Financial Rehabilitation and Insolvency Act of 2010

(R.A. No.10142)
Dean Nilo T. Divina
Faculty of Civil Law
University of Santo Tomas
____________________________________________________________________________________

or has liabilities that are greater than its

1. Debt reliefs or remedies available to or his assets
a juridical insolvent debtor under
FRIA Previous ruling (New Frontier vs
Equitable Bank case (2007), that an
i. Rehabilitation insolvent debtor cannot file petition for
rehabilitation no longer holds.
a. Court supervised
rehabilitation NB The term debtor does not include
i. Voluntary banks, insurance companies, pre-need
ii. Involuntary companies, and national and local
government agencies or units
b. Pre-negotiated
rehabilitation 4. What is the objective of
rehabilitation?
c. Out of court or informal
restructuring agreement or Corporate rehabilitation contemplates a
Rehabilitation Plan continuance of corporate life and
i. Petition for activities in an effort to restore and
liquidation reinstate the corporation to its former
ii. Voluntary position of successful operation and
iii. Involuntary solvency, the purpose being to enable the
company to gain a new lease on life and
2. Reliefs or remedies available to OR allow its creditors to be paid their claims
AGAINST individual debtor out of its earnings. Thus, the basic issues
i. Suspension of payments in rehabilitation proceedings concern the
ii. Voluntary liquidation viability and desirability of continuing the
iii. Involuntary Liquidation business operations of the distressed
corporation, all with a view of effectively
3. What do you mean by insolvent restoring it to a state of solvency or to its
debtor? former healthy financial condition
through the adoption of a rehabilitation
Insolvent shall refer to the financial plan. Philippine Asset Growth Two,
condition of a debtor that is generally Inc. and Planters Development Bank
unable to pay its or his liabilities as they vs. Fastech Synergy Philippines Inc., et
fall due in the ordinary course of business al. G.R. No. 206528, 28 June 2016
 2
Given the various stakeholders of the
insolvent debtor- shareholders, creditors,
the state, it is better to rehabilitate the
debtor than to carry out its liquidation. Is
the present value recovery better than
if the debtor is to go under liquidation
within 120 days from filing of the
petition?
In the recent case of Viva Shipping Lines,
Inc. v. Keppel Philippines Mining, Inc.,
the Court took note of the 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 debtor whose assets are less than
Rehabilitation Plan that is
anchored on realistic assumptions
and goals.
5. How is this objective attained?
During the pendency of the
rehabilitation, enforcement of claims
against the debtor are generally
suspended- to give time to the debtor and
the rehabilitation receiver to rehabilitate
the company undistracted by court suits.
Likewise, the rehabilitation plan is
binding on the debtor and all creditors
affected by the proceedings even to those
who did not take part or opposed the
rehabilitation plan under the cram down
effect of the plan.
National and local taxes are waived until
approval of the rehabilitation plan or its
termination.
6. What is the objective of liquidation
of juridical debtors?
To resolve and adjust competing claims
and property rights of the creditors and
the debtor, maximize asset recovery of the
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debtor and equitably distribute the
debtor’s properties to the creditors based
on the rules on concurrence and
preference of credit
7. What is the objective of suspension
of payments for individual debtor?
Unlike in liquidation, the individual
debtor does not ask for discharge. He only
wants deferment of payments to give him
time to be back on his feet.
8. What is the objective of voluntary
liquidation of an individual debtor?
The objective is to be discharged from his
obligations and to start afresh
9. How do we distinguish voluntary
from involuntary liquidation of
individual debtors?
Voluntary liquidation is filed by the
liabilities. Involuntary liquidation is filed
by a creditor or group of creditors whose
aggregate claim is at least 500,000 if the
debtor commits an act of insolvency
(basically fraudulent act to defeat the
rights of creditor/creditors)
10. Who can file petition for
rehabilitation?
a. sole proprietorship
b. Partnership when the filing is
approved by at least a majority of the
partners
c. Corporation when approved by at
least 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.
11. What is the procedure for debtor
initiated rehabilitation
The procedure is as follows:

