§,SSENTIALS OF

CR ED IT TRANSACTIONS
,.,.Q
AN D
BANKING LAWS
TIMOTEO B. AQUINO
//
Professor of Law
and Pre-Bar Reviewer
Un iversity of Asia and the Pacific School of /,aw and Governance
Far F,as tern Un i uersity h ~5 titutc of Law
Lyceu m of the Philippin es College of La w
Ang~l.:s Un ,:i,ers ,.ty Foundat ion College of l aw
R eco/cto s Review Center. San Sebastian College
Form er Professor. U11i uers,ty of PerpPtzwl Help -DALT,·\ . Colle1<e of La ,.,
San Bcda College of Law
Arella no Unic·ersity la w Fozw rlatw n
For"'"' Pre/Pr / of Studen t Affr11 rs . S an Beda C-olle::e of Lau
✓ \t llh o r: ReP1eu.•;•r on Ci1 •il /,ou
Tnrt.s nnd Dam ages
Ph ilippin e Corpo rat e Law Compendium
Essentials of Insu ra nce La w
Notes and Ca ses on Bank in,: l aw
l a nd N e[Jotiable In strum ents La 11 , (Vo l.s. I nnd fl)
/-, Co -Autho r: Reviewer on Commercwl Law
Esse ntia ls of Tra nsportation and P ,, blic Utilities La«
Fu.n damentols of Negotiable Instrum en ts Law
F11ndam. entnls of Obligations a nd Con tract
Revised. Rllles on S umm ary Proced u re. Revisiti'd
Handbook on Summary anri 8 m r1ll Claim s Procedure an d
Bou ncing Checks Law
--,-: '-
\ __ . . . ... ~~ J

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450 ESSENTIALS OF CREDIT TRANSACTIONS
AND BANKING LAWS

a n insolvent debtor is necessary so that self-interest cannot prevail.

However, even with a system in place, it is still necessary to be
vigilant because "the heavy scent of manipulation is in the air;
vigilance on the part of the courts, and most especially, of the lawye rs CHAPTER18
and other professionals hired by the estate (and even creditors), is
imperative if the process is to operate fairly."•
CONCURRENCE AND PREFERENCE
OF CREDITS

Obligation imports the concepts of debt , credit and respon sibil-

ity. Respon si bility involves th e biniling co mmitm ent to sa tisfy the
obligation and t h e righ t of the creditor to obtain satisfaction from
the patrimony of th e debtor in case of breach. ' Th e li ability of the
patrimony of the debtors is expressed in Article 2236 of the New
Civil Code that states:

Art. 2236. The debtor is liable with all his property,

present and future, for the fulfillment of his obligations,
subject to the exemptions provided by law. (1911a)

1. PATRIMONY OF DEBTOR. It should be likewise

recalled that one of the characteristics of obligations is that it s hould
be capable of valuation. One of the reasons for this characteristic is
because they should be capable of being satisfi e d with the patrimony
of the debtor.
2. EXEMPT PROPERTIES. There are properties that are
part of the patrimony of the debtor t h a t are exempt from execution
and cannot be attached or levied upon by the creditors. These include
the exempted properties under t he Revised Rules of Court as well as
special laws.
3. EXEMPT UNDER THE RULES. Section 13 of Rule 39
of the Revised Rules of provides a list of properties that are exempt
from execution:

Section 13. Property exempt from execution. - Except as oth e rwise

ex pressly provided by law. the fo llowing properr.y, Hnd no or.he r. s ha ll be
exempt from execution:

1
JBL Reyes. Oh~ervations, ibid.

'Evere tt v. Perez, US Court of Appeals, 9th Circuit, 30 F.3rd J 209 (1994)

45 1

1

452 ESSENTL\LS OF CREDIT TRANSA CTIO NS
Ac'l'D BA N IG NG LAWS
(a) Th e judgme nt obli gor's family hom e flS provid ed hy lflw, or th e
homestead in whi ch he resides. and land necessarily used in connection
therewith;
(b) Ordinary tools and impl ements personally used by him in hi s
trade, employment, or livelihood;
(c) Three horses, or three cows, or three carabaos, or other beas ts of
burden, such as t h e judgment obligor may select necessarily used by him in
hi s orrunary occupation ;
(d) His necessary clothing and articles for ordinary personal use,
excluding jewelry;
(e) Household furniture and utensils necessary for housekeeping,
and used for that purpose by the judgment obligor and his family, such
as the judgment obligor may select, of a value not exceeding one hundred
thousand pesos;
(f) Provisions for individual or family use sufficient for four months;
(g) The professional libraries and equipment of judges, lawyers,
physicians, pharmacists, dentists, engineers, surveyors, clergymen, teach-
ers, and other professionals, not exceeding three hundred thousand pesos in
value;
(h) One fishing boat and accessories not exceeding the total value of
one hundred thousand pesos owned by a fisherman and by the lawful use of
which he earns his livelihood;
(i) So much of the salaries, wages, or earnings of the judgment
obligor for his personal services within the four months preceding the levy
as are necessary for the support of his family;
(j) Lettered gravestones;
Monies, benefits, privileges, or annuities accruing or in a ny
(k)
mann er growi ng out of any life insurance;
The ri gh t to receive legal support., or money or property obtai ned
0)
as such support, or any pension or gratuity from the Government;
(m) Properties specia lly exempted by law .
But no a rticle or species of property mentioned in this section shall
be exempt from execution issued upon a judgment rP.r.overed fo r its pri ce or
upon a judgment of forec losu re of a mortgage th neon . (12a )
3. 01. EXEMPTION OF FAMILY HOME. The family h ome
is exempt from execution , forced s a le or attachment. 1 By way of
2
For tal eza v. Lapitan, ti78 SC RA 469 (20] 2).
PART I - 4 PERSONS IN FlNANClA.L DISTRESS 45:1
CHAP'T 8 R 18 - C:: ON ClffiR E NCE AND PREFERENC E OF CR EDITS
excepti on , t h e famil y h ome is not exempt from executi on if t.h 0 de bt
is fo r th e foll owing:
( 1) Non -pay ment of taxes ;
(2) D e bts in curre d prior to constitution ;
(3) Debts secure d by mortgages before or a fte r con stitu-
tio n ; and
(4) Debts du e to labo r er s, m ech an ics, a rchi tects,
builders, m aterial m e n a nd o thers who have rendered s ervi_c e
or furnished materials for the construction of the building
a. Waiver of Exemption of Family Home. The family
home's exemption from execution must be set up and prove d to
the Sheriff before the sa le o f t h e prope rty at public auction . The
exe mption may be waived or b e barred by lac h es by the failure to se t
up and prove th e s tatus of the prope rty as a family hom e at the time
of the levy or at a reasonable time thereafter .3
3. 02. OTHER EXEMPTIONS UNDER THE LAW. There
are specia l laws and rules that exempt certain properties from
execution . These incl ude :
a. Foreign currency deposits a r e exempt from a ttachme nt.,
garnishment, or any oth er order or process o f any court, le gi s lative
body, gove rnme nt age ncy or any a dmin istrative body whatsoeve r .·•
b. Properti es of public dominion are o uts id e th e com m e rce
of man . Th e ownership of a property of public dominion is a spec ia l
collective ownership that r esides in th e socia l group for ge n e r a I
use and enjoyment.5 H e nce, t h e properties of public dominion a re
e xempt from att ac hm ent and e xecuti o n .
c. Government funds are not s ubject to ex ecution. "The
universal rule that where the State gives its consent to be s u e d
by private parties e ither by general m· special law , it may limit
cla imant's ac tion "only up to the completion of proceedings ante rior
to the stage of exec utio n " and that th e power of the Courts e nds when
th e judgme nt is r e ndered, s ince government funds and prop e rties
may not b e seized und er writs of execution or garnishment to satisfy
~Oli va -De Mes a v. Acero, Jr., G .R. No. 185064, J an uary 16. 2012 .
' R.A. 6426 as amended by As a mended by P.D. 1035, and further a me nd ed by
P.O . 1246. prom. Nove mber 21, 1977.
5
Laure l v. Garcia, G. R. No. 920 13, July 25, 1990 citing 3 Manresa 66-69 .
 454 ESSENTIALS OF CREDIT TRANSACTIONS
AND BANKlNG LAWS
su ch judgments, is based on obvious considerations of public policy.
Disbursements of public funds must be covered by the corresponding
appropriation as required by law. The functions and public services
rendered by the State cannot be allowed to be paralyzed or disrupted
by the diversion of public funds from their legitimate and specific
objects, as appropriated by law." 6
d. Section 13(i) of Rule 39 includes as exempt properties "so
much of the salaries, wages, or earnings of the judgment obligor for
his personal services within the four months preceding the levy as
are necessary for the support of his family ." It has been said that the
exemption und er this procedural rule should be read in conjunction
with the Civil Code, the substantive law which proscribes the
execution of employee's wages, particularly Article 1708 of the
New Civil Code which provides that "the laborer's wage shall not
b e subject to execution or attachment, except·for debts incurred for
food, shelter, clothing and medical attendance." This is obviously
meant to favor only laboring men or women whose works are
manual. Persons belonging to this class usually look to the reward
of a da y's labor for immediate or present support, and such persons
are more in n eed of the exe mption than any other. In this context,
exemptions under this rule are confined only to natural persons and
not to juriclical entities .7
e. The same is also true with respect to "ordinary tools and
impl ements personally used by him in his trade, employment, or
livelihood" that a r e also exempt under Section 13(b) Rule 39. This
exemption pertains only to natural and not to juridical persons,
However, it would appear that the exemption contemplated by the
provision involved is personal, available only to a natural person,
s uch as a dentis t's dental chair a nd electric fan used in the dentist's
office.•
Art. 2237. Insolvency shall be governed by special
laws insofar as they are not inconsistent with this Code.
(n)
"Republic v. Villasor. G.R. No. L-30671, November 28, 1973, 54 SCRA 83, 87;
University of the Phi jjppines v. Dizon, G.R. No. 171182, August 23, 2012.
1 mentioned in the preceding article, owned by two or
D' Armoured Sec urity and Investigation Agency, Inc. v. Orpia, et al., G.R. No.
151325, Ju ne 27, 2005; Gaa v. Court of Appeals, 140 SCRA 304 (1 985).
8
D' Armoured Security a nd Inves tigation Agency, Inc. v. Orpia, et a l., G.R. No.
151325, Ju ne 27, 2005 ; Belen v. de Leon, G.R. No. L-15612, November 30, 1962; Pen-
ta gnn Securi ty and Investi ga tion Agency v. Jimenez, 192 SCRA 49 2 (1 990).
PART l - 4 P ERSONS IN FI NANCIAL DISTRESS 455
CHAPTER 18 - CONCURRENCE AND PR EFERENC E OF' CREDITS
1. G OVE R N I NG LAW. As will be discussed in t he next
Ch apter , insolven cy, r e ha bilitati on a n d liquid ation a re now governed
by R.A. 10 142 oth erwise known as the Financial Rehabilitation and
Ins olven cy Act (FRIA for s hor t) of 2010, which laps ed into law on
July 18, 2010. It is expressly provided in th e FRIA tha t dis tribution
of t h e ass ets is s till governed by t h e New Civil Cod e provi s ions on
Con currence and Preferen ce of Cr edits.
2. S PECIAL S TAT U TES. Oth er s ta tutes provi de for rules
on r ehabilitation , in solve ncy a nd liquid ation of t h e assets of certa in
s pecific t ypes bus iness enti ties. For exa mp le. there a r e special rules
on conserva tor s hip and liquida tion of banks u n de r Ne w Centra l
Bank Act . Section 30 of New Cen t ra l Bank Act ma k e the rul es on
concurren ce a nd p refer ence of cr edits u nd e r t he New Civil Code
a pplicabl e.
a . Ot h er ru les on co ns e r va t.or s hip, in solve nr.y ;.i nd liquid a ti on
are provid ed for in Section s 255 to 257 the In s ura nce Code. P .D.
61 2 a s a mended by R.A . 10607 , fo r in s u rance compa n ies. On t he
oth er h a nd . pre- need com pa nies a r e liq uida ted in accord a nce wit h
Section s 49 to ci2 of R. A. 9892 ot h e rwi se known as the Pre- Need
Code of th e Philippines.
b. The sp ecia l la ws lik e th e New Centra l Ba nk Ac t. t he
Insura nce Cod e a nd th e Pre- Need Code, gove rn the liquidatio n of
the corpora tio ns that t hese res pec tive laws r egul a te. FRIA may be
applied suppletoril y.
Art. 2238. So long as the conjugal partnership or
absolute community subsists, its property shall not
be among the assets to be taken possession of by
the assignee for the payment of the insolvent debtor's
obligations, except insofar as the latter have redounded
to the benefit of the family. If it is the husband who is
insolvent, the administration of the conjugal partnership
of absolute community may, by order of the court, be
transferred to the wife or to a third person other than
the assignee. (n)
Art. 2239. If there is property, other than that
more persons, one of whom is the insolvent debtor, his
undivided share or interest therein shall be among the
assets to be taken possession of by the assignee for the
payment of the insolvent debtor's obligations. (n)
 456 ESSENTIALS OF CREDIT TRANSACTIONS
AND BANKING LAWS
Art. 2240. Property held by the insolvent debtor as a
trustee of an express or implied trust, shall be excluded
from the insolvency proceedings. (n)
1. WHEN THE RULES ON CONCURRENCE AND
PREFERENCE OF CREDITS APPLY. The rules on Concurrence
and Preference of Credits under the New Civil Code are designed to
effect an equitable distribution of the insolvent's property among his
creditors. Necessarily, the underlying assumption is that the assets
of the debtor are less than the liabilities to be satisfied. If the assets
of the debtor are sufficient to pay his liabilities, then there is no need
for these rules because all that will be done is to pay every debt and
the balance if any will be given to the debtor. The Supreme Court
explained:
"A preference of credit bestows upon the preferred creditor an
advantage of having his credit satisfied first ahead of other claims which
may be established against the debtor. Logically, it becomes material only
when the properties and assets of the debtors are insufficient to pay his
debts in full ; for if the debtor is amply able to pay his various creditors in
full, how can the necessity exist to determine which of his creditors shall
be paid first or whether they shall be paid out of the proceeds of the sale
(of) the debtor's specific property. Indubitably, the preferential right of
credit attains significance only after the properties of the debtor have been
inventoried and liquidated, and the claims held by his various creditors
have been established."9
a. The earlier case of Pacific Farms, Inc. v. Esguerra'"
involved a defendant that furnished lumber and construction
materials to the Insular Farms, Inc. (the petitioner's predecessor-in-
interest) that the latter used in the construction of the six buildings.
Out of the total procurement price of P15,000.00, the amount of
P4 , 710 .18 remains outstanding and unpaid by the Insular Farms,
Inc. The Court ruled that the rules on concurrence and preference of
credits do not apply for the following reasons:
u_ • • The said case, however, is inapplicable because it concerned not
one but two or more preferred creditors who, pursuant to articles 2242 a nd
"Dr,velopment Bank of the Philippines v. National Labor Relation s Commis-
sion, G .R. No. 10803 1 March I , 1995 citing Kuenzle & Sheriff (Ltd.) v. Villanueva,
41 Phil. 6 11 l1916] ; Barretto v. Villanu Pva, C .R. No. 149:lR, 29 DPc.emher lflfi2, n
SCRA 928; Philippine Savings Bank v. Lantin, G.R. No. 33929, 2 September 1983.
124 SCRA 4 76.
IDG.R . No. L-21783, November 29, 1969.
PAR'T l - 4 PF: RS(JNS IN FINAN CIAL DISTR ESS 457
CH APTER 18 CO NC URREN CE 1-\J' ID PR F:F'E RENCE OF C' RF: D IT:,
2249 of th e Civil Cod e, mu s t necessa ril y be convened a nd th e nature anti
ex tent of their res pec tive cla im s asce rta ined . Thus. we held th,n before
there ca n be a pro rnta paym e nt of credits entitled to p refere nce as lo the
sa me specific re::i l property , t here must fir st be som e proceedi ng where th e
claims of all t he preferrerl cr editors may be bindingly adjudicated. such ;is
in solvency. t he settl ement. of ;:i decedent's es tate under Ru le 87 of thE· Rul es
of Court, or li qu id ation proceerlings of s imilar import.
But the case befor e us does not in volve a rp.:estion of prefere nce of
cr edits. and is not one wher e two or more creditors have sepan1 te a nd rl ist i net
claims agai nst the same debtor wh o has in su fficie n t. prope rty . Ind eed. 1t. 1s
a matter of necessity a nd logic t hat the question of preference should anse
only wher e the debtor cannot pay hi s debts in fu ll. For, if debt.or A is nhle
in full to pay all hi s three creditors . B, C. a nd D. how ca n the need anse for
determining which of th e three creditors s hall be paid first or whethe r th ey
shall be paid out of the proceeds of a s peci fic property?•· 1 1
2. MEANINGOFCONCURREN CEAND PREFERENCE
RULES. Concurrence of credits! m ea n s t h at there are two or more
credits of a single debtor. Th e rule con cu rrence under th e New Givi l
Code results in the dis tribution of t h e assets t h at is being liqrndated
on a pro rata ba sis. In oth er words, there is no prefe1Te d s t a tus is
that given to any of the credi ts; the cre dits are treate d e qually.
a. Preference. Preference of credit means preference in
application of credits in favor of certru n creditors. "It is a melhod
adopted to d e termine and s pecify the order in which cr edits s h o uld
be paid in the final di stributi o n of th e proceeds of the insolvent's
assets. It is a right to a firs t preference in t h e discharge of th e fund s
of the judgment debtor." 12
b. Distinguished from Lien. A preference applies only
to claims that do not -attach to specific properties. A lien like n
mortgage lien , creates a charge on a particular property .13
3. CHARACTERISTICS OF STATUTORY PROVI-
S10::--l'S. The Cou rt Co mmission explai n ed the ch a ra c t er is ti cs of th e
statutory rules o n con curre n ce a nd prefer e nce of credits in chi:, wise:
"The title on ··Concurrence an d Prefere nce of Credi1.s·· is c- ha r ;, c1Prized
by four fea tures: (1) t he lie ns a nd mortgages with respec t c.n ,; pi'!c ifi c mov ab le,
a nd immov able property h ave been increase<l: (2) the propose rl Civi l Cndf-
11
Pacific Fa rms. Inc. v Esguerra , (LR. No. L-:n 783. November '.29. 19f.9.
1·-'yn[:son, Jr . v. Ph ilipµinf' i': ation ,il 8 :rn k. C . R. No. l 7 l 132. , \u g\tSt I ii . :20 12.
1
'Ibid .

