Financial Rehabilitation and Insolvency Act of 2010

• Repealed the Insolvency Law (Section 148)

 
• Section 148. Repealing Clause. — The
Insolvency Law (Act No. 1956), as
amended, is hereby repealed. All other
laws, orders, rules and regulations or parts
thereof inconsistent with any provision of
this Act are hereby repealed or modified
accordingly.
 Relevant Issuances
November 16, 2015 -- THE EXPANSION OF THE
COVERAGE OF CASES COGNIZABLE BY SPECIAL
COMMERCIAL COURTS TO INCLUDE ALL CASES ON
INSOLVENCY AND LIQUIDATION UNDER THE FRIA
 
April 21, 2015 A.M. No. 15-04-06-SC
FINANCIAL LIQUIDATION AND SUSPENSION OF PAYMENTS
RULES OF PROCEDURE FOR INSOLVENT DEBTORS (2015)
 
August 27, 2013 A.M. No. 12-12-11-SC
FINANCIAL REHABILITATION RULES OF PROCEDURE
(2013)
• 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.
 
• 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.
 Purposes
• Encourage debtors, both juridical and natural persons,
and their creditors to collectively and realistically
resolve and adjust competing claims and property rights
• Ensure a timely, fair, transparent, effective and
efficient rehabilitation or liquidation of debtors.
• Ensure or maintain certainty and predictability in
commercial affairs, preserve and maximize the value of
the assets of these debtors, recognize creditor rights
and respect priority of claims, and ensure equitable
treatment of creditors who are similarly situated.
• Facilitate a speedy and orderly liquidation of these
debtors' assets and the settlement of their obligations.
 Nature of FRIA Proceedings
• In rem – jurisdiction over all affected
persons is acquired by publication in
newspaper of general circulation in the
Philippines
• Summary – note prohibited pleadings;
orders are immediately executory
• Non-adversarial – the court may decide
matters on the basis of pleadings and other
documentary evidence, and conduct
clarificatory hearings when necessary
 Coverage
COVERED NOT COVERED

a. Juridical and natural a. Banks

persons who are debtors b. Insurance companies
b. Government FIs and c. Pre-need companies
GOCCs d. National and local
c. Foreign companies government agencies or
undergoing rehab units. (but government
proceedings abroad but FIs and GOCCs are
also doing business in the covered)
country  
 
 Remedies
• Rehabilitation
• Court supervised rehab
• Debtor-initiated (voluntary)
• Creditor-initiated (involuntary)
 
• Pre-negotiated rehabilitation
 
• Out of court restructuring agreements (OCRA)
 
• Liquidation
 
• Juridical debtors
• Liquidation

• Individual debtors
• Suspension of payments
• Liquidation
Court supervised rehab- how initiated?
• 2014 bar exam:

Under the Financial Rehabilitation and Insolvency Act (FRIA), the filing
of a petition for voluntary rehabilitation must be approved by: (1%)
 
• (A) a majority vote of the Board of Directors and authorized by the
vote of the stockholders representing at least a majority of the
outstanding capital stock
• (B) a majority vote of the Board of Directors and authorized by the
vote of the stockholders representing at least two-thirds of the
outstanding capital stock
• (C) two-thirds vote of the Board of Directors and authorized by the
vote of the stockholders representing at least a majority of the
outstanding capital stock
• (D) two-thirds vote of the Board of Directors and authorized by the
vote of the stockholders representing at least two-thirds of the
outstanding capital stock
 Court Supervised Rehab-How Initiated

