REPUBLIC ACT No.

10142
AN ACT PROVIDING FOR THE REHABILITATION OR LIQUIDATION OF
FINANCIALLY DISTRESSED ENTERPRISES AND INDIVIDUALS
The "Financial Rehabilitation and Insolvency Act (FRIA) of 2010"
AND
THE FINANCIAL REHABILITATION RULES OF PROCEDURE
(AM NO. 12-12-11-SC)

SALIENT FEATURES & CASES

Rehabilitation in general

Rehabilitation shall refer to the restoration of the debtor to a condition of successful

operation and solvency (Sec. 4gg, FRIA).

Restoration is the central idea behind the remedy of corporate rehabilitation. In common
parlance, to “restore” means “to bring back to or put back into a former or original state.”
Case law explains that corporate rehabilitation contemplates a continuance of corporate
life and activities in an effort to restore and reinstate the corporation to its former
position of successful operation and solvency, the purpose being to enable the
company to gain a new lease on life and allow its creditors to be paid their claims out of
its earnings (BPI Family Savings Bank, Inc. v. St. Michael Medical Center, Inc., GR No.
205469, 25 March 2015).

Rehabilitation assumes that the corporation has been operational but for some reasons
like economic crisis or mismanagement had become distressed or insolvent, i.e., that it
is generally unable to pay its debts as they fall due in the ordinary course of business or
has liability that are greater than its assets. Thus, the basic issues in rehabilitation
proceedings concern the viability and desirability of continuing the business operations
of the distressed corporation, all with a view of effectively restoring it to a state of
solvency or to its former healthy financial condition through the adoption of a
rehabilitation plan (ibid.)

Rehabilitation contemplates a continuance of corporate life and activities in an effort to

restore and reinstate the corporation to its former position of successful operation and
solvency (New Frontier Sugar Corp. v. RTC, Branch 39, Iloilo City, GR No. 165001, 31
January 2007; Metrobank v. ASB Holdings, Inc., GR No. 166197, 27 February 2007).

A rehabilitation case is commercial in nature that should be resolved expeditiously for

the benefit of all parties concerned and the economy in general (ibid.)

“Rehabilitation” contemplates a continuance of corporate life and activities in an effort to

restore and reinstate the corporation to its former position of successful operation and
solvency (Ruby Industrial Corp. V. CA, 284 SCRA 445 [1998]); also PNB v. CA, 576
SCRA 537, 20 January 2009)
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Purpose of Rehabilitation

Rehabilitation proceedings have two-pronged purpose, namely: (a) to sufficiently and

equitably distribute the assets of the insolvent debtor to its creditors; and (b) to provide
the debtor with a fresh start ( Phil. Bank of Communications v. Basic Polyprinters and Packaging Corp., 738
SCRA 561, 20 October 2014; Asiatrust Dev’t. Bank v. First Aikka Dev’t. Inc., 650 SCRA 172 [2011] ).

The purpose of rehabilitation proceedings is not only to enable the company to gain a
new lease on life but also to allow creditors to be paid their claims from its earnings,
when so rehabilitated (BPI Family Savings Bank, Inc. v. St. Michael Medical Center,
Inc., GR No. 205469, 25 March 2015).

Ultimate and prime consideration in rehabilitation

While the voice and participation of the creditors is crucial in the determination of the
viability of the rehabilitation plan, as they stand to benefit or suffer in the implementation
thereof, the interests of all stakeholders is the ultimate and prime consideration
(Victorio-Aquino C. Pacific Plans, Inc., 744 SCRA 480, 10 December 2014).

Rehabilitation is not a refuge of a debtor guilty of fraud

The protective remedy of rehabilitation was never intended to be a refuge of a debtor

guilty of fraud (Banco de Oro-EPCI, Inc. v. JAPRL Dev’t. Corp., 551 SCRA 342 [2008]).

Rehabilitation proceedings in our jurisdiction, much like the bankruptcy laws of the
United States, have equitable and rehabilitative purposes. On the one hand, they
attempt to provide for the efficient and equitable distribution of an insolvent debtor’s
remaining assets to its creditors; and on the other, to provide debtors with a “fresh start”
by relieving of the weight of their outstanding debts and permitting them to reorganize
their affairs (BPI v. SEC, et al., GR No. 164641, 20 December 2007 citing US cases).

Basic issue in rehabilitation

The basic issues in rehabilitation proceedings concern the viability and desirability of
continuing the business operations of the petitioning corporation (Phil. Bank of
Communications v. Basic Polyprinters and Packaging Corp., 738 SCRA 561, 20
October 2014).

Material financial requirement is essential in rehabilitation

A material financial commitment becomes significant in gauging the resolve, determination,

earnestness and good faith of the distressed corporation in financing the proposed rehabilitation
plan. This commitment may include the voluntary undertakings of the stockholders or the would-
be investors of the debtor- corporation indicating their readiness, willingness and ability to
contribute funds or property to guarantee the continued successful operation of the
debtor corporation during the period of rehabilitation (BPI Family Savings Bank, Inc. v.
St. Michael Medical Center, Inc., GR No. 205469, 25 March 2015).
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Declaration of Policy under the FRIA

The State encourages debtors, both juridical and natural persons, and their creditors to
collectively and realistically resolve and adjust competing claims and property rights. In
furtherance thereof, the State shall ensure a timely, fair, transparent, effective and
efficient rehabilitation or liquidation of debtors (Sec. 2, FRIA).

Construction of the FRIA Rules (F-Rules) (AM No. 12-12-11-SC)

The F-Rules shall be liberally construed to promote a timely, fair, transparent, effective,
and efficient rehabilitation of debtors, in accordance with the declared policy of the FRIA
(Sec. 3, Rule 1, F-Rules).

Nature of Proceedings

The proceedings under FRIA shall be in rem in nature and shall be conducted in a
summary and non-adversarial matter. It covers all persons affected upon publication in
a newspaper of general circulation (Sec. 3, FRIA).

Jurisdiction over all persons affected by the proceedings is acquired upon publication of
the notice of the commencement of the proceedings and the commencement order or
any similar order of the proceedings in one (1) newspaper of general circulation in the
Philippines for two (2) consecutive weeks. The proceedings shall be summary and non-
adversarial in nature (Sec. 4, Rule 1, F-Rules).

“In rem” – A technical term used to designate proceedings or actions instituted against
the thing, in contradistinction to personal actions, which are said to be in personam
(Black’s Law Dictionary, 6th ed).

Rehabilitation proceedings are summary and non-adversarial in nature, and do not

contemplate adjudication of claims that must be threshed out in ordinary court
proceedings (Advent Capital and Finance Corp. v. Alcantara, 665 SCRA 224, 25
January 2012).

A rehabilitation case is commercial in nature that should be resolved expeditiously for

the benefit of all parties concerned and the economy in general (New Frontier Sugar
Corp. v. RTC, Branch 39, Iloilo City, GR No. 165001, 31 January 2007; Metrobank v.
ASB Holdings, Inc., GR No. 166197, 27 February 2007).

Rehabilitation proceedings in our jurisdiction, much like the bankruptcy laws of the
United States, have equitable and rehabilitative purposes. On the one hand, they
attempt to provide for the efficient and equitable distribution of an insolvent debtor’s
remaining assets to its creditors; and on the other, to provide debtors with a “fresh start”
by relieving of the weight of their outstanding debts and permitting them to reorganize
their affairs (BPI v. SEC, et al., GR No. 164641, 20 December 2007 citing US cases).
FRIA – LPIgnacio 4

Court may approve a rehabilitation plan even over the opposition of creditors holding a
majority of the total liabilities of the debtor (Pacific Wide Realty and Dev’t. Corp. v.
Puerto Azul Land Inc., 605 SCRA 503, 25 November 2009).