458 ESSENTIALS OF CREDIT TRANSACTIONS
AN D BANKING LAWS
and th e Insolvency Law h ave been brou ght in to h a rm ony: (::l) pn~ferred
claim s as to th e free property of th e insolvent have also been a u gmented ;
a nd (4) the ord er of preference, la id down in a rticl es 1926 a nd 1927 of th e
present Civil Code, a mon g claims with respect to specific person Ft l a nd real
property has been aholish ed , except tha t taxes must first be sati sfi ed." 14
4. INSOLVENCY AND SIMILAR PROCEEDINGS
NECESSARY. To accomplish a n e quitable distribution of ass ets,
th ere mus t first b e some procee ding where notice to all of the
insolvent's creditors may be given and where the claims of preferred
creditors may be bindingly adjudicated. 15
a. The right of preference cannot exist in any effective way
prior to the time of its presentation in distribution proceedings . It
will find application when, in proceedings such as insolvency, the
preferred credits shall be paid in full before all other claims.
b. For an orderly settlement of a debtor's assets, all creditors
must be convened, their claims ascertained and inventoried and
therea fter the preferences determined in the course of judicial
proce edings which have for their object the subjection of the property
of th e debtor of the pay ment of his debts and other lawful obligations .
Th e a im is to gain ass urance that the orderly determination of
prefer e n ce of cr e ditors' claims is assured ; the adjudication made
will be binding on all parties-in-interest, since those proceedings are
proceeding in rem ; and the le ga l scheme of cla ssification, concurrence
a nd preferen ce of credits in the Civil Code , , the FRIA, and othe r
a pplica b le laws , lik e the Labor Code, is preserved in harmony. 16 The
Suprem e Court ex plaine d :
"'However , Article 2242 only finds application when there is a
concurren ce of credits , i.e. wh en the sa me specific propP.rty of the debtor is
subjected to th e cla ims of sever al creditors and t.h e value of such property of
t he debto r is insufficient to pa y in full all the creditors. In such a situatio n,
th e qUF,stion of prefer ence will arise, that is, there will be a need to determine
which of th e creditors will be paid ahead of th e others . 14 Fundamental
t en ets of due process will dict a te that thi s .statutory lien should then only
be enforced m th e context of some kind of a proceeding wher e the claims of
1
·'Report of the Code Commission, pp. 164-164 .
15
De Baretto v. Villanueva, No. L-14938, December 29, 1962, 6 SCRA 928; DBP
v. Secreta ry of Labor, G.R. No. 79351 , November 28, 1989.
. __ .
15
Developrnent Bank of the Philippines v. Na tional Labor Relations Com -
rn i_s3.9wn, ~ -R. No. 86227, J an uary 19, 1991; Philippine Savings bank v. Lanti n. No.
L-J 29, Septem ber 2, 1983, 124 SCRA 476.
I
PART J - 4 PERS ONS I N FTNANC lAL DlSTR P.SS -159
C HAPTER 18- CONC URRE NC E AND PR EFER ENCE O F CRED ITS
Fi ll t. h e prn fe rred credi tors may be bi n di n gly a djudica ted. s uch as inso lvency
proceP.dings.
Th is is made ex plicit by Ar tic le 2243 whi ch st a tes th a t th e claims a nd
lie n s enum er a ted in a r ticles 224 1 and 2242 s h all be consider ed as mortgages
or pl ed ges of r eal or personaJ property , or li ens wi t h in th e p urv1ew of legal
provisions governi ng insolven cy .''"
5. FRAUDULEN T TRANSFER OF DEBTORS. It s h ou ld
he n oted , however, th a t t h e fa ct th at t h e r e i s s t ill no i n s olvency_or
liqui d atio n procee di n gs d oes n o t preve nt t he courts fr? m a nnullin g
a t ransfer of prop e r ty of an i n s olvent d e b to r . For m s taz:ic e ,_ th e
annulme nt of tr a n s fe r is j u stified if t h e _circumsta n ces indicat e
fraud agains t cr e d itors . "Nei th e r a d ecla r a trnn_o_f m s~lve n cy n or th e
institution of insolven cy proceedin gs is a co nd1t10n sine qua non for
a trans fer of a ll or n early a ll of a d e btor 's assets t o b e r egarde d m
fraud of cre ditors . It is s u fficient t h a t a debto r is gre a t ly e mbarrassed
financially ." 15 Thu s , t h e Court cited t h e ru les on con c urre nce a nd
preference o f cred i t s is on e case :
"In this case, PNCC's h uge negativ e ne t worth - at least P6 b illion
as expressly a dmitted by P NCC's cou ns el durin g the or al a:rgum e nts . or
Pl4 billion based on th e 2006 COA A udit R eport - necessanl y tra n s la t es
to a n ext r em ely e mba rrassing fi n ancial situ ation . With its huge nega tive
net worth arisi ng from un paid hill ions of pesos in debt, P NCC ca n not cla im
th a t it is fina nciall y stab le . As a con seq u ence. t he Co mprom ise Agree men t
stip ul a tin g a tr a nsfer in favo r of Rads toc k of s ubstantially a U of P NCC's
asse ts constitutes fra u d . To legitimi ze l h e Co mpromise Agree men t jus t
becau se th er e is still no ju dicial declaration of PNCC"s insolven cy will work
fra ud on P NC C's oth er cr ed itors. th e b igges t cr editor of which is the Natinn n l
Governm ent. To in sist th a t P:--JC C is very mu ch li quid. gi ve n it;- nclmir.1.Nl
huge nega tive n et worth , is no th ing bul deni a l of th e truth . The to ll fe es
tha r. P NCC collects belong to th e Na tiona l Gov ern me n t . Obvio us ly, PNCC
ca nnot clai m it is liquid based on its collect io n of such toll fees. beca use
PN CC merely hold s su ch to ll fees in tru st fo r the Na tio na l Go ve rn me n t.
PNCC do es not ow n th e toll fees , a nd s uch to U fees do not fo rm pa rt of
PNCC's asset s .
PN CC owes the N ation a l Governm en t P36 billio n, a s ubsta ntia l part
of which con stitu tes taxes and fees x x x
17 J
Bernardo Constr uction v. Court of Ap peals, G.R. No. 105827, ,J anuary 3 1,
2000.
18 Strategic Alli ance OPvelopmPnt Corporation v. Radstoc k Securi ties, Ltd..
G.R. No. 178158, December 4 , 2009.
 460 i;;SSEN TJAl.S OF CREDIT TRA.t'-JSACTIONS
A.ND BANKJ NG LAWS
Th e 1'36 billion debt to t he National Governme nt was a cknowl ed ged
by th e PNC C Board in th e same board r esolution that r ecognized th e
Marubeni loan s. Since PNCC is clea rl y in solvent with a hu ge negative net
worth, the govern m ent. e nj oys preference over Radstock in th e satis facti on
of PNCC's liability arising from taxes an d duti es, pursuant to the provisions
of the Civi l Code on concurrence and preference of credits . Articles 2241 ,
2242. and 2243 of the Ci vil Code expr essly mandate that t a xes a nd fees due
the National Governm e n t "sh a ll be preferre d" and "shall first be satisfi ed"
over claims like t hose a risi ng from the Marubeni loans which "shall enjoy
no prefer ence" under Article 2244.
However, in Aagrant violation of the Civil Code, the PNCC Boa rd
favored Radstock over the National Governm e nt in the order of credits. Thi s
would strip PNCC of its assets leaving virtually nothing for the National
Gove rnm ent. Thi s action of the PN CC Board is m a nifestly a nd grossly
disadvantageou s to the National Government a nd amounts to fraud ."' 9
b. In an earlier case, a creditor - taking advantage of his
know ledge t h a t inso lvency proceedings were to be instituted by
t he debtor if the creditors did not com e to an understanding as to
the m a nn er of di stribution of th e insolvent's asset among th e m,
and beli eving it most probable that they would not arrive at such
understanding - sch e m ed and transferred its credit to a sister
co mpany in the United States which , in turn, secured a writ of
attachmen t in the court therein t hereby gaining control over the
plane of t he debtor. The creditor was made liable under Article 19 of
the N ew Civil Code for abuse ofright.20
c. In this conn ection, it should be noted that the owner of the
sole proprietorship, the partners in a partnership or the directors
an d officers of a corporation are liable under Section 10 of FRIA if
they wiU dispose the assets of the debtor knowing tha t an insolvency
proceeding will be commenced.
PEe.Tott
6. PROCEDUREfFOR DIVISION OF THE ASSETS OF
THE INSOLVENT CREDITOR. After the Court had issued a
Decision declaring t he debtor , whether n atural or juridical person,
as insolvent, the assets of the insolvent debtor shall be divided
a mong the creditors in accordance with Articles 2241 to 2251 of the
New Civil Code.
9
' S tra tegic Alli a nce Development Corporation v. Radstoc k Sec urities Ltd
G.R. No. 178158, Dece mber 4, 2009. ' .,
2
'Velayo, etc. v. Shell Co., of the Phi ls .. et al ., G.R. No. L-78 17 October 31
1956, 100 Phil. 187. ' '
PART 1 - -1 PERSONS JN FINANCIAL DISTRESS 461
CHAfYI'ER 18- CONCURRENCE AND PREFERENCE OF CREDITS
6.01. CLASSIFICATION OF CREDITS. The prov.ision s on
concurre n ce and prefer e nce of credits under th e New Civil Code may
be seen to classify cr edits again st a particular insolvent into three
general categor ies , namely:
(1) Special preferred credits listed in Articles 224 1 a nd
2242,
(2) Ordinary preferred credits listed in Article 2244;
and
(3) Co mmon credits unde r Article 2245. 21
6.02. DISTRIBUTION OF ASSETS. The statutory rules on
concurrence and preference of credits a re embodied in Arti cles 221 5
to 225 1 in rel ation to Articles 2241 to 2244 of th e New Civil Code
The s tatutory rules are as foUows :
Art. 2245. Credits of any other kind or class, or
by any other right or title not comprised in the four
preceding articles , shall enjoy no preference. (1925)
Art. 2246. Those credits which enjoy preference
with respect to specific movables, exclude all others to
the extent of the value of the personal property to which
the preference refers .
Art. 2247. If there are two or more credits with
respect to the same specific movable property, they
shall be satisfied pro rata, after the payment of duties,
taxes and fees due the State or any subdivision thereof.
(1926a)
Art. 2248. Those credits which enjoy preference in
relation to specific real property or real rights, exclude
all others to the extent of the value of the immovable or
real right to which the preference refers.
Art. 2249. If there are two or more credits with
respect to the same specific real property or real rights,
they shall be satisfied pro rata, after the payment of the
taxes and assessments upon the immovable property or
real right. (1927a)
2 1Repu bhc of the Philippines v. Peralta, G.R. No. L-5656S , May 20, 19117

