Quisumbing Torres

XV.

INSOLVENCY IN THE PHILIPPINES

1.

Overview and Introduction to the Jurisdiction / Applicable

Legislation

There are three types of remedies available to a financially distressed individual

or juridical person, to wit, suspension of payments, corporate rehabilitation, and
insolvency. The applicable laws are the Civil Code of the Philippines (Civil Code),
the Insolvency Law, Presidential Decree No. 902-A (P.D. 902-A), and the Rules
of Procedure on Corporate Rehabilitation. The type of proceeding that applies to
a debtor depends on the particular relief sought.
If what is sought is merely a little financial breathing space, then the remedy is a
suspension of payments, which provides for the deferment of payments and temporary
protection against actions/executions by unsecured creditors. If, on the other hand,
the rehabilitation of a company entails more radical measures such as changes in
organization, management, and/or strategy, and requires temporary protection
against both secured and unsecured creditors, then the remedy is to seek corporate
rehabilitation. Finally, if the debtor company is no longer capable of or interested in
maintaining its business, it may apply for insolvency and have its assets distributed
accordingly among its various creditors.
Each of these remedies is discussed in more detail below.

2.

Proceedings for Solvent Debtors (Individuals or

Corporations)

2.1

Suspension of Payments

An individual debtor who possesses sufficient property to cover all of his/its debts
but foresees the impossibility of meeting them when they respectively fall due, may
file a petition with a Philippine Regional Trial Court (the Court) to be declared in
a state of suspension of payments. The petition must be filed with the Court of the
place where the debtor has his/its residence within six months prior to the filing
of the petition.
a.

Effects of a Petition for Suspension of Payments

The filing by a debtor of a petition for suspension of payments:

i.
ii.
iii.

b.

Suspends all pending executions against the debtors properties,

except executions against properties specially mortgaged;
Bars ordinary creditors from instituting proceedings in any Philippine
court against the debtor; and
Prohibits the debtor from disposing of his property or making
payments, except in the ordinary course of the business in which the
debtor is engaged.
Court Proceedings

The petition for suspension of payments must include a Schedule of Creditors, a

statement of the debtors assets and liabilities, and the debtors proposed
agreement for the suspension of payments. The proposed agreement must be
approved by two thirds (2/3) of the creditors representing at least three fifths
(3/5) of the debtors total liabilities. If the required vote is not achieved, the
proceeding is terminated and the creditors may enforce their respective credits.
If the required vote is achieved without any objection from the creditors, the
Court will issue an order that the proposed agreement be carried out, and such
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agreement shall be binding on all creditors that have been properly summoned
and included in the Schedule of Creditors. If the required vote is achieved but
there is an objection from any of the creditors, the Court will conduct a hearing
on the objection. If the objection is found to be meritorious, the proceeding will
terminate. If the objection is found to be unmeritorious, the Court will
proceed as though no objection had been made.
The amount of the debts of the debtor is not affected by a suspension of
payments. However, the payment for such debts is delayed.
c.

Objections to the debtors proposed agreement

The possible grounds for objecting to the proposed agreement are as follows:
i.

defects in the call for the meeting of the creditors, in the holding
thereof, and in the deliberations thereat, which prejudice the rights
of the creditors;

ii.

fraudulent connivance between one or more creditors and the debtor

to vote in favor of the proposed agreement;

iii.

fraudulent conveyance of claims for the purpose of obtaining the

required majority.

If the debtor fails wholly or in part to perform the Court-approved agreement, the
rights which the creditors had against the debtor before the agreement shall
re-vest in them.
2.2

Corporate Rehabilitation

A debtor, which is a corporation, partnership, or association, that foresees the

impossibility of meeting its debts when they respectively fall due, or any creditor
or creditors holding at least 25 percent of such debtors total liabilities, may petition
the proper Court to have the debtor placed under rehabilitation. The petition for
rehabilitation must be filed with the Court of the place where the debtors principal
office is located. The petition for rehabilitation must be accompanied by, among
others, a rehabilitation plan.
a.