Notification to foreign creditors

Whenever notice is to be given to creditors in the Philippines, such notice shall also be
given to the known foreign creditors with no addresses in the Philippines. The court may
order that appropriate steps be taken with a view to notifying any foreign creditor whose
address is not yet known (Sec. 7, Rule 1, F-Rules).

Prohibited pleadings

The following pleadings are prohibited:

(A) motion to dismiss;

(B) motion for a bill of particulars;
(C) petition for relief;
(D) motion for extension;
(E) motion for postponement and other motions of similar intent;
(F) reply;
(G) rejoinder;
(H) intervention; and
(I) any pleading or motion that is similar to or of like effect as any of the foregoing.
(Sec. 4, Rule 1, F-Rules)

When motion for extension/postponement is allowed

For stated and fully supported compelling reasons, the court may allow the filing of
motions for extension or postponement, provided, the same shall be verified and under
oath (Sec. 4, Rule 1, F-Rules).

Any motion/pleading shall be verified

Any pleading, motion, or other submission submitted by any interested party shall be
supported by verified statements that the affiant has read the submission and its factual
allegations are true and correct of his personal knowledge or based on authentic
records, and shall contain supporting annexes, which the submitting party shall attest as
faithful reproductions of the originals. An unverified submission shall be considered as
not filed. An improperly verified submission may be considered as not filed, at the
discretion of the judge. Upon motion, the originals of the annexes to a submission may
be produced in court for examination or comparison by a party to the proceedings.

All pleadings or motions shall be filed in three (3) printed and two (2) digital copies in
CD format. Annexes to the pleadings and other submissions shall be in printed form.
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The court may decide matters on the basis of affidavits, counter-affidavits, and other
documentary evidence, conducting clarificatory hearings when necessary. (Sec. 4, Rule
1, F-Rules)

Any order is immediately executory

Any order issued by the court under the F-Rules is immediately executory. Review of
any order of the court shall be in accordance with Rule 6 of the Rules. Provided,
however, that the reliefs ordered by the trial or appellate courts shall take into account
the need for resolution of the proceedings in a just, equitable, and speedy manner (Sec.
4, Rule 1, F-Rules).

In a case, it was ruled that a motion for new trial or reconsideration is a prohibited
pleading (BPI Family Savings Bank, Inc. v. Pryce Gases, Inc., 653 SCRA 42, 29 June
2011). However, Sec. 1, Rule 6, F-Rules provides that a party may file a motion for
reconsideration of any order issued by the court prior to the approval of the
Rehabilitation Plan. No relief can be extended to the party aggrieved by the court's
order on the motion through a special civil action for certiorari under Rule 65 of the
Rules of Court. An order issued after the approval of the Rehabilitation Plan can be
reviewed only through a special civil action for certiorari under Rule 65 of the Rules of
Court.

Further, an order approving or disapproving a rehabilitation plan can only be reviewed

through a petition for certiorari to the Court of Appeals under Rule 65 of the Rules of
Court within fifteen (15) days from notice of the decision or order (Sec. 2, Rule 6, F-
Rules).

The 2013 Rules retained the guideline in the 2008 Rules that review may be sought
from the Court of Appeals (CA) only after the rehabilitation court issues an order
approving or disapproving the rehabilitation plan (Lexber, Inc. v. Dalman, 756 SCRA 34,
20 April 2015).

Contra: Under the Section 4, Rule 65 of the Rules of Court, the petition shall be filed
not later than sixty (60) days from notice of the judgment, order or resolution, or from
notice of the denial of the motion for reconsideration.

Powers of officers/directors of a corporation during rehabilitation

There is nothing in the corporate rehabilitation that would ipso facto deprive the Board
of Directors and corporate officers of a debtor corporation of control such that it can no
longer enforce its right to recover its property from an errant lessee (Umale v. ASB
Realty Corp., 652 SCRA 215, 15 June 2011).

In Sec. 9, Rule 1, F-Rules, creditors are allowed to decide in accordance with the
relevant provisions of the Corporation Code in the case of stock or non-stock
corporations or the Civil Code in the case of partnerships.
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Venue (Sec. 6, F-Rules)

1) For a debtor that is a corporation, partnership or sole proprietorship: in the Regional

Trial Court which has jurisdiction over the principal office as specified in its articles of
incorporation or partnership or in its registration papers with the Department of Trade
and Industry (DTI) in cases of sole proprietorship. If located in Metro Manila, in the
Regional Trial Court of the city or municipality where the head office is located.

2) For group of debtors: in the Regional Trial Court which has jurisdiction over the
principal office of any of the debtors alleged to be insolvent, as specified in its articles of
incorporation or partnership, or registration papers with the DTI in cases of sole
proprietorship.

Coverage, Exclusion and Applicability

Coverage

The FRIA covers insolvent individual debtor and juridical entities duly organized
and existing under Philippine laws, and their affiliates and subsidiaries, sole
proprietorship duly registered with the DTI, a partnership duly registered with the SEC
(Sec. 4k, FRIA); government financial institutions other than banks and government
owned or controlled corporations, unless their specific charter provides otherwise (Sec.
5, FRIA).

Exclusion

The FRIA does not include within its coverage banks, insurance companies, pre-need
companies, and national and local government agencies or units (Sec. 5, FRIA).

The FRIA is unavailable to non-resident citizens and aliens/foreigners as it covers only

an “individual debtor,” a natural person who is a resident and citizen of the Philippines
who becomes insolvent (Sec. 4o, FRIA).

Sureties or solidary debtors are excluded. It was ruled that a creditor can demand
payment from the surety solidarily liable with the corporation seeking rehabilitation
(Banco de Oro-EPCI, Inc. v. JAPRL Dev’t. Corp., 551 SCRA 342 [2008]). In Section
10c, Rule 1, F-Rules, the suspension or stay order shall not apply to the enforcement of
claims against sureties and other persons solidarily liable with the debtor, and third
party or accommodation mortgagors as well as issuers of letters of credit, unless the
property subject of the third party or accommodation mortgage is necessary for the
rehabilitation of the debtor as determined by the court upon recommendation by the
rehabilitation receiver.

The issuance of stay order cannot suspend foreclosure of accommodation mortgages

(Situs Dev. Corp. v. Asiatrust Bank, 688 SCRA 621, 16 January 2013).
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The mere pendency of a petition for corporate rehabilitation and the issuance of a stay
order do not and cannot enjoin the courts from the enforcement of claims; neither does
it make the case unique and peculiar (BPI v. Co, 774 SCRA 28, 09 November 2015).

Applicability

The FRIA shall apply to pending insolvency, suspension of payments and rehabilitation
cases except if not feasible or would work injustice in the opinion of the court (Sec. 146,
FRIA; Sec. 2, F-Rules).

The FRIA shall apply to all contracts of the debtor regardless of the date of perfection
(Sec. 147, FRIA).

What is insolvency?

It refers to the financial condition of a debtor that is generally unable to pay its or his
liabilities as they fall due in the ordinary course of business or has liabilities that are
greater than its or his assets (Sec. 4p, FRIA; Sec. 5k, Rule 1, F-Rules).

The first insolvency contemplated above is otherwise known as technical insolvency

and the second is referred to as actual insolvency (Philippine National Bank v. CA, 576
SCRA 537, 20 January 2009).

BALANCE SHEET TEST:

Denotes the state of the person whose liabilities are more than his assets. Here,
“insolvency” is similar to “bankruptcy.” (See Black’s Law Dictionary; 42 Am. Jur. 2d.
942)

EQUITY TEST:

The inability of a person to pay his debts as they become due in the ordinary course of
his business. Here the debtor is said to be “illiquid” but not bankrupt.