462 ESSENTIALS OF CREDIT TRANSACTIONS
AND BANKJNG LAWS
Art. 2250. The excess, if any, after the payment
of the credits which enjoy preference with respect to
specific property, real or personal, shall be added to
the free property which the debtor may have, for the
payment of the other credits. (1928a)
Art. 2251. Those credits which do not enjoy any
preference with respect to specific property, and those
which enjoy preference, as to the amount not paid, shall
be satisfied according to the following rules:
(1) In the order established in Article 2244;
(2) Common credits referred to in Article 2245
shall be paid pro rata regardless of dates. (1929a)
6.03 . RULES ON SPECIAL PREFERRED CREDITS.
Articles 2241 and 2242 augmented and harmonized the provisions
of the previous Insolvency Law and the old Civil Code. The Code
Commission stated that:
As for the first point, the present Code e numerates seven preferred
claims with respect to specific personal property. This number has been
increased to thirteen. The new liens are either required by public policy
(Nos. 1, 2, a nd 13), or by social justice (Nos. 6, 7, and 8). With respect to real
property, the encumbrances have been increased from five to ten. The new
ones are Nos. 2; 3, 6, 8 and 9, all of which are demanded by considerations
of justice.
X X X
The question as to whether the Civil Code and the Insolvency Law can
be harmonized is settled by this article. The preferences named in articles
2261 a nd 2262 are to be enfor ced in accordance with t he Insolvency Law.
T axes on the specific property will be paid first." 22
a. The special preferred credits that are specified under
Articles 224 1 and 2242 of the New Civil Code are in the nature of
liens . Article 2243 expressly provides:
Art. 2243. The claims or credits enumerated in the
two preceding articles shall be considered as mortgages
or pledges of real or personal property, or liens within
the purview of legal provisions governing insolvency.
22
Report oft.he Code Comm ission, p. J 6'1 .
PART 1 - 4 PERSONS IN FINANC IAL DISTRESS ,16:l
CHAPTER \8 - CONCURR ENCE AND PREFERl-:NC 8 OF n rno tTS
Taxes mentioned in No. 1, Article 2241 , and No . 1, Article
2242 , shall first be satisfied . (n)
b. Th e S upre me Co urt e xp la in ed Lhe rules on special pre -
ferred credit;; und e r Art icles 224 1 a nd 22 -! 2 in R epU,blic u. Peralta "
as fo llow s:
"Turning fir s t to s pecial pr efe rr ed credits unde r Articles 224 l a nd
2242, it s hould be noted at on ce th at th ese credits co ns titute lie ns or
en cum brances on th e s pecific movable or im movable property to which they
r e late . Article 2243 makes clear that these credi ts "s hall be co nsid ered as
m ortgages or pledges of real or personal p roperty, or liens within th e puruie'.J.J
of legal prouisions goue rning in soluency ." It s h ould b_e e mpha s ized in t.hi s
connect ion t hat "du ties, tax es a nd fees d u e Io n s peci fic mova bl e property
of the insolvent) to th e State or a n y s ubdivision t hereof' (Artie~; 2241 [11)
and "taxes du e upon the [insolvent's ) la nd or building (2242 [l)) s tand first
in prefer ence in r es pect of t h e particular movable or i~ movabl_e ~~operty
to which the tax lien s h ave attach e d. Article 2243 as q uite explicit : '[T]axe s
mentioned in number J, A rticle 224 1 and number 1. Article 2242 shall fi rs /
be satisfied . "The claims listed in numb er s 2 to 13 in Article 224 1 a nd in
numb ers 2 to 10 in Articles 2242, a ll come after taxes in order of precedence ;
su ch claim s enj oy th eir privileged ch a r acter as liens and m ay be paiu oi_i-ly
to the extent th at taxes have been paid from the proceeds of the specific
property involved (or from any other s ources) and only in r espect of th e
rem a ining bala nce of such proceeds . What is more. th ese oth er (non-tax)
credits, although constituting lie n s a ttaching to particular property, a r e
not preferred one over anot h er inter se. Provided tax liens shall have been
satisfied, non-tax liens or special preferred cr edi ts which s ub sist in res pect
of specific movable or immovable property a r e to be treated on an eq u al
basis and to be satisfied concurrently an d proportionately. Put succinctly.
Articles 224 1 and 2242 jointly with Articles 2246 to 2249 es t a hlish a tw o-
tier order of preference. The first tie r includes only taxes. duti es ,rnd fees
due on specific mov a ble or immov a ble property. All other s pecial prefern ,d
cr edits stand on t h e sa m e second tier to be sa tisfied, pari pas su a nd p .' o
rata, out of any r esidu a l va lu e of the s pec ific pro perty to which s uch ot hs;: r
credits relate .
Credits w hich are s pecia ll y preferred beca u se th ey constitute lie n s
(tax or non-tax) in t u rn , lake precedence ove r ordin ary preferred credits so
far as co ncerns the property to whi ch the liens h a ve attach e d . The specially
preferr ed cred its must be discharged firs t out of th e proceeds of th e prope rt y
to which they relate . befo re ordin a ry preferred creditors may lay claim to
a ny part of s uch proceeds.
I
t
23 G.R. No. L-56568, May 20. 1987 .