• Debtor initiated
• Filed by: owner in case of a sole proprietorship, or by a
majority of the partners in case of a partnership, or, in case
of a corporation, by a majority vote of the board of
directors or trustees and authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock
• Ground: It is insolvent and it may be rehabilitated
 Court Supervised Rehab-How Initiated
• Creditor-initiated
• Filed by: Any creditor or group of creditors with a claim of at
least Php1,000,000.00 or at least twenty-five percent (25%) of
the subscribed capital stock or partners' contributions, whichever
is higher
• Grounds:
• Creditors’ due and demandable claims have not been paid for at
least sixty (60) days or that the debtor has failed generally to
meet its liabilities as they fall due; or
• 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.
• Creditors must establish that the debtor may be rehabilitated
Pre-negotiated Rehab—How Initiated
• Filed by: An insolvent debtor, by itself or
jointly with any of its creditors

• Must be 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.
 Commencement Order
• Section 16. The rehabilitation proceedings shall commence upon the issuance of
the Commencement Order
 
• Section 17. Effects of Commencement Order
 
• Vest the rehabilitation receiver with all the powers and functions of a receiver
 
• Serve as the legal basis for the initiation of avoidance proceedings or
proceedings to render null and void:
1. any extrajudicial activity or process to seize property, sell encumbered
property, or otherwise attempt to collect on or enforce a claim against the
debtor after the commencement date
2. any set-off after the commencement date of any debt owed to the debtor by
any of the debtor's creditors
3. the perfection of any lien against the debtor's property after the
commencement date

• Consolidate the resolution of all legal proceedings by and against the debtor to
the court: Provided, that the court may allow the continuation of cases in other
courts where the debtor had initiated the suit.
 Commencement Order
2017 bar exam:

What is a commencement order, and what

is the effect of its issuance? Explain your
answer. (4%)
 Commencement Order
• Section 16. Contents of the Commencement Order:
• Appointment of the rehab receiver
• 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
• A stay order

• Section 21. The Commencement Order shall be

effective for the duration of the rehabilitation
proceedings for as long as there is a substantial
likelihood that the debtor will be successfully
rehabilitated.
 Stay Order
• Suspends all actions or proceedings, in court or otherwise, for the enforcement
of claims against the debtor;

• Suspends all actions to enforce any judgment, attachment or other provisional

remedies against the debtor;

• Prohibits the debtor from selling, encumbering, transferring or disposing in any

manner any of its properties except in the ordinary course of business; and

• Prohibits the debtor from making any payment of its liabilities outstanding as of
the commencement date.

• “Claims” 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.
 Stay Order
Section 10. Debtor shall be liable for
double the value of the property sold,
embezzled or disposed of or double the
amount of the transaction involved if it
willfully disposes any property of the debtor
other than in the ordinary course of
business or authorize, or conceal any
property of the debtor.
 Exceptions to Stay Order
 
• Cases already pending appeal in the Supreme Court as of commencement date:
• Cases pending or filed at a specialized court or quasi-judicial agency
• Enforcement actions 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;
• Action of customers or clients of a securities market participant to recover
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;
• 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;
• 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
• Criminal action against the individual debtor or owner, partner, director or
officer of a debtor.
 Management During Rehab
GR: The rehabilitation receiver shall not take over the management and control of the
debtor. However, all disbursements, payments or sale, disposal, assignment, transfer
or encumbrance of property, or any other act affecting title or interest in property,
shall be subject to the approval of the rehabilitation receiver and/or the court.

Exceptions:
• Actual or imminent danger of dissipation, loss, wastage or destruction of the
debtor's assets or other properties;
• Paralyzation of the business operations of the debtor; or
• 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 which case, the court may appoint:
• the rehabilitation receiver to assume the powers of management of the debtor, or
• a management committee that will undertake the management of the debtor
 Stay Order
• 2006 bar

What is the rationale for the Stay Order? 5%

 Stay Order
“The justification for the suspension of actions or claims,
without distinction, pending rehabilitation proceedings is
to enable the management committee or rehabilitation
receiver to effectively exercise its/his powers free from
any judicial or extra-judicial interference that might
unduly hinder or prevent the "rescue" of the debtor
company.