Remedies under the FRIA

There are three (3) remedies under the FRIA: 1) court-supervised rehabilitation
(CSR), 2) pre-negotiated rehabilitation (PNR), and 3) out-of-court or informal
restructuring agreements or rehabilitation plans (OCRA). A debtor may also choose
to directly undergo, or convert any of the aforementioned relief into, liquidation.
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Court Supervised Rehabilitation (CSR)

Initiation of Proceedings

Court supervised rehabilitation (CSR) may be initiated by either the insolvent debtor or
creditor/s. An insolvent debtor may file a verified petition for CSR with the court. The
petition shall establish the insolvency of the debtor and include the schedule of debts,
inventory of assets, rehabilitation plan and names of the nominees for rehabilitation
receiver (Sec. 12, FRIA).

A creditor or group of creditors with claims of at least P1.0 million or 25% of the
subscribed capital stock or partners’ contributions of the debtor may file a verified
petition for CSR. The petition shall include the rehabilitation plan and names of the
nominees for rehabilitation receiver (Sec. 13, FRIA).

Creditors may initiate a rehabilitation proceeding based on the following grounds:

(A) there is no genuine issue of fact or law on the claim/s of the petitioner/s, and that
the due and demandable payments thereon have not been made for at least sixty
(60) days; or
(B) the debtor has failed generally to meet its liabilities as they fall due; or
(C) at least one creditor, other than the petitioner/s, has initiated foreclosure
proceedings against the debtor that will prevent the debtor from paying its debts
as they become due or will render it insolvent (Sec. 5, Rule 2, F-Rules).

A debtor-initiated rehabilitation is a “voluntary rehabilitation.” A creditor-initiated

rehabilitation is an “involuntary rehabilitation.”

Administration of the Proceedings

Action on the petition

If the court finds the petition sufficient in form and substance, it will issue a
commencement order within five (5) working days from the filing of the petition. If
deficient in form or substance, the court may, in its discretion, a) allow the amendment
or supplement of the petition, or b) to submit the necessary documents (Sec. 15, FRIA).
The court shall dismiss the petition if the deficiency is not complied within the extended
5-day period (Sec. 7, Rule 2, F-Rules).

The issuance of the commencement order signals the start of the rehabilitation
proceedings. The commencement order shall, among others (a) appoint a rehabilitation
receiver, (b) prohibit the debtor’s suppliers from withholding supply of goods and
services, (c) direct all creditors to file their claims, and (d) set the case for initial hearing
(Sec. 15, FRIA).
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Time bar rule

The creditors shall file their verified notices of claims with the court at least five (5) days
before the initial hearing date, their failure to do so on time will bar them from
participating in the rehabilitation proceedings but will not prejudice their right to receive
distributions if recommended by the rehabilitation receiver and approved by the Court
(Sec. 8M, Rule 1, F-Rules).

Effects of the commencement order

The effects of the court's issuance of a Commencement Order shall retroact to the date
of the filing of the petition (Sec. 9, Rule 1, F-Rules).

Issuance of suspension or stay order/effects

The commencement order (Sec. 16, FRIA) shall also include a suspension or stay order
suspending all actions or proceedings for the enforcement of claims or judgments
against the debtor and prohibiting debtor from selling, encumbering or disposing of any
of its properties and from making any payment of its liabilities (Sec. 16q). In Section 8V,
Rule 1, F-Rules, the Stay or Suspension Order shall:

(i) suspend all actions or proceedings in court or otherwise, for the

enforcement of all claims against the debtor;

(ii) suspend all actions to enforce any judgment, attachment or other

provisional remedies against the debtor;

(iii) prohibit the debtor from selling, encumbering, transferring or disposing in

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

(iv) prohibit the debtor from making any payment of its liabilities outstanding
as of the commencement date except as may be provided herein.

The Commencement Order and the Stay or Suspension Order on the suspension of
rights to foreclose or otherwise pursue legal remedies shall apply to government
financial institutions, notwithstanding provisions in their charters or other laws to the
contrary (Sec. 20, FRIA).

The issuance of stay order cannot suspend foreclosure of accommodation mortgages

(Situs Dev. Corp. v. Asiatrust Bank, 688 SCRA 621, 16 January 2013).

The issuance of a stay order does not affect the right to commence actions or
proceedings in order to preserve ad cautelam a claim against the debtor and to toll the
running of the prescriptive period to file the claim (Sec. 8, last par., Rule 2, F-Rules).
FRIA – LPIgnacio 10

The suspension order, however shall not apply (Sec. 18, FRIA):

a) to cases on appeal in the Supreme Court at the time of the issuance of the
commencement order (Sec. 18a, FRIA);

b) the enforcement of claims against sureties and other persons solidarily liable with
the debtor and third party/accommodation mortgagors (Sec. 18c, FRIA);

c) the sale by licensed brokers or dealers of pledged securities pursuant to a

securities pledge or margin agreement (Sec. 18e, FRIA); and

d) any criminal action against the individual debtor or owner, partner, director or
officer of a debtor (Sec. 18g, FRIA).

There shall be no diminution of security or lien; they are merely suspended during the
stay order (Sec. 60, FRIA).

The issuance of stay order cannot suspend foreclosure of accommodation mortgages

(Situs Dev. Corp. v. Asiatrust Bank, 688 SCRA 621, 16 January 2013).

Obligation of issuing bank under a letter of credit is primary and solidary. It is not
enjoined by the stay order (MWSS v. Daway, 432 SCRA 559 [2004]).

During rehabilitation, the only payments sanctioned by the Interim Rules are those
made to creditors in accordance with the provisions of the plan (Express Investments III
v. Bayantel, 687 SCRA 50, 05 December 2012).

Properties owned by stockholders cannot be included in the inventory of assets of a

corporation under rehabilitation (Bustos v. Millians Shoe, Inc., 824 SCRA 67, 24 April 2017).

Parri Passu Principle

- During rehabilitation, the assets of the distressed corporation are held in trust for
the equal benefit of all creditors to preclude one from obtaining an advantage or
preference over another. All creditors should stand on equal footing.
- Both secured and unsecured creditors shall suffer a write-off of penalties and
default interest and the escalating interest rates shall equally be imposed on
them.
- The commitment embodied in the parri passu principle only goes so far as to
ensure that the assets of the distressed corporation are held in trust for the equal
benefit of all creditors.
(Express Investments III Private Ltd. and Export Dev't. Canada v. Bayantel, Inc.,
687 SCRA 50, 05 December 2012)
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Treatment of contracts

All contracts not confirmed in writing by the debtor within ninety (90) days
following the issuance of the commencement order shall be considered
automatically terminated (Sections 8U & 56, Rule 1, F-Rules).

Rulings on what is a claim that maybe included in the stay order

A claim shall include all claims or demand of whatever nature or character against a
debtor or its property, whether of money or otherwise (Philippine Airlines, Inc. v. CA,
576 SCRA, 20 January 2009).

The definition is all-encompassing as it refers to all actions whether for money or

otherwise. There are no distinctions or exemptions (Sps. Sobrejuanite v. ASB
Development Corp., 471 SCRA 763, 30 September 2005; PAL v. Zamora, GR No.
166996, 06 February 2007).

All actions for claims against a corporation pending before any court, tribunal or board
shall ipso facto be suspended in whatever stage such actions may be found (Pacific
Wide Realty and Dev’t. Corp. v. Puerto Azul Land Inc., 605 SCRA 503, 25 November
2009).

What are automatically stayed or suspended are the proceedings of an action or suit
and not just the payment of claims—the actions that are suspended cover all claims
against a distressed corporation whether for damages founded on a breach of contract
of carriage, labor cases, collection suits or any other claims or a pecuniary nature
(Malayan Insurance Company, Inc. v. Victorias Milling Co., Inc., 585 SCRA 45, 17 April
2009).