464 ESSENTJALS OF CREDIT TRANSACTIONS
AND BANKING LAWS
If the value of the specific property involved is greater th a n the s um
total of the tax liens and other specially preferred credits, the r esidual
value will form part of the "free property" of the insolvent - i. e. , prope rty
not impressed with liens by operation of Articles 2241 and 2242. Tf, on
the other hand, the value of the specific movable or immovable is less
than the aggregate of the tax liens and other specially preferred credits,
the unsatisfied balance of the tax liens and other such credits are to the
treated as ordinary credits under Article 2244 and to be paid in the order of
preference there set up ."
c. The duties and taxes that are preferred are the taxes on
the specific taxes and properties. They do not include all the taxes
that are due from the debtor. •
6.04. RULES ON ORDINARY PREFERRED CREDITS.
With respect to ordinary preferred credits, the same will be satisfied
out of the "free" properties that include: (1) the excess from the
properties after satisfying the special preferred credits under
Articles 2241 and 2242; and (2) all other properties that are not
subject to special preferred credits.
a. The Code Commission explained that the provisions of the
previous Insolvency Law and the New Civil Code on preferred claims
as to the free· property of the insolvent have also been augmented by
the new provisions. The Code Commission explained that:
"With regard to the third change, the Insolvency Law in [S]ection
50 enumerates seven preferred claims , in the order named, as to the free
property of the insolvent. It is proposed that these preferred claims be
increased to fourteen (Art. 2264). The added ones refer to support (Nos. 3, 5,
and 6), fines and civil indemnification arising from a criminal offense (No.
7), clamages for death or personal injuries caused by a quasi-delict (No 12),
gifts due to public and private institutions of charity or beneficence (No. 13),
and credits appearing in a public instrument or in a final judgment, (No.
14). It is but right that these credits which are of special importance, should
receive priority with regard to the free assets.""
b. With respect to Article 2244, the rule is preference of
credits because the credits listed therein shall be satisfied according
to the order in which they are enumerated . The Supreme Court
explained the rule as follows :
"In contrast with Articles 2241 and 2242, Article 2244 creates no
liens on determinate property which follow such property. What Article
2 sion, G. R. No. 82763-64. March 19, 1990, 183 SCRA 328.
'Report of the Code Co mmission, p. 164.
PART I - ~ PERSO NS I N F1:-!ANCl AL DI STR ESS -165
CHAPTER 18 - CONCURR ENC E M "D PREFERE NC E O F CR EU ITS
224 4 cr ea t es are s im ply ri gh ts in fa vo r of ce rt a in credi to rs to hav,, th e cas h
and oth er assets of th e insol ve nt a ppli ed in a ce rtain sequence or ord er of
pri ority.
Only in r es pect of th e in solve nt's "fre e prope rty'' is a n ord er of priority
esta b lis he d by Articl e 2244 . In thi s sequence, certain taxes and a si;ess men ts
also figure but th ese do not have th e same kind of ove rr idin g prefer ence that
Articles 2241 No. l and 2242 No. I cr ea t e for tax es which con s tituted li en s
on the taxpayer's property. Under Article 2244,
(a) taxes and assessments due to the na tional governm e nt, exclu.rl-
ina th ose w hich result in tax ben s under Articles 224 l No. 1 a nd 2242 No. I
bu"t in.eluding the ba lance thereof not satisfied out of the movable ,Jr immov-
a ble property to which s u ch liens attach ed , are ninth in priority;
(b) taxes a nd assessments due a ny province, excluding th ose im-
pressed as tax li e ns und er Articles 2241 No. 1 a nd 2242 No. 1, but including
the bal a nce thereof not satisfi ed out of the movab le or immovable propert y
to which such li ens att ach ed , are tenth i n prior ity; an d
(c) taxes a nd assessments due a n y ci ty or municipality, excluding
those impressed as tax lien s under Articles 224 1 No. I and 2242 No. 2 but
including th e bala nce th ereof not satisfied out of the movable or immovable
property to which such liens attach ed , a.re eleven th in priority _"~5
d. Effect of Labor Claims . With respect w labor claims,
the a pplicab le pro visio n is Article 110 of the Lahor Code as a me nd ed
which provides th a t "in th e event of bankruptcy or liq u id a ti on of
an e mployer's business. hi s workers s hall enj oy fi rst preference
as regards th eir unpaid wages and other mon eta ry cl a im s, a n y
provision of law to th e co ntrary notwithstanding. Such unpaid
wages , a nd mon etary clai ms s h a ll be paid in full hP.fore th e claims of
the Government and other creditors may be paid ."
e. Th e a m e nd ed provi s ion s of Article 110 expan d worker
preference to cover not only unpaid wages but a lso other mon e t a ry
claims to which even claims of the Gove rnm ent must bti dee m ed
subordinate. 26 However , la bor claims are not a bsol utely prefe rred
credits, as taxes a r e unde r Articles 2241 (1) a nd 2242 (2). They
can be satisfied only after special preferred credits under Articles
2241 and 2242 are paid, meaning. out of th e ·'free prope rti es" or th e
25 Republi c of the Philippines v. Peralta, G.R. No. L-56568, May 20. 1987.
~6 Development Ba nk of the Philippines v. National La bor Rela tions Commi s-
466 ESSENTIALS OF CREDIT TRANSACTIONS
AND BANKING LAWS
property left after the said special preferred credits are paid. 21 The
Supreme Court explained :
'"Article 110 of the Labor Code does not purport to create a lien in favor
of workers or employees for unpaid wages either upon all of the properties
or upon any particular property owned by their employer. Claims for unpaid
wages do not therefore fall at all within the category of specially preferred
claims established under Articles 2241 and 2242 of the Civil Code, except to
the extent that such claims for unpaid wages are already covered by Article
2241, number 6. "claims for laborers' wages, on the goods manufactured or
the work done:" or by Article 2242, number 3: "claims of laborers and other
workers engaged in the construction, reconstruction or repair of buildings,
canals and other works, upon said buildings, canals or other works." To the
extent that claims for unpaid wages fall outside the scope of Article 2241,
number 6 and 2242, number 3, they would come within the ambit of the
category of ordinary preferred credits under Article 2244.
X X X
We, however. do not believe that Article 110 has bad no impact at
all upon the provisions of the Civil Code. Bearing in mind the overriding
precedence given to taxes, duties and fees by the Civil Code and the fact that
the Labor Code does not impress any lien on the property of an employer,
the use of the phrase "first preference" in Article 110 indicates that what
Article 110 intended to modify is the order ofpreference found in Article 2244,
which order relates, as we have seen, to property of the Insolvent that is not
burdened wi th the liens or encumbrances created or recognized by Articles
2241 and 2242. We have noted that Article 2244, number 2, establishes
second priority for claims for wages for services rendered by employees or
laborers of the Insolvent "for one year preceding the commencement of the
proceedings in insolvency." Article 110 of the Labor Code establishes "first
preference" for services rendered "during the period prior to the bankruptcy
or liquidation, " a period not limited to the year immediately prior to the
bankruptcy or liquidation. Thus, very substantial effect may be given to
the provisions of Article 110 without grievously distorting the framework
established in the Civil Code by holding, as we so hold, that Article 110 of
the Labor Code has modified Article 2244 of the Civil Code in two respects:
(a) firstly, by removing the one year limitation found in Article 2244,
number 2; and (b) secondly, by moving up claims for unpaid wages
of laborers or workers of the Insolvent from second priority to first
priority in the order of preference established I by Article 2244 ."28
2
' Banco Filipino Savings and Mortgage Bank v. National L;ibor Relations
Co mmi ssion. G.R . No. 821 35, August 20, 1990.
_ '"Republic of the Philippines v. Peralta, G.R. No. L-56568, Moy 20, 1987. [Em-
ph asis su pplied]
PART 1 - 4 PERSONS IN FI NANC lAL DISTR ESS 467
CHAPTER 18 - CONCURRENC E AND PREFER EN CE OF CREDITS
f. BIR Cl e arance Not Required . Th e rul e s o n con c ur -
r e n ce a n d pre fer e n ce of cr edi t s a pply to liquidatio n o f b a n ks. 29 In
one case, th e Supre m e Cour t ex p lai n e d t h at th e Burea u of in te rn a l
R eve nu e is n ot w i t h in i t s pow e r s to r ef)uir e a t a x clear a n ce b efor e
th e satisfactio n of a ll th e claim s under Articl e 2244. The BIR r e -
quire d p rior co mplia n ce with t h e t ax clear a n ce r e quire m e nt a s a
condi t ion fo r t h e appr ov a l of t h e project o f di s tri b ution o f t h e 11 ssets
o f a b a nk und e r Eq uid atio n , is co ntr a r y to bo th th e letter a nd inte nt
of th e ]a w .30 T h e S u pre m e C o u r t r ejecte d t h e s t a n ce of t h e BlR an d
o bserv e d :
"The la w express ly provides t h a t deb ts a nd lia bilities of t he ba nk
und er liquida t ion a r e to be pai d in accor da nce wit h t he rul es on rn ncurre nce
and preferen ce of cr edit u nd e r th e Civil Code . Duties. t axes, a nd fees
du e the Governm ent enjoy pri ori t y only whe n t hey a re w ith refe re nce to
a s pecific mova bl e prope rty. un der Ar ticle 22 41 (1) of t he Civil Code, or
immovable pro pe rty, und er Ar t ic le 224 2( 1) of th e s a me Code . Howeve r . wit.h
referen ce to th e other real a nd pe r so n a l pr ope rty of t he debtor. some times
referred to a s "fr ee proper ty.'' th e t a xes a nd assessm e n ts du e th e N::ition a l
Governme nt, oth er t.h r1 n t hose in Articl es 22 4 1( 1) a nd 2242(1 ) of th e Ci,i l
Code, such as th e corpo ra te in co me tax, will come onl y in n inth place i n t he
order of preferen ce. On th e other ha nd, i.f th e BIR's conte ntion th a t a ta x
clearance be securP.d first befor e t he project of di s tributi on of th e assets of
a bank under liquida tion may be a pproved . th e n th e ta x liabili ties wiU be
given absolute preference in a ll ins t a nces. including th ose th a t do not fal l
under Articles 224 1(1) a nd 2242(1 ) of th e Civi l Code. In orde r to sec ur e a ta x
clearance which will serve as p roof th a t t he t a xpaye r had co mple tely pa id
off his tax liabilities, PDT C will be co mp e lled to se ttl e a nd pay fir s t all ta x
liabilities and deficien cies of the ba nk, r e gardless of the ord er of prefe re nce
under the pertinent provis ions of the Civil Code . Following th e BIR's
stance, therefore, only then may the proj ect of dis tribution of the br1nk 's
assets be approved and the other de bts and claims thereafter settled . even
though under Article 2244 of the Civil Code such debts and claims enjoy
preference over taxes a nd assess ments du e the National Governm en t . Th e
BIR effectively wants t his Court to ignore Section 30 of the New Centra l
Bank Act and disregard Article 2244 of the Civil Code. However, as a court
of law, this Court has the solemn duty to apply the law . It cannot and will
not give its imprimatur to a violation of the laws."
6.05. RULES ON COM.MON CREDITS. Article 2250 of th e
New Civil Code pro-..,.ides that the excess. if any, after the payme nt
of the credits that e njoy preference with respect to spe cific prope rty ,
20
Section 30, New Central Ba nk Act.
Philippine Deposit Ins mance Co rpor:ition v. Burea u of Intern al Re ve nue.
30
CLR. No. 172892, June 13. 20 13.
468 ESS ENTIALS OF CR EDIT TRANSACTION S
AND BANKJNG LAWS
real or personal , shall he added to the free property that th e debtor
may have, for the payment of the other credits . Und er Article
225 1. those credits. which do not enjoy a n y prefer e nce with respect
to specific property, and those, which enjoy prefenmce, as to th e
amount not paid, s hall be satisfi ed first in th e order establish ed in
Article 22--14 . It is only afte r th e ordin a ry preferred credits und er
Article 2244 are satisfied that common credits referred to in Articl e
2245 shall be paid pro rata regardless of dates.
a. Thus, the common credits under Article 2245 shall be
satis fied from the excess of the properties after satisfying both th e
special preferred credits under Articles 2241 and 2242 and th e
ordinary preferred credits under Article 2244. In other words if
there is no excess after satisfying both special and ordinary prefer;ed
cr edits, then the creditors who hold common credits will not r eceive
any portion of the properties of the debtor.
6 .06. SUMMARY OF RULES . In summary, the rules on
concurrence and preference of credits under the New Civil Code may
be stated thus:
(1) There is preference with respect to taxes only under
Articles 2241 and 2242 of the New Civil Code (NCC).
·( 2) As to all the other claims or liens mentioned in
Articles 2241 and 2242 of the NCC, there is no order of
preference and the balance (after taxes are deducted) of the
proceeds of the specific movable or immovable property as the
case may be shall be divided among the claimants or creditors
in proportion to the value of the claims or pro rata.31
(3) Th e excess of the specific property, if any , after the
pay m e nt of the credits which enjoy preference, shall be added to
the free property which the debtor may have, for the payment
of the other credits and shall be disposed in accordance with the
order of preference under Article 2244 of the NCC as modified
by Article 110 of the Labor Code that elevated labor claims to
No. 1 a nd r emoved the one year limit.32
(4) If there is an excess after satisfying the claims or
liens under Artic le 2244 . ;:i ll other common credits shall be
sa tisfi ed pro rota. ·"
31
.-\rtic!cs 224 6-22 -19 , NCC .
2
" .-\rticle 22,5 0, NC C.
3
, A.rcid1e 225 1, NC C; Jose Cordova v. R,.yes, Dawi'\y Pt al ., G . R. Nn. 1465fi5,
J u ly 3, 200 7.
PART l - 4 PE RSONS IN FINANC IAL DISTRESS -1 69
C HAPT ER 18 CONCURR ENC E A ND PRE FERE NC E OF C: RED [T S
6.07 . SPECIFIC PROPERTIES . Wi t h r es pect to spec ifi c
prope rties und e r Ar ti cle 224 l (for personal prope rties) and ~: 24 2 (for
r eal properti es) , the onl y pr e ferred credit is fo r taxes. Th e secon d
se n tence of Arti cle 2243 provides that ·' taxes me nt ion ed in No . 1.
Article 2241 , an d No . 1, Article 2242 , sh all first be sa ti sfied ."
R. The e num e ration in Articl es 2241 a nd 2242 Rr e not or der s
of preference . That article li s t s t h e credits which m ay concur wi th
r espect t o s pecific r ea l pro pe r ties and which would be satisfi ed pro
r aca acco rdin g to arti cle 2249.:i-•
b. After satisfying th e taxes mentioned in No. l . Article
221 1, and No . 1, Article 2242 , all the res t of credits mentioned in
both Articl es 2241 a.nd 2242 s hall be s atisfie d pro rata. The t erm pro
rata eans in proportion or ratably or a division according to share.
interest or liability of each. 35 The Justice J.B.L. Reyes expl a ined in
"A. The previous decision failed co ta ke fully into account the rad ica l
changes introduced by the Civil Code of the Philippines into the system of
priorities among creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled to
preference as to specific real property under Article 1923 were to be resolved
according to an order of priorities established by Article 1927 , whereby
one class of creditor s could exclude the creditors of lower order until the
claims of the former were fully sa tisfied out of the proceeds of the sale of the
real property subject of the preference, and could even exhaust proceeds ir
necessary.
Under the system of the Civil Code of the Philippines, however,
only taxes enjoy a similar absolute preference . All th e remaining thirteen
classes of preferred creditors under Article 2242 enjoy no priority among
themselves, but must be paid pro rata, i. e. , in proportion to the amount of
the respective credits. Thus, Article 224 9 provides:
"lf t.h ere are two or more credits with respect to th e sa me specific
real proper ty or real rights, they shall be satisfied pro rata, after the
payment of the taxes and assessments upon the immovable property
or rea l righ ts.'·
But in ord er to mak e this prora ting fuUy efiecti ve. th e preferre/1
creditors enumerated in Nos. 2 to 14 of Arti cle 2242 (or such of thE-m as havP
' '' Ca rried Lumb er Company v. Ar.,,ricultural Cr edit. Coo pera ti ve and Fina ncin g
Administration, C .R. N o. L- 2 1836. April 22, 1975 .
I
I
35 Article 2249, NCC; Carried Lumbe r Company v. Agri cu ltura l C redit _Coo!'~
erative and Fin a ncing Adm inistration , C.R. No. L-2 18 36 Apri l 22 , 197ii c1tLng ~
1
l
C.J .S . 967-8.
470 ESSENTIALS OF CREDIT TRANSACTIONS
AND BANKJNG LA. WS
credits outstanding) must necessarily be convened, and the import of th eir
claims ascertained . It is thus apparent that the full application of Articles
2249 a nd 2242 demands that there must be first some proceeding where the
claims of all the preferred creditors may be bindingly adjudicated, such as
insolvency, the settlement of decedent's estate under Rule 87 of the Rules of
Court. or other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civ:il Code that •-
''The claims or credits enumerated in the two preceding articles
shall be considered as mortgages or pledges of real or personal
property, or liens within the purview of legal provisions governing
insolvency xx x. (Italics supplied)
And th e rule is further clarified in the Report of the Code Commission ,
as follows
''The question as to whether the Civil Code and the Insolvency
Law can be harmonized is settled by this Article (2243) . The
preferences named in Articles 2261 and 2262 (now 2241 and 2242)
are to be enforced in accordance with the Insolvency Law." (Italics
supplied)
Thus, it becomes evident that one preferred creditor's third-party
claim to the proceeds of a foreclosure sale (as in the case now before us) is
not the proceeding contemplated by law for the enforcement of preferences
und er Article 2242, unless the claimant were enforcing a credit for taxes
that enjoy absolute priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to ascerta in the pro r::ita
dividend corresponding to each , because the rights of th e oth er creditors
likewise enjoying preference under Article 2242 can not be ascertained.
Wherefore, the order of the Court of First Instance of Ma nila now appealed
from , decreeing that the proceeds of the foreclosure sale be apportioned only
between appellant and appellee, is incorrect, and must be reversed."'"
c. In one case, the petitioner argued that he was a preferred
creditor because private respondents illegally withdrew his shares
from the custodian banks and sold them without his knowledge and
consent and without authority from the SEC. He quoted Article
2241 (2) of the Civil Code particularly the statement that "claims
arising from misappropriation, breach of trust, or malfeasance by
public officials committed in the performance of their duties, on the
movables, money or securities obtained by them ." He asserted that,
as a preferred creditor, h e was entitled to the entire moneta ry value
3
"D e Barretto v. Villanueva G.R. No. L-14938 , J anuary 28, 1961 & December
29. l 962 (Resolution on the Motion for Reconsidera tion).
PART 1 - ~ PERSONS IN FI NANCJAL DISTRESS 471
CHAPTER 18 - CON CURRENC E AND P REFERENCE OF CREDITS
of hi s s h a r es. The Su pre m e Cour t r eject e d t h e p e tition er 's a rgum e n t
r u ling that Article 224 1 r efer s only to specific mova bl e property .
Certa in ly, peti tio n e r had the ri gh t to d e m a n d t h e r et urn of his
C S PI s h a r es. The re wa s no dis pu te tha t the complaint was e ntitled
to th e s h a r es . H ow e ver , p e titioner w as co nfronted by a n impossible
s i t u a tio n as t h e s h a r es h a d a lread y been s old . Conseque ntly , h e
sought ins tead to r ecove r the ir mon e t ar y va lue. His claim was for
the payment of money, which is generic property and not specific
or determinate. P e t ition e r did n ot fall under a ny of the prov isions
applicable t o preferred cr editor s , h e n ce, he was deemed an ordinary
credit or under Arti cle 2 2 45 . Artic le 2251 (2) states that that common
credits r efe rred t o in Ar t icle 2245 s h a ll be paid pro rata regardl ess of
dates. 37
6.08. LABOR CLAIMS . The prefe rence for labor cla ims is
further r e iterate d in Section 133 of FRIA th a t sta t es:
Section 133. Concurrence and Preference of
Credits. - The Liquidation Plan and its Implementation
shall ensure that the concurrence and preference
of credits as enumerated in the Civil Code of the
Philippines and other relevant laws shall be observed,
unless a preferred creditor voluntarily waives his
preferred right. For purposes of this chapter, credits
for services rendered by employees or laborers to the
debtor shall enjoy first preference under Article 2244 of
the Civil Code, unless the claims constitute legal liens
under Article 2241 and 2242 thereof.
a. However , the Supreme Court clarified that Arti cle 11 0
of the Labor Code does not eliminate the require ment that the re
should be a liquidation proceedings for the following reaso ns:
(1) Because of its impact on the entire syste m of credit ,
Article 110 of the labor Code cannot be viewed in isol a tion
but must b e r e ad in relation to the Civil Code scheme on
classification and preference of credits;
(2) In the same way that the Civil Code provisions on
cla ssification of cre dits and the Insolvency Law h a ve been
37 Cordoba v. Reyes Da way Lim Bernardo Lindo Rosales Law Offices, C .R. No.
14 0555, July 3, 2007 .