Effects of a Petition for Rehabilitation

If the Court finds the petition to be sufficient in form and substance, it will,
not later than five days from the filing of the petition, issue a Stay Order
which, among others: (a) appoints a Rehabilitation Receiver; (b) stays the
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 sureties not solidarily liable with the debtor; (c) prohibits the debtor from
selling, encumbering, transferring, or disposing in any manner any of its
properties except in the ordinary course of business; (d) prohibits the debtor
from making any payment of its liabilities outstanding as at the date of filing
of the petition; (e) prohibits the debtors suppliers of goods or services from
withholding supply of goods and services in the ordinary course of business
for as long as the debtor makes payments for the services and goods supplied
after the issuance of the stay order; (f) directs the payment in full of all
administrative expenses incurred after the issuance of the Stay Order; and (g)
sets an initial hearing on the petition, and directs all creditors and interested
parties to file their verified comments on or oppositions to the petition before
the said initial hearing.
The Stay Order applies to both secured and unsecured creditors. The Stay
Order is effective from the date of its issuance until the dismissal of the
petition or the termination of the rehabilitation proceeding.

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b.

Court proceedings

If, after the initial hearing on the petition for rehabilitation, the Court is satisfied
that there is merit in the petition, it will give due course to the petition and
refer the same to the Rehabilitation Receiver. The Rehabilitation Receiver will
evaluate the rehabilitation plan and submit his recommendations to the Court
not later than 120 days from the date of the initial hearing.
The petition will be dismissed if no rehabilitation plan is approved by the Court
upon the lapse of 180 days from the date of the initial hearing. The Court may
extend this period only if it appears by compelling evidence that the debtor may
successfully be rehabilitated. However, the period for approving or
disapproving a rehabilitation plan may not exceed 18 months from the date of
filing of thepetition.
The Court may approve a rehabilitation plan even over the opposition of
creditors holding a majority of the total liabilities of the debtor if, in its
judgment, the rehabilitation of the debtor is feasible and the opposition of
the creditors is manifestly unreasonable. The Court may impose such terms,
conditions, or restrictions as the effective implementation and monitoring
of the rehabilitation plan may reasonably require, or for the protection and
preservation of the interests of the creditors should the plan fail.
On motion by a party or on its own, within 90 days from the approval of the
rehabilitation plan, the Court may revoke the approval thereof on the ground
that the same was secured through fraud.
c.

Clawback provisions

Upon motion by a party or on its own, the Court may declare void any
transfer of property or any other conveyance, sale, payment, or agreement
made in violation of the Courts Stay Order or in violation of the Rules on
Corporate Rehabilitation.
d.

Effects of an approved rehabilitation plan on prior agreements

between the debtor and creditor(s)

Contracts and other arrangements between the debtor and its creditors
will continue to be effective to the extent that these contracts and other
arrangements do not conflict with the approved rehabilitation plan.
In a recent decision involving a creditors security agreement with a debtor
under rehabilitation, the Supreme Court of the Philippines ruled that a Stay
Order and an approved rehabilitation plan merely suspend the enforcement
of the security, and do not prejudice the status of the secured creditor vis--vis
the unsecured creditors.

3.

Insolvency Proceedings (Individuals or Corporations)

In insolvency proceedings, the basic premise is that the debtor does not have enough
assets/properties to cover his obligations. Insolvency proceedings may be voluntary
or involuntary.

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3.1

Voluntary Insolvency

A debtor owing debts exceeding Ph P1,000 (approx. US $25) may seek a declaration
of insolvency.
a.

Court Proceedings

The petition for voluntary insolvency must be filed in the Court of the place
where the debtor has resided (in case of an individual) or has had its principal
office (in case of a corporation, partnership or association) for six months
preceding the filing of the petition. The petition must allege, among others,
the debtors inability to pay all his/its debts in full; his/its willingness to
surrender all his/its property, estate, and effects not exempt from execution
for the benefit of the creditors; and an application to be adjudged insolvent.
The debtor must also include in the petition a schedule of debts and of creditors,
and an inventory of all his/its assets. The filing of the petition is deemed an act
of insolvency. If the debtor is a corporation, the petition may be filed by any
officer of the corporation, duly authorized by the board of directors.
Upon the filing of the petition, the court will issue an order declaring the
debtor insolvent.
3.2

Involuntary Insolvency

Three or more creditors whose total credits exceed Ph P1,000 (approx. US $25) may
seek a declaration of insolvency against a debtor. The creditors must be Philippine
residents whose credits accrued in the Philippines, and did not become creditors
by assignment within 30 days prior to the filing of the petition.
a.

