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Financial Rehabilitation and Insolvency Act of 2010 (FRIA) converted into liquidation proceedings or motion of

the debtor/creditor
- To encourage debtors (both juridical and natural
persons), and their creditors to collectively and
- Acknowledges cross-border insolvency
realistically resolve and adjust competing claims
proceedings.
and property rights.
o Upon petition, the court may issue
- Ensure a timely, fair, transparent, effective and
necessary relief arising from insolvency or
efficient rehabilitation or liquidation of debtors.
rehabilitation proceedings in a foreign
- To ensure or maintain certainty and predictability in
jurisdiction involving a foreign entity with
commercial affairs.
assets in the Phils.
- To preserve and maximize the value of the assets of
the debtors.
- Contains an express provision allowing a Creditors
- To recognize creditors rights and respect priority of
Committee.
claims, and ensure equitable treatment of creditors
o Serve as the primary liaison between the
who are similarly situated.
rehab receiver and creditors in order to
The overriding policy of the FRIA is to encourage assist the rehab receiver in communicating
debtors and their creditors to collectively and with the creditors of the debtor.
realistically resolve and adjust competing claims and o Can a rehabilitation court empower a
property rights. Creditors Committee to interfere with the
judgment of the BOD of the company
In a nutshell, FRIA wants to give debtors who are unable under rehabilitation?
to meet their credit obligations, in the absence of bad
faith/negligence, a breathing spell by way of suspension HELD: The SC noted the expansive powers
of payments and adoption of remedial measures that well beyond those of the rehabilitation
can help them put their house in order again. receiversgranted to the Creditors
Committee. The SC clarified that while
A successful rehabilitation will be mutually beneficial to
corporate powers of all corporations may be
debtors and creditors. In case the effort fails, the
exercised, PD 902-A provides an exception by
government will step in to see to it that the debtors
empowering the rehabilitation court to Create
remaining assets are properly liquidated and equitably
and appoint a management committee to
distributed to the creditors.
undertake the management of corporations.
SALIENT POINTS OF THE FRIA LAW The exception applies when there is imminent
danger of dissipation, loss, wastage or
The proceedings in a summary and non-adversarial destruction of assets or other properties or
manner with view towards efficient rehabilitation or paralyzation of business operations of such
liquidation of debtors. corporations which may be prejudicial to the
- Affords tax exemptions on indebtedness reduced or interest of minority stockholders, parties-
forgiven pursuant to rehabilitation or liquidation litigants, or the general public.
proceedings.
In such a case, the management
- Rehabilitation proceedings may be initiated by the committee may overrule or revoke the
debtor/creditor, which may take the form of actions of the previous management and
o Court-supervised, BOD of the entity/entities under
o Pre-negotiated, or management notwithstanding any
o Out-of-court/informal proceedings. provision of law, articles of incorporation,
or bylaws to the contrary.
- Upon determination that the debtor may no longer
be rehabilitated pending rehab proceedings may be However, since BNY neither petitioned for
the appointment of a management
committee nor presented evidence
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showing that any of the conditions to 4. Prohibits the debtor from making any
warrant its creation exist, the expansive payment of its liabilities outstanding
powers granted to the monitoring as of the commencement date,
committee are not sanctioned under the EXCEPT as may be provided herein
law. (utilities like water, electricity)

- The first 2 are for the benefit of the debtors,


to prevent multiplicity of suits and protect the
o Under the FRIA, the Creditors Committee
debtor from having to defend himself in
is not authorized to modify or supplant the
litigation against multiple lawsuits.
decisions of the BOD of a debtor, as the
FRIA maintained the legal difference - The last 2 are for the benefit of the creditors
between a Creditors Committee and a and for the preservation of the value of the
Management Committee. debtors properties, also prevent sham
transactions by the debtor wherein their
- The Stay or Suspension Order under FRIA. property is transferred to a 3rd person in order
o Arguably the very heart of the FRIA itself. to defraud creditors.
o Effective for the duration of the rehab
proceedings for as long as there is a - Waiver by both the National and LGUs of taxes and
substantial likelihood that the debtor can fees under the FRIA.
be successfully rehabilitated. o Simultaneous with the issuance of the
o Summary in nature and immediately Commencement Order (and with the Stay
executory. or Suspension Order) but entirely distinct
o Mandatory and may be availed of by the and separate therefrom.