472 ESSENTIALS OF CREDIT TRANSACTIONS
AND BANKING LAWS
brought into harmony, so also must the kindred provisions of
the Labor Law be made to harmonize with those laws;
(3) In the event of insolvency, a principal objective
should be to effect an equitable distribution of the insolvent's
property among his creditors. To accomplish this there must
first be some proceeding where notice to all of the insolvent's
crerutors may be given and where the claims of preferred
creditors may be bindingly adjudicated;
(4) A distinction should be made between a preference
of crerut and a lien. A preference applies only to claims that
do not attach to specific properties. A lien creates a charge on
a particular properly. The right of first preference as regards
unpaid wages recognized by Article 110 does not constitute a
lien on the property of the insolvent debtor in favor of workers.
It is but a preference of credit in their favor, a preference in
apphcation. It is a method adopted to determine and specify the
order in which creruts should be paid in the final distribution
of the proceeds of the insolvent's assets. It is a right to a first
preference in the discharge of the funds of the judgment
debtor.3 8
c. To reiterate, the Supreme Court explained that the
right to preference given to workers under Article 110 of the
Labor Code cannot exist in any effective way prior to the time of
its presentation in distribution proceedings. It will find application
when , in proceedings such as insolvency, such unpaid wages shall
be paid in full before the "claims of the Government and other
crerutors" may be paid. But, for an orderly settlement of a debtor's
assets, all creditors must be convened, their claims ascertained and
inventoried, and thereafter the preferences determined in the course
of jurucial proceedings which have for their object the subjection
of the property of the debtor to the payment of his debts or other
lawful obligations. Thereby, an orderly determination of preference
of creditors' claims is assured; the adjudication made will be binding
on all parties-in-interest, since those proceedings are proceedings
in rem; and the legal scheme of classification, concurrence and
38
Development Bank of the Philippines v. National Lahor Relati ons Commis-
sion, 18.3 SCRA 328; Development Bank of the Philippines v. Nat ional Labor Rela -
ti ons Commission, G.R. No. 108031 March I, 1995. (See Dissenting Opinions in the
latter case)
PART 1 - 4 PERSONS IN F1 NANC[AL DI STR ESS 473
CHAPTER 18 -- CONCURRENCE AND PREFER ENCE OF CREDITS
preference of credits in the Civil Code, th e In so lvency Law, and the
Labor Code is preserved in harmony. 39
d. It shoul d be noted in this connection that Article 110 not
only elevated labor claims but also removed th e one year limit under
Article 2244 of the New Civil Code. Nevertheless, the prescriptive
period under the Labor Code should still be considered . Article
291 of the Labor Code provi des tha t all money claims arising from
employer-employee relationship must be file d within three years
from the tim e the cause of action accrues, oth erwise they shall be
barred forever . Hence, the limit of the preferred la bor claims should
be three yea rs.
6.09. SECURED CREDITORS. If rehabilit ation is no longer
fea sible and the asse ts of Lh e corporation a re fi nally liq uida ted.
secured creditors sha ll enjoy prefe rence over un sec ured r reditors.
a . It ha s a lso been repeatedly reitera ted th a t un der Ar ticles
2241 and 2242 of the Civil Code, a mortgage credit is a special
preferred credit that enjoys pr eference with respect to a specific/
determinate property of the debtor .1°Creditors of secured obliga tions
may pursue their security interest or lien . or th ey may choose t.o
abandon the preference and prove their credits as ordinary claims.10
Moreover, Section 2248 of the Civil Code provides tha. t those
credits which enjoy preference in relation to specifi c real property
or real rights , exclude all others to the extent of the valu e of th e
immovable or real right to which the preference refers. A securr.d
creditor enjoys preference over a specific mortgaged property and
has a right to foreclos e the mortgage under Section 2248 of the Civil
Code. When there is no Stay Order, the crerutor-mortgagee has th e
right to foreclose the mortgage over a specific real property whether
or not the debtor-mortgagor is under insolvency or liquidation
proceedings.' 1
39Philippine Export and Foreign Loan Guarantee Corp. v. Court of Appea ls.
G.R. No. 118701 , December 12, 1995 citing (Philippine Savings Bank v. Lantin , G R.
No. L-33929, September 2, 1983, 124 S CRA 476; Bolinao, Jr. v. Padolina (1 86 SC!lA
368), Development Bank of the Philippines v. National Labor Relations Cc mm1 ss10n
(186 SCRA 841), Development Bank of the Philippines v. National Labor Relatwns
Commission (218 SCRA 183) and , not too long ago , in Development Bank of r.he _Phil -
ippines v. National Labor Relations Commission (229 SCRA 350), HauLea v. Na uonal
Labor Relations Commission (230 SCRA 119) and Development Ba nk of the Philip-
pines v. The National Labor Relations Commission (236 SCRA 11 7) _
10 Barayoga v. Asset Privatization Trust, G.R. No. 160073 October 24. 20~o:
Hautea v. National Labor Relations Comnnss10n, G.R. i\o. 96149, Februa? lfi. l!'l.~~
11Rizal Commercial Banking Corporation v. Intermediate Ap pe ll a t, Court, 3
Phil. 10 (1999); Consuelo Metal Corporation v._ Pl a nters Develop~ enr Ban,k CR,:~~•-
152580, June 26, 2008; See Chapter 19 for a d1scuss10 n on the etl ecL of a ~l ay O. J · ·
474 ESSENTIALS OF CREDIT TRAi"\JSACTIONS
AND BANKI NG L,\ WS
7. PREFER EN CE AS TO S PECIFI C PROPERTIES . ln
t he sett lement of t he asse ts of a n in solven t <lcb tol', t h n c la im s wit h
r es pect t o specific pr oper t ies sh a ll bP sat.is fi e<l fi rst in accor dance
wi th Articl es 224 1 a nd 2242.
7.01. PREFEREN CE AND CONCURRENCE. All t he cr ed it s
specifi e d in Articles 2241 a nd 22 4 2 a r e preferred cr edi ts w ith resp ect
to ,;pecific movable p roper ties . H owever, t h e rul es on con r. ul're nce
apply as between th e si milar credi ts .
a. Article 2243 is clear th at th e preferen ce is only with
respect to taxes . Articl e 2243 provides tha t taxes m e ntioned in No .
1, Article 224 1, a nd No . l , Article 2242 , shall fir st be sa tisfie d. 42
However , the rule on con cu r r ence will apply if there are two or more
cr edit with respect to t h e sa me movable. Article 2247 provides that
if th er e a r e t wo or more credi t s wit h respect t o the same specific
mova ble property , they shall be sa tisfied pro rata, a fter the payment
of duties , taxes a nd fee s due the State or any subdivision thereof.
8. SPECIAL PREFERRED CREDITS WITH RESPECT
TO MOVABLE . Preferred clai m s or liens as to specific m ovable or
personal pr oper ty ar e e numerated in Article 2241 of the New Civil
Code th at r ea ds as follows :
Art. 2241 . With reference to specific movable pro-
perty of the debtor, the following claims or liens shall be
preferred :
(1) Duties , taxes and fees due thereon to the
State or any subdivision thereof;
(2) Claims arising from misappropriation, breach
of trust, or malfeasance by public officials committed
in the performance of their duties, on the movables,
money or securities obtained by them ;
(3) Claims for the unpaid price of movables sold
on said movables , so long as they are in the possessio~
of the debtor, up to the value of the same ; and if the
movable has been resold by the debtor and the price is
still unpaid , the lien may be enforced on the price ; this
2 (13) Claims in favor of the depositor if the
' Cornm issioner of Interna l Reve nu e v N
G.R No . 74 965. November fl , 1994 . . , at.ion a l Labo r Rela tions Com mi ssio n ,
PART 1 - 4 PF;RSONS I N F I NANC lAL Dl ~T Rr•:ss •175
C HAPT ER I S - CONCURR ENCE AND P REFERE NCE OF r.RED ITS
right is not lost by the immobilization of the thing by
destination , prov ided it has not lost its form , substance
and identity ; neither is the right lost by the sale of the
thing toge the r w ith oth er property for a lump sum , when
the price thereof can be determined proportionally ;
(4) Credits guaranteed with a pledge so long
as the things pledg ed are in the hands of the creditor,
or those guaranteed by a chattel mortgage , upon the
things pledged or mortgaged , up to the value thereof;
(5) Credits for the making, repair, safekeeping or
preservation of personal property, on the movable thus
made , repa ired , kept or possessed ;
(6) Claims for laborers' wages , on the goods
manufactured or the work done ;
(7) For expenses of salvage, upon the goods
salvaged ;
(8) Credits between the landlord and the tenant,
arising from the contract of tenancy on shares , on the
share of each in the fruits or harvest;
(9) Credits for transportation , upon the goods
carried , for the price of the contract and incidental
expenses , until their delivery and for thirty days there-
after;
(10) Credits for lodging and supplies usually
furnished to travellers by hotel keepers, on the movables
belonging to the guest as long as such movables are in
the hotel, but not for money loaned to the guests ;
(11) Credits for seeds and expenses for cultivation
and harvest advanced to the debtor, upon the fruits
harvested ;
(12) Credits for rent for one year, upon the personal
property of the lessee existing on the immovable leased
and on the fruits of the same , but not on money or
instruments of credit ;
depositary has wrongfully sold the thing deposited ,
upon the price of the sale .
 PA RT 1 - 4 PERSONS rN F1NANC IAL DTST'RESS 477
476 ESSENTIALS OF CREDIT TRANSACTIO NS CHAPTER t8 - CONCURRENCE AND PREFERENCE OF CR ED IT!;
A."·.JD BA.'1-llU NG LAWS