i. File a petition for rehabilitation in
the RTC of the city where the
debtor has principal office. It shall
be verified to establish the
insolvency of the debtor and the
viability of its rehabilitation. It shall
include, among others,
rehabilitation plan and names of at
least three nominees to the position
of rehabilitation receiver ( who will
implement the rehabilitation plan).
ii. If the court finds the petition to be
sufficient in form and substance, it
shall issue within five working days
a commencement order.
Otherwise, the court, at its
discretion, give petitioner time to
amend the petition to make it
sufficient in form and substance.
iii. The rehabilitation proceedings
shall commence upon issuance of
the commencement order. The
commencement order, among
others, appoints the rehabilitation
receiver and sets the case for initial
hearing. It shall also include a stay
order which shall suspend all
actions or proceedings for the
enforcement of claims against the
debtor, as well as actions to enforce
any judgment or attachment or
provisional remedy against the
debtor; prohibits disposition or
encumbrance of property except in
the ordinary course of business and
prohibit debtor from making any
payment except when authorized
by the rules. CJAPDEP
The stay order does not include,
among others, cases on appeal with
the sc, cases falling with a
specialized court or quasi-judicial
agency, enforcement of claims
against surety and other persons
solidarily liable with the debtor and
third party or accommodation
mortgagors as well as issuers of
letter of credit, unless the property
subject of third party mortgage is
necessary for the rehabilitation of
the debtor as determined by the
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3
court; criminal action against the
debtor.SSQSIAC
iv. At the hearing, court will direct
creditors to give their comments to
the petition and rehab plan and the
rehab receiver to submit report to
a the court on whether debtor can be
rehabilitated.
v. Receiver submits report to the court
on whether debtor can be
rehabilitated.
vi. Within ten days from submission of
the report, the court may give due
course to the petition or convert the
proceedings into one for liquidation
(if debtor is insolvent and no
substantial likelihood for
rehabilitation.
vii. If the petition is given due course,
the court shall direct receiver to
review, revise and/or recommend
action on the rehab plan.
viii. Receiver consults with debtor and
creditors.
ix. Receiver submits rehab plan to the
court.
x. Court directs creditors to give
comments to the rehab plan.
xi. Court approves rehab plan upon
recommendation of receiver and
even over the objection of creditors
if objection is manifestly
unreasonable.
xii. The court has one year from filing
of petition to approve rehabilitation
plan.
xiii. Proceedings terminated by order of
the court declaring successful
implementation of the rehab plan
or a failure of rehabilitation.
There is failure of rehabilitation in the
following cases:
 4