The date when the claim arose, or when the action is filed, is of no moment—as long as
the corporation is under a management committee or a rehabilitation receiver, all
actions for claims against it must yield to the greater imperative or corporate
rehabilitation, excepting only claims for payment of obligations incurred by the
corporation in the ordinary course of business (Malayan Insurance Company, Inc. v.
Victorias Milling Co., Inc., 585 SCRA 45, 17 April 2009).

Enforcement of writs of execution issued by judicial or quasi-judicial tribunals, since

such writs emanate from “actions for claims,” likewise, be suspended (Malayan
Insurance Company, Inc. v. Victorias Milling Co., Inc., 585 SCRA 45, 17 April 2009).

The automatic suspension of an action for claims against a corporation under a

rehabilitation receiver or management committee embraces all phases of the suit, that
is, the entire proceedings of an action or suit and not just the payment of claims during
the execution stage after the case had become final and executory (Castillo v. Uniwide,
619 SCRA 641, 30 April 2010 Garcia, et al. vs. Philippine Airlines, Inc., G.R. No.
164856, August 29, 2007).
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Even if the relationship is one of trust, there is no provisions in the Interim Rules that a
claim arising from a trust relationship is excluded from the Stay Order—the stay order is
effective on all creditors of the corporation without distinction, ether secured or
unsecured (Abrera v. Barza, 599 SCRA 534, 11 September 2009).

Even ejectment proceedings are suspended (Tyson v. CA, 461 SCRA 469).

§ CASE: LCI filed a petition for corporate rehabilitation. Finding the same to be sufficient
in form and substance, the Rehabilitation Court issued a Commencement Order dated
January 13, 2012 which, inter alia: (a) declared LCI to be under corporate rehabilitation;
(b) suspended all actions or proceedings, in court or otherwise, for the enforcement of
claims against LCI; (c) prohibited LCI from making any payment of its outstanding
liabilities as of even date, except as may be provided under RA 10142; and (d) directed
the BIR to file and serve on LCI its comment or opposition to the petition, or its claims
against LCI. The BIR - personally and by publication - was notified of the rehabilitation
proceedings involving LCI and the issuance of the Commencement Order related
thereto. Instead of filing a comment or opposition, the BIR, through Misajon, still opted
to send LCI: (a) a notice of informal conference dated May 27, 2013, informing the latter
of its deficiency internal tax liabilities for the Fiscal Year ending June 30, 2010; and (b) a
Formal Letter of Demand dated May 9, 2014, requiring LCI to pay deficiency taxes in
the amount of P567,51 9,348.39, notwithstanding the written reminder coming from
LCI's court-appointed receiver of the pendency of rehabilitation proceedings concerning
LCI and the issuance of a commencement order.
The Rehabilitation court cited the BIR and Misajon in contempt of court for defying the
commencement order. The BIR justified their action by claiming that they only
performed such acts to toll the prescriptive period for the collection of deficiency taxes
and (b) to cite them in indirect contempt would unduly interfere with their function of
collecting taxes due to the government, cannot be given any credence.

A) Can the BIR proceed to collect deficiency taxes in spite of the issuance of a
commencement order?
B) What is the remedy of creditors in pursuing their claims against a distressed
debtor in case of issuance of a commencement order?

A) NO. Section 16 of RA 10142 provides, inter alia, that upon the issuance of a
Commencement Order – which includes a Stay or Suspension Order – all actions or
proceedings, in court or otherwise, for the enforcement of “claims” against the
distressed company shall be suspended. Under the same law, claim “shall refer to
all claims or demands of whatever nature or character against the debtor or its property,
whether for money or otherwise, liquidated or unliquidated, fixed or contingent, matured
or unmatured, disputed or undisputed, including, but not limited to; (1) all claims of the
government, whether national or local, including taxes, tariffs and customs
duties; and (2) claims against directors and officers of the debtor arising from acts done
in the discharge of their functions falling within the scope of their
authority: Provided, That, this inclusion does not prohibit the creditors or third parties
from filing cases against the directors and officers acting in their personal capacities.”
FRIA – LPIgnacio 13

B) The remedy of creditors of the distressed debtor is to submit their claims to the
rehabilitation court for proper consideration so that they may participate in the
proceedings, keeping in mind the general policy of the law “to ensure or maintain
certainty and predictability in commercial affairs, preserve and maximize the value of
the assets of these debtors, recognize creditor rights and respect priority of claims, and
ensure equitable treatment of creditors who are similarly situated.” In other words, the
creditors must ventilate their claims before the rehabilitation court, and any “[a]ttempts
to seek legal or other resource against the distressed corporation shall be sufficient to
support a finding of indirect contempt of court.” x x x

The insistence that: (a) Misajon, et al. only performed such acts to toll the prescriptive
period for the collection of deficiency taxes; and (b) to cite them in indirect contempt
would unduly interfere with their function of collecting taxes due to the government,
cannot be given any credence. BIR could have easily tolled the running of such
prescriptive period, and at the same time, perform their functions as officers of the BIR,
without defying the Commencement Order and without violating the laudable purpose of
RA 10142 by simply ventilating their claim before the Rehabilitation Court. After all, they
were adequately notified of the LCI’s corporate rehabilitation and the issuance of the
corresponding Commencement Order. It was improper for Misajon, et al. to collect, or
even attempt to collect, deficiency taxes from LCI outside of the rehabilitation
proceedings concerning the latter, and in the process, willfully disregard the
Commencement Order lawfully issued by the Rehabilitation Court. Hence, the
rehabilitation court correctly cited them for indirect contempt. (BIR v. Misajon, G.R. No.
224764. April 24, 2017, Perlas-Bernabe)

Rehabilitation will not deprive corporate officers and directors of control of the
corporation

There is nothing in the corporate rehabilitation that would ipso facto deprive the Board
of Directors and corporate officers of a debtor corporation of control such that it can no
longer enforce its right to recover its property from an errant lessee (Umale v. ASB
Realty Corp., 652 SCRA 215, 15 June 2011).

§ CASE: Umale v. ASB Realty Corp., GR No. 181126, 15 June 2011 (J. del Castillo)

Due to the termination of the lease and the continued illegal occupation, ASB Realty
Corporation (ASB Realty) filed a case for unlawful detainer seeking to recover from Umale a
parcel of land identified as Lot 7, Block 5, Amethyst Street, Ortigas Center, Pasig City which
was originally owned by Amethyst Pearl Corporation (Amethyst Pearl), a company that is, in
turn, wholly-owned ASB Realty.
 
Umale challenged ASB Realty’s personality to recover the subject premises considering that
ASB Realty had been placed under receivership by the Securities and Exchange Commission
(SEC) and a rehabilitation receiver had been duly appointed. Umale claims that it is the
rehabilitation receiver that has the power to take possession, control and custody of the
 FRIA – LPIgnacio 14

debtor’s assets. Hence, it is the duly-appointed receiver of ASB Reatly that should sue to
recover possession of the property.
Can a corporate officer of ASB Realty (duly authorized by the Board of Directors) file
suit to recover an unlawfully detained corporate property despite the fact that the
corporation had already been placed under rehabilitation?

YES.
Corporations, such as ASB Realty, are juridical entities that exist by operation of law. As a
creature of law, the powers and attributes of a corporation are those set out, expressly or
impliedly, in the law. Among the general powers granted by law to a corporation is the power to
sue in its own name. This power is granted to a duly-organized corporation, unless specifically
revoked by another law. The question becomes: Do the laws on corporate rehabilitation
particularly PD 902-A, as amended, and its corresponding rules of procedure forfeit the power
to sue from the corporate officers and Board of Directors?