the la w makes no di stinction, and we ca nnot make it without impairin g

In the foregoing cases, if the movables to which the
lien or preference attaches have been wrongfully taken,
the creditor may demand them from any possessor,
within thirty days from the unlawful seizure. (1922a)
8.01. UNPAID PRICE OF MOVABLES. The second p ara-
graph of Article 2241 gives preference to claims for th e unpaid
price of movables sold, on said movables, so long as they are
in th e possession of the debtor, up to the value of the same. The
require ments a r e as follows :
(1) Th e thing sold is a movable;
(2) There is an unpaid price;
(3) The mov able is still in possession of the debtor;
said preference, which would be the case if, when partia l payme nt has been
made, t he pr eference were limited to a part of the persona l pro perr.y sold
propor tionate to the unpaid portion of the pu rchase pri ce; or. wha t amounts
to the sam e thing. if said prefer ence were li mi te d to wha t, rema ins of th e
per sonal property after de ducing a part proportionate to the price already
pai d.'·'
b. S p ecia l ru les a r e pr ovid ed fo r if the movable is sold or if
immobilized b y dest in a tion :
(1) The lien may b e enfor ced on the price if the thing is
sol d an d t h e p rice is still unpaid ;
(2) Th e ri ght is not los t by th e sa le of t h e t hin g toge ther
wi th oth er property fo r a lump s um , when the price thereof ca n
b e determined proportionally ;