To allow such other actions to continue would only add to

the burden of the management committee or
rehabilitation receiver, whose time, effort and resources
would be wasted in defending claims against the
corporation instead of being directed toward its
restructuring and rehabilitation.”
 Equality in Equity
• 2008 bar:

Explain the key phrase "equality is equity"

in corporate rehabilitation proceedings.
(2%)
• “During rehabilitation receivership, the assets are held in
trust for the equal benefit of all creditors to preclude
one from obtaining an advantage or preference over
another by the expediency of an attachment, execution
or otherwise. For what would prevent an alert creditor,
upon learning of the receivership, from rushing posthaste
to the courts to secure judgments for the satisfaction of
its claims to the prejudice of the less alert creditors.
 
• As between creditors, the key phrase is "equality is
equity." When a corporation threatened by bankruptcy is
taken over by a receiver, all the creditors should stand on
an equal footing. Not anyone of them should be given any
preference by paying one or some of them ahead of the
others. This is precisely the reason for the suspension of
all pending claims against the corporation under
receivership. Instead of creditors vexing the courts with
suits against the distressed firm, they are directed to file
their claims with the receiver who is a duly appointed
officer of the SEC.”
 Disposition of Assets
GR: No funds or property of the debtor shall be used or disposed of
except in the ordinary course of business of the debtor, or unless
necessary to finance the administrative expenses of the rehabilitation
proceedings. (Section 48)

Administrative expenses are those:

• Incurred or arising from the filing of a petition for rehabilitation or
liquidation
• Incurred in the ordinary course of business of the debtor after the
commencement date;
• Incurred for the fees of the rehabilitation receiver or liquidator and
of the professionals engaged by them (Section 4)
• Compensation of employees required to carry on the business after
the commencement date (Section 56)
• Claims for salary and separation pay for work performed after the
commencement date (Section 56)
• Obligations from post commencement loans or credit arrangements
(Section 56)
• Contractual obligations of the debtor arising or performed during
rehabilitation, and afterwards for confirmed contracts (Section 57)
 Disposition of Assets
Exceptions to the GR that no funds or property of
the debtor shall be used or disposed of except in
the ordinary course of business of the debtor:
 
Three general kinds of properties that may be
disposed of during rehab:
• Unencumbered property of the debtor
• Encumbered property of the debtor
• Property of the debtor held by third persons
pursuant to statutory liens
 
 Disposition of Assets
Sections 49 and 52 The court may authorize the sale of
unencumbered property of the debtor outside the ordinary course of
business upon a showing that:
• The property is perishable, costly to maintain, susceptible to
devaluation or otherwise in jeopardy;
• If the sale is for the implementation of a Rehabilitation Plan;
• In order to provide a substitute lien, mortgage or pledge of
property allowed under the FRIA;
• For payments made to meet administrative expenses as they arise;
• For payments to victims of quasi delicts upon a showing that the
claim is valid and the debtor has insurance to reimburse the debtor
for the payments made;
• For payments made to repurchase property of the debtor that is
auctioned off in a judicial or extrajudicial sale; or
• For payments made to reclaim property of the debtor held pursuant
to a possessory lien.
 
 Disposition of Assets
Sections 50 and 53. The court may authorize the sale of
encumbered property of the debtor, or property of others
held by the debtor where there is a security interest
pertaining to third parties under a financial, credit or other
similar transactions if:
• such sale, transfer, conveyance or disposal is not
necessary for the continued operation of the debtor's
business;
• the debtor has made arrangements to provide a
substitute lien or ownership right that provides an equal
level of security for the counter-party's claim or right.
• property is subject to rapid obsolescence, depreciation
or diminution in value
• The secured creditor has no adequate protection (debtor
refuses to maintain or insure the property) Section 61.
 Disposition of Assets
Section 51. In case of third parties who
have in their possession or control property of
the debtor pursuant to a pledge, mechanic's
lien or similar claims, the court may allow the
disposition of the said property as may be
beneficial for the rehabilitation of the debtor.
 