Corporate rehabilitation is defined as the restoration of the debtor to a position of successful

operation and solvency, if it is shown that its continuance of operation is economically feasible
and its creditors can recover by way of the present value of payments projected in the plan
more if the corporation continues as a going concern than if it is immediately liquidated. The
intention of the law is to effect a feasible and viable rehabilitation by preserving a floundering
business as a going concern, because the assets of a business are often more valuable when
so maintained than they would be when liquidated. This concept of preserving the corporations
business as a going concern while it is undergoing rehabilitation is called debtor-in-possession or
debtor-in-place. This means that the debtor corporation (the corporation undergoing
rehabilitation), through its Board of Directors and corporate officers, remains in control of its
business and properties, subject only to the monitoring of the appointed rehabilitation
receiver. The concept of debtor-in-possession, is carried out more particularly in the SEC
Rules, the rule that is relevant to the instant case. It states therein that the interim
rehabilitation receiver of the debtor corporation does not take over the
control and management of the debtor corporation. Likewise, the
rehabilitation receiver that will replace the interim receiver is tasked only to
monitor the successful implementation of the rehabilitation plan. There is
nothing in the concept of corporate rehabilitation that would ipso facto deprive the Board of
Directors and corporate officers of a debtor corporation, such as ASB Realty, of control such
that it can no longer enforce its right to recover its property from an errant lessee.
 Being placed under corporate rehabilitation and having a receiver appointed to carry
out the rehabilitation plan do not ipso facto deprive a corporation and its corporate
officers of the power to recover its unlawfully detained property.
 
CONTRA: Bank officers/directors have no power over the bank and its
operation when a receiver is appointed.
• The bank officers/directors have no power over the bank and its operation when
a receiver is appointed.
• The receivership is equivalent as an injunction to restrain bank officers from
intermeddling with the property of the bank in any way.
FRIA – LPIgnacio 15

• When a bank is placed under receivership, its officers, including its acting
president, are no longer authorized to transact business in connection with the
bank’s assets and property.

"Claims" that are not suspended

The suspension of “all claims” as an incident to corporate rehabilitation does NOT

contemplate the suspension of criminal charges filed against the corporate officers of
the distressed corporation (Jose Marcel Panlilio, et al., vs. RTC Branch 51, Manila, GR
No. 173846, 02 February 2011; Rosario v. Co., GR No. 133608, 563 SCRA 239, 26
August 2008). Criminal actions against the individual officer of a corporation are not
subject to the Stay or Suspension Order in rehabilitation proceedings (Sec. 18, FRIA).

BP 22 case is not a "claim."

The filing of a case for BP 22 is not a "claim" that can be enjoined within the purview of
PD 902-A on stay order. True, although conviction of the accused for the alleged crime
could result in the restitution, reparation or indemnification of the private offended party
for the damage or injury he sustained by reason of the felonious act of the accused,
nevertheless, prosecution for violation of BP 22 is a criminal action, the purpose of
which is to punish the mere issuance of a bad check, rather than for its non-payment
(Rosario v. Co., 563 SCRA 239 [2008]).

Stay order applies only to those who are in the category of debtor and creditor

Suspension of all actions for claims against corporations pertains to those who stand in
the category of debtors and creditors. Unit buyers in a condominium are not in the same
category.

Section 24 of the interim rules limits the coverage of the Rules on rehabilitation and
consequently the rule of suspension of action to those who stand in the category or
debtors and creditors; the relationship between the petitioner banks, as mortgagor of
the ASB property, on one hand, and respondents SLGT and Dylanco, as unit buyers, on
the other, cannot be that of a debtor-creditor as to bring the case within the purview of
the rules on corporate recovery, let alone the Sobrejuanite case; then, too, the vinculum
that binds SLGT/Dylanco, as unit buyers and as suitors before the HLURB, and ASB is
far from being akin to that of debtor-creditor; as it were, SLGT/Dylanco sued ASB for
having constituted, in breach of PD 957, a mortgage on the condominium project
without prior HLURB approval and so much as notifying them of the loan release for
which reason they prayed for the delivery of their units free from all liens and
encumbrances; with the view we take of the case, the complaint of individual
respondents is not in the nature of “claims” that should be covered by the suspensive
effect of a rehabilitation proceeding (Metrobank vs. SLGT Holdings, Inc., et al., G.R.
Nos. 175181-82, Sept 14, 2007).
FRIA – LPIgnacio 16

Effectivity and duration of suspension/stay order

Unless lifted by the court, the Commencement Order shall be effective for the duration
of the rehabilitation proceedings for as long as there is a substantial likelihood that the
debtor will be successfully rehabilitated (Sec. 21, FRIA) unless (a) earlier lifted by the
court, (b) the rehabilitation plan is seasonably confirmed or approved, or (c) the
rehabilitation proceedings are ordered terminated by the court pursuant to Section 73 of
the F-Rules (Sec. 11, Rule 2, F-Rules).

Effect of stay order on the security of the secured creditors

The issuance of the commencement order or stay/suspension order shall not diminish
or impair the security of the secured creditors, except that the stay order may suspend
their rights to enforce their security (Sec. 60, FRIA). The court, however, may allow the
secured creditor to enforce his security or foreclose on the property of the debtor
constituting the security if said security or property is not necessary for rehabilitation
(Sec. 60, FRIA).

By that statutory provision, it is clear that the approval of the Rehabilitation Plan and the
appointment of a rehabilitation receiver merely suspend the actions for claims against
respondent corporations. Petitioner bank’s preferred status over the unsecured creditors
relative to the mortgage liens is retained, but the enforcement of such preference is
suspended. The loan agreements between the parties have not been set aside and
petitioner bank may still enforce its preference when the assets of ASB Group of
Companies will be liquidated. Considering that the provisions of the loan agreements
are merely suspended, there is no impairment of contracts, specifically its lien in the
mortgaged properties (Metrobank v. ASB Holdings, Inc., GR No. 166197, 27 February
2007).

Stay order will not oust a court of its jurisdiction over a case filed before it; the
case will only be suspended

The stay order simply suspends all actions for claims against a corporation undergoing
rehabilitation -- it does not work to oust a court of its jurisdiction over a case properly
filed before it (de Castro v. Liberty Broadcasting Network, Inc., GR No. 165153, 25
August 2010, 629 SCRA 77).

Verified notice of claim and the failure of the creditor to file a notice of claim

Every creditor of the debtor or any interested party whose claim is not yet listed in the
schedule of debts and liabilities shall file his verified notice of claim not later than five (5)
days before the first initial hearing date fixed in the Commencement Order. If a creditor
files a belated claim, he shall not be entitled to participate in the proceedings but shall
be entitled to receive distributions arising therefrom if recommended and approved by
the rehabilitation receiver, and approved by the court (Sec. 12, Rule 1, F-Rules).
FRIA – LPIgnacio 17

A creditor who failed to file its claim shall not be entitled to participate in the
rehabilitation proceedings, but shall be entitled to receive distributions therefrom (Sec.
23,FRIA).

Modification of suspension of payments

The court, on motion or motu proprio, may modify or terminate, or set conditions, for the
continuance of suspension of payment, or relieve a claim from coverage, if it is proven
that a creditor does not have adequate protection over the property securing its claim
(Sec. 61a, FRIA) or that the value of the claim secured by the debtor’s property (which
is not necessary for rehabilitation) exceeds the fair market value of the said property
(Sec. 61b, FRIA).

Initial hearing

The initial hearing shall be set at a date no later than forty (40) days from the date of the
filing of the petition (Sec. 8Q, Rule 1, F-Rules). At the initial hearing, the court shall
determine compliance with the jurisdictional requirements; i.e. filing of a publisher's
affidavit showing that the publication requirements and a petitioner's affidavit showing
that the service requirement for local creditors and notification requirement for foreign
creditors had been complied with, as required in the commencement order (Sec. 13,
Rule 2, F-Rules)

Thereafter, the court shall determine which creditors timely filed their claims and hear
any objection to the appointed rehabilitation receiver or to the rehabilitation plan (Sec.
22, FRIA). A creditor who failed to file its claim shall not be entitled to participate in the
rehabilitation proceedings, but shall be entitled to receive distributions therefrom (Sec.
23,FRIA).