(4) The movable has not been immobilized by (3) This right is not lost by t he immobilization of t h e
destination t o such and extent that it has lost already lost its t hing by d esti n a tion , provided it. h a s not lost its fo rm , s ubstan ce
form , s ubstance and identity. a nd ide ntity.
a. Rationale. The Supreme Court explained that the 8. 02. LIEN FOR MAKING REPAIRS AND SAFEKEEP-
basic principle of the preference with respect to the unpaid price of ING. R ela t e d to pa r . 5 of Ar ticle 224 1 is th e Mech a nic's Lie n pro-
m ovables esta blished by the above legal provision is one of equity vide d for in Article 1731 t h at s ta t es th at "he who h as executed wo rk
a nd justice.'' The Couxt further explained : upon a movable h as a r igh t to r e t ai n it by way of pl edge until h e is
paid ." Th e m echan ic's lien is a ki n to a con tra ctor 's or wa r eh ouse-
·'While the price was unpaid, the purchaser's patrimony increased a t m a n 's li en in th a t by way of ple d ge , t h e repa irma n h a s t he ri ght to
th e expense of the vendor; the latter becomes in the end a gratuitous surety r etain possessi on of th e mova ble until h e is pa id. However , t he right
fo r the purchaser 's creditor s, for th e personal property sold is a pledge of r e t ention is condition ed upon th e execu tio n of work upon r.he mov -
from which the creditors might collect their credit without any r eason
whatever unless th e preferenc e is established ; that is to say, that the vendor a ble .
ha s a preference because he has placed the thing among the purchaser's a. The cre a tion of a m echa nic's lien does not depen d upon
pa trimon y.'' (25 Encidopedia ,Juridica Espriiiola, p. 362.) ''Without the sale, th e owner's n onpay m e nt. Rather , the contracto r ·'cr ea tes·: his or h er
- the trib une Gre neir used to say, in the tribuneship - the thing sold
own lien by performing th e wor k or furni s hing the mat e n a ls. "
cou ld not have beco me a pledge to th e other creditors . The latter should ,
t herefore. fir st of ail , fu lfi ll the obligation devolving on the debtor ." (5 Colin b. In Bachrach Motor Co. v. Mendoza:• the Court rul ed that
y Capita nt, Cu rso Elemental de Derecho Ci vil, p. 182.) a person who h as m ade r e pairs upon a n a utomobile a t th e requ eSt of
If th is is so, the oth er debtors (creditor s) cannot collect from the
proceeds of t he r esa le of t he personal property until the original vendor
of the sam e has been pa id the full price of th e original sale, to the extent . "C l C · • Ti orwo Unson et al. v . Urqu i-
"Voluntary insolvency of the entra ap1z. rn ·
of the price of said persona l property in the r esale. This preference st ands jo, Zulo~ga & Escubi, G.R. No. L-28205 Decernber 24, 1: 2~0. I 70:20:2, July 11. 2008,
whether the pu rcha se price has heen par tially paid or not at all; because ·••Optimum Motor Center Corporation v. Tan, G. J c· .,
, . . _ d Hill ffll 1 757 So 2d 468 (A a . 1v. •" PP·
53 Arn. Jur. 2d Mechani cs Liens§ 0 an ~ v. ~ q s·c 19 1 63 1 S.E.2d 252
2000); Butler Contracting, Inc. v. Court Street. LLG, 36 - · · ~ ·
3
(2006).
_ ' Volu ntary insolve ncy of th e "Central Ca piz." Timorwo Unson , et al. v. Urqui- '
0
43 Phil. 410 (1922).
Jo, Zuloaga & Escu bi, G.R. No. L- 28205, December 24, 1927.
 478 ESSENTIALS OF CREDIT TRANSACTIONS
AND BANKING LAWS
the owner is entitled to retain it until he has been pa id the price of
the work executed
8.03. LABORER'S WAGES . Article 1707 of the new Civil
Code provides that "the laborer's wages shall be a lien on the
goods manufactured or the work done." On the other hand, one of
the preferred credits with respect to movable properties specified
in paragraph 6 of Article 2241 is for claims for laborers' wages, on
the goods manufactured or the work done." The lien r eferred to in
the first article is on the goods manufactured or work done . Article
1707 of the new Civil Code seems to contemplate chattels and not
immovable property as confirmed by Article 2241. "For the payment
of the laborer's wages, article 1707 creates a lien on the goods
manufactured or work done, if the laborer be engaged by the owner
of the goods to b e manufactured or work to be done .""'
a. However, Article 1707 and par. 6 of Article 2241 does not
apply where there is a contractor because Article 1729 of the New
Civil Code provides that "those who put their labor upon or furnish
materials for a piece of work undertaken by the contractor have an
action against the owner up to the amount owing from the latter to
the contractor at the time the claim is made ."•8
8. 04. RENTALS. Article 2241, par. 12 of the New Civil Code
est ablis hes a preference in favor of "credits for rent for one year'.
upon the personal property of the lessee existing on the immovable
leased and on the fruits of the same," without imposing the condition
t hat the rent should have been incurred personally by the lessee. 49
9. SPECIAL PREFERRED CREDITS ON IMMOVABLE
!'ROPERTY. The preferred credits with respect to specific
immovable or real property are enumerated in Article 2242 of the
New Civil Code which reads.
Art. 2242. With reference to specific immovable
pr~perty and real rights of the debtor, the following
claims, mortgages and liens shall be preferred and
shall constitute an encumbrance on the immovable or
real right:
(1) Taxes due upon the land or building;
"Bautista v. The AuJitor Gen era l, G.R. No. L-6799 June 29 1955
·'"Ib id. ' '
~l n the Matter of the Intestate Es tate of th e Deceased Go Foo k Li a ne
mez v . YJUco. G.R. No. L-1 6784, May 19, I 965. . . Go-
PART I - •I PERSONS IN F1 NA.NCIAL DJSTRESS 479
C H.APT ER 18 - CO NCURRE NC E AND PREFERENCE OF CREDITS
(2) For the unpaid price of real property sold,
upon the immovable sold ;
(3) Claims of laborers, masons, mechanics and
other workmen , as well as of architects, engineers and
contractors, engaged in the construction, reconstruction
or repair of buildings, canals or other works , upon said
buildings , canals or other works ;
(4) Claims of furnishers of materials used in the
construction, reconstruction , or repair of buildings,
canals or other works , upon said buildings, canals or
other works ;
(5) Mortgage credits recorded in the Registry of
Property, upon the real estate mortgaged;
(6) Expenses for the preservation or improvement
of real property when the law authorizes reimbursement,
upon the immovable preserved or improved;
(7) Credits annotated in the Registry of Property,
in virtue of a judicial order, by attachments or executions ,
upon the property affected, and only as to later credits;
(8) Claims of co-heirs for warranty in the partition
of an immovable among them, upon the real property
thus divided;
(9) Claims of donors or real property for pecuniary
charges or other conditions imposed upon the donee,
upon the immovable donated;
(10) Credits of insurers, upon the property insured,
for the insurance premium for two years. (1923a)
9 .01. CONTRUCTOR'S LIEN. The Supreme Court explained
the concept of contractor's li e n (also known as Refectionary Credit)
under Article 2242 the prope r mode for its enforceme nt in J .L.
Bernardo Construction u. Court of Appeals50 as follows :
"Art icles 22 41 a nd 2242 of th e Civil Cod e e numerates certain credits
which e nj oy pre fe rence with r es pec t to s pecific personal or rea l p_rope rty of
th e d ebtor . Specifically, t he co ntra ctor's lie n cla imed by th e pe t1t1on ers 15
.
c
50 G.R. No. 105827 , J a nu ar y 3 1, 2000.
480 ESSENTIALS OF CREDIT TRANSACTI ONS
AND BANKING LAWS
gra nted under the third paragraph of Article 22 42 which provid es th a t th e
claims of contractors engaged in t he con struction , r econ structi on or repair
of buildings or other works shall be preferred with r espect to th e s peci fi c
building or other immovable property co nstru cted .
However, Article 2242 only find s application wh en there is a concur-
rence of credits, i.e. , when the same specific property of th e debtor is
subjected to the claims of several creditors and the value of such property of
the debtor is insufficient to pay in full all the creditors . In such a situation,
the question of preference will arise, that is, th er e will be a need to deter min e
which of the creditors will be paid ahead of the others. Fundamental tenets
of due process will dictate that thls statutory lien should then only be
enforced in the context of so me kind of a proceeding where the claims of all
the pn'!ferred cr editors may be bindingly adjudicated , such as insolven cy
proceedings."
b. In Jan-Dec Construction Corp. u. Court of Appeals, the
Cou rt ruled that neither Article 2242 of the Civil Code nor the
enforcement of the lien thereunder is applicable to the respondent,
"because said provision applies only to cases in which there are
several creditors carrying on a legal action against an insolvent
debtor. Respondent is not a debtor of the petitioner. Respondent is
not a party to the Construction Agreement between petitioner and
Intermodal."51
c. The preference under paragraphs (3) and (4) of Article
2242 attaches only to the building, canals or works upon which the
refection or work was made. It does not attach to like the separate
properties like the land .52
PROBLEM:
1. It is not disputed that CLC has in its favor a materialman's lien
because it supplied to the owner of the warehouse, FACOtvlA, on
credi t lumber a nd m aterials whi ch were u sed in I.h e construr.t.ion of
the w11rehou se . For t h e construction of the warehouse, the company
actu a lly delivered lumber a nd constru ction materials t.o FAC0}.1A
va lued at PB,233.55. FACOMA mad e partial payments . As of January
1. 1955 it had not paid to t h e com pany the balance of its acco unt
amounting to P4,733.55. In view c,f th e FACUJ\1A's failure to pay
the s tipulated installments, th e CLC secured a writ of exec u tion
"Jan- Dec Construction Co rp. v. Cou rt of Appeals, G.R. No. 1468 18, Febru-
ary 6, 2006; See also J Bernardo Construction v. Court of Appeals, G.R. No. 105827,
,January 31, :2000.
2
' Lopez v. Orosa, Jr . G.R. No . 10817-18, February 28, 1958.
PAln' 1 - ~ PF:RSONS l N FIN:\NC L-\L D1 STRE S 181
CHAPTER 18 CONC URRENCE AND PREFER E)!CE OF rn1-:orr~;
to en fo rce th e ju dg ment. IL 1s also not dispu red tha ACC Pr\ h~, a
mo r tgage lien because FAC01vL<\ obtai ned from t he ACCF,\ ,i na n nf
P27 .200. 00 for the constru ction of its wa r ehouse . As !:'ec11rit v fnr t h~t.
loa n, the F ACOJ\,lA mo r tgaged to ACC F'A its lease rig ht s ove.r ~ p~rce\
of la nd located at Ba rri o Ma nin gdi n g Sta. Barbar a, Pa ng::i :<ina n a nd
t h e wa reh ouse to be con st r ucted on the sa id la nd together w1t.h the
oth er imp rove ments existin g the reo n. T he mortga ge wa s r eco rd ed in
t he r egistratio n boo k of t he r egister of deeds. The tria l court rul ed
th a t t he lumber co mpa n y's lie n over th e wa rehouse is superior to the
ACCFA's mort gage lien beca use it is a llegedly ah ead in the or der of
preference in I.h e enum eration of ten claim s, mort ga ges a nd hens in
ar ticl e 22 42 . Ts t.h P rn lin g of t h e tr ia l co urt correct?
A: No . The trial court erred in holding t.hat the lumber compa ny's li en
over the warehouse is superior to t he ACCFAs mortgage lien . It wa s
mis taken in assuming that the enum eration of ten clai ms . mort gages
a nd liens in arti cle 2242 creates an order of prefer ence . It is not
correct to say that the mat.eria l man's (mechanic's) lien or refectiona ry
credit of the lumber compa ny , bei n g listed as No. 4 in article 2242 .
is superior to the ACCFA's mortgage cr edit which is listed as No. 5.
The enumer ation in article 2242 is not an order of preference. Thal
article lists th e credits which ma y concur with respect to speci fi c real
properties and which would be satis fi ed pro rata accor ding to artic le
2249 .
There is no dispute that th e FACOi\L--\ ware hous e wa ,
constructed by mea n s of t h e materials supplied by Carried Lumber
Company and that the construction was financed by the ACC FA
which h ad loaned !>27,200.00 to th e FACOl'vlA. Therefore. it i, j11~t
and proper that t h e two cr editors should have- pro rala shares in th a t
ware house .
The lower court's solu tion of awarding t he wa rehouse to t he
lumber company wa s a n unwarra nt ed disrega rd of th e ACC FXs cla im
On the other h and; th e sh eriffs adjudication of the whole warehousE-
to t h e ACCFA nullifies t he lumber co mpa ny's clai m. Neit her solut10n
ts ju st because it. results in unju st enrichment by one party, a,t th ~
expense oft h r ot h, r . ( C'a.rri ed L11mbcr Compan_v u. Agnwltura,. Crer/u
0
and Coopera twe· F,·.na.n.ring · Organization.
· · GR . . LVo. L· 218 ..i''6Aori/
,
•J:,,
-- .
1975)
10. ORDINARY PREFERRED CREDITS. With rele re nce
h d ebtor rh e fr,ll owrn g
to or.her propertv, real an d persona l , of t e - , ·
. . -
clai ms or credits sha
U b t' cl . h
e pre erre in t e orde r n a me d be low :
Art. 2244. With reference to other property, real a~d
personal, of the debtor, the following claims or credits
shall be preferred in the order named:
482 ESSENTIALS OF CREDIT TRANSACTIONS
AND BANKJNG LAWS
(1) Proper funeral expenses for the debtor, or
children under his or her parental authority who have
no property of their own, when approved by the court;
(2) Credits for services rendered the insolvent
by employees, laborers, or household helpers for one
year preceding the commencement of the proceedings
in insolvency; ~ A•n . 110 , LA£ol( CO OE ~ rnovEP W ~ ,1.
. - HO i ·)'R.. \.. \Oll i
(3) Expenses during the last illness of the debtor
or of his or her spouse and children under his or her
parental authority, if they have no property of their own;
(4) Compensation due the laborers or their
dependents under laws providing for indemnity for
damages in cases of labor accident, or illness resulting
from the nature of the employment;
(5) Credits and advancements made to the debtor
for support of himself or herself, and family, during the
last year preceding the insolvency;
(6) Support during the insolvency proceedings,
and for three months thereafter;
(7) Fines and civil indemnification arising from a
criminal offense;
(8) Legal expenses, and expenses incurred in the
administration of the insolvent's estate for the common
interest of the creditors, when properly authorized and
approved by the court;
(9) Taxes and assessments due the national
government, other than those mentioned in Articles
2241, No. 1, and 2242, No. 1;
(10) Taxes and assessments due any province,
other than those referred to in Articles 2241, No. 1, and
2242, No.1 ;
(11) Taxes and assessments due any city or mu-
nicipality, other than those indicated in Articles 2241,
No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries
caused by a quasi-delict;
(13) Gifts due to public and private institutions of
charity or beneficence;
PART 1 - 4 PERSO:-.IS IN FINANCIAL DISTRESS .j 3
CHAPTER 18 - CON CURR ENC E AND PREFERE NC E Of CREDIT
(14) Credits which , without special privilege , ap-
pear in (a) a public instrument; or (b) in a final judgment,
if they have been the subject of litigation . These credits
shall have preference among themselves in the order of
priority of the dates of the instruments and of the judg-
ments, respectively. (1924a)
10.01. EFFECT OF LABOR CODE . Ar ticle 2244(2) qu alifies
the prefere nce credi ts for ser vices re n der ed th e in solvent. by
e mpl oyees, labor e rs, or house hold hel pe rs to t hose ea rn ed for one
year preceding the commence m ent of t he proceedin gs in in solvency.
Article 110, Labor Code modified Article 2244(2) by re moving th e
one-year limitation and by elevating th ese cr edi ts from 2nd to 1s t . As
thus modifi ed , t he excess of Lh e prope r ties t ha l a ns wer ed for spec ia l
preferred credits plu s th e other propert ies that ;:ire not s uhjPct to
such special preferred cr edits shall be sati s fi ed in accordance with
the fo llowing ord e r of prefere nce:
(1) Credits fo r se rvices re nde r ed the insolvent by e m-
ployees , la bore r s, or h ouseh old he lre rs prior to t he proceedings
in inso lve ncy ;
(2) Prope r fun e ra l expe nses fo r th e de bto r, or childre n
und er his or he r pa re nta l a uthority who have no property of
th eir own , wh e n ;:i pproved by th e court :
(3) Expenses durin g th e last illn ess of th e d e btor or
of his or h e r spou se and childre n und e r hi s or he r pa re nta l
a uthority, if th ey have no prope rty of th eir own ;
(4) Comp en sation due the la borers or their de pend e nts
und er law s providing for inde mnity fo r da mages in ca ses of
labor accident, or illness resulting from the nature of th e
employm e nt;
(5) Credits and a dvanceme nt.s mad e to the de btor fo r
s upport of himself or herself, and famil y. during t he la st year
preceding the insolven cy;
(6) Support du ring t he insolvency proceedings, and for
three months thereafter;
(7) Fines and civil indemnification a rising from a
criminal offe nse;
(8) L egal expenses, and expenses incurred in th e ad-
minis tration of th e insolvent's estate for th e comm on interest
484 ESSENTIALS OF CREDIT TRANSACTIO NS
AND BANKING LAWS
of th e cr editors, wh en properly authorized and ap proved by th e
court;
(9) Taxes a nd assessm ents due th e natiomil govern -
ment, other than those mentioned in Articles 22 41 , No . 1, and
22 42, No. J ;
(10) Taxes a nd assessme nts due any province, other
than those referred to in Articles 224 1, No . I , and 2242, No. l ;
(J 1) Taxes and assess ments du e a ny city or municipa lity,
oth er th a n those ind icated in Articles 2241 , No. L a nd 2242,
No . 1:
(12) Dama ges for death or per sonal injuries ca used by a
quasi- dclict :
(l 3) Gifts d ue to public a nd priva te in s titutions of cha rity
or ben efi cence;
(14) Credits which , without special privilege, appea r
m (a) a public instrument; or (b) in a final judgment, if they
have been t he s ubject of litigation . These credits shall have
preference among themselves in the order of priority of the
dates of th e instruments and of the judgments. respectively.
CHAPTER19
FINANCIAL REHABILITATION
AND INSOLVENCY ACT OF 2010
Orrlinary rul es on collection of debts cannot cope with th e
special situations where th ere are numerou s creditors a nd the
debtor's assets are not suffici ent to answer for all obligations.
The misfortune of debtors , who lost their assets either through
circumstances they cannot control or just erroneous management
decisions, will be further aggravated. These debtors would then
lose a second chance to pursue their mea ns of li velihood. On the
other hand , the cr editors might not be in a better position because
each creditor must spend increasing time and resources to beat
other creditors to the insolvent's assets.' This Chapter discu sses the
special statutory rules that aim to address these concerns.
1. APPLICABLE LAW. Insolvency, rehabilitation and
liquidation is now governed by R.A. 10142 otherwise known as
the Financial Rehabilitation and Insolvency Act of 2010 (FRL\ for
short). FRJA lapsed into law on July 18, 2010.
a. The FRIA expressly repealed the Insolvency Law or Act
No. 1956 that was passed way back in 1909. However, FRL'\ did not
repeal and even adopts the rules on concurrence and preference of
credits under the New Civil Code.
b. Supreme Court A.M . No. 12-12-11-SC entitled "Financial
Rehabilitation Rules of Procedure (2013) implements that provisions
of FRIA . These are the rules of pleading, practice and procedure to
govern actions brought under FRIA.
1.01. THE PROCEEDINGS. The proceedings under FRIA are
as follows :
1
Bai rd , Jackson & Adl er, pp. 20-21.
485
486 ESS ENTIALS OF CREDI T TRANSAr.TI ONS
PART 1 - 4 PERSOKS IN FI NANCIAL DISTRESS 4S7
AND BAl"\JKJNG LAWS CHAPTER 19 - FINANCLI\L REHABILITATION
AND INSOLVENCY ACT OF 2.010
ci . Reh ci bilita ti on procee dings lh at includ es : 2. RATIONALE AND STATE POLICIES . Generally,
(1) Voluntary r eh ab ilita tion: 2 both insolvency a nd liquid ation proceedings have only one aim - to
conserve all the remaining assets of the insolvent/liquidated person/
(2) Involuntary r e h abilitation ;' corporation for distribution to th e creditors. 10 However, such aim
(3) P e tition fo r Approval of P r e-Negotiated Re habi- s hould be taken in the larger context of economic stability, growth
litation ;' an d development. The Explanatory Notes to the House Bill that was
later enacted into FRIA include the following discussion:
b. Pe tition for Suspe nsion of Payment of Individual debtor;5
c. Voluntary Liquida tion of Sole Proprietorship. Partnership "The absence of effective and orderly insolvency procedures can
or Corporation ;6 aggrava te economic a nd financial crises. Without effective procedurE>s that
are applied in a consistent manner, creditors may be unable to collect on
d. Involuntary Li q u idati on of Sole Proprietorship, Partner- their claims, which will adversely affect the future availability of credit.
ship or Corporation;7 Without orderly procedures, the rights of the debt.ors may not be adequately
protected and different creditors may not be treated equitably. On the
e. Voluntary Liquidation of Individual D ebtor; 8 and other h and, the consistent application of orderly and effective insolvency
procedures plays a critical role in fostering growth and competitiveness and
f. Involuntary Liquidation of Individual Debtor (due to acts may also assist in the prevention and resolution of financial crises.
of Insolvency). 9
X X X
1. 02 . NATURE OF PROCEEDINGS. Section 3 provides that
the proceedings under FRIA are judicial in nature that are classified The legislative framework of our insolvency proceedings is sorely
as procee dings in rem. Section 3 provides: outdated. Likewise, it is inadequate and unresponsive to the modern
business trends and it is generally unable to provide quick resolution of
financial dilemmas. This inadequacy and unresponsiveness of the insolvency
Section 3. Nature of Proceedings. The proceedings were deeply felt during the economic crisis of 1997 and 1998
proceedings under this Act shall be in rem. Jurisdiction when long-drawn out proceedings following corporate failures caused
over all persons affected by the proceedings shall be immense waste of resources. In some cases, the proceedings drag on to the
considered as acquired upon publication of the notice extent of seriously threatening the survival of the subject comparues. "11
of the commencement of the proceedings in any
newspaper of general circulation in the Philippines in a. FRIA expresses the following State Policies:
the manner prescribed by the rules of procedure to be
promulgated by the Supreme Court. Section 2. Declaration of Policy. - It is the policy
of the State to encourage debtors, both juridical and
The proceedings shall be conducted in a summary
natural persons, and their creditors to collectively and
and non-adversarial manner consistent with the declared
realistically resolve and adjust competing claims and
policies of this Act and in accordance with the rules of
property rights. In furtherance thereof, the State shall
procedure that the Supreme Court may promulgate.
ensure a timely, fair, transparent, effective and efficient
rehabilitation or liquidation of debtors. The rehabilitation
' Section 12. FRIA. or liquidation shall be made with a view to ensure or
3
Sec r. ion 13. FRIA. maintain certainly and predictability in commercial
'Section 76, FRU . affairs, preserve and maximize the value of the assets
'Section 94 , FRL\.
6
Section 90, FRIA .
' Section 91, FRIA. 10
8 Sps . .'\ .ranela v. Th e Court of Appeals , G.R. No. 95253. ,July 10, 1992.
Section 103, FRIA . 11
Explanatory Note to House Bill No. 132 of Representative (no w Senator>
' Section 105, FRV\ .
Juan Edgardo M. Angara .
 ESSENTIALS OF CREDI T TRANSACTI ONS
AND BAN Kl NG LAWS
of these debtors , recognize creditor rights and respect
priority of claims , and ensure equitable treatment of
creditors who are similarly situated. When rehabilitation
is not feasible, it is in the interest of the State to facilities
a speedy and orderly liquidation of these debtor's assets
and the settlement of their obligations.
b. Accordingl y, FRL<\ seeks to attain th e stated purposes
a nd poli cies through th e foll owing:
(1) To "establish a more sys tematic fram ework for
insolvency proceedings"; 12
(2) To "pr ovi de equitable t reatm ent to all parties
involved in a financial restructuri n g or rehabilitation"; 13
(3) To "ma xi mize the ch a n ces for the survival of the
company concerned by providing a n a il ing enterprise fo ur
different remedies , to wit: (l) fa st-track re h abilitation; (2)
cour t -supervised r ehabilitation ; (3) negotiated reh abilitation ;
a nd (4) di ssolution-liquid ation .""
3. PERSONS INVOLVED. The indispensable persons that
a re involved in r eh abil itation and insolvency proceedings are the
debtor s and th e creditors. After aU , it is necessary to initiate these
proceed ings onl y if there is a de btor who is incapable or is presently
in no position to settl e its obli ga tion s to creditors.
3.01. DEBTOR. Deb tor shall refer to a sole proprie torship
dul y registered with the Depa rtment of Trade and Industry (DTI) ,
a partn e rship dul y registered with the Securiti es a nd Exchange
Commission (SEC) , a corporation duly organized and existing und er
Philippin e laws, or an individual debtor who has become insolvent.15
Understandably , FRI.A does not cover th e government because of
t he ba s ic rule t hat th e State is always solvent. 16
a. Indi vidual debtor shall refer to a natural person who is a
resident and citizen of the Philippines that has become in solvent. 17
2
' Exp lan ator y No te to House Bill No. I 32 of Represent ;;. tive (now Senator)
J uan Edgardo M . Anga ra
13
lbid.
" Ib id.
15
Section 3, FRIA.
16
Aran eta, et al . v . Gatrnaitan , C .R. Nos . L- 8895 and L -9 19 1, April 30, 1957.
17
Sec t10n 3, FRIA.
PART I - 4 PERSONS IN FI NANCIAL DISTRESS 489
CHAPTER 19 - FI NANCIAL REHABILITATI ON
AND INSOLVENCY ACT OF 2010
b. Group of debtors s hall refer to and can cover c,nly: ( 1)
corporation s that are financially related to one anoth er a.s parent
corporations, subsidiaries or affiliates; (2) partnerships that
are owned more than 50% by the same p erson; a nd (3) single
proprietorships that are owned by the same person. When the
petition covers a group of debtors, a ll r efer en ce und er these rules to
debtor shall include and apply to the group of debtors. 18
(1) A group of debtors may jointly file a petition for
voluntary rehabilitation under the FRLA. whe n one or more of
its members foresee the impossibility of meeting debts when
they respectively fall due, and the financial distress would
likely adversely affect the financial condition and/or operations
of the other members of the group and/or the participation of
the other members of t he group is essential under the terms
a nd conditions of the proposed Rehabilitation Plan .19
c. Excluded Debtors. Excluded from t h e operation of
the FRI.A are debtors which are (1) banks, (2) pre-need co mpanies,
(3) insurance companies, and (4) n ational an d loca l govE·rnm e nt
agencies or units. Rehabilitation of banks , pre-need companies, and
insurance companies is still govern ecl by the ir respcr.tivc governing
special laws. 20
d. Juridical Entities and Related Enterprises. Each
juridical entity shall be considered as a separate e nLity u n de r th e
proceedings under FRIA. Section 7 provides :
Section 7. Substantive and Procedural Consolida-
tion. - Each juridical entity shall be considered as a
separate entity under the proceedings in this Act. Under
these proceedings, the assets and liabilities of a debtor
may not be commingled or aggregated with those of
another, unless the latter is a related enterprise that is
owned or controlled directly or indirectly by the same
interests: Provided, however, That the commingling or
aggregation of assets and liabilities of the debtor with
those of a related enterprise may only be allowed where:
18
Section 3, FRIA.
19
Section 12, FR IA.
20
• sectio n 5, FRIA; See In surance Code. New Central Bank Act and Pre-Need
Cod e.

