Ix-Fria 2 PDF

CREDIT TRANSACTIONS
FINANCIAL REHABILITATION AND INSOLVENCY ACT

Preliminary

1 What is the purpose of the FRIA?

● Encourage debtors and their creditors to resolve and adjust competing claims and property
rights

2.1 Which debtors are covered by the FRIA

● Sole proprietorship registered with DTI
● Partnership registered with SEC
● Corporation organized under Philippine laws
● Individual Debtors who became insolvent under the law (Sec 4[k])

2.2 Which debtors are not covered by the FRIA?

● Banks
● Insurance companies
● Pre-need companies
● Unincorporated companies (Sec 5)
● Joint venture not registered as partnership
● Estate of a deceased person

2.3 When is a person considered insolvent?

● Financial condition
● Debtor either
○ generally unable to pay its/his liabilities as they fall due in the OCOB
○ Has Liabilities > Assets (Sec 4[q])

3.1 Under the FRIA, what options are available to the insolvent debtor?

The following
● Rehabilitation
● Out of court restructuring
● Liquidation
● Suspension of payment (for individual debtors)
Credtrans - JLO Block A 2022

FRIA 1 Herce
What is the nature of the proceedings under the FRIA?

● In rem
● Summary and non-adversarial (Sec 3)

3.2 What is a suspension of payment?

● Remedy available to individual debtor
● Who seeks to suspend payments outside the necessary or legitimate expenses of his
business
● While the proceedings are pending

3.3 What is rehabilitation?

● Restoration of the debtor
● To a condition of successful operation and solvency
● If it is shown that its continuance of operation is
○ Economically feasible
○ Creditors can recover more if debtor continues as a going concern (Sec 4[gg])

3.4 What are the types of rehabilitation?

● Court Supervised
○ Voluntary (Sec 12)
○ Involuntary (Sec 13)
○ Pre-negotiated (Sec 76)
○ Out of Court or Informal (Sec 83)

3.5 What is liquidation?

● Disposal of all the properties of the insolvent debtor to satisfy all his obligations

What is a claim?

● All claims or demands
● Of whatever nature or character against the debtor
● Whether
○ for money or otherwise
○ Liquidated or unliquidated
○ Fixed or contingent
○ Matured or unmatured
○ Disputed or undisputed
FRIA 2 Herce
● Includes (but not limited to)
○ All government claims (national or local)
○ Claims against directors and officers of the debtor arising from acts done within their
functions
■ Without prejudice to creditors filing a case against the directors acting their personal
capacity

Suspension of Payment

Preliminary Concepts
Who may initiate ● Only individual debtors
Can the debtor be ● Only individual debtors (Sec 3)

Individual or Juridical
Threshold ● NO
requirement for the
debt
What are the grounds ● Has sufficient property to cover all debts
for initiating the ● But forsees the impossibility of meeting them when due (Sec 3)
proceedings?
● Schedule of debts and liabilities

What major items
● Inventory of assets
have to be in the
● Proposed agreement
petition?
● At least 3 nominees for the position of commissioner (Sec 94)

What is an individual debtor?

● Natural person
● Resident and citizen of the philippines
● Became insolvent (Sec 2[o])


FRIA 3 Herce
Procedure
● Must contain be comply with the things mentioned in preliminary

Filing of petition
concepts
● Court finds petition sufficient in form and in substance

Issuance of Order
● Order is issued within 5 days from filing
● Publication - newspaper of general circulation in province or city

where filed.
Notification through
● 1x a week for 2 consecutive weeks (Sec 95)
publication and

sending notice
● Sending notice - registered mail to all creditors named in the
schedule of debts (Sec 95)
● Presence of at least creditors whose claims amount to at least ⅗

of liabilities
● Commissioner will preside over the meeting
○ Check if ⅗ rule is met
○ Discuss proposition
○ Vote (Sec 97)
● When is a proposed agreement deemed rejected
Creditor’s meeting ○ Number for creditors required do not appear
and voting ○ Majority required not obtained (Sec 98)
● Required majority
○ ⅔ of creditors voting unite upon the same proposition
○ Claims represented by majority at least ⅗ of total liabilities (Sec
97[d])
● Creditors unaffected by the order may refrain from attending and
voting
○ If they vote however, they are bound by such (Sec 98)
● Must be filed within 10 days from the date of last meeting (Sec
100)
● The objection must be for the following grounds (DFCFC)
Objections ○ Defects in the call, holding, and deliberations of the meeting
which prejudice rights
○ Fraudulent Connivance between creditors and debtor
○ Fraudulent Conveyance of claims to obtain a majority (Sec 98)
● Court will hear and rule on the objection ASAP in a summary

manner.
Hearing and Issuance
● Decision of majority ANNULLED
of Court order
○ The proceedings will be terminated
○ Creditors can exercise rights which correspond to them (Sec

FRIA 4 Herce
100)
● Decision of majority UPHELD (no objection, objection overturned)
○ Order parties to carry out agreement and they are bound by it
(Sec 101)
● PARTIES BOUND
○ GR: All creditors whose claims are included in the debts
○ EX: the following
■ Claims for personal labor, maintenance, expenses of last
illness and funeral of wife or children incurred 60 days prior
filing
■ Secured creditors who failed to attend or refrained from
voting
● Effect of FAILURE TO COMPLY with agreement

○ All rights creditor had against debtor prior the agreement will
Implementation
revert back
○ Individual debtor may be subject to insolvency
Prohibited Transactions During Suspension of Payment
Transaction Prohibited?
GR: YES
EX: used in ordinary operations of commerce
Sale by individual debtor of his property
or industry in which debtor is engaged (Sec
95)
GR: YES
Encumbrance individual debtor of his EX: used in ordinary operations of commerce
property or industry in which debtor is engaged (Sec
95)
YES. Those outside of necessary or legitimate

Payment
expenses of his business or industry
Rehabilitation
Preliminary Concepts
Voluntary Involuntary

FRIA 5 Herce
Who may initiate ● The insolvent debtor or group of ● The Creditor or Group of
debtors (Sec 12) Creditors (Sec 13)
● Juridical person (Sec 3) ● Either