interested party as a matter of right, w/n o Only effective until the Rehabilitation Plan
the order an appeal was perfected. has been either approved/dismissed.
o May be availed of by writ of execution o Creates a real and enforceable right in
(R39). An interested debtor/creditor may favor of the debtor under rehabilitation.
enforce the Stay or Suspension Order by
securing a Writ of Execution from the - A debtor may enter into sham transactions in order
rehab or insolvency court which issued the to hide his assets from the court or sell his
same Satay or Suspension Order. properties despite the prohibition of the Stay or
o The Stay or Suspension Order is Suspension Order.
automatically included in the issuance of
the Commencement Order. It has 4 - REMEDIES of Creditor for Non-compliance with the
important effects on the insolvent debtor Suspension Order and of this Act.
(effects of a Commencement order): o Fine of not more than 1million and
imprisonment for not less than 3 months
1. Suspends all actions/proceedings, in nor more than 5 years for each offense
court or otherwise, for the
enforcement of claims against the - REMEDIES of Debtor:
debtor; o Under the Rules of Crout, Writ of
2. Suspends all actions to enforce any Prohibitiononce issued, shall command
judgment, attachment, or other the respondent court/tribunal to desist fro
provisional remedies against the hearing or proceeding when he is acting
debtor; with grave abuse of discretion amounting
3. Prohibits the debtor from selling, to lack or excess of jurisdiction.
encumbering, transferring, or o Under Article 27 of the Civil Code, the
disposing in any manner any of its debtor who suffers material or moral loss
properties, EXCEPT in the ordinary due to the neglect or the unjustified
course of business; refusal of a public officer to uphold his
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legal duty to obey the Stay or Suspension o No genuine issue of fact or law on he
Order and secion 19 of the FRIA may sue claims of petitioner/s, and that the due
the latter for damages and/or and demandable payments thereon have
administrative charges against the said not been made or at least 6o days or that
officer. the debtor has failed generally to meet its
o Under Article 2176 of the Civil Code on liabilities as they fall due; or
quasi-delict/tort. o A creditor other than the petitioner/s has
o Administrative remedy: the aggrieved initiated foreclosure proceedings against
debtor may rely on the ground of refusal the debtor that will prevent the debtor
to perform official duty, neglect of from paying its debts as they become due
duty, or inefficiency and incompetence in or will render it insolvent;
the performance of official duties.
o Criminal remedy: criminal complaint under - Rehabilitation proceedings shall commence upon
RA 3019 or the Anti-graft and Corrupt the issuance of the Commencement Order
Practices Act. (automatically includes the Stay or Suspension
Order).
- Nature of Rehabilitation Proceeding
o In rem, summary, non-adversarial manner - Court shall issue the Commencement Order within
5 working days from filing if it finds the petition for
- How is jurisdiction over the parties acquired? rehab to be sufficient in form and substance.
o Upon the publication of the notice of the
commencement of the proceedings in any
newspaper of general circulation in the - How long shall the CO be effective?