 
* the proceeds of the sale will be distributed in
accordance with the order prescribed under the
rules of concurrence and preference of credits
 Avoidance Proceedings
Any transaction occurring prior to
commencement date may be rescinded or
declared null and void
 
Grounds:
• Transaction was executed with intent to
defraud a creditor or creditors or
• Transaction constitutes undue preference
of creditors.
 Avoidance Proceedings
Section 58. Disputable presumption of design to defraud creditors:
• Provides unreasonably inadequate consideration to the debtor
and is executed within ninety (90) days prior to the
commencement date;
• Involves an accelerated payment of a claim to a creditor within
ninety (90) days prior to the commencement date;
• Provides security or additional security executed within ninety
(90) days prior to the commencement date;
• Involves creditors that obtained more than its pro rata share in
the assets of the debtor, executed at a time when the debtor
was insolvent; or
• Is intended to defeat, delay or hinder the ability of the
creditors to collect claims where the effect of the transaction is
to put assets of the debtor beyond the reach of creditors or to
otherwise prejudice the interests of creditors.
 Avoidance Proceedings
Presumptions under the Civil Code
Art. 1382. Payments made in a state of insolvency for obligations to
whose fulfilment the debtor could not be compelled at the time
they were effected, are also rescissible.

Art. 1387. All contracts by virtue of which the debtor alienates

property by gratuitous title are presumed to have been entered
into in fraud of creditors, when the donor did not reserve sufficient
property to pay all debts contracted before the donation.

Alienations by onerous title are also presumed fraudulent when

made by persons against whom some judgment has been issued.
The decision or attachment need not refer to the property
alienated, and need not have been obtained by the party seeking
the rescission.
 Avoidance Proceedings
Section 127. Any transaction occurring prior
to the issuance of the Liquidation Order
entered into by the debtor or involving its
assets, may be rescinded or declared null
and void on the ground that the same was
executed with intent to defraud a creditor
or creditors or which constitute undue
preference of creditors.
 Avoidance Proceedings
Who may initiate avoidance proceedings:
• Rehab receiver – benefit belongs to the
estate
• Creditor – benefit belongs to the creditor
exclusively
 Approval of Rehab Plan
  COURT SUPERVISED PRE-NEGOTIATED
Required Must be approved by: Must be approved by:
votes for a. All classes of creditors whose right are creditors holding at least two-thirds
approval adversely modified or affected by the Plan. (2/3) of the total liabilities of the
of the b. The
S Plan is deemed to have been approved debtor,
rehab by a class of creditors if members of the said including
plan class holding more than fifty percent (50%) of a. secured creditors holding more than
the total claims of the said class vote in favor fifty percent (50%) of the total
of the Plan. secured claims of the debtor and
b. unsecured creditors holding more
than fifty percent (50%) of the total
unsecured claims of the debtor.
 
Period Section 72. The court shall have a maximum Section 81. Period for Approval of
for period of one (1) year from the date of the filing Rehabilitation Plan. — The court shall
confirma of the petition to confirm a Rehabilitation Plan. have a maximum period of one hundred
tion   twenty (120) days from the date of the
If no Rehabilitation Plan is confirmed within the filing of the petition to approve the
said period, the proceedings may, upon motion or Rehabilitation Plan.
motu proprio, be converted into one for the  
liquidation of the debtor. If the court fails to act within the said
period, the Rehabilitation Plan shall be
deemed approved.
 
 Cram-Down Power
Section 64. Notwithstanding the rejection of the
Rehabilitation Plan, the court may confirm the
Rehabilitation Plan if all of the following circumstances are
present:
• The Rehabilitation Plan complies with the requirements
specified in this Act;
• The rehabilitation receiver recommends the
confirmation of the Rehabilitation Plan;
• The shareholders, owners or partners of the juridical
debtor lose at least their controlling interest as a result
of the Rehabilitation Plan; and
• 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.
 