● There must be approval from any of
the following
Can the debtor ○ Owner - sole proprietorship
be Individual or ○ Majority of Partners - Partnership
Juridical ○ Majority Vote of board (at least ⅔
of capital stock), unless a higher
one is required by the articles of
partnership - Corporation,
● Aggregate claim of either

○ At least 1 million
Threshold
requirement for ○ 25% of subscribed
-
the debt capital or partner’s
contribution, whichever
is higher (Sec 13)
Any of the following

● No genuine issue of fact of
law on the claim, and that
the due and demandable
payments have not been
made for at least 60 days
What are the ● Debtor generally failed to
grounds for meet its liabilities when
initiating the -
due
proceedings? ● Creditor (not petitioner)
initiated foreclosure that
will prevent debtor from
paying its debts as they
become due or will render
it insolvent (Sec 13)

● Name, business, and principal and ● Name, business, and

other addresses of the debtor principal and other
What major ● Nature of the business and activities, addresses of the debtor
items have to be and address of the same ● Nature of the business
● History of the debtor and activities of the debtor
in the petition?
● Fact and cause of the insolvency ● Circumstances sufficient
● Relief sought to support at petition
● Relief sought
FRIA 6 Herce
● Pending actions by or against the ● Names of at least 3
debtors nominees for receiver and
● Demands to enforce claims or liens their qualifications
● Manner of rehabilitation, and how such ● Address at which
may benefit creditors documents regarding the
● Address at which documents debtor may be reviewed
regarding the debtor may be reviewed ● Showing of s ubstantial
(Sec 12) likelihood of rehabilitation
(Sec 14)

In any proceeding for rehabilitation, what must the person filing show?

● The debtor is insolvent and
● Rehabilitation must be viable or likely (Sec 12)

When is rehabilitation viable or likely?

● Proposed RP complies with minimum contents
● Sufficient monitoring by receiver of debtor’s business
● Debtor has met with creditors in an attempt to reach a consensus with the RP
● Receiver submits a report
○ RP is realistic, feasible, and reasonable
○ Otherwise, there is substantial likelihood of rehabilitation because
■ Sufficient assets to rehabilitate
■ Sufficient cash flow
■ Debtor, partners, etc, in good faith and due diligence
■ Petition is not a sham meant to delay enforcement of rights
■ Debtor likely to pursue a viable RP
■ Petition, RP, and attachments not contain materially false or misleading statements
■ And if:
● Petitioner is debtor, then has met with creditors representing ¾ of outstanding
obligation to reach a consensus
● Petitioner is creditor met with debtor and made a good faith effort to reach a
consensus on the proposed RP
■ Debtor not commit acts of misrepresentation or in fraud of creditors (Sec 21)

Procedure
Steps Voluntary Involuntary

FRIA 7 Herce
Filing of petition ● Petition must be verified in both
● Court finds petition sufficient in form and in substance, it will issue a

Commencement Order (CO)
Action on ● If insufficient, court will give the petitioner a reasonable time to amend
Petition or supplement.
● Commencement order will set date of initial hearing, not more than 40
days from filing
Publication of ● NOGC once a week, for at least 2 consecutive weeks

Commencement ● First publication within 7 days from the time of issuance of CO
Order and ● Personal delivery of copy of petition to each creditor holding at least
Delivery of 10% of total liabilities
Notice
● Receiver must establish preliminary registry of claims

● It is available for public inspection
Establishment of ● The day, time, place of inspection is published in a NOGC 1x every
Registry Claims week, 2x consecutive weeks.
● Inspection cannot exceed 15 days after the last publication
● Claims must be supported by evidence

Part of Registry? When to file? Effect of not filing on
time
YES No need. N/A

Filing of Not entitled to
Creditor’s Claim At least 5 days before participate in rehab
NO the date of initial proceedings, but
hearing entitled to receive
distributions

● Even if filed late, the court should still accept
● Debtor, creditor, or other interested parties may submit challenges to a

claim
● Must be done within 30 days from the expiration of the period to
Challenge of inspect
Claims ● After 30 days, receiver submits to the court registry of claims
● Registry of Claims includes
○ Unchallenged claims
○ Challenged claims, resolved and unresolved

FRIA 8 Herce
● At the initial hearing, the court will
○ Determine creditors who timely filed notice claims
○ Hear and rule on any objection to qualification of receiver
Initial Hearing
○ Direct creditors to comment on RP
○ Direct receiver to evaluate financial condition and submit a report
○ Determine reasonableness of rehab receiver’s fees
Creditors ● Creditors submit comments to the court and receiver

Comments on ● Not more than 20 days after initial hearing
the Petition and
Rehab Plan
● Receiver submits preliminary findings and recommendations on

whether
○ Debtor is insolvent
Submission of ■ Causes thereof
Rehab ■ Irregular acts which may have contributed to insolvency
Receiver’s ○ Goals and procedures to accomplish the same in the RP are
report realistic, feasible, and reasonable
○ Substantial likelihood for rehabilitation
○ Dismissal
○ Dissolution or liquidation
The court may do any of the following actions

Action of the Court Grounds
Following must concur

● Debtor is insolvent
Give Due Course
● Substantial likelihood of
rehabilitation
Grant Due Any of the following

Course, Dismiss, ● Debtor is not i nsolvent
or Convert ● Petition is a sham meant to
delay enforcement of the
rights of creditors
● Petition, RP, and documents
Dismiss
contain materially false or
misleading statements
● Debtor committed acts of
misrepresentation or in fraud
of creditors


FRIA 9 Herce
Any of the following
● Debtor is insolvent, but no
Convert
likelihood of successful rehab
● Failure of rehab
(Sec 26)
Consultation ● Receiver confers with debtors and all classes of creditors

with Debtor and ● He may consider their views and proposals for the revision, review, or
Creditors preparation of a new RP (Sec 63)
● Rehab receiver will call a meeting with the debtor and all classes of
creditors
● Not less than 2 weeks nor more than 4 weeks from the date of the
order
● Order will be published in a NOGC, if none, then the court will
Formation of
determine the newspaper that will best notify the creditors.
Creditor’s
● Creditors may organize a committee among themselves. They can
Committee
make a committee composed of reps from each class such as
○ Secured Creditors
○ Unsecured Creditors
○ Trade Creditors and Suppliers
○ Employees of the Debtor
Review, ● Receiver will revise and review the RP OR make a new one
Revision, and
Preparation
● Receiver will notify the creditors that the RP is ready