A. Dismissal of the petition by the from judicial or extrajudicial interference

court; that might unduly hinder or prevent the
B. The debtor fails to submit a “rescue” of the distressed company, rather
rehabilitation plan; than to waste its/his time, effort and
C. Under the rehabilitation plan resources in defending claims against the
submitted by the debtor, there is corporation. (BAR 2006)
no substantial likelihood that the
debtor can be rehabilitated within NB The stay order is now referred to
a reasonable period; under FRIA as commencement order. The
D. In the implementation of the commencement order includes a stay
rehabilitation plan, the debtor fails order
to perform its obligations
thereunder or there is failure to PA Assurance (PA) was incorporated
realize the objectives, targets or in 1980 to engage in the sale of pre-
goals set forth therein, including need educational plans. It sold open-
the timeliness and conditions for ended educational plans which
the settlement of the obligations guaranteed the payment of tuition
due to the creditors and other and other fees to planholders
claimants; irrespective of the cost at the time of
E. The Commission of fraud in availment. It also engaged in the sale
securing the rehabilitation plan or of fixed value plans which guaranteed
its amendment; and the payment of a pre-determined
F. Other analogous circumstances as amount to planholders. In 1982, PA
may be defined by the rules of was among the country’s top
procedure. corporations. However, it
subsequently suffered financial
Upon failure of the rehabilitation, the difficulties.
Court may issue an order converting the
proceedings to a liquidation. On September 8, 2005, PA filed a
Petition for Corporate Rehabilitation
The Blue Star Corporation filed with before the RTC of Makati City. On
the RTC a petition for rehabilitation October 17, 2005, 10 plan holders filed
on the ground that it foresaw the an Opposition and Motion to Exclude
impossibility of paying its obligations Planholders from Stay Order on the
as they fall due. Finding the petition ground that planholders are not
sufficient in form and substance, the creditors as they (planholders) have a
court issued an Order appointing a trust relationship with PA. Are the
rehabilitation receiver and staying the planholders correct?
enforcement of all claims against the
corporation. Answer:
No. The planholders is not correct. On
What is the rationale for the Stay November 21, 2000, the Court approved
Order? the Interim Rules of Procedure on
Corporate Rehabilitation of 2000 (Interim
Answer: Rules), which took effect on December 15,
The stay order is a recognition that all 2000. The Interim Rules apply to petitions
assets of a corporation under for rehabilitation filed by corporations,
rehabilitation are held in trust for the partnerships, and associations pursuant
equal benefit of all creditors under the to PD 902-A, as amended. Under the
doctrine of “equality is equity”. As all the Interim Rules, “claim” shall include “all
creditors ought to stand on equal footing, claims or demands of whatever nature or
not any one of them should be paid ahead character against the debtor or its
of others. Furthermore, the stay order will property, whether for money or
enable the the rehabilitation receiver to otherwise.” “Creditor” shall mean “any
effectively exercise its or his powers free holder of a claim.” Hence, the claim of the
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planholders from PA is included in the
definition of “claims” under the Interim
Rules. (BAR 2014)
IMPORTANT POINTS
a. Stay order covers claims
pecuniary nature
b. It does not cover surety, issuers of
l/c and third party mortgagors
except if property of latter needed
for rehab of the debtor
Under the FRIA, the Stay Order may now
cover third-party or accommodation
mortgages, in which the "mortgage is
necessary for the rehabilitation of the
debtor as determined by the court upon
recommendation by the rehabilitation
receiver." The FRIA likewise provides that
its provisions may be applicable to further
proceedings in pending cases, except to
the extent that, in the opinion of the
court, their application would not be
feasible or would work injustice.
Sec. 146 of the FRIA, which makes it
applicable to "all further proceedings in
insolvency, suspension of payments and
rehabilitation cases x x x except to the
extent that in the opinion of the court
their application would not be feasible or
would work injustice," still presupposes a
prospective application. The wording of
the law clearly shows that it is applicable
to all further proceedings. In no way could
it be made retrospectively applicable to
the Stay Order issued by the
rehabilitation court back in 2002. Situs
Dev. Corporation et al., vs. AsiaTrust
Bank et al., G.R. No. 180036, 16 January
2013, C.J. Sereno
The rules in effect at the time the
rehabilitation petition was filed were the
Interim Rules. The Interim Rules took
effect on December 15, 2000, and did not
allow the joint or consolidated filing of
rehabilitation petitions. MERVIC
REALTY, INC. AND VICCY REALTY,
INC., Petitioners, v. CHINA BANKING
CORPORATION, Respondent. G.R. No.
193748, February 03, 2016
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5
c. The court not bound by the report
of the receiver
The CA's reliance on the expertise of the
court-appointed Rehabilitation Receiver,
who opined that respondents'
of rehabilitation is viable, in order to justify
its finding that the financial statements
submitted were reliable, overlooks the
fact that the determination of the validity
and the approval of the rehabilitation
plan is not the responsibility of the
rehabilitation receiver, but remains the
function of the court. The rehabilitation
receiver's duty prior to the court's
approval of the plan is to study the best
way to rehabilitate the debtor, and to
ensure that the value of the debtor's
properties is reasonably maintained; and
after approval, to implement the
rehabilitation plan. Notwithstanding the
credentials of the court-appointed
rehabilitation receiver, the duty to
determine the feasibility of the
rehabilitation of the debtor rests with the
court. While the court may consider the
receiver's report favorably recommending
the debtor's rehabilitation, it is not bound
thereby if, in its judgment, the debtor's
rehabilitation is not feasible. Philippine
Asset Growth Two, Inc. and Planters
Development Bank vs. Fastech
Synergy Philippines Inc., et al. G.R.
No. 206528, 28 June 2016, J. Perlas-
Bernabe
d. The court may terminate rehab if
there is no material financial
commitment of the debtor to make
it work
The Regional Trial Court correctly
dismissed petitioner's rehabilitation plan.
It found that petitioner's assets are non-
performing. Petitioner admitted this in its
Amended Petition when it stated that its
vessels were no longer
serviceable. In Wonder Book Corporation
v. Philippine Bank of Communications, a
rehabilitation plan is infeasible if the
assets are nearly fully or fully depreciated.
This reduces the probability that
rehabilitation may restore and reinstate
petitioner to its former position of
successful operation and solvency.
 6