 Cram-down power

Section 68. For the avoidance of doubt, the provisions of other

laws to the contrary notwithstanding, the court shall have the
power to approve or implement the Rehabilitation Plan despite
the lack of approval, or objection from the owners, partners or
stockholders of the insolvent debtor: Provided, That the terms
thereof are necessary to restore the financial well-being and
viability of the insolvent debtor.
 
Section 69. The confirmed Rehabilitation Plan 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.
 Breach of Rehab Plan
Section 72. In case of breach of the terms
of the rehab plan, the court may:
• Order that the breach be cured;
• Order amendments to the rehab plan;
• Convert the proceedings to one for
liquidation;
• Enforce the applicable provisions of the
rehab plan through a writ of execution.
 Grounds for Termination
Section 74. Grounds for Termination of proceedings. —
• Successful rehabilitation
• Failure of rehabilitation
 
There is failure of rehabilitation in the following cases:
• Dismissal of the petition by the court;
• The debtor fails to submit a Rehabilitation Plan;
• Under the Rehabilitation Plan submitted by the debtor, there is no substantial
likelihood that the debtor can be rehabilitated within a reasonable period;
• The Rehabilitation Plan or its amendment is approved by the court but in the
implementation thereof, the debtor fails to perform its obligations thereunder,
or there is a failure to realize the objectives, targets or goals set forth therein,
including the timelines and conditions for the settlement of the obligations due
to the creditors and other claimants;
• The commission of fraud in securing the approval of the Rehabilitation Plan or
its amendment; and
• Other analogous circumstances as may be defined by the rules of procedure.
 Termination of Rehab
 
Section 75. Effects of Termination. — Termination of the
proceedings shall result in the following:
• The discharge of the rehabilitation receiver, subject to
his submission of a final accounting; and
• The lifting of the Stay Order and any other court order
holding in abeyance any action for the enforcement of a
claim against the debtor.
 
• Provided, however, That if the termination of
proceedings is due to failure of rehabilitation or
dismissal of the petition for reasons other than technical
grounds, the proceedings shall be immediately
converted to liquidation.
 OCRA
Section 84. It must be approved by creditors representing at least
• At least eighty-five percent (85%) of the total liabilities, secured and
unsecured, of the debtor.
• At least sixty-seven percent (67%) of the secured obligations of the debtor;
• At least seventy-five percent (75%) of the unsecured obligations of the debtor;
and

Section 85. Standstill Period. — A standstill period that may be agreed upon by the
parties pending negotiation and finalization of the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan contemplated herein shall
be effective and enforceable not only against the contracting parties but also
against the other creditors
 
Requirements:
• It is approved by creditors representing more than fifty percent (50%) of the
total liabilities of the debtor;
• Notice is published in a newspaper of general circulation in the Philippines once
a week for two (2) consecutive weeks; and
• The standstill period does not exceed one hundred twenty (120) days from the
date of effectivity.
 Liquidation
JURIDICAL DEBTOR-INITIATED CREDITOR-INITIATED
DEBTOR

Debtor must Three (3) or more creditors the aggregate of

establish his whose claims is at least either One million
insolvency pesos (Php1,000,000.00) or at least twenty-five
percent (25%) of the subscribed capital stock or
partner's contributions of the debtor, whichever
is higher
 
Grounds:
a. 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
 Liquidation
INDIVIDUAL DEBTOR-INITIATED CREDITOR-INITIATED
DEBTOR

Debtor must establish Any creditor or group of creditors with a

his insolvency, and that claim of, or with claims aggregating, at
he owes debts least Five hundred thousand pesos
exceeding Five hundred (Php500,000.00)
thousand pesos  
(Php500,000.00) Creditors must set forth or allege at least
one act of insolvency in Section 105
 
Special rules:
a. Bond required. upon filing
b. Bond required (2x value of claims) if
creditors want absent debtor’s
properties to be sold during the
proceedings
 