Additional hearings

The court may hold additional hearings as may be necessary to continue the initial
hearing process but these hearings must be concluded not later than ninety (90) days
from the first hearing date fixed in the Commencement Order (Sec. 15, Rule 1, F-Rules).

Action of the rehabilitation receiver

After the initial hearing, the rehabilitation receiver shall submit to the court his report on
whether or not to give due course to the petition. The rehabilitation receiver may
likewise recommend the liquidation of the debtor (Sec. 24, FRIA). The report shall be
submitted within forty (40) days from the termination of the initial hearing, with or without
the comments from the creditors (Sec. 16, Rule 2, F-Rules).

The rehabilitation receiver shall establish a preliminary registry of claims (Sec. 44,
FRIA) within twenty (20) days from assumption (Sec. 44, Rule 2, F-Rules). Interested
parties may challenge or oppose any claim therein (Sec. 45, FRIA). The confirmation of
the rehabilitation plan shall bind the debtor and persons who may be affected by it,
FRIA – LPIgnacio 18

including the creditors, whether or not such persons have participated in the
proceedings or opposed the Rehabilitation Plan or whether or not their claims have
been scheduled (Sec. 69a, FRIA).  

Determination of claims

The rehabilitation receiver shall make the registry available for public inspection
providing the place/s and date/s of inspection and publish the same in a newspaper of
general circulation in the Philippines once every week for two (2) consecutive weeks.
The period of inspection shall not exceed fifteen (5) days from the last publication (Sec.
44, Rule 2, F-Rules).

Challenge to the claim/s must be made and submitted to the court within thirty (30) days
from the expiration of the period to inspect. Upon the expiration of the thirty (30)-day
period, the rehabilitation receiver shall submit to the court the registry of claims. The
registry of claims shall include the following lists of (1) claims that have not been subject
to challenge; (2) claims resolved by the rehabilitation receiver after these have been
challenged; and (3) disputed but unresolved claims. (Sec. 45, Rule 2, F-Rules)
The aggrieved party may seek the review of the decision of the rehabilitation receiver on
a claim by filing a motion with the rehabilitation court within five (5) days from receipt of
the rehabilitation receiver's assailed decision, which shall be decided by the court at the
soonest possible time. (Sec. 46, Rule 2, F-Rules)

Action of the court upon receipt of the rehabilitation report

Within ten (10) days from receipt of the report the court may give due course to the
petition, dismiss the petition or convert the proceedings into one for the liquidation of the
debtor (Sec. 17, Rule 2, F-Rules).

If the petition is given due course, the rehabilitation plan must be submitted within a
period of not more than ninety (90) days from the date of the order giving due course to
the petition (Sec. 18, Rule 2, F-Rules).

The Rehabilitation Receiver

A rehabilitation receiver must be a resident citizen, knowledgeable of insolvency,

possess good moral character and have no conflict of interest (Sec. 29, FRIA). His role
is to preserve the value of the assets of the debtor and implement the rehabilitation plan
(Sec. 31, FRIA). He may be removed for cause by the court, motu proprio or upon
motion of creditors holding 50% of the total liabilities of the debtor (Sec. 32, FRIA).

Management of the debtor or appointment of a Management Committee

Upon motion of interested party, the receiver may manage the debtor or appoint a
management committee (MC) (Sec. 36, FRIA; Sec. 31, Rule 2, F-Rules).
FRIA – LPIgnacio 19

Organization of a Creditors’ Committee

After the petition is given due course, a Creditors’ Committee may be organized to be
represented by each class of creditors such as secured creditors, unsecured creditors,
trade creditors and suppliers, and employees of the debtor. It shall be the primary
liaison between the rehabilitation receiver and the creditors. The creditors' committee
cannot exercise or waive any right or give any consent on behalf of any creditor unless
specifically authorized in writing by such creditor. The creditors' committee may be
authorized by the court or by the rehabilitation receiver to perform such other tasks and
functions to facilitate the rehabilitation process. (Secs. 39-42, Rule 2, F-Rules).

Immunity from suit

The rehabilitation receiver and all persons employed by him shall not be subject to any
action, claim or demand in connection with any act done or omitted to be done by them
in good faith in connection with the exercise of their powers and functions or other
actions duly approved by the court (Sec. 41, FRIA).

Post-Commencement Date Actions

The court may, upon the recommendation of the rehabilitation receiver, authorize the
sale of the debtor’s assets if the assets are perishable, susceptible to devaluation or are
otherwise in jeopardy (Sec. 49, FRIA).
The rate and term of interest, if any, on secured and unsecured claims shall be
determined and provided for in the rehabilitation plan (Sec. 54, FRIA; Sec. 53, Rule 1,
F-Rules).

The court may rescind or declare null and void (a) any sale or disposal of debtor’s
property which is not made in the ordinary course of business or (b) any transaction of
the debtor occurring prior to the issuance of the commencement order which was
executed with intent to defraud creditor/s or gives undue preference to any creditor
(Sec. 58, FRIA).

There shall be no diminution of security or lien; they are merely suspended during the
stay order (Sec. 60, FRIA). The court, on motion or motu proprio, may terminate, modify
or set conditions for the continuance of suspension of payment, or relieve a claim from
the coverage thereof, upon showing that: (a) a creditor does not have adequate
protection over the property securing its claim; or (b) the value of a claim secured by a
lien on property which is not necessary for rehabilitation of the debtor exceeds the fair
market value of the property. (Sec. 60, Rule 2, F-Rules)

By that statutory provision, it is clear that the approval of the Rehabilitation Plan and the
appointment of a rehabilitation receiver merely suspend the actions for claims against
respondent corporations. Petitioner bank’s preferred status over the unsecured creditors
relative to the mortgage liens is retained, but the enforcement of such preference is
suspended. The loan agreements between the parties have not been set aside and
FRIA – LPIgnacio 20

petitioner bank may still enforce its preference when the assets of ASB Group of
Companies will be liquidated. Considering that the provisions of the loan agreements
are merely suspended, there is no impairment of contracts, specifically its lien in the
mortgaged properties (Metrobank v. ASB Holdings, Inc., GR No. 166197, 27 February
2007).

Liability of Directors and Officers

Directors and officers of the debtor shall be liable up to double the value of the property
sold, embezzled or otherwise disposed of if they knowingly dispose of debtor’s property
other than in the ordinary course of business, approve fraudulent or grossly
disadvantageous transactions, or conceal, embezzle or misappropriate debtor’s
property (Sec. 10, FRIA).

The rehabilitation plan and the “cram-down” power

The FRIA provides for the minimum contents of a rehabilitation plan (Sec. 62, FRIA). As
a rule, the rehabilitation plan is submitted upon filing of the petition for CSR. The
rehabilitation receiver may propose changes thereto, considering the views and
comments of the debtor and creditors (Sec. 63, FRIA). The rehabilitation plan is
approved by a majority of each class of creditors, the majority being based on the value
of claims held by the creditors in each class. If no such majority is obtained, the
rehabilitation plan is considered rejected (Sec. 64). The court, however, exercise its
cram-down power and approve the rehabilitation plan over the objection of any class
of creditors under the following circumstances: (a) the rehabilitation receiver
recommended the confirmation of the rehabilitation plan; (b) the rehabilitation plan
would give the objecting class of creditors greater compensation (computed at net
present value) than at liquidation; or (c) the shareholders of debtor loses their controlling
interest in the debtor as a result of the rehabilitation plan. A breach of the rehabilitation
plan may result in the liquidation of the debtor (Sec. 64, second par., FRIA).