creditors holding a majority of the

The plan of selling properties of corporation’s total liabilities if there is a
petitioner's sister company to generate showing that rehabilitation is feasible and
cash flow cannot be a basis for the the opposition of the creditors is
approval of the rehabilitation plan. As manifestly unreasonable. Also known as
pointed out by the Regional Trial Court, the "cram-down" clause, this provision,
this plan requires conformity from the which is currently incorporated in the
sister company. Even if the two FRIA, is necessary to curb the majority
companies have the same directorship creditors’ natural tendency to dictate
and ownership, they are still two separate their own terms and conditions to the
juridical entities. VIVA SHIPPING rehabilitation, absent due regard to the
LINES, INC., Petitioner, v. KEPPEL greater long-term benefit of all
PHILIPPINES MINING, INC., stakeholders. Otherwise stated, it forces
METROPOLITAN BANK & TRUST the creditors to accept the terms and
COMPANY, PILIPINAS SHELL conditions of the rehabilitation plan,
PETROLEUM CORPORATION, CITY preferring long-term viability over
OF BATANGAS, CITY OF LUCENA, immediate but incomplete recovery.
PROVINCE OF QUEZON, ALEJANDRO Bank of the Philippine Islands v.
OLIT, NIDA MONTILLA, PIO Sarabia Manor Hotel Corporation,
HERNANDEZ, EUGENIO BACULO, G.R. No. 175844, 29 July 2013, J. Perlas-
AND HARLAN Bernabe
BACALTOS, Respondents. G.R. No.
177382, February 17, 2016, LEONEN, J.
BAR EXAM QUESTIONS
e. Equality is equity principle
Debtor Corporation and its principal
All assets of a corporation under stockholders filed with the SEC a
rehabilitation receivership are held in trust petition for rehabilitation and
for the equal benefit of all creditors, declaration of a state of suspension of
precluding one from obtaining an payments under P.D. 902-A. The
advantage or preference over another by objective was for SEC to take control of
the expediency of attachment, execution the corporation and all its assets and
or otherwise. Once the corporation is liabilities, earnings and operations
taken over by a receiver, all the creditors and rehabilitating the company for
stand on equal footing and no one may be the benefit of investors and creditors.
paid ahead of the others. This is precisely
the reason for suspending all pending Generally, the unsecured creditors
claims against the corporation under had manifested willingness to
receivership. This is called the “pari passu cooperate with Debtor Corporation.
principle”. (BAR 2008) The secured creditors, however,
expressed serious objections and
f. Mortgagee and pledgee cannot reservations.
foreclose
First Bank had already initiated
g. Commencement order retroacts to judicial foreclosure proceedings on
date of petition the mortgage constituted on the
factory of Debtor Corporation.
h. Affects even objecting creditors
Second Bank had already initiated
Among other rules that foster the foreclosure proceedings on a third-
foregoing policies, Section 23, Rule 4 of party mortgage constituted on certain
the Interim Rules of Procedure on assets of the principal stockholders.
Corporate Rehabilitation (Interim Rules)
states that a rehabilitation plan may be Third Bank had already filed a suit
approved even over the opposition of the against the principal stockholders
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 7

who had held themselves liable jointly NB same answer except that for the
and severally for the loans of Debtor jurisdiction of the SEC which has been
Corporation with said Bank. transferred to the RTC

After hearing, the SEC directed the c) The order of suspension of

appointment of a rehabilitation payments suspended the foreclosure
receiver and ordered the suspension proceedings initiated by the Second
of all actions and claims against the Bank. While the foreclosure is against
Debtor Corporation as well as against the property of a third party, it is in
the principal stockholders. reality an action to collect the
principal obligation owed by the
a) Discuss the validity of the SEC corporation. During the time that the
order of suspension? payment of the principal obligation is
b) Discuss the effects of the SEC suspended, the debtor corporation is
order of suspension on the considered to be not in default and,
judicial foreclosure proceedings therefore, even the right to enforce the
initiated by First Bank. security, whether owned by the
c) Would the order of suspension debtor-corporation or of a third party,
have any legal effect on the has not yet arisen.
foreclosure proceedings
initiated by Second Bank? NB Under Section 18 of FRIA, the stay
Explain. order shall not apply to the
d) Would the order of suspension enforcement of claims against sure
have any effect on the suit filed by ties and other persons solidarily liable
Third Bank? Explain. with the debtor, and third party or
e) What are the legal consequences accommodation mortgagors as well as
of a rehabilitation receivership? issuers of letter of credit, unless the
f) What measures may the receiver property subject of the third party or
take to preserve the assets of accommodation mortgage is
Debtor Corporation? necessary for the rehabilitation of the
debtor as determined by the court
Answer: upon the recommendation of the
rehabilitation receiver.
a) The SEC order of suspension of
payment is valid with respect to the d) For the same reason as in (c), the
debtor corporation, but not with order of suspension of payments
respect to the principal stockholder. suspended the suit filed by Third Bank
The SEC has jurisdiction to declare against the principal stockholders.
suspension of payments with respect
to corporations, partnership or e) Under PD 902-A, the appointment
associations, but not with respect to of a rehabilitation receiver will
individuals. suspend all actions for claims against
the corporation and the corporation
b) The SEC order of suspension of will be placed under rehabilitation in
payment suspended the judicial accordance with a rehabilitation plan
proceedings initiated by First Bank. approved by the Commission.
According to the Supreme Court in a
line of cases, the suspension order NB the FRIA repealed PD 902-A
applies to secured creditors and to the insofar as it is now the RTC not the
action to enforce the security against SEC that has authority to appoint
the corporation regardless of the stage rehabilitation receiver
thereof.
f) To preserve the assets of the
Debtor Corporation, the receiver may
take custody of, and control over, all
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 8