 Liquidation Order
Section 112. Liquidation Order. — The Liquidation Order shall:
• (a) order the sheriff to take possession and control of all the property of the
debtor, except those that may be exempt from execution;
• (b) prohibit payments by the debtor and the transfer of any property by the
debtor;
 
Section 113. Effects of the Liquidation Order. —
• The juridical debtor shall be deemed dissolved and its corporate or juridical
existence terminated;
• 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;
• 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;
• 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.
• No foreclosure proceeding shall be allowed for a period of one hundred
eighty (180) days.
 Rights of Secured Creditors-Liquidation
vs. Rehabilitation
Liquidation:
Section 114. Rights of Secured Creditors. — The Liquidation Order shall not
affect the right of a secured creditor to enforce his lien in accordance with the
applicable contract or law.
 
A secured creditor may:
• Waive his rights under the security or lien, prove his claim in the liquidation
proceedings and share in the distribution of the assets of the debtor; or
• Maintain his rights under his security or lien.
 
If the secured creditor maintains his rights under the security or lien:
• The value of the property may be fixed in a manner agreed upon by the
creditor and the liquidator.
• The liquidator may sell the property and satisfy the secured creditor's entire
claim from the proceeds of the sale; or
• The secured creditor may enforce the lien or foreclose on the property
pursuant to applicable laws.
Rights of Secured Creditors-Liquidation
vs. Rehabilitation
Rehabilitation:
• Section 60. No Diminution of Secured The issuance of the
Commencement Order and the Suspension or Stay Order shall
not be deemed in any way to diminish or impair the security
or lien of a secured creditor, or the value of his lien or
security, except that his right to enforce said security or
lien may be suspended during the term of the Stay Order.

• The court, upon motion or recommendation of the

rehabilitation receiver, may allow a secured creditor to
enforce his security or lien, or foreclose upon property of the
debtor securing his/its claim, if the said property is not
necessary for the rehabilitation of the debtor. The secured
creditor and/or the other lien holders shall be admitted to
the rehabilitation proceedings only for the balance of his
claim, if any.
 Suspension of Payments
Ground: An individual debtor possesses sufficient property to cover all his debts
but foresees the impossibility of meeting them when they respectively fall due

Effects of suspension order:

• Debtor prohibited from selling, transferring, encumbering or disposing in any
manner of his property, except those used in the ordinary course of business
• Debtor prohibited from making any payment outside of the necessary or
legitimate expenses of his business or industry
• Upon motion filed by the individual debtor, the court may issue an order
suspending any pending execution against the individual debtor: Provided, that
properties held as security by secured creditors shall not be the subject of
such suspension order. The suspension order shall lapse when three (3) months
shall have passed without the proposed agreement being accepted by the
creditors or as soon as such agreement is denied.
• No creditor shall sue or institute proceedings to collect his claim from the
debtor from the time of the filing of the petition for suspension of payments
and for as long as proceedings remain pending except:
• 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
• secured creditors.
 Suspension of Payments
Debtor is required to submit to the court a proposed agreement with his creditors.
The manner of approval of the proposed agreement is as follows:
 
Quorum requirement: The presence of creditors holding claims amounting to at
least three-fifths (3/5) of the liabilities shall be necessary for holding a meeting.
 
Vote requirement: To form a majority, it is necessary that:
• Two-thirds (2/3) of the creditors voting unite upon the same proposition; and
• The claims represented by said majority vote amount to at least three-fifths
(3/5) of the total liabilities of the debtor mentioned in the petition
 
Section 99. The proposed agreement shall be deemed rejected if the
number of creditors required for holding a meeting do not attend thereat, or if the
two (2) majorities are not in favor thereof (meeting should be held/approval must
be obtained within 90 days from last publication of the suspension order --FLR). In
such instances, the proceeding shall be terminated without recourse and the
parties concerned shall be at liberty to enforce the rights which may correspond to
them.
 Suspension of Payments
Section 101. The Order confirming the approval of the
proposed agreement on any amendment thereof made
during the creditors' meeting shall be binding upon all
creditors whose claims are included in the schedule of
debts and liabilities submitted by the individual debtor
and who were properly summoned.
 