● The creditors will convene as a whole or per class to vote the approval
● A plan is deemed rejected unless approved by all classes of creditors
Creditors
whose rights are adversely affected by the RP
Meeting to
● A plan is approved by a class of creditors if members of said class
Approve
holding more than 50% of the total claims vote in favor of the plan (Sec
64)
● Despite the rejection, court can exercise the cram down power
Submission of ● Receiver submits approved plan to the court for confirmation
Rehabilitation otifies creditors that the plan has been submitted (Sec 65)
● Receiver n
Plan to the
Court
● Must file within 20 days from receipt of notice that Plan has been
Filing of submitted for confirmation
Objections ● Grounds for objecting to RP (exclusive)
○ Support induced by fraud
FRIA 10 Herce
○ Data or documents relied upon in the RP materially false or
misleading
○ RP is not supported by voting creditors
Court may do any of the following actions depending on the ground

Ground Action of the Court
Debtor in Bad Faith Convert into Liquidation
Merit in objection Order receiver or other party to

Hearing on cure defect
Objections, No objection
Court Action,
and Merit in objection, but defect
Confirm RP
Confirmation of cured
the
Rehabilitation No merit to objection
Plan ● Court confirm despite unresolved disputes, provided RP provides
provisions to pay such claims
● Court has Cramdown Power
● Court must confirm within 1 year from the date of filing the petition to
confirm
● Failure to do so will result in the conversion (upon motion or motu
proprio) of the proceedings into liquidation
● Allowed after confirmation upon a verified motion for leave to amend

Amendments ● Order granting the amendments must be published once in a NOGC
not later than 5 days from the date of the order
● Rehab proceedings are terminated by court order declaring

○ Success
○ Failure
● Any stakeholder or the receiver can petition for such termination
● Failure of rehab in the following cases
○ Court dismisses petition
○ Debtor fails to submit RP
Termination of
○ Under the RP no substantial likelihood of rehabilitation within a
Proceedings
reasonable period
○ RP approved but in the implementation, debtor fails or objectives
not realized
○ Fraud in obtaining approval of RP
○ Court does not confirm RP
○ RP may no longer be implemented according to its terms
● Court may do the following upon failure of the RP, upon motion

FRIA 11 Herce
○ Issue order to cure breach. Failure to do so will convert to liquidation
○ Convert to liquidation
○ Allow debtor to submit amendments to RP, subject to approval
○ Issue any other order to remedy the breach
○ Enforce provisions of the RP through WOE
● The termination of the rehab proceedings result in the following
○ Discharged of receiver subject to final accounting
○ Lifting of Stay Order and any other order

Prohibited Transactions
GR: YES
EX: in the following cases
● OCOB
Sale by
● Necessary to finance admin expenses
individual
● Approval of court and upon application of the receiver, of
debtor of his
unencumbered property outside the OCOB because the property is
property
○ Perishable
○ Costly to maintain
○ Susceptible to devaluation
Encumbrance GR: YES

individual EX: When either
debtor of his ● OCOB
property ● Authorized by the court under Sec 52
NOT ALL.
● Payment of administrative expenses is allowed when due
● These are
○ Arise from filing of a petition
○ Those in connection with FRIA proceedings
Payment
○ OCOB after commencement date
○ Payment of new obligations after commencement date to finance
rehab
○ Fees for rehabilitation receiver and professionals
○ Others mandated or allowed by the SC in its rules

Limitations on the Rights of Creditors

FRIA 12 Herce
GR: YES
Suing or
EX: When either:
instituting
1. Claims for personal labor, etc.
proceedings
2. Secured creditor
Foreclosure YES. By virtue of the commencement Order
Payment YES.
Set-off YES. Any set-off after commencement date

Are there any differences in the treatment of secured and unsecured creditors?

● YES. Secured creditors are given preferential treatment (Sec 4[jj, kk])

Difference Discussion
● GR: The rights of a secured creditor are not diminished, but the right to
enforce the security may be suspended during the term of the S tay
order (Sec 60)
● EX:
○ The court may however allow the enforcement if the property is not
necessary for rehabilitation. They will be admitted to the
proceedings for the purpose of receiving the balance to their claim
(Sec 113[d])
○ The court may modify the continuance of a suspension of pay, etc
No Diminution of
when
Secured
■ Creditor does not have adequate protection over the property
Creditors Rights
securing the claim
■ Value of a claim secured on property which is not necessary for
rehabilitation exceeds the fair market value of the said property
● A creditor is deemed to lack adequate protection when
○ Debtor fails or refuses to honor a pre-existing agreement to keep
the property secured
○ Fails or refuse to take commercially reasonable steps to maintain
the property
○ Property depreciates to an extent that creditor is under secured
Sale of ● Court may authorize it with the debtor’s consent (Sec 50)
encumbered
property


FRIA 13 Herce
Rehabilitation Receiver

Who is a ● Person entrusted with powers, duties related to the rehabilitation of the
rehabilitation debtor
receiver?
Who may be ● Any person, natural or juridical

rehabilitation ● If its juridical, the entity must designate a natural person who is
receivers? qualified to be one
Natural Juridical
● Either a General Requirements

○ PH citizen ● Duly authorized to do
○ Resident of the PH for at least 6 business in the Philippines
months prior nomination for at least 6 months prior
● Good moral character (GMC) with appointment
acknowledge integrity, impartiality, ● Good standing as certified
and independence by the appropriate agency
● Expertise and acumen to manage and ● No COI
operate a business similar in size ● Not been earlier
● Knowledge in management, finance, dismissed as RR
and rehabilitation of distressed ● Submit the following
companies ○ Name of person
● General familiarity with designated to be RR
○ Rights of the creditors subject to ○ Sworn Certification
suspension of payments and that person is qualified
Qualifications rehabilitations ● Submit sworn
○ Duties and obligations of a receiver undertaking, binding itself
● Not earlier dismissed as RR to be solidarily liable with
● No COI RR
● Bond in an amount determined by the ● Bond in amount
court determined by court
● Not disqualified