Phils in the manner prescribed by the o For as long as there are indicators that
Rules of Court. there will be potential likelihood of
1. Regularly published; rehabilitation, unless lifted by the court.
2. Does not cater to a particular group; o If none, court shall issue another order to
3. Bona fide clientele. convert rehab to insolvency.

- The term debtor excludes the following: - EFFECT OF COMMENCEMENT ORDER:


o Bank; o Suspends all actions/proceedings, in court
o Insurance company; or otherwise, for the enforcement of
o Pre-need company; claims against the debtor;
Provided that government financial institutions o Suspends all actions to enforce any
other than banks and GOCCs shall be covered by judgment, attachment, or other
the FRIA. provisional remedies against the debtor;
o Prohibits the debtor from selling,
- Court-supervised rehabilitation proceedings: encumbering, transferring, or disposing in
o Voluntary proceeding; and any manner any of its properties, EXCEPT
o Involuntary proceeding. in the ordinary course of business;
o Prohibits the debtor from making any
- How an insolvent debtor initiate a voluntary payment of its liabilities outstanding as of
proceeding? the commencement date, EXCEPT as may
o File petition for rehabilitation be provided herein (utilities like water,
electricity)
- A creditor may initiate involuntary proceeding. Any o Rehabilitating entity shall have the ff
creditor or group of creditors with a claim of, or the powers:
aggregate of whose claims is, at least 1million pesos 1. obtain records to which debtors
or at least 25% of the subscribed capital stock may management and directors have
initiate involuntary proceeding. access, including bank accounts;
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2. Prohibit or render null and void the 2. Hear and determine any objection to the
results of any extrajudicial activity; qualifications of the appointment of the
3. To seize property. A Any perfection of rehabilitation receiver and, if necessary,
lien against the debtors property appoint a new one in accordance with
after commencement date is FRIA;
rendered null and void. 3. Direct creditors to comment on the
4. Consolidate all legal proceedings petition and the Rehabilitation Plan, and to
against the debtor to the court. submit the same to the court and to the
PROVIDED that the court may allow rehabilitation receiver within a period not
the continuation of cases on other more than 20days; and
courts where the debtor had initiated 4. Direct the rehabilitation receiver to
the suit. evaluate the financial condition of the
debtor and to prepare and submit to the
- Stay or Suspension Order shall apply to court within 40days from initial hearing
government financial institutions. HOWEVER, it the report.
shall not apply to the following:
1. Cases already pending appeal in the SC as - What is the effect of failure to file notice of claim?
of the commencement date. Provided that 1. A creditor whose claim is not listed in the
any final and executory judgment arising schedule of debts and liabilities and who
from such appeal shall be referred to the fails to file a notice of claim in accordance
court for appropriate action; with the Commencement Order but
2. Cases pending/filed at a specialized subsequently files a belated claim shall not
court/quasi-judicial agency which, upon be entitled to participate in the rehab
determination by the court, is capable of proceedings, but shall be entitled to
resolving the claim more quickly, fairly, receive distributions arising therefrom.
and efficiently than the court; - When may the court give due course to the
3. Enforcement of claims against sureties and petition?
other persons solidarily with the debtor 1. Within 10days from receipt of the report
and third party or accommodation of the rehab receiver, the court may give
mortgagors as well as issuers of letters of due course to the petition upon a finding
credit (revenue generating); that:
4. To any form of action of customers or 1. The debtor is insolvent, and
clients of a securities market participant to 2. There is a substantial likelihood for
recover or otherwise claim moneys and the debtor to be successfully
securities entrusted to the latter in the rehabilitated.
ordinary course of the latters business, as
well as any action of such securities - What will be the action of the court if the petition is
market participant or the appropriate given due course?
regulatory agency or self-regulatory org to 1. The court shall direct the rehab receiver
pay or settle such claims/liabilities; to:
5. Any criminal action against individual 1. Review,
debtor/owner, partner, director, or officer 2. Revise, and/or
of a debtor shall not be affected by any 3. Recommend action on the rehab plan,
proceeding commenced under FRIA. and
(Doctrine of Corporate Entity) 4. Submit the same or a new one to the
court w/in 90days.
- What are actions which the court shall undertake at 2. The court may refer any dispute relating to
the initial hearing? the Rehabilitation Plan or the rehab
1. Determine the creditors who made timely proceedings pending before it to
and proper filing of their notice of claims; arbitration or other modes of dispute
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resolution as provided (ADR) should it a reasonable period (e.g., lotto, more
determine that such mode will resolve the borrowings; but what are deemed viable
dispute more quickly, fairly, and efficiently are downsizing, cut down on number of
than the court. branches, companywide point-of-sale
system, go paperless, lease an office to
- When may the court dismiss the petition? raise revenue);
1. Withing 10days from receipt of the report 4. In the implementation of the rehab plan,
of the rehab receiver, the court may debtor fails to perform its obligations;
dismiss the petition upon a finding that: 5. The commission of fraud in securing the
1. Debtor is not insolvent; approval of the Rehabilitation Plan or its
2. Petition is sham intended only to amendment; and
delay the enforcement of rights of 6. Other analogues circumstances.
creditors;
3. The petition, rehab plan, and - What is the remedy in case there is no rehab or
attachments thereto contain any failure of rehab?
materially false or misleading 1. Upon motion by affected party, court may:
statements; or 1. Issue an order directing that the
4. Debtor has committed acts of breach be cured within a specified
misrepresentation or in fraud of period, failing which the proceedings
creditors. may be converted to liquidation;
- What is the consequence if petition is dismissed? 2. Issue an order converting the
proceedings to a liquidation;
1. Court may, in its discretion, order 3. Allow debtor/rehab receiver to submit
petitioner to pay damages to any amendments to the rehab plan;
creditor/debtor who may have been 4. Issue any other order to remedy the
injured by the filing of the petition. breach consistent with the present
regulation, other applicable law, and
- When may the court convert the proceedings into best interests of the creditors.
one of liquidation?
