/judjuris/juri2014/dec2014/gr_193108_2014.html

LIQUIDATION OF INSOLVENT JURIDICAL DEBTORS

What are the recourse of an insolvent juridical debtor?

1. Voluntary liquidation
2. Involuntary liquidation

VOLUNTARY LIQUIDATION

What is voluntary liquidation? Initiated by an insolvent debtor

Who initiates: insolvent debtor may apply for liquidation

How initiated: filing a petition for liquidation with the court

Contents of the petition. The petition shall establish the insolvency of the
debtor and shall contain the following:

(a) a schedule of the debtor's debts and liabilities including a list of

creditors with their addresses, amounts of claims and collaterals, or
securities, if any;
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(b) an inventory of all its assets including receivables and claims against
third parties; and
(c) the names of at least three (3) nominees to the position of liquidator.

INVOLUNTARY LIQUIDATION

What is involuntary liquidation? Initiated by creditors

Who initiates: Three (3) or more creditors the aggregate of whose claims is at
least either One million pesos (Php1,000,000,00) or at least twenty-five percent
(25%0 of the subscribed capital stock or partner's contributions of the debtor,
whichever is higher

How initiated: filing a petition for liquidation of the debtor with the court

Contents of the petition. The petition shall show that:

(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 one hundred eighty (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.

INSOLVENCY OF INDIVIDUAL DEBTORS

Who is an insolvent debtor?

Insolvent debtor refer to the financial condition of a person 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.

What are the recourse of an insolvent individual debtor?

1. Suspension of payment
2. Voluntary liquidation
3. Involuntary liquidation

What is suspension of payment?

When 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.
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Who initiates: individual debtor

How initiated: filing a petition by the individual debtor with the court

Contents of the petition.

(a) schedule of debts and liabilities

(b) an inventory of assess, and
(c) a proposed agreement with his creditors.

When the court issues a suspension of payment order, what actions are
suspended?

It suspends any pending execution against the individual debtor.

Is there any exception to the suspension of payment order?

Yes. Properties held as security by secured creditors shall not be the

subject of such suspension order. Secured creditors are those with a secured
claim or claims secured by a lien (i.e. mortgage)

Can a creditor still sue the debtor who filed a petition for suspension of
payment?

Yes. But only:

(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 sixty (60) days immediately prior to the filing of the petition; and
(b) secured creditors.

How long does a suspension of payment order survive?

Three (3) months or as soon as such agreement is denied.

Voluntary Liquidation.

What is voluntary liquidation? Initiated by an insolvent debtor

Who initiates: individual debtor whose properties are not sufficient to cover his
liabilities, and owing debts exceeding Five hundred thousand pesos
(Php500,000.00)
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How initiated: filing a verified petition with the court of the province or city in
which he has resided for six (6) months prior to the filing of such petition

Contents of the petition. It shall contain a schedule of debts and liabilities and
an inventory of assets.

Involuntary Liquidation.

What is involuntary liquidation? Initiated by creditors

Who initiates: Any creditor or group of creditors with a claim of, or with claims
aggregating at least Five hundred thousand pesos (Php500, 000.00)

How initiated: filing a verified petition for liquidation with the court of the
province or city in which the individual debtor resides.

Contents of the petition.

Petition for liquidation shall set forth or allege at least one of such acts:

(a) That such person is about to depart or has departed from the Republic
of the Philippines, with intent to defraud his creditors;
(b) That being absent from the Republic of the Philippines, with intent to
defraud his creditors, he remains absent;
(c) That he conceals himself to avoid the service of legal process for the
purpose of hindering or delaying the liquidation or of defrauding his
creditors;
(d) That he conceals, or is removing, any of his property to avoid its being
attached or taken on legal process;
(e) That he has suffered his property to remain under attachment or legal
process for three (3) days for the purpose of hindering or delaying the
liquidation or of defrauding his creditors;
(f) That he has confessed or offered to allow judgment in favor of any
creditor or claimant for the purpose of hindering or delaying the liquidation
or of defrauding any creditors or claimant;
(g) That he has willfully suffered judgment to be taken against him by
default for the purpose of hindering or delaying the liquidation or of
defrauding his creditors;
(h) That he has suffered or procured his property to be taken on legal
process with intent to give a preference to one or more of his creditors and
thereby hinder or delay the liquidation or defraud any one of his creditors;
(i) That he has made any assignment, gift, sale, conveyance or transfer of
his estate, property, rights or credits with intent to hinder or delay the
liquidation or defraud his creditors;
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(j) That he has, in contemplation of insolvency, made any payment, gift,

grant, sale, conveyance or transfer of his estate, property, rights or credits;
(k) That being a merchant or tradesman, he has generally defaulted in the
payment of his current obligations for a period of thirty (30) days;
(l) That for a period of thirty (30) days, he has failed, after demand, to pay
any moneys deposited with him or received by him in a fiduciary; and
(m) That an execution having been issued against him on final judgment
for money, he shall have been found to be without sufficient property
subject to execution to satisfy the judgment.

PROVISIONS COMMON TO LIQUIDATION IN INSOLVENCY OF INDIVIDUAL

AND JURIDICAL DEBTORS

What is a liquidation order?

A Liquidation order is one which:

(a) declare the debtor insolvent;

(b) order the liquidation of the debtor and, in the case of a juridical debtor,
declare it as dissolved;
(c) order the sheriff to take possession and control of all the property of the
debtor, except those that may be exempt from execution;
(d) order the publication of the petition or motion in a newspaper of general
circulation once a week for two (2) consecutive weeks;
(e) direct payments of any claims and conveyance of any property due the
debtor to the liquidator;
(f) prohibit payments by the debtor and the transfer of any property by the
debtor;
(g) direct all creditors to file their claims with the liquidator within the
period set by the rules of procedure;
(h) authorize the payment of administrative expenses as they become due;
(i) state that the debtor and creditors who are not petitioner/s may submit
the names of other nominees to the position of liquidator; and
(j) set the case for hearing for the election and appointment of the
liquidator, which date shall not be less than thirty (30) days nor more than
forty-five (45) days from the date of the last publication.