Addition Requirements for the
Natural Person
● Designated and
authorized to act on behalf
of the entity
● Representative must be a
director, officer,
stockholder, or partner of
the juridical entity

FRIA 14 Herce
● Sword statement binding
himself to be solidarily
liable with firm

Principal Duties
● Preserve and maximize the value of the assets of the debtor during
rehabilitation
● Determine viability of rehabilitation of the debtor
● Prepare and recommend a rehabilitation plan
● Implement the approved plan

Other Duties
● Verify the accuracy of facts in the petition and annexes
● Verify and correct
○ Inventory of assets of the debtor, their valuation
○ Schedule of debts and liabilities
Powers, Duties
● Evaluate the validity and true amounts of the claims against the debtor
and
● Sue and recover, with court approval,
Responsibilities
○ Amounts owed to the debtor
○ Property or money of the debtor paid or transferred in fraud of
creditors or undue preference
● Take possession, custody and control the debtor’s property
● Monitor the operations of the business of the debtor
● Engage the services or to employ persons or entities to assist him in
the discharge of his functions
● Determine the best manner of rehabilitation
● Implement the Plan as approved by the court
● Assume powers of management if directed by the court
● Exercise other powers conferred upon him by the court
● Submit a status report on the rehabilitation
How removed?
● By the court either
○ Motu proprio
○ Motion by creditors holding more than 50% of total obligations

Removal of a
Grounds
Rehabilitation
● Incompetence, gross negligence, failure to perform proper degree of
Receiver
care
● Lack of particular competency required for the case
● Illegal acts in the performance of duties
● Unqualified or Disqualified
● COI, unless waived

FRIA 15 Herce
● Manifest lack of independence that is detrimental to the general body
of stakeholders

Commencement Order

What is a commencement order?

● It’s an order issued by the court which commences the rehabilitation proceedings (Sec 16)

What are the contents of the commencement order?

The following
● Declare that the debtor is under rehabilitation
● Appoint a rehab receiver
● Prohibit the debtor’s supplier of goods from withholding supplies of goods and services
in the OCOB as long as the debtor makes payments
● Authorize payment of admin expenses
● Set the case for initial hearing
○ Not more than 40 days from the date of filing the petition (Sec 16)

What are the legal effect of a commencement order

● Vest rehab receiver with all powers pertaining to him
● Prohibit or serve as legal basis for nullifying any extrajudicial activity to
○ seize property
○ Sell encumbered property
○ Attempt to enforce claim after commencement date
○ UNLESS, otherwise allowed in the FRIA
● Nullify any set-off after the commencement date
● Nullify the perfection of any lien against the debtor’s property after commencement date
● Consolidate the resolution of all legal proceedings by and against the debtor
○ Court may however allow continuation of cases in other courts where debtor initiated suit
(Sec 17)

What is the effectivity and duration of a commencement order?

● GR: Effective for the duration of the rehab proceedings
● EX: any of the following
○ Earlier lifted by the court
FRIA 16 Herce
○ RP is seasonably confirmed
○ Court terminates rehab proceedings

The effects of the commencement order retroacts to what?

● Date of filing of the petition

What are the effects of a suspension order?

● Suspend
○ All actions or proceedings in court for the enforcement of claims
○ All actions to enforce any judgement, attachment, or other provisional remedies
● Prohibit the debtor from
○ Selling, encumbering, or disposing of his property EXCEPT if OCOB
○ Making any payment of outstanding liabilities as of commencement date EXCEPT as
provided (Sec 16)

To what does the suspension order not apply to?

● Cases pending appeal in the SC as of the commencement date
● Cases pending before a specialized court or quasi-judicial agency which is capable of
resolving the claim more quickly than rehab court
● Enforcement of claims against sureties, solidary co-debtors, and third party or
accommodation mortgages
○ EX: Property subject of accommodation mortgage is necessary for the rehabilitation of
the debtor as determined by the court
● Criminal action against the individual debtor, owner, director will not be stayed.

What is the effect of a stay order on government institutions

● The same. It applies to them notwithstanding provisions of their charters (Sec 19)

What is the effect of a stay order on taxes owed by the insolvent debtor?

● Taxes, penalties, interest owing to the government upon the issuance of the commencement
order, up until approval of the RP or dismissal of the petition are waived (Sec 18)

Pre-negotiated rehabilitation

What is pre-negotiated rehabilitation?


FRIA 17 Herce
● Debtor and required number of creditors agree in the rehabilitation before the filing of the
petition

Preliminary Things
Who may initiate ● The insolvent debtor by itself, or jointly with its creditors (Sec 76)
the proceedings?
Debtor Creditor
Must have authority from any of the Endorsed and approved by the
following following

Individual t least ⅔ of
A
Himself
Debtor Creditors total liabilities

What are the Sole Prop Owner
requirements for More than 50%
Majority of Secured
the approval of Partnership of total secured
partners Creditors
PNR? claims
majority vote of More than 50%
BOD and Unsecured of total
stockholders Creditors unsecured
Corp
representing ⅔ claims
of outstanding
capital stock

Can the debtor be ● Either

an individual or
juridical person?
Is there a
threshold amount
N/A
required for the
debt?
What are the

grounds for
N/A
initiating the
proceedings?

FRIA 18 Herce
As a minimum, the following
● Schedule of debts and liabilities
● Inventory of debtors assets
What major items
● Pre-negotiated RP
must be alleged in
● Names of at least 3 nominees for rehab receiver
the petition?
● Summary of disputed claims
○ With a report of provisioning funds for such claims should
they be valid

Procedure
Step What happens
● Must be verified
Filing of petition
● Debtor by himself or jointly with creditors
Court will issue an order which

● Identifies the debtor and principal business or activities
● Declare debtor is under rehabilitation
● Summarize the grounds for filing
● Direct Publication of the Order in an OCOB
● Direct the service by personal delivery of a copy of petition on
Issuance of court certain creditors
order ● State that copies of the petition and Plan can be examined
● State that creditors and other interested parties may file opposition
● Appoint the rehabilitation receiver
● Suspension or Stay Order

Effect of the Order
● Same as that of a commencement order
Publication of ● OCOB once a week, at least 2 consecutive weeks, first publication
order and within 7 days from the time of issuance of the order
notification of ● Personal delivery on creditor that is not a petitioner
creditors ○ At least 10% of total liabilities of debtor
● Must file within 8 days from date of last publication

● Grounds for objection are limited to the following
Verified objection
○ Petition, RP, and documents contain materially false or
to the petition or
misleading statements
plan
○ Majority of class of creditors do not support the RP
○ RP fails to accurately account for a claim and claim not declared

FRIA 19 Herce
as contested
○ Support induced by fraud
Comments ● Allowed to do so for any reason
● After receiving objectives, court will set same for hearing.