Section 102. Failure of Individual Debtor to Perform
Agreement. — If the individual debtor fails, wholly or in
part, to perform the agreement decided upon at the
meeting of the creditors, all the rights which the creditors
had against the individual debtor before the agreement
shall revest in them, and the individual debtor may be
subject to insolvency proceedings.
 Receiver
Qualifications (same as liquidator)
• (May be juridical or natural person. Juridical person must
appoint an individual representative)
• A citizen of the Philippines or a resident of the Philippines in
the six (6) months immediately preceding his nomination;
• Of good moral character and with acknowledged integrity,
impartiality and independence;
• Has the requisite knowledge of insolvency and other
relevant commercial laws, rules and procedures, as well as
the relevant training and/or experience that may be
necessary to enable him to properly discharge the duties
and obligations of a rehabilitation receiver; and
• Has no conflict of interest: Provided, That such conflict of
interest may be waived, expressly or impliedly, by a party
who may be prejudiced thereby. (applicable to liquidator
and members of the management committee)
 Conflict of Interest

• he is a creditor, owner, partner or stockholder of the debtor;

• he is engaged in a line of business which competes with that of the
debtor;
• he is, or was, within five (5) years from the filing of the petition, a
director, officer, owner, partner or employee of the debtor or any
of the creditors, or the auditor or accountant of the debtor;
• he is, or was, within two (2) years from the filing of the petition,
an underwriter of the outstanding securities of the debtor;
• he is related by consanguinity or affinity within the fourth civil
degree to any individual creditor, owner/s of a sole proprietorship-
debtor, partners of a partnership-debtor or to any stockholder,
director, officer, employee or underwriter of a corporation-debtor;
or
• he has any other direct or indirect material interest in the debtor
or any of the creditors.
 Receiver
Principal duties
• Preserve and maximize the value of the assets of the
debtor during the rehabilitation proceedings,
• Determine the viability of the rehabilitation of the
debtor,
• Prepare and recommend a Rehabilitation Plan to the
court, and
• Implement the approved Rehabilitation Plan.
 
How decisions are challenged
• Any decision of the rehabilitation receiver regarding a
claim may be appealed to the court.
 Receiver
Removal (same as liquidator)
• 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:
• Incompetence, gross negligence, failure to perform or failure to
exercise the proper degree of care in the performance of his duties
and powers;
• Lack of a particular or specialized competency required by the
specific case;
• Illegal acts or conduct in the performance of his duties and powers;
• Lack of qualification or presence of any disqualification;
• Conflict of interest that arises after his appointment; and
• Manifest lack of independence that is detrimental to the general
body of the stakeholders.
 Tax Matters
Section 19. Waiver of Taxes and Fees Due to the National
Government and to Local Government Units (LGUs). —
Upon issuance of the Commencement Order by the court,
and until the approval of the Rehabilitation Plan or
dismissal of the petition, whichever is earlier, the
imposition of all taxes and fees, including penalties,
interests and charges thereof, due to the national
government or to LGUs shall be considered waived, in
furtherance of the objectives of rehabilitation.
 
Section 71. Treatment of Amounts of Indebtedness or
Obligations Forgiven or Reduced. — Amounts of any
indebtedness or obligations reduced or forgiven in
connection with a Plan's approval shall not be subject to
any tax, in furtherance of the purposes of this Act.
• LAND BANK OF THE PHILIPPINES V. FASTECH SYNERGY
PHILIPPINES, GR NO. 206150, AUGUST 9, 2017
 