The provisions of other laws to the contrary notwithstanding, the court shall have the
power to approve or implement the Rehabilitation Plan despite the lack of approval, or
objection from the owners, partners or stockholders of the insolvent debtor (Sec. 68 last
par., FRIA).

The “cram-down” power of the Rehabilitation Court has long been established and even
codified under Section 23, Rule 4 of the Interim Rules (Victorio-Aquino c. Pacific Plans,
Inc., 744 SCRA 480, 10 December 2014).

It is undeniable that there is a need to move to a regime of modern restructuring, cram-

down and court supervision in the matter of corporate rehabilitation in order to address
the greater interest of the public (Victorio-Aquino C. Pacific Plans, Inc., 744 SCRA 480,
10 December 2014).
FRIA – LPIgnacio 21

The rehabilitation plan is an indispensable requirement in corporate rehabilitation

proceedings (Siochi Fishery Ent. Inc. v. BPI, GR No. 193872, 19 October 2011).

Court may approve a rehabilitation plan even over the opposition of creditors holding a
majority of the total liabilities of the debtor (Pacific Wide Realty and Dev’t. Corp. v.
Puerto Azul Land Inc., 605 SCRA 503, 25 November 2009).

Rehabilitation to be decided in one-year; Supreme Court may extend period

The court shall have a maximum period of one (1) year from the date of filing of the
petition to confirm a rehabilitation plan. If no rehabilitation plan is confirmed within the
said period, the proceedings may upon motion or motu propio, be converted into one for
the liquidation of the debtor (Sec. 72, FRIA).

The court shall decide the petition within one (1) year from the date of filing of the
petition, unless the court, for good cause shown, is able to secure an extension of the
period from the Supreme Court (Lorenzana v. Austria, 720 SCRA 319, 02 April 2014).

Filing of objections to rehabilitation plan (Sec. 64, Rule 1, F-Rules)

A creditor may file a verified opposition containing its written objections to the
Rehabilitation Plan accompanied by affidavits and supporting documents within twenty
(20) days from receipt of notice from the court that the Rehabilitation Plan has been
submitted for confirmation. Objections to a Rehabilitation Plan shall be limited to the
following:

(A) the creditors' support was induced by fraud;

(B) the documents or data relied upon in the Rehabilitation Plan are materially
false or misleading; or
(C) the Rehabilitation Plan is in fact not supported by the voting creditors.

The court shall hear and decide on the objections which shall not be later than ten (10)
days from expiration of the filing of the objections. If the court finds merit in the
objection, it shall order the rehabilitation receiver or other party to cure the defect,
whenever feasible. If the court determines that the debtor acted in bad faith, or that it is
not feasible to cure the defect, the court shall convert the proceedings into one for the
liquidation of the debtor (Sec. 65, Rule 1, F-Rules).

Confirmation of rehabilitation plan

The provisions of other laws to the contrary notwithstanding, the court shall have the
power to approve or implement the Rehabilitation Plan despite the lack of approval, or
objection from the owners, partners or stockholders of the insolvent debtor: provided,
that the terms thereof are necessary to restore the financial wellbeing and viability of the
insolvent debtor (Sec. 66, Rule 1, F-Rules).
FRIA – LPIgnacio 22

The rehabilitation plan, once approved, is binding upon the debtor and all persons who
may be effected by it, including the creditors, whether such persons have or have not
participated in the proceedings or have opposed the plan or whether their claims have
or have not been scheduled (Veterans Philippine Scout Security Agency, Inc. v. First
Dominion Prime Holdings, Inc., 679 SCRA 168, 23 August 2012).

Review of decision or order on rehabilitation plan

An order approving or disapproving a rehabilitation plan can only be reviewed through a

petition for certiorari to the Court of Appeals under Rule 65 of the Rules of Court within
fifteen (15) days from notice of the decision or order (Sec. 2, Rule 6, F-Rules).

Contra: As pointed out earlier, under Section 4, Rule 65 of the Rules of Court, the
period to file a petition is sixty (60) days from notice of judgment or from receipt of the
ruling on the motion for reconsideration.

Pre-Negotiated Rehabilitation (PNR)

An insolvent debtor may choose to initially negotiate a rehabilitation plan with its
creditors out-of-court. If creditors holding two-thirds of the total liabilities of the debtor,
including those holding 50% each of the secured and unsecured claims, approve or
endorse the rehabilitation plan, the debtor may file a verified petition with the court for
the approval of such pre-negotiated rehabilitation plan (PNR) (Sec. 76, FRIA).

If the court determines that the petition is sufficient in form and substance within five (5)
days from the filing of the petition (Sec. 2, Rule 2, F-Rules), it shall issue an order
allowing any creditor to oppose the petition and a suspension or stay order (similar to
the one discussed under CSR) (Sec. 77). If there are no objections, the court will
approve the rehabilitation plan (Sec. 78, FRIA). If there are objections, the court will
hear them (Sec. 80). The court has a maximum of 120 days from the time of the filing of
petition to approve the rehabilitation plan. The rehabilitation plan shall be deemed
approved if the court fails to act within the 120-day period (Sec. 81, FRIA).

Effectivity and duration of stay or suspension order

It shall retroact to the date of the filing of the petition and shall be effective for one
hundred twenty (120) days from the filing of the petition unless earlier lifted by the court
on account of (a) the approval of the Pre-Negotiated Rehabilitation Plan, or (b) the
termination of the rehabilitation proceedings (Sec. 3, Rule 3, F-Rules).

Limited grounds to object the petition for rehabilitation (Sec. 5, Rule 3, F-Rules)

Any creditor or other interested party can only object on the following limited grounds:
FRIA – LPIgnacio 23

(A) the allegations in the petition or the Pre-Negotiated Rehabilitation Plan, or the
attachments thereto, are materially false or misleading;
(B) the majority of any class of creditors do not in fact support the Pre-Negotiated
Rehabilitation Plan;
(C) the support of the creditors or any of them was induced by fraud; or
(D) the Pre-Negotiated Rehabilitation Plan fails to accurately account for a claim
against the debtor and the claim is not categorically declared as a contested
claim.

The court shall hear and decide objections not earlier than twenty (20) days nor later
than thirty (30) days from the date of the second publication of the Order. If the court
finds the objection meritorious, it shall direct the debtor, when feasible, to cure the
defect within fifteen (15) days from receipt of the order. If the court determines that the
debtor or creditors supporting the Pre Negotiated Rehabilitation Plan acted in bad faith,
or that the objection is non curable, the court may convert the rehabilitation proceedings
into liquidation. A finding by the court that the objection has no substantial merit or that
the same has been cured shall be deemed an approval of the Pre-Negotiated
Rehabilitation Plan (Sec. 7, Rule 3, F-Rules).

Out-of-court or Informal Restructuring Agreements or Rehabilitation Plans

(OCRA)
The FRIA sets the minimum requirements for out-of-court or informal restructuring
agreements or rehabilitation plans such as debtor’s consent thereto and approval of
creditors holding 67% of the secured claims, 75% of the unsecured claims and 85% of
the total obligations, secured or unsecured (Sec. 84, FRIA). There shall be a standstill
period pending the negotiation and finalization of the out-of-court or informal
restructuring agreements or rehabilitation plans which shall not exceed 120 days. The
standstill period shall be approved by creditors holding 50% of the total liabilities of the
debtor (Sec. 85, FRIA).

Effective and expiration of the standstill period

The standstill period shall be effective after publication of the notice once a week for two
(2) consecutive weeks in a newspaper of general circulation in the Philippines (Sec.
3[7], Rule 4, F-Rules).
The standstill period shall expire upon (1) the lapse of 120 days from the effectivity of
the standstill agreement, (2) the effectivity of the OCRA, or (3) the termination of the
negotiations for the OCRA as declared by creditors representing more than fifty percent
(50%) of the total liabilities of the debtor, whichever comes first (Sec. 3, Rule 4, F-
Rules).