● Not earlier than 20 days. Not later than 30 day from date of the
second publication of the Order

The court may take any of the following actions depending on its
findings

Finding of the Court Action of the court/Result
Hearing on
Merit in the objections Order the debtor to cure the defect
Objections
Debtor or Creditors in bad
faith MAY C
onvert proceedings into
liquidation
Defects not curable
No merit in the objection

RP will be deemed approved
Defects cured

● Within 10 days from date of second publication, court will approve

unless verified objection
● RP can only be implemented after the lapse of 20 days from the date
of the second publication of the order
● Court has 120 days from the date of filing of the petition to approve
Approval
the RP.
● RP is deemed approved if the court fails to do so within the said
period
● The approval of the Plan will have the same effects as confirmation
of a rehabilitation plan under section 69

Out of Court Restructuring Agreement

What is OCRA?

● It is an informal restructuring agreement
● A RP agreed upon by the debtor and required number of creditors
● It is not submitted to the court for approval

FRIA 20 Herce

What are the required approvals for OCRA?

Who must approve Required number
Debtor N/A
Their vote must represent at least 67% of the

Secured Creditors
secured obligations
Their vote must represent at least 75% of the

Unsecured Creditors
secured obligations
Total vote must represent at least 85% of the

All Creditors
total liabilities

Does the cram down effect apply?

● YES.

Out of Court Restructuring Agreement

What is a standstill period?

● Period agreed upon by the debtor and creditor to enable them to negotiate and enter into
an OCRA
● It may have provisions which are similar to those of a commencement order

Against whom is the standstill period enforceable against?

● Not only the parties to it, but all other creditors provided the requirements are complied with

What are the requirements?

● Approval of creditors representing more than 50% of total liabilities of the debtor
● Notice is published in a NOGC at least once a week for 2 consecutive weeks
● Period does not exceed 120 days from effectivity date

When will the standstill period expire?

● After 120 days from the effectivity of the agreement
● Effectivity of the OCRA
● Termination of the negotiations for the OCRA as declared by the creditors
FRIA 21 Herce

Pre-commencement contracts and obligations

What is the rule for pre-commencement contracts?

● All valid and subsisting contracts as of the commencement date continue in force
● However,
○ The court may cancel the contract
○ It must be confirmed within 90 days following the commencement of the proceedings by
notifying the other contracting party. Otherwise, if not confirmed, contract will be
considered terminated (Sec 57)

What will these contracts be considered?

● Administrative expenses (Sec 57)

What is the ground to rescind or nullify a pre-commencement transaction?

● That it was either
○ In fraud of creditors
○ Constitute undue preference of creditors (Sec 57)

When is a contract presumed to be in fraud of creditors or constitute undue preference of
creditors?

● It provides the following within 90 days prior the commencement date
○ Unreasonable inadequate consideration
○ Security or additional security
● Involves
○ Accelerated payment of a claim within 90 days prior commencement date
○ Creditors where such benefit more than pro rata share in the debtor’s assets when the
debtor was insolvent
● Transaction is intended to defeat or delay the collection, by putting assets of the debtor
beyond the reach of creditors
● Other provisions in other relevant laws (Sec 58)

Who may file the petition to rescind or nullify?

● The rehabilitation receiver
● Any creditor, with the conformity of the receiver (Sec 59)


FRIA 22 Herce
What if the receiver does not consent to such?

● The creditor may seek leave of court for the purpose.
● If granted, the receiver will transfer all rights, title, and interest in the action to the creditor
(Sec 59)

To whom do the benefits of such action belong to?

● The creditor, to the extent of his claim
● The excess belongs to the estate (Sec 59)

Management of the Business during Rehabilitation

Does the insolvent debtor lose management of the business during rehabilitation
proceedings?

● GR: NO. It remains with the existing management, subject to any law or agreement. (Sec 47)
The receiver will generally not take over (Sec 31)
● EX: Existing management will lose control upon recommendation of the receiver on the
following grounds
○ Actual or iminent danger, loss, waste, or destruction of assets
○ Paralyzation of business operations
○ Gross mismanagement of the debtor
○ Fraud
○ Wrongful conduct on existing management
○ Willful violation of the FRIA by existing management (Sec 36)

How can the fact that the receiver takes possession of the assets of debtor and the fact that
control remains with the receiver by reconciled?

● The receiver does not actually take possession of the properties needed for day-to-day
business operations of the debtor
● There has to be approval of the rehabilitation receiver or court in the following
○ Disbursements
○ Payment or sale
○ Act affecting title or interest in property (Sec 47)

Management committee?


FRIA 23 Herce
What is a management committee?

● It’s the committee that takes place of the management of the debtor and assumes their
rights and responsibilities
● Can take custody and control of the assets of the debtor

Creditors committee

What is the role of the creditor's committee?

● Assist the rehab receiver in communicating with the creditors
● Primary liaison between receiver and creditors
● They may be authorized to perform other tasks to facilitate rehabilitation

What are the examples of classes of creditors?

● Secured creditors
● Unsecured creditors
● Trade creditors
● Employees of the debtor

Liquidation

In what instances will rehabilitation be converted into liquidation?