1. W/in 10days from receipt of the report of - What are the effects of termination?
the rehab receiver upon a finding that: 1. The discharge of the rehab receiver
1. Debtor is insolvent; and subject to his submission of a final
2. There is no substantial likelihood for accounting; and
the debtor to be successfully 2. The lifting of the Stay Order and any other
rehabilitated. court order holding in abeyance any action
for the enforcement of a claim against the
- When may the court terminate the proceedings? debtor.
1. Upon motion by any stakeholder or the
rehab receiver by order of the court - When may an individual debtor apply for a
declaring a successful implementation of suspension of payment?
the rehabilitation plan or a failure of 1. An individual debtor who, possessing
rehabilitation. sufficient property to cover all his debts
but foreseeing the impossibility of meeting
- Where is there a failure of rehabilitation: them when they respectively fall due, may
1. Dismissal of the petition by the court; file a verified petition that he be declared
2. Debtor fails to submit a Rehabilitation in the state of suspension of payments by
Plan; the court of the province or city in which
3. Under the Rehab Plan submitted by the he has resided for 6 months prior to the
debtor, there is no substantial likelihood filing of his petition.
that the debtor can be rehabilitated within
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- When may the court issue Suspension Order for
individual debtor? - Powers of rehabilitation receiver?
1. Upon motion filed by the individual 1. To verify the accuracy of the factual
debtor, provided that the properties held allegations in the petition and annexes;
as security by secured creditors shall not 2. To verify and correct, if necessary, the
be the subject of such SO. inventory of all assets of the debtor and
their valuation;
- When shall the suspension order lapse? 3. To verify and correct, if necessary, the
1. The SO shall lapse when 3months shall schedule of debts and liabilities of the
have passed w/o the proposed agreement debtor;
being accepted by the creditors or as soon 4. To evaluate the validity, genuineness, and
as such agreement is denied. true amount of all the claims against the
debtor;
- May a creditor institute an action to collect his 5. To take possession, custody and control,
claim pending the proceeding? and preserve the value of all the
1. NO, for as long as the proceedings remain properties of the debtor; and
pending. 6. To sue and recover, with approval of the
Exceptions: court, all amounts owed to, and all
1. Creditors having claims for personal properties pertaining to the debtor;
labor, maintenance, expense of last 7. To have access to all information
illness and funeral of the wife/children necessary, proper, and relevant to the
of debtor incurred within 60days operations and business of the debtor and
immediately prior to the filing of the for its rehabilitation;
petition; and 8. To sue and recover, with the approval of
2. Secured creditors. the court, all property or money of the
debtor paid, transferred, or disbursed in
- Who may be a rehabilitation receiver? fraud of the debtor or its creditors or
1. Any qualified natural or juridical person, which constitute undue preference of
provided if a juridical entity, it must creditors;
designate a natural person/s who possess 9. With the courts approval, employ persons
all the qualifications and none of the or entities to assist him in the discharge of
disqualifications. his functions;
10. To determine the manner by which the
- What are the qualifications of a rehabilitation debtor may be best rehabilitation, review
receiver? and/or recommend action on the rehab
1. Citizen of the Phils or a resident thereof in plan and submit the same or a new one to
the 6months immediately preceding his the court for approval;
nomination; 11. To implement the rehab plan approved by
2. Of good moral character and with the court.
acknowledged integrity, impartiality, and 12. Submit a status report on the rehab
independence; proceedings every quarter as ma be
3. Has the requisite knowledge of insolvency requird by the court motu proprio or upon
and other relevant commercial laws, rules motion f any creditor, or as may be
and procedures, relevant training and provided in the rehab plan.
experience necessary to properly
discharge the duties and obligations of a
rehab receiver;
4. Has no conflict of interest, PROVIDED such
conflict of interest may be waived by a
party who may be prejudiced.
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