Binding effect of the OCRA

If duly approved, the OCRA shall be binding on the debtor and all affected persons,
including the creditors, whether or not they will participate in the negotiations (Sec. 2,
Rule 4, F-Rules).
FRIA – LPIgnacio 24

Stay of implementation of OCRA

Any court action or other proceedings arising from or relating to, the out-of-court or
informal restructuring/workout or rehabilitation plan shall not stay its implementation,
unless the relevant party is able to secure a temporary restraining order or injunctive
relief from the Court of Appeals (Sec. 88, FRIA) via an original action under Rule 65 of
the Rules of Court (Sec. 7, Rule 4, F-Rules).

Court assistance

An insolvent debtor and/or creditor may file a petition with the Regional Trial Court
where the insolvent debtor resides or where the principal business is located for court
assistance to execute or implement a standstill agreement or an OCRA (Secs. 8 & 9,
Rule 4, F-Rules). The court may issue a writ of execution to enforce its terms or issue
other forms of additional assistance as maybe necessary to execute or implement the
standstill agreement or OCRA, including the award of damages properly pleaded and
proved, and to protect the interests of the creditors, the debtor, and other interested
parties (Sec. 10, Rule 4, F-Rules).

The judgment of the court shall be final and immediately executory (Sec. 16, Rule 4, F-
Rules). However, any judgment of the court may be elevated to the Court of Appeals
under Rule 65 of the Rules of Court (ibid.).

Annulment of OCRA or standstill agreement

The debtor or creditor may file a petition to annul (1) the standstill agreement or (2) the
OCRA based on the ground of non-compliance with the requirements for a standstill
agreement or an OCRA. Vitiation of consent due to fraud, intimidation, or violence may
be raised as a ground to annul the standstill agreement or the OCRA if committed
against such number of creditors required for the approval of the standstill agreement or
OCRA, as the case may be (Sec. 10, Rule 4, F-Rules).

The respondent shall file a verified comment or opposition within five (5) days from
receipt of summons (Sec. 13, Rule 4, F-Rules).

The court will determine the existence of a genuine issue of material facts or whether
the petition will be granted. If no comment is filed, a clarificatory hearing may be
conducted. Upon a determination of genuine issue of material facts, the court shall
conduct a summary hearing not later than 20-days from the filing of the petition. A
judgement shall be rendered not later than 60-days from filing of the petition (Secs. 14
& 15, Rule 4, F-Rules).

The judgment shall be final within 10-days from receipt of the decision and is
immediately executory. However, any judgment of the court may be elevated to the
Court of Appeals under Rule 65 of the Rules of Court (Sec. 16, Rule 4, F-Rules).
FRIA – LPIgnacio 25

Liquidation in Insolvency

Objective of insolvency proceedings

The objective in insolvency proceedings is “to effect an equitable distribution of the

bankrupt’s properties among his creditors and to benefit the debtor by discharging him
from his liabilities and enabling him to start afresh with the property set apart for him as
exempt (Metropolitan Bank and Trust Comp. v. SF Naguiat Enterprises, Inc., 753 SCRA
474, 18 March 2015).

Nature and Procedure

There are two kinds of liquidation proceedings – voluntary and involuntary. In voluntary
liquidation, the insolvent debtor may directly file a verified petition for liquidation with the
court attaching a schedule of its debts, inventory of assets and names of nominees for
liquidator. The insolvent debtor may also convert proceedings for CSR or PNR into
liquidation by filing a motion with the court (Sec. 90, FRIA). In involuntary liquidation,
three or more creditors with claims of at least P1 million or holding 25% of the total paid-
up capital or partners’ contributions of the debtor may directly file a verified petition for
the liquidation of the debtor. Such creditors may also convert proceedings for CSR or
PNR into liquidation by filing a motion with the court (Sec. 91, FRIA).

If the court finds the petition sufficient in form and substance, it shall issue a liquidation
order declaring the debtor insolvent which shall have the following effects: the debtor
shall be deemed dissolved, and its corporate or juridical existence terminated, legal title
to the assets of the debtor shall be deemed vested in the liquidator, and all contracts of
the debtor are deemed terminated, no foreclosure proceedings shall be allowed for a
period of one hundred eighty (180) days (Sec. 113, FRIA). The liquidation order shall
not affect the rights of the secured creditors to enforce his security, although he may
waive his security (Sec.114, FRIA).

The Liquidator is elected by creditors who filed their claims within the period set by the
court. A secured creditor cannot vote unless he waives his security (Sec. 115, FRIA).
The liquidator has the power to recover all the assets belonging to the debtor, take
possession thereof, and sell the same (Sec. 119, FRIA). The liquidator also has the duty
to prepare the registry of claims which, after entertaining any opposition or challenge,
shall be submitted to the court for final approval (Sec. 123, FRIA).

The liquidator may sell, but only at public auction, unencumbered assets of the debtor
and convert them to money. Private sale may be allowed if a) the goods are perishable,
quickly deteriorate or disproportionately expensive to keep or maintain, or b) it is to the
best interest of the debtors and creditors (Sec. 131, FRIA).
Within three (3) months from assumption of office, the liquidator shall submit a
liquidation plan which shall govern the manner of disposition of the assets of the debtor
(Sec. 129, FRIA). In the disposition of the assets, the Civil Code provisions on
concurrence and preference of credits shall be observed (Sec. 133, FRIA).
FRIA – LPIgnacio 26

Cross-Border Insolvency

The Court may issue orders, in connection with an insolvency or rehabilitation

proceedings taking place in a foreign jurisdiction (Sec. 140, FRIA), suspending any
actions to enforce claims against the entity or otherwise seize or foreclose on property
of the foreign entity located in the Philippines, requiring the surrender of property of the
foreign entity to the foreign representative, or providing other necessary relief (Sec.
141, FRIA).

Scope of application

This Rule applies where:

(A) assistance is sought in a Philippine court by a foreign court or a foreign

representative in connection with a foreign proceeding;
(B) assistance is sought in a foreign State in connection with a proceeding governed
by the FRIA and the F-Rules; or
(C) a foreign proceeding and a proceeding governed by the FRIA and the F-Rules
are concurrently taking place; or
(D) Creditors in a foreign State have an interest in requesting the commencement of,
or participating in, a proceeding under Rules 2, 3, and 4 of the F-Rules.

The mere filing of a petition does not subject the foreign representative or the foreign
assets and affairs of the debtor to the jurisdiction of the local Courts for any purpose
other than the petition for recognition and resulting related proceedings (Sec. 1, Rule 5,
F-Rules).

SUSPENSION OF PAYMENT OF INSOLVENT INDIVIDUAL DEBTORS

 only individual debtors are covered

 a natural person who is a resident and citizen of the Philippines who has become
insolvent (Sec. 4(o), FRIA)
• NOT available to non-resident citizens and aliens
 NO more corporate suspension of payment proceedings

Who may refrain from attending creditor’s meeting?

Secured creditors and creditors having claims for personal labor, maintenance, expense
of last illness and funeral of the wife or children of the debtor incurred within sixty (60)
days immediately prior to the filing of the petition may refrain from attending the
creditors’ meeting and from voting therein. Such persons shall not be bound by any
agreement arrived at in such meeting. Unless, being aware of this right, they attend the
meeting, participate in the discussions and vote therein.
FRIA – LPIgnacio 27

Residual power of court

The court, upon motion of any affected party, may issue any order which may be
necessary or proper to enforce the agreement. If the debtor fails, wholly or in part, to
perform his obligations under the agreement, or to comply with any order of the court,
the court, upon motion of any creditor, shall declare the agreement terminated, and all
the rights which the creditors had against the debtor before the agreement shall revest
in them.

***** © LP Ignacio *****