Ground/Event How converted?
Debtor is insolvent and there is no

substantial likelihood of rehabilitation Court’s discretion (may)
(Sec 25[c])
There is merit to objection. But, debtor in bad

faith or not feasible to cure defect Court will convert into liquidation
(Sec 67)
Court does not confirm within 1 year from

date of filing Upon motion or motu proprio
(Sec 72)

FRIA 24 Herce
Breach or failure of rehabilitation plan Court, upon motion by affected parties, will
(Sec 74) convert
Termination is due to failure or dismissal of

petition other than technical grounds Immediately converted
(Sec 75)
Court determines debtor or creditors that

support the Plan is in bad faith, or objection
Court may convert
is non-curable
(Sec 80)
Pendency of court-supervised or

pre-negotiated, debtor petitions for
Upon motion of debtor
conversion
(Sec 90)
CSR or PNR, 3 or more creditors, aggregate

claims is at least 1 million or at least 25% of
subscribed capital or contribution of debtor Upon motion
(whichever is higher)
(Sec 91)
Anytime after notice and hearing, upon

recommendation of the rehab receiver
(Sec 92)

Preliminary Things
Individual Juridical Individual Juridical
Who may ● Insolvent ● Insolvent ● Any creditor or ● At least 3 creditors

initiate debtor debtor group of creditors
Who is the ● Individual ● Juridical ● Individual ● Juridical

debtor
● Liabilities ● Claim or aggregate Claim or aggregate

Threshold exceed claim is at least claim is either
amount assets and N/A 500,000 ● at least 1 million
● Debt ● At least 25% of
exceeds subscribed capital

FRIA 25 Herce
500,000 stock or partner’s
pesos (Sec contribution of the
103) debtor
Whichever is higher
(Sec 91)
EITHER Any of the following

○ there is no genuine acts of insolvency
issue of fact or law must be alleged:
on the claims of the
petitioner, and that ● Debtor depart from
the due payments PH
thereof has not ● Absent from PH
been made for at ● Conceals himself
least 180 days OR to avoid service of
○ Debtor generally process
failed to meet its ● Removes property
liabilities when due to avoid
● No substantial attachment
likelihood of ● Suffered property
rehabilitation to remain under
attachment for 3
days
● Confessed
Grounds for judgement to favor
initiating of any creditor
● Willfully suffered
judgement by
default
● Suffered his
property to be
taken on legal
process
● Any disposition of
estate, rights, or
credits
● Disposition in
contemplation of
insolvency
● A merchant,
generally
defaulted in
payment of
obligations for 30

FRIA 26 Herce
days
● For 30 days, failed
to pay money
deposited or
received in
fiduciary capacity
● Execution against
him but no
sufficient property
(Sec 105)
● Schedule of debts and

liabilities
○ List of creditors
○ Addresses
○ Amounts of claims
Major items ○ Collaterals and
in the securities
petition ● Inventory of all assets,
including
○ receivables
○ Claims against 3rd
parties
● Names of at least 3
nominees for liquidator

Procedure
Individual Juridical Individual Juridical
● Must be verified and comply with the requirements mentioned in the

Filing of petition
previous table
● If sufficient in form and ● Court will issue If sufficient in form,

substance, the court will issue an order court will issue an
a liquidation order requiring order:
Issuance of ● Otherwise dismiss. individual
court order ● Court has 10 days to act on debtor to show ● Directing
petition cause why not publication of
insolvent petition in
OCOB

FRIA 27 Herce
● If court satisfied ● Directing
not insolvent, creditors who
may issue an are not
order forbidding petitioners to
the debtor from file comment
making any ● Directing copy
payments of of petition to be
debts and served to all
transfer or known creditors
property subject to the
following rules
1. If exceed 20,
service to at
least the first 20
largest
2. More than 20,
but one or more
acquired credit
within 6 months
prior petition,
number of
creditors to be
served be
copies will
increase by
such number
Publication of ● OCOB once a

order and week for 2
--- --- ---
notification of consecutive
creditors weeks (Sec 91)
Filing of ● Debtors and creditors who are not petitioners will file their comments
Comments within 15 days from the date of last publication
Hearing on the ● Court will conduct a hearing

Petition or ● Determine whether the evidence is sufficient to warrant the issuance of
Motion a liquidation order
Issuance of ● Issued when petition is meritorious

Liquidation ● May be issued even if the debtor on whom summons is served, fails to
Order file a comment or opposition
Publication of ● OCOB once a week for 2 consecutive weeks

FRIA 28 Herce
the Liquidation
Order
● For the appointment and election of the liquidator

Hearing
● Not less than 30 days no more than 45 days from date of last publication
● Creditors entitled to vote will elect

● Nominees receiving the highest number of votes in terms of amount of
claims and qualified pursuant to Sec 118 will be appointed
● Only creditors that filed claims, not barred by prescription, can vote
● Rule on secured creditor
○ GR: Cannot vote
○ EX: when he
■ Waives security or lien
Appointment of
■ Has the value of property subject of security fixed by agreement,
Liquidator
and is admitted for the balance of his claim
● Court may appoint a liquidator in the following instances
○ Creditors don’t attend on election date
○ Creditors who attend fail or refuse t o elect
○ Elected liquidator fails to qualify
○ Vacancy for any reason
● Court may however set another date for the election
● The former rehabilitation receiver may be appointed
● Liquidator must prepare a preliminary registry

● Secured creditors who waived, etc, will be considered considered
unsecured
Registry of
● Registry is available for public inspection
Claims
● All claims must be proven before being paid
● Set-off is allowed. The balance will be allowed in the liquidation
proceedings
● Must file within 30 days to submit such challenges

● After 30 days, receiver must submit the registry of claims to the court
Opposition or
○ Those which are undisputed
Challenge to
● Rule on finality of claim
Claims
○ GR: Once submitted, claims are final
○ EX: fraud, accident, mistake, or inexcusable neglect (can be set aside)
Submission of ● Liquidator must resolve the disputed claims

Disputed ● Submit claim after
Claims to Court ● He may disallow claims
Submission of ● Liquidator must submit it within 3 months f rom assumption of office
Liquidation Plan ● It must enumerate at least

FRIA 29 Herce
○ All assets of the debtor
○ Claims against the debtor
○ Schedule of liquidation of assets and payment of claims
Implementation ● Liquidator will implement

of the ● Payments will be made in accordance with the LP
Liquidation Plan
● Court will determine whether completed

Complete
● When complete, court will issue an order
Implementation
○ approving the report
of the Plan
○ SEC to remove debtor from registry of legal entities
Termination of ● Upon receipt of evidence that debtor has been removed,
the Proceedings ○ Court will issue an order terminating t he proceedings
Discharge of ● Liquidator will render final accounting

the Liquidator ● Notice of the same to creditors

Liquidation Order

What is a liquidation order?