• A material financial commitment to support a
Rehabilitation Plan becomes significant in gauging the
resolve, determination, earnestness, and good faith of
the distressed corporation in financing the proposed
rehabilitation plan. This commitment may include the
voluntary undertakings of the stockholders or the would-
be investors of the debtor-corporation indicating their
readiness, willingness, and ability to contribute funds or
property to guarantee the continued successful
operation of the debtor-corporation during the period of
rehabilitation.
• PHILIPPINE ASSET GROWTH TWO, INC. V. FASTECH SYNERGY
PHILIPPINES, GR NO. 206528, JUNE 28, 2016
  
• The purpose of rehabilitation proceedings is not only to enable
the company to gain a new lease on life, but also to allow
creditors to be paid their claims from its earnings when so
rehabilitated. Hence, the remedy must be accorded only after a
judicious regard of all stakeholders' interests; it is not a one-
sided tool that may be graciously invoked to escape every
position of distress. Thus, the remedy of rehabilitation should be
denied to corporations whose insolvency appears to be
irreversible and whose sole purpose is to delay the enforcement
of any of the rights of the creditors, which is rendered obvious
by: (a) the absence of a sound and workable business plan; (b)
baseless and unexplained assumptions, targets, and goals; and (c)
speculative capital infusion or complete lack thereof for the
execution of the business plan, as in this case.
• VIVA SHIPPING LINES, INC. V. KEPPEL PHILIPPINES MINING, INC., G.R. NO.
177382, FEBRUARY 17, 2016.
 
SC took note of the characteristics of an economically feasible rehabilitation plan
as opposed to an infeasible rehabilitation plan:
 
Characteristics of an economically feasible rehabilitation plan:
a. The debtor has assets that can generate more cash if used in its daily
operations than if sold.
b. Liquidity issues can be addressed by a practicable business plan that will
generate enough cash to sustain daily operations.
c. The debtor has a definite source of financing for the proper and full
implementation of a Rehabilitation Plan that is anchored on realistic assumptions
and goals.
 
These requirements put emphasis on liquidity: the cash flow that the distressed
corporation will obtain from rehabilitating its assets and operations. A corporation's
assets may be more than its current liabilities, but some assets may be in the form
of land or capital equipment, such as machinery or vessels. Rehabilitation sees to it
that these assets generate more value if used efficiently rather than if liquidated.
 
On the other hand, this court enumerated the
characteristics of a rehabilitation plan that is
infeasible:
(a) the absence of a sound and workable business
plan;
(b) baseless and unexplained assumptions, targets
and goals;
(c) speculative capital infusion or complete lack
thereof for the execution of the business plan;
(d) cash flow cannot sustain daily operations; and
(e) negative net worth and the assets are near
full depreciation or fully depreciated.
VICTORIO AQUINO V. PACIFIC PLANS, GR NO. 193108,
DECEMBER 10, 2014
 
The cram-down rule states that a rehabilitation plan may be
approved even over the opposition of the creditors holding a
majority of the corporation's total liabilities if there is a
showing that rehabilitation is feasible and the opposition of the
creditors is manifestly unreasonable. This rule 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.
BANK OF THE PHILIPPINE ISLANDS V. SARABIA MANOR HOTEL
CORPORATION, G.R. NO. 175844, JULY 29, 2013
  
In order to determine the feasibility of a proposed rehabilitation
plan, it is imperative that a thorough examination and analysis of
the distressed corporation's financial data must be conducted. If the
results of such examination and analysis show that there is a real
opportunity to rehabilitate the corporation in view of the
assumptions made and financial goals stated in the proposed
rehabilitation plan, then it may be said that a rehabilitation is
feasible. In this accord, the rehabilitation court should not hesitate
to allow the corporation to operate as an on-going concern, albeit
under the terms and conditions stated in the approved rehabilitation
plan. On the other hand, if the results of the financial examination
and analysis clearly indicate that there lies no reasonable
probability that the distressed corporation could be revived and that
liquidation would, in fact, better subserve the interests of its
stakeholders, then it may be said that a rehabilitation would not be
feasible. In such case, the rehabilitation court may convert the
proceedings into one for liquidation.
Good luck!!!!
Anything worth doing
is worth doing well.