the existing assets and property of the

corporation; evaluate existing assets Example. 180 million liabilities to five
and liabilities, earnings and creditors – a, b, c, d and e. The
operations of the corporation; and obligations due to a, b, and c amount to
determine the best way to salvage and 120 million but all of them are secured.
protect the interest of the investors The obligations due to d and e
and creditors. (BAR 1999) amounting to 60 million are
unsecured.
12. When may creditor/s commence
involuntary Proceedings? The plan has to be approved by the
creditors holding at least 120m
Any creditor or group of creditors with liabilities. Of the secured creditors who
a claim of, or the aggregate of whose gave the approval, they should hold at
claims is, at least One Million Pesos least 60 million and one peso and of the
(Php1,000,000.00) or at least twenty- unsecured creditors who gave the
five percent (25%) of the subscribed approval, they should hold at least 30
capital stock or partners' contributions, million and one peso.
whichever is higher, may initiate
involuntary proceedings against the 14. What are the requirements for an
debtor by filing a petition for Out of Court or Informal
rehabilitation with the court if: (a) restructuring agreement or rehab
there is no genuine issue of fact on law plan?
on the claim/s of the petitioner/s, and
that the due and demandable a. The debtor must agree to the out-
payments thereon have not been made of-court or informal
for at least sixty (60) days or that the restructuring/workout agreement
debtor has failed generally to meet its or Rehabilitation Plan;
liabilities as they fall due; or (b) a b. It must be approved by creditors
creditor, other than the petitioner/s, representing at least sixty-seven
has initiated foreclosure proceedings (67%) of the secured obligations of
against the debtor that will prevent the the debtor;
debtor from paying its debts as they c. It must be approved by creditors
become due or will render it insolvent. representing at least seventy-five
percent (75%) of the unsecured
13. What do you understand by pre- obligations of the debtor; and
negotiated rehabilitation plan? d. It must be approved by creditors
holding at least eighty-five percent
An insolvent debtor, by itself or jointly (85%) of the total liabilities,
with any of its creditors, may file a secured and unsecured, of the
verified petition with the court for the debtor.
approval of a pre-negotiated
Rehabilitation Plan which has been It means that among the secured
endorsed or approved by creditors and unsecured creditors and total
holding at least two-thirds (2/3) of the number of creditors, there is a
total liabilities of the debtor, including threshold percentage of liabilities.
secured creditors holding more than The approval is based on the
fifty percent (50%) of the total secured amount of liabilities and not based
claims of the debtor and unsecured on number of creditors.
creditors holding more than fifty
percent (50%) of the total unsecured 15. What do you mean by standstill
claims of the debtor. The petition shall agreement?
include the pre-negotiated
Rehabilitation Plan, including the It is an agreement by the debtor and
names of at least three (3) qualified the creditors providing for a standstill
nominees for rehabilitation receiver. period pending negotiation and
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 9
finalization of the out-of court or
informal restructuring agreement
which is effective and enforceable not
only against the contracting parties but
also against other creditors. Provided,
That such agreement is approved by
creditors representing more than 50%
of the total liabilities of the debtor;
notice thereof is published in a
newspaper of general circulation in the
Philippines once a week for two
consecutive weeks; and the standstill
period does not exceed 120 days from
the date of effectivity. The notice must
invite creditors to participate in the
negotiation for out- of- court
rehabilitation or restructuring
agreement and notify them that said
agreement will be binding on all
creditors if the required majority votes
are met.
16. When may an insolvent juridical
debtor file a petition for voluntary
liquidation?
An insolvent debtor may apply for
liquidation by filing a petition for
liquidation with the court. The petition
shall be verified, shall establish the
insolvency of the debtor and shall
contain (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; (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.
If the petition is sufficient in form and
substance, the court shall issue a
Liquidation Order.
Is the issuance of an order,
declaring a petitioner in a
Voluntary liquidation proceeding
insolvent, mandatory upon the
court?
Assuming that the petition was in due
form and substance and that the assets
of the petitioner are less than his
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liabilities, the court must adjudicate
the insolvency. (BAR 1991)
17. Who may file petition for
involuntary liquidation?
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, may apply for and seek the
liquidation of an insolvent debtor by filing
a petition for liquidation of the debtor
with the court if (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.
If the petition is sufficient in form and
substance, the court shall issue an Order:
(1) directing the publication of the
petition or motion in a newspaper of
general circulation once a week for two
(2) consecutive weeks; and (2) directing
the debtor and all creditors who are not
the petitioners to file their comment on
the petition or motion within fifteen (15)
days from the date of last publication.
If, after considering the comments filed,
the court determines that the petition or
motion is meritorious, it shall issue the
Liquidation Order.
Bar exam questions
a. Can a distressed corporation
file a petition for corporate
rehabilitation after the
dismissal of its earlier petition
for liquidation ? Why?
b. Can the corporation file a
petition for rehabilitation first,
and after it is dismissed file a
petition for liquidation ? Why?
Answer:
 10

making any payment outside of the

a) Yes, the dismissal of a petition for necessary or legitimate expenses of his
insolvency does not preclude the business or industry, so long as the
distressed corporation from filing a proceedings relative to the suspension of
petition for corporate rehabilitation. payments are pending;
The dismissal of the petition for
insolvency only means that the The suspension order shall lapse when
corporation may still be restored to three (3) months shall have passed without
solvency. the proposed agreement being accepted by
the creditors or as soon as such agreement
NB same is denied.