It is the order that will
● Declare the debtor insolvent
● Order the liquidation of the debtor (if juridical, dissolved)
● Order the sheriff to take possession and control of property of the debtor, except those
exempt
● Order the publication of the petition in a NOGC once a week for 2 consecutive weeks
● Direct payments of any claims and conveyance of any property due to the liquidator
● Prohibit payments by the debtor and transfer or property
● Direct all creditors to file their claims with the liquidator
● Authorize payments of admin expenses
● State that those who are not petitioners may submit names of other candidates for
liquidator
● Set case for hearing for election of liquidator

What are the legal effects of a liquidation order?

What will be affected Effect of liquidation order

FRIA 30 Herce
Juridical Debtor ● Deemed dissolved. Corporate existence also terminated
● Deemed vested with either

Legal title and control of all
○ The liquidator
assets
○ The court, if liquidator has not yet been elected
● Deemed terminated and/or breached

Contracts of the debtor ● UNLESS, the liquidator, within 90 days from assumption of
office, declares otherwise and contracting party agrees
Separate actions for ● Prohibited

collection
● Transferred to the liquidator for him to settle and accept

Pending actions for ● The liquidator can contest or dispute the claim, and the
collection court will allow, hear, and resolve it unless it is already on
appeal.
Foreclosure proceedings ● Not allowed for 180 days

Are the rights of secured creditors affected by the LO?

● NO.
● However, he must, prior to the election of the liquidator, manifest in writing whether he
○ Waives his right under the lien to prove his claim in the liquidation proceedings and
share in the distribution of assets
○ Maintain his rights

What is the consequence if the secured creditor fails to file this manifestation?

● Deemed to have opted to maintain his right under the lien

What rights are granted to the secured creditor if he decides to maintain his right?

● The value of the property may be fixed in a manner agreed upon
○ If less that claim secured, liquidator may convey to secured creditor and be and
admit creditor to proceedings
○ If more, liquidator may convey to creditor and waive right of redemption upon
receiving the excess
● Liquidator may sell the property and satisfy the claim from the proceeds
● Secured creditor may enforce lien or foreclose

What is the effect if the secured creditor waives his right?

FRIA 31 Herce
● He is entitled to participate in the proceedings

Liquidation Order

Who may be appointed as a liquidator?

● Any person, natural or juridical
● But if it is a juridical liquidator, it must designate a natural person who possesses all the
qualifications and none of the disqualifications
● The rehabilitation receiver who was administering the debtor prior liquidation

What are the qualifications of a liquidator?

● Either a
○ Filipino citizen
○ Resident of PH for 6 months preceding nomination
● Good moral character with acknowledged integrity, independence, impartiality (3i)
● Knowledge of insolvency and commercial laws, rules and procedure.
● Training that may be necessary to enable him to discharge duties
● No conflict of interest, unless waived

When does an individual have a conflict of interest?

● He is a creditor, owner, partner or stockholder (COPS) of the
○ debtor
○ creditor
● Engaged in business which competes with creditor
● Within 5 years from filing of the petition, he was any of the following of the debtor or
creditor
○ Officer
○ Director
○ Owner
○ Employee
○ Partner
○ Legal Counsel
○ Auditor or accountant
● Within 2 years from filing, he was an underwriter of the outstanding securities of the
debtor
● Related by consanguinity or affinity within the 4th civil degree
● Direct or indirect material interest in the debtor or creditor

FRIA 32 Herce
● Former receiver or member of the management committee, counsel, or employee

Who makes the appointment/election?

● Creditors who are entitled to vote (those who have filed their claims within periods set by
the court)
● Court when
○ Creditors do not attend the election day
○ They attend but refuse or fail to vote
○ The elected liquidator is unqualified
○ Vacancy for any reason

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

● Preserve and maximize the value of the assets of the debtor
● Recover the assets of the debtor
● Liquidate the assets to discharge all claims against the debtor
● The following are also included
○ Sue and recover assets, debts, and claims
○ Possess of all property of the debtor
○ Sell, with court approval property of the debtor
○ Redeem mortgages and pledges
○ Settle all accounts
○ Recover property or its value which were fraudulently conveyed
○ Engage professionals as may be necessary and reasonable to assist him in the
discharge of his functions
● Take all reasonable steps to manage and dispose of the assets of the debtor to maximize
to proceedings

Can they be removed?

● YES. For any of the following grounds:
○ Not receive highest votes
○ Incompetence, gross negligence,
○ Lack of specialized competency required by the case
○ Illegal acts in the performance of duties
○ Unqualified or Disqualified to be a liquidator
○ Conflict of interest, unless waived
○ Partiality
○ Other analogous grounds

FRIA 33 Herce

Are they entitled to compensation?

● YES.

Prohibited Transactions

● YES. He may sale, unencumbered assets, and convert them into money
● Must be sold at a public auction
● Private sale may be allowed with court approval if
○ Goods are perishable
Sale of assets
○ Quickly deteriorate in value
○ Expensive to maintain
○ Private sale is in the best interest of the debtor and creditors
● Exempt property however are set apart

Pre-liquidation transactions

What are the rules for these?

● Same as that of rehabilitation

Cross-border Insolvency

What is the situation contemplated in cross-border insolvency?

● There is a foreign entity that is under insolvency proceedings
● The creditor is filipino
● The foreign entity has assets in the Philippines

What provisional relief may the court issue?

● Suspend action to enforce claims against the entity or seize or foreclose on property of
the foreign entity in the philippines
● Requiring the surrender of property of the foreign entity to the foreign representative
● Other necessary relief (Sec 141)

Cases

FRIA 34 Herce
Steel Corp of the PH v Mapfre Insular Insurance Corp

● The RTC, as a rehabilitation court has no jurisdiction over the insurance claim against
one of the insurers. They must file a separate action for that purpose
● Rehabilitation proceedings are summary and non-adversarial in nature.
● An insurance claim is not a claim within the meaning of the FRIA.
● Respondents are not claiming or demanding any more or property. They are not creditors,
but contingent debtors

Panlilo v Rosales

● The suspension of all claims does not suspend criminal charges against officers of a
distressed corporation
● The filing of a BP 22 case against the officers of a corporation is not a claim that can be
enjoined

BIR v Lepanto

● The BIR sending a demand letter for deficiency taxes notwithstanding the issuance of a
commencement order constitutes contempt of court.
● The proper procedure was to ventilate their claims in court
● During the pendency of rehabilitation, there is a waiver of taxes.