What are the effects of the issuance of liquidation order against a juridical
or individual debtor?

(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;
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(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;
(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 one hundred
eighty (180) days.

Does a liquidation order affect the rights of a secured creditor?

No. The Liquidation Order shall not affect the right of a secured creditor to
enforce his lien in accordance with the applicable contract or law.

What are the options available to a secured creditor?

(a) waive his right under the security or lien, prove his claim in the
liquidation proceedings and share in the distribution of the assets of the
debtor; or
(b) maintain his rights under the security or lien:

If the secured creditor maintains his rights under the security or lien:

(1) the value of the property may be fixed in a manner agreed upon by 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;

(2) the liquidator may sell the property and satisfy the secured creditor's
entire claim from the proceeds of the sale; or

(3) the secure creditor may enforce the lien or foreclose on the property
pursuant to applicable laws.

Who is a liquidator?

Natural person or juridical entity appointed as such by the court and

entrusted with such powers and duties as set forth in this Act: Provided, That, if
the liquidator is a juridical entity, it must designated a natural person who
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possesses all the qualifications and none of the disqualifications as its

representative, it being understood that the juridical entity and the
representative are solidarity liable for all obligations and responsibilities of the
liquidator.

What are the qualifications of a Liquidator?

The liquidator shall have the same qualifications as a rehabilitation

receiver as follows:

(a)A citizen of the Philippines or a resident of the Philippines in the six (6)
months immediately preceding his nomination;
(b)Of good moral character and with acknowledged integrity, impartiality
and independence;
(c)Has the requisite knowledge of insolvency and other relevant
commercial laws, rules and procedures, as well as the relevant training
and/or experience that may be necessary to enable him to properly
discharge the duties and obligations of a rehabilitation receiver; and
(d)Has no conflict of interest: Provided, That such conflict of interest may
be waived, expressly or impliedly, by a party who may be prejudiced
thereby.

How are liquidators chosen?

1. election
2. court appointment

Who may elect a liquidator?

1. Creditors who have filed their claims within the period set by the
court, and
2. Creditors whose claims are not barred by the statute of limitations

Are secured creditors entitled to elect a liquidator?

No, except, when:

(a) he waives his security or lien; or

(b) has the value of the property subject of his security or lien fixed by
agreement with the liquidator, and is admitted for the balance of his claim.

When can a court appoint a liquidator?

(a) on the date set for the election of the liquidator, the creditors do not
attend;
(b) the creditors who attend, fail or refuse to elect a liquidator;
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(c) after being elected, the liquidator fails to qualify; or

(d) a vacancy occurs for any reason whatsoever, In any of the cases
provided herein, the court may instead set another hearing of the election
of the liquidator.

How is a liquidator removed?

A liquidator maybe removed any time by the court for cause, either motu
propio or upon motion of any creditor entitled to vote for the election of the
liquidator.

What are the powers, duties and responsibilities of the liquidator?

The liquidator shall be deemed an officer of the court with the principal
duly of preserving and maximizing the value and recovering the assets of the
debtor, with the end of liquidating them and discharging to the extent possible
all the claims against the debtor. The powers, duties and responsibilities of the
liquidator shall include, but not limited to:

(a) to sue and recover all the assets, debts and claims, belonging or due to
the debtor;
(b) to take possession of all the property of the debtor except property
exempt by law from execution;
(c) to sell, with the approval of the court, any property of the debtor which
has come into his possession or control;
(d) to redeem all mortgages and pledges, and so satisfy any judgement
which may be an encumbrance on any property sold by him;
(e) to settle all accounts between the debtor and his creditors, subject to
the approval of the court;
(f) to recover any property or its value, fraudulently conveyed by the debtor;
(g) to recommend to the court the creation of a creditors' committee which
will assist him in the discharge of the functions and which shall have
powers as the court deems just, reasonable and necessary; and
(h) upon approval of the court, to engage such professional as may be
necessary and reasonable to assist him in the discharge of his duties.

In addition to the rights and duties of a rehabilitation receiver, the

liquidator, shall have the right and duty to take all reasonable steps to manage
and dispose of the debtor's assets with a view towards maximizing the
proceedings therefrom, to pay creditors and stockholders, and to terminate the
debtor's legal existence. Other duties of the liquidator in accordance with this
section may be established by procedural rules.

In addition to the above powers and duties, what are the other duties of a
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liquidator?

The liquidator shall make and keep a record of all moneys received and all
disbursements made by him or under his authority as liquidator. He shall render
a quarterly report thereof to the court, which report shall be made available to
all interested parties. The liquidator shall also submit such reports as may be
required by the court from time to time as well as a final report at the end of the
liquidation proceedings.

What is a liquidation plan?

A plan submitted by the liquidator to the court setting forth the assets of
the debtor and a schedule of liquidation of the assets and payment of the claims.

May the assets of the debtor be sold to pay debts?

Yes. The liquidator may sell the unencumbered assets of the debtor and
convert the same into money.

How are properties sold? Public auction.

May a private sale be allowed instead of public auction?

Yes. With the approval of the court if:

(a) the goods to be sold are of a perishable nature, or are liable to quickly
deteriorate in value, or are disproportionately expensive to keep or
maintain; or
(b) the private sale is for the best interest of the debtor and his creditors.

May the property of the debtor be paid directly to the creditor instead of
being sold?

Yes, but only with the approval of the court.