Important Cases on FRIA (Financial Rehabilitation and Insolvency Act)

Dec. 11, 2020 Lecture by Atty. Zarah Villanueva-Castro, San Beda Univ., Mendiola

She said most of the questions for finals will be lifted from this lecture.

FRIA
(Financial Rehabilitation and Insolvency Act)

STATE POLICY

- seeks to encourage debtors, and their creditors to collectively and realistically

resolve and adjust competing claims and property rights.

- timely, fair, transparent, effective and efficient Rehabilitation or Liquidation of

debtors.

-creditors can initiate rehabilitation of debtor.

- ensure or maintain certainty and predictability in commercial affairs, preserve

and maximize the value of assets of debtors. Treatment of creditors is equitable.

- when rehabilitation is not feasible, it is in the interest of the State....

NATURE OF PROCEEDING

- is in rem. Therefore requires publication of notice of commencement of

proceedings in a newspaper of general circulation (Sec.3 of FRIA)

- Summary and non-adversarial

APPLICABILITY TO PENDING CASES

- FRIA will govern all petitions filed after FRIA has taken effect.
- All further proceedings in insolvency, suspension of payments and rehabilitation
cases except if Court opinion is that applicability is not feasible or would work
injustice. (Sec. 146, FRIA)

DEBTORS COVERED

Included:

1. Sole proprietorship
 2. Partnership
3. Corporation
4. Individual debtors

Excluded:

1. Banks, insurance companies - because have banking laws

2. Pre-need companies
3. National & local government agencies/units

EACH DEBTOR is SEPARATE ENTITY

But, co-mingling of related debtors where:

- debtors are related

- assets & liabilities are co-mingled
- have common creditors
- voluntarily joined
- consolidation is beneficial to all/ will serve rehabilitation objective.

key word: co-mingling

PROCEEDINGS COVERED

REHABILITATION – “Restoration” of the debtor to a condition of successful operation

and solvency (Sec.4, GGI??) if it is shown that its continuance is economically feasible
and its creditors can recover from the assets.

Restoration is key word- Restoration of business operation that is why no

individual debtor. Has to be sole proprietor, has to have a business. Individual debtor
can’t be rehabilitated. He has o make petition for suspension of payment.

LIQUIDATION- assets to be converted into cash. So not __________________

INSOLVENT
- refers to financial condition when debtor is unable to pay liabilities or has
liabilities greater than his assets.

2 Kinds of Insolvency:
ACTUAL vs. TECHNICAL INSOLVENCY

Actual Insolvency- corporation’s assets are not enough to cover its liabilities. Not
enough cash to pay expenses. Need time to convert assets to cash.
Technical Insolvency- Sufficient assets but foresees it cannot pay debts for more than a
year.

LIQUIDATION vs. REHABILITATION

- Liquidation and Rehabilitation cannot be undertaken at the same time.

- Rehabilitation: means continuance of operations
- Liquidation: need to convert assets to cash to liquidate.

APPLICABLE LAWS

FRIA
Administrative Matter 12-12-11-SC (Financial Rehabilitation Procedure)

Where to file?
RTC (Principal office of debtor)

BASIC ISSUE IN REHABILITATION

Viability of business- whether viable to continue

RATIONALE OF REHABILITATION- resuscitate businesses in financial distress because

assets still more valuable when maintained than when liquidated.

Rehab assumes assets are serviceable to meet business needs. Otherwise, stop the
bleeding asap.

PURPOSE OF REHABILITATION

Viva Shipping Lines Inc. vs. Keppel Philippine Marina

- balance of interest to recover and continue ordinary business, while attending to

creditors.
- Fresh start to creditors.

PARTIES TO REHABILITATION PROCEEDINGS

“Creditors are indispensable parties”

Rehab cannot be decided without creditors’ participation.

case: Viva Shipping Lines Inc. vs. Keppel Philippine Marina

 - failure of petitioner to implead its creditors as respondents cannot be cured by
serving copies of Petition on its creditors.

- “Creditors” for proceeding called Rehab include:

- BIR
- Employees
- Utilities
- Suppliers
- Service providers
- Consultants

Viva Shipping- Because Viva failed to declare former employees as “creditors”, they
denied employees due process.

DEBTS NEED NOT MATURE TO JUSTIFY REHABILITATION APPLICATION

- The condition that triggers rehabilitation proceedings is not the maturation of

the corporation’s debts but the inability of the debtor to pay its debts in the
future.
- Foresight is required. Debts of the corporation should not have matured.
- Inability of debtor as it foresees this challenge of paying future debts.

Case: Metrobank & Trust Co. vs. Liberty Corrugated Boxes Mfg. Corp.

DEBTORS IN DEFAULT CAN FILE REHABILITATION

- “CLAIM”- Debtor corporations already in default may file case for rehabilitation.

DEBTORS NOT YET IN DEFAULT

- Can apply for rehabilitation.

Qualification for rehabilitation – is the inability of debtor to pay them because:

- when maturity happened, could not pay
- when actually mature, cannot pay

Bar Exam 2019 Question: 3 TYPES OF REHABILITATION

A. COURT-SUPERVISED
1. Voluntary - initiated by debtor
2. Involuntary – initiated by creditors

B. PRE- NEGOTIATED - by creditors & debtors. Pre-agreed before going to court on how
to proceed with proposed rehabilitation, to be approved by the court.
C. OUT OF COURT/ INFORMAL RESTRUCTURING