b) Yes, the dismissal of a petition for 19. Who are not covered by the court
rehabilitation means that the order and proceedings on
corporation can no longer be restored suspension of payments?
to solvency. Hence, it can file a
petition for insolvency. The court may a. those creditors having claims for
also convert the petition for personal labor, maintenance,
rehabilitation to liquidation expense of last illness and funeral
proceedings if the court finds that the of the wife or children of the
debtor cannot be rehabilitated. debtor incurred in the sixty (60)
days immediately prior to the filing
18. When may an individual debtor file of the petition; and
a petition for Suspension of b. secured creditors
Payments? c. creditors whose claims are not
listed in the petition.
An individual debtor who, possessing
sufficient property to cover all his debts 20. What are the requisites for the
but foreseeing the impossibility of meeting approval of the petition by the
them when they respectively fall due, may court?
file a verified petition that he be declared
in the state of suspension of payments by The presence of creditors holding claims
the court of the province or city in which amounting to at least three-fifths (3/5) of
he has resided for six (6) months prior to the liabilities shall be necessary for
the filing of his petition. He shall attach to holding a meeting.
his petition, as a minimum: (a) a schedule
of debts and liabilities; (b) an inventory of The creditors and individual debtor shall
assess; and (c) a proposed agreement with discuss the propositions in the proposed
his creditors. agreement and put them to a vote;

If the court finds the petition sufficient in To form a majority, it is necessary:

form and substance, it shall, within five (5)
working days from the filing of the 1. that two-thirds (2/3) of the
petition, issue an Order, among others, creditors voting unite upon the
calling a meeting of all the creditors named same proposition; and
in the schedule of debts and liabilities; 2. that the claims represented by said
directing such creditors to prepare and majority vote amount to at least
present written evidence of their claims three-fifths (3/5) of the total
before the scheduled creditors' meeting liabilities of the debtor mentioned
and forbidding the individual debtor from in the petition; and
selling, transferring, encumbering or
disposing in any manner of his property, If the decision of the majority of the
except those used in the ordinary creditors to approve the proposed
operations of commerce or of industry and agreement or any amendment thereof
prohibiting the individual debtor from made during the creditors' meeting is
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 11
upheld by the court, or when no
opposition or objection to said decision
has been presented, the court shall order
that the agreement be carried out and all
parties bound thereby to comply with its
terms.
NB for petition for suspension of
payments, the number of creditors is
important.
The total amount of liabilities owing to 6
creditors, a, b, c, d, e and f is 25o million.
The amount due to each of a, b and c is
150 million. In the creditors meeting, the
three agreed to the petition but not the
remaining creditors. The petition cannot
be approved by the court because a, b and
c while representing at least 3/5 of total
liabilities do not represent at least 2/3s of
number of creditors.
One day jerry haw, doing business
under the name Starlight Enterprises, a
sole proprietorship, finds himself
short on cash and unable to pay his
debts as they fall due although he has
sufficient property to cover such debts.
He asks you, as his retained counsel,
for advice on the following queries:
Should he file a petition with the SEC to
be declared in a state of suspension of
payments in view of the said financial
condition he faces? Explain your answer.
Answer:
I would counsel Jerry Haw to file the
Petition for Suspension of Payment with
the ordinary courts, rather than the SEC.
SEC’s jurisdiction over such cases is
confined only to petitions filed by
corporations and partnerships under its
regulatory powers.
NB Jurisdiction of SEC over petition for
rehabilitation transferred to the RTC.
Suspension of payments as a remedy is part
of the commencement order in a petition
for rehabilitation insofar as juridical
persons are concerned. Natural persons
may file petition for suspension of paymen
21. Distinguish petition for liquidation
from suspension of payment.
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The distinctions are as follows :
In liquidation, the liabilities of the debtor
are more than his assets, while in
suspension of payments, assets of the
debtor are more than his liabilities but
that the debtor foresees the impossibility
of paying his debts as they fall due.
In liquidation, the assets of the debtor are
to be converted into cash for distribution
among his creditors, while in suspension
of payments, the debtor is only asking for
time within which to convert his frozen
assets into liquid cash with which to pay
his obligations when the latter fall due.
There is discharge in voluntary
liquidation of individual debtor but there
is no discharge in suspension of payment
The court order in petition for suspension
of payments does not include secured
creditors whereas in petition for
liquidation, foreclosure proceedings shall
not be allowed for a period of 180 days
from issuance of the liquidation order.
22. When may an individual debtor file
a petition for liquidation?
An individual debtor whose properties are
not sufficient to cover his liabilities, and
owing debts exceeding Five hundred
thousand pesos (Php500,000.00), may
apply to be discharged from his debts and
liabilities by 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. He shall attach
to his petition a schedule of debts and
liabilities and an inventory of assets. The
filing of such petition shall be an act of
insolvency.
If the court finds the petition sufficient in
form and substance it shall, within five (5)
working days issue the Liquidation Order.
23. A debtor who has been adjudged
insolvent is given his discharge by
the court after his properties have
been applied to his debts. A year
later, with those debts still not fully
paid, he wins in the sweepstakes
 12
and comes into a large fortune. His
creditors sue him for the balance.
Would the suit prosper? Reasons.
The suit will not prosper on debts that
are properly discharged in insolvency.
Those that are not discharged,
assuming that a discharge can be
obtained, include:
1. Taxes and assessments due the
government, national or local;
2. Obligation arising from
embezzlement or fraud;
3. Obligations of any person liable
to the insolvent debtor for the
same debt;
4. Alimony or claim for support;
5. In general, debts that are not
provable against the estate of
the insolvent or not listed in the
schedule submitted by the
insolvent debtor. (BAR 1988)
24. When may creditor/s file a petition
for involuntary liquidation against
an individual debtor?
Any creditor or group of creditors with a
claim of, or with claims aggregating at
least Five hundred thousand pesos
(Php500, 000.00) may file a verified
petition for liquidation with the court of
the province or city in which the
individual debtor resides alleging that the
debtor committed an act of insolvency.
Distinguish between voluntary
liquidation and involuntary
liquidation of individual debtors.
Answer:
In voluntary liquidation, it is the debtor
himself who files the petition for
insolvency, while in involuntary
liquidation, a creditor or group of
creditors are the ones who file the
petition for liquidation against the
insolvent debtor.
In voluntary liquidation, the filing of the
petition is by itself the act of insolvency
whereas in involuntary liquidation filed
by creditor/s against the individual, the
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latter must have committed an act of
insolvency.
The required amount of debt for the
debtor to file the petition for voluntary
liquidation should exceed P 500,000
whereas in involuntary liquidation, the
creditor/s claims should be at least P
500,000.
25. May the following be declared
insolvent assuming that the
petition for liquidation is sufficient
in form and substance?
(1) Married woman;
(2) Partnership;
(3) Insane person
Explain your answer.
Answer:
1. Yes, a married woman may be
declared insolvent in respect to her
own debts.
2. Under FRIA, a partnership may be
declared insolvent, either in a
voluntary or involuntary
liquidation proceeding.
3. An insane person cannot file a
petition for voluntary liquidation
because he lacks legal capacity to act.
26. What are considered acts of
insolvency under FRIA?
The following shall be considered acts of
insolvency. DAC2 SC DPAC MFE
a. That such person ( debtor) 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;
 13
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;
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.
“X”, owner of a general merchandise
store, departed from the Philippines
with intent to defraud her creditors
and has remained absent from the
country. While she has liabilities
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totaling P100,000, her assets, however,
are worth P120,000.
(a) May “X” be declared an
insolvent? Reason.
Answer:
(a) Yes, X may be declared insolvent.
Under FRIA, although the debtor has
more than sufficient property to pay
all his creditors, yet if she would
commit any act of insolvency, she
should be declared insolvent thru a
petition for involuntary liquidation.
One of the acts of insolvency out of the
13 enumerated by the Insolvency Law,
is: that being absent from the
Philippines, with intent to defraud
his/her creditors, he/she remains
absent.
Juan opened a coffee shop using
money borrowed from financial
institutions. After
3 months, Juan left for the USA with
the intent of defrauding his
creditors. While
his liabilities are P1.2 M, his assets,
however are worth P1.5. M. May Juan
be declared
insolvent?
No. Juan may not be declared insolvent if
he was the one who filed the petition for
liquidation because his assets worth P1.5
M are more than his liabilities worth P1.2
M. However, his creditors may file a
petition for involuntary liquidation since
he committed an act of insolvency (BAR
1998)
27. What does the Liquidation Order
contain ?
The Liquidation Order shall:
1. declare the debtor insolvent;
2. order the liquidation of the debtor
and, in the case of a juridical debtor,
declare it as dissolved;
3. order the sheriff to take possession
and control of all the property of the
debtor, except those that may be
exempt from execution;
 14