LBP v Fastech Synergy Philippines

● A rehabilitation is feasible when
○ Debtor has assets that can generate more case if used in daily operations than if
sold
○ Liquidity issues can be addressed by a practicable business plan that will generate
enough cash to sustain daily operations
○ Doctor has a definite source of financing for the implementation of the Plan
● A rehabilitation is infeasible
○ Absence of a sound and workable plan
○ Baseless and unexplained assumptions, targets
○ Speculative capital infusion or lack thereof to execute the Plan
○ Cash flow cannot sustain daily operations
○ Negative net worth and assets are nearly or fully depreciated
● Present Value Recovery
○ Present value recovery acknowledges that, in order to pave way for rehabilitation,
the creditor will not be paid by the debtor when the credit falls due. The court may
order a suspension of payments to set a rehabilitation plan in motion; in the

FRIA 35 Herce
meantime, the creditor remains unpaid. By the time the creditor is paid, the financial
and economic conditions will have been changed. Money paid in the past has a
different value in the future. It is unfair if the creditor merely receives the face value
of the debt. Present value of the credit takes into account the interest that the
amount of money would have earned if the creditor were paid on time.


FRIA 36 Herce

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CREDIT TRANSACTIONS

FINANCIAL REHABILITATION AND INSOLVENCY ACT

Credtrans - JLO Block A 2022

Who may initiate ● Only ​individual debtors

Can the debtor be ● Only ​individual debtors ​(Sec 3)

● Schedule ​of debts and liabilities

Credtrans - JLO Block A 2022

● Must contain be comply with the things mentioned in preliminary

● Court finds petition sufficient in form and in substance

● Publication​ - newspaper of general circulation in province or city

● Presence of at least creditors whose claims amount to ​at least ⅗

● Court will hear and rule on the objection ASAP in a summary

Credtrans - JLO Block A 2022

● Effect of ​FAILURE TO COMPLY​ with agreement

Prohibited Transactions During Suspension of Payment

YES​. Those outside of necessary or legitimate

Credtrans - JLO Block A 2022

● Juridical person ​(Sec 3) ● Either

● Aggregate claim of ​either

Any of the following

● Name​, business, and principal and ● Name​, business, and

Steps Voluntary Involuntary

Credtrans - JLO Block A 2022

● Court finds petition sufficient in form and in substance, it will issue a

Publication of ● NOGC​ once a week, for at least 2 consecutive weeks

● Receiver must establish preliminary registry of claims

YES No need. N/A

● Debtor, creditor, or other interested parties​ may ​submit challenges to a

Credtrans - JLO Block A 2022

Creditors ● Creditors ​submit​ comments to the court and receiver

● Receiver submits ​preliminary findings and recommendations ​on

The court may do any of the following actions

Following must concur

Grant Due Any of the following

Credtrans - JLO Block A 2022

Consultation ● Receiver ​confers​ with debtors and all classes of creditors

● Receiver will notify the creditors that the RP is ready

Court may do any of the following actions depending on the ground

Debtor in Bad Faith Convert into Liquidation

Merit in objection Order receiver or other party to

● Allowed​ after confirmation upon a verified motion for leave to amend

● Rehab proceedings are terminated ​by court order​ declaring

Credtrans - JLO Block A 2022

Encumbrance GR​: ​YES

Credtrans - JLO Block A 2022

Foreclosure YES​. By virtue of the commencement Order

Set-off YES. ​Any set-off after commencement date

Credtrans - JLO Block A 2022

Who may be ● Any person, ​natural or juridical

● Either a General Requirements

Credtrans - JLO Block A 2022

Credtrans - JLO Block A 2022

Credtrans - JLO Block A 2022

Can the debtor be ● Either

What are the

Credtrans - JLO Block A 2022

Step What happens

Court will issue an order which

● Must file within 8 days from date of last publication

Credtrans - JLO Block A 2022

Comments ● Allowed to do so for any reason

● After receiving objectives, court will set same for hearing.

No merit in the objection

Who may initiate ● Only individual debtors

Can the debtor be ● Only individual debtors (Sec 3)

● Schedule of debts and liabilities

● Publication - newspaper of general circulation in province or city

● Presence of at least creditors whose claims amount to at least ⅗

● Effect of FAILURE TO COMPLY with agreement

YES. Those outside of necessary or legitimate

● Juridical person (Sec 3) ● Either

● Aggregate claim of either

● Name, business, and principal and ● Name, business, and

Publication of ● NOGC once a week, for at least 2 consecutive weeks

● Debtor, creditor, or other interested parties may submit challenges to a

Creditors ● Creditors submit comments to the court and receiver

● Receiver submits preliminary findings and recommendations on

Consultation ● Receiver confers with debtors and all classes of creditors

● Allowed after confirmation upon a verified motion for leave to amend

● Rehab proceedings are terminated by court order declaring

Encumbrance GR: YES

Foreclosure YES. By virtue of the commencement Order

Set-off YES. Any set-off after commencement date

Who may be ● Any person, natural or juridical

Their vote must represent at least 67% of the

Their vote must represent at least 75% of the

Total vote must represent at least 85% of the

Debtor is insolvent and there is no

There is merit to objection. But, debtor in bad

Court does not confirm within 1 year from

Termination is due to failure or dismissal of

Pendency of court-supervised or

CSR or PNR, 3 or more creditors, aggregate

Anytime after notice and hearing, upon

Who may ● Insolvent ● Insolvent ● Any creditor or ● At least 3 creditors

● Schedule of debts and

Publication of ● OCOB once a week for 2 consecutive weeks

● Liquidator must prepare a preliminary registry

● Must file within 30 days to submit such challenges

Discharge of ● Liquidator will render final accounting

● Deemed vested with either

● Deemed terminated and/or breached

● Transferred to the liquidator for him to settle and accept

Foreclosure proceedings ● Not allowed for 180 days