Court Proceedings

The petition for involuntary insolvency must be filed in the Court of the place
where the debtor resides or has his/its principal place of business, and must
be verified by at least three of the petitioners. The petition must also allege
one or more acts of insolvency.
The petition must be accompanied by a bond, in such sum as the Court will
direct, conditioned upon the payment to the debtor of all costs and damages
occasioned by the proceedings in insolvency if the petition is dismissed by
the Court, or withdrawn by the petitioners, or if the debtor is not declared
insolvent. The Court may, upon motion, direct the filing of an additional bond
when deemed necessary.
The Court will require the debtor to show cause why he/it should not be
declared insolvent. If the Court finds the petition meritorious, the Court
will issue an order declaring the debtor insolvent.
3.3

Provisions applicable to both voluntary or involuntary insolvency

proceedings
a.

Effect of Order of Insolvency

An Order of Insolvency
olvency generally suspends all civil proceedings pending
against the debtor.

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All property of the insolvent not exempt by law from execution will be
conveyed to an assignee-in-insolvency elected by the creditors. By way of
exception, the debtors property that is subject of a pledge or mortgage is not
included in the debtors assets that are assigned to the assignee-in-insolvency
for the satisfaction of the debtors general creditors.
No discharge is granted to a corporation that is declared insolvent.
b.

Rights of secured creditors

A creditor whose credit is secured by a mortgage or pledge is allowed, at its

option, either (i) to foreclose the property subject of such security
arrangement (notwithstanding the stay effected by the Order of Insolvency),
or (ii) to pursue his/its claim in the insolvency proceeding together with
other creditors, by releasing or surrendering to the assignee-in-insolvency
the properties subject of the pledge or mortgage.
If the secured creditor opts for foreclosure, such creditor cannot participate in
the election of the assignee-in-insolvency. But the creditor may be admitted in
the insolvency proceeding to recover the balance of the debt, after deducting
the value of the property foreclosed. The creditor recovers the balance by
participating in the pro-rata distribution of the debtors estate.
If the creditor pursues his claim in the insolvency proceeding, he may recover
his credit by participating in the pro-rata distribution of the debtors estate, but
will have to relinquish his security and surrender the properties subject of the
security to the assignee-in-insolvency.
c.

Preference of Credits

In an insolvency proceeding, certain types of credits enjoy preference with

respect to specific movable or immovable properties (Special Preferred
Credits).
Among the Special Preferred Credits, taxes and assessments due upon the
property to which the claims relate enjoy absolute preference. All the remaining
classes of Special Preferred Credits with respect to specific movable or
immovable property (e.g., credits secured by a pledge or mortgage) do not
enjoy priority among themselves, but must be paid concurrently and pro rata,
i.e., in proportion to the amount of the respective credits.
Credits that do not enjoy any preference with respect to specific property are
satisfied in the order established in Article 2244 of the Civil Code. Article 2244
provides for the preference of certain claims and credits which, without special
privilege, appear in (i) a public instrument (i.e., the instrument is notarized)
or (ii) a final judgment. These credits have preference among themselves in the
order of priority of the dates of the instruments and of the judgments, respectively.

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d.

Clawback provisions

The assignee-in-insolvency may recover property given as security, or the

value thereof, if the debtor, being insolvent, or in contemplation of insolvency,
within 30 days before the filing of a petition to be declared insolvent by or
against him, procures any of his property to be attached, sequestered, or seized
on execution, or makes any pledge, mortgage, assignment, transfer, sale, or
conveyance thereof to anyone with a view to: (i) giving a preference to any
creditor or person having a claim against him; or (ii) preventing the property
from being distributed ratably among his creditors; or (iii) defeating the object
of, or in any way hindering, impeding, or delaying the operation of the provisions
of the Insolvency Law. In such a case, the attachment, sequestration, seizure,
pledge, mortgage, transfer, sale, assignment, or conveyance is considered void.
Under the Insolvency Law, if the pledge, mortgage, conveyance, sale, assignment,
or transfer of the property is not made in the usual and ordinary course of
business of the debtor, or if such seizure is made under a judgment which the
debtor has confessed or offered to allow, that fact is deemed as prima facie
evidence of fraud.
Furthermore, any pledge, mortgage, conveyance, sale, assignment, or transfer of
property made by the insolvent within one month before the filing of a petition in
insolvency by or against him, except for a valuable pecuniary consideration made in
good faith, is considered void.

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