4. order the publication of the petition transferred to the Liquidator for

or motion in a newspaper of general him to accept and settle or
circulation once a week for two (2) contest. If the liquidator contests
consecutive weeks; or disputes the claim, the court
5. direct payments of any claims and shall allow, hear and resolve such
conveyance of any property due the contest except when the case is
debtor to the liquidator; already on appeal. In such a case,
6. prohibit payments by the debtor and the suit may proceed to judgment,
the transfer of any property by the and any final and executor
debtor; judgment therein for a claim
7. direct all creditors to file their claims against the debtor shall be filed
with the liquidator within the period and allowed in court; and
set by the rules of procedure; (e) no foreclosure proceeding shall be
8. authorize the payment of allowed for a period of one
administrative expenses as they hundred eighty (180) days.
become due;
9. state that the debtor and creditors 29. What are the remedies of the
who are not petitioner/s may submit secured creditor in liquidation
the names of other nominees to the proceeding ?
position of liquidator; and
10. set the case for hearing for the During liquidation proceedings, a secured
election and appointment of the creditor may waive its security or lien,
liquidator, which date shall not be prove its claim, and share in the
less than thirty (30) days nor more distribution of the assets of the debtor, in
than forty-five (45) days from the which case it will be admitted as an
date of the last publication. unsecured creditor; or maintain its rights
under the security or lien, in which case:
28. What are the effects of the
Liquidation Order 1. [T]he value of the property may be fixed
in a manner agreed upon by the creditor
Upon the issuance of the Liquidation and the liquidator. When the value of the
Order: property is less than the claim . . . the
[creditor] will be admitted . . . as a creditor
(a) the juridical debtor shall be for the balance. If its value exceeds the
deemed dissolved and its claim . . . the liquidator may convey the
corporate or juridical existence property to the creditor and waive the
terminated; debtor’s right of redemption upon
(b) legal title to and control of all the receiving the excess from the creditor;
assets of the debtor, except those
that may be exempt from 2. [T]he liquidator may sell the property
execution, shall be deemed vested and satisfy the secured creditor’s entire
in the liquidator or, pending his claim from the proceeds of the sale; or
election or appointment, with the
court; 3. [T]he secured creditor may enforce the
(c) all contracts of the debtor shall be lien or foreclose on the property pursuant
deemed terminated and/or to applicable laws.
breached, unless the liquidator,
within ninety (90) days from the It is worth mentioning that under
date of his assumption of office, Republic Act No. 10142, otherwise known
declares otherwise and the as the Financial Rehabilitation and
contracting party agrees; Insolvency Act (FRIA) of 2010, the right of
(d) no separate action for the a secured creditor to enforce his lien
collection of an unsecured claim during liquidation proceedings is
shall be allowed. Such actions retained. A secured creditor, however, is
already pending will be subject to the temporary stay of
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 15

foreclosure proceedings for a period of 180 No relief can be extended to the party
days, upon the issuance by the court of aggrieved by the court’s order on the
the Liquidation Order. Metropolitan motion through a special civil action
Bank and Trust Company vs. S.F. for certiorari under Rule 65 of the Rules
Naguiat Enterprises, G.R. No. 178407, of Court.
18 March 2015, J. Leonen
C. The court’s dismissal of the petition for
Distinguish the remedies of the suspension of payment on the ground
secured creditors in rehabilitation of insufficiency in form and substance
proceedings, suspension of payment resulting in the non-issuance of the
and liquidation proceedings. suspension order and its order
confirming or disapproving the
In rehabilitation, the stay order suspends proposed suspension of payment
enforcement of the mortgage lien until agreement, as well as the liquidation
termination of the rehabilitation order and the order approving or
proceedings. The order of the court in disapproving the liquidation plan can
suspension of payments does not cover only be reviewed through a petition for
secured creditors while in liquidation, the certiorari to the Court of Appeals under
secured creditor can only enforce his lien Rule 65 of the Rules of Court within 15
after 180 days from issuance of the days from notice of the decision or
liquidation order. order.

What will guide the liquidator in

carrying the liquidation of the
insolvent debtor?

The Liquidator shall submit to the court a

Liquidation Plan. The Plan shall take into
account the rules on concurrence and
preference of credit unless a preferred
creditor voluntarily waives his preferred
right. Once approved, the Plan shall be
carried out to settle the claims against the
debtor.

30. What are the procedural remedies

under FRIA ?

A. Decisions of the Regional Trial Court

on rehabilitation are immediately
executory and shall be appealable to
the Court of Appeals under Rule 43 of
the Rules of Court. Motion for
reconsideration of the decision is not
allowed.

B. A party may file a motion for

reconsideration of a suspension of
payment order or any order issued by
the court prior to its order confirming
or disapproving the proposed
agreement to suspend payment, as well
as any order of issued by the court prior
to the issuance of the liquidation order.

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