490 ES SENTIALS OF CREDIT TRANSACTIONS
AND BANKING LAWS
(a) There was commingling in fact of assets and
liabilities of the debtor and the related enterprise prior
to the commencement of the proceedings;
(b) The debtor and the related enterpr ise have
common creditors and it will be more convenient to
treat them together rather than separately;
(c ) The related enterpr ise voluntarily accedes to
join the debtor as party petitioner and to commingle i~
assets and liab ilities with the debtor's; and
(d) The consolidation of assets and liabilities of
the debtor and the related enterprise is beneficial to all
concerned and promotes the objectives of rehabilitation.
Provided, finally, That nothing in this section shall
prevent the court from joining other entities affiliated
with the debtor as parties pursuant to the rules of pro-
cedure as may be promulgated by the Supreme Court.
3.02. I NSOLVEN T DE BTOR. Insolvent shall refer to the
fin ancia_l _conditi on of a debtor t h at is generally unable to pay its or
h is ha b1ht1es a s t hey fa ll du e in t he ordinary course of business or
h as li abi li ties t h at ar e greater t ha n its or his assets.21
(1) Liabilities sh all refe r to monetary claims against
t he debtor , incl uding stock.holder's advances that have been
recor ded in th e debtor's a udited financial statements as
advances for fu ture subscriptions.22
(2) Ordinary course of business shall refer to trans-
actions in t h e pu rs ui t of the individual debtor's or debtors'
busi?ess operations prior to r ehabilitation or insolvency pro-
ceedings a n d on ordinary business terms .23
(3) Insol vency shall r efer to the financial incapacity
of t_h e debtors to p ay their liabilities as they fall due in the
ordi n ary course of business or whenever their liabilities are
greater th a n t heir assets. 2 '
" Section 3, FRlA.
"' Ibi d .
" Ibid .
1 30
'Sect ion 5(k) . Rul e I. A.M . No. 12-12- ll ·SC.
PART 1 - 4 P ERSONS IN FINANCIAL DISTRESS 491
CHAPTER 19- FINAN CIAL REHABILITATION
AND INSOLVEN CY ACT OF 2010
3.03. CREDITOR. Creditor shall refer to a natural or juridical
person which has a claim against the debtor that a rose on or before
the commencement date. 25 Commencement Date refers to the date
on which the court issues the Commencement Orde r , which shall
be r etroactive to the date of filin g of the petition for voluntary or
involuntary proceedings.26
(1) General unsecured creditor shall refer to a creditor
whose cl aim or a portion t hereof its neither secured , preferred
nor subordinated under th e FRIA.27
(2) S ecured creditor sh a ll r efer to a cr editor with a
secured claim .28 In this connection "S ecured Claim " sh all r efer
to a claim that is secured by a 1ie n 29 while Lien s hall refer to
a statutory or contractual claim or judicial charge on r eal or
personal property that legal1y entitles a creditor to resort to
said property for payment of the claim or debt secured by su ch
lien.30
3 .04. LIABILITY FOR UNLAWFUL DISPOSITION
OF ASSETS. Section 10 prohibit s dis positi on of assets under the
circumstances stated therein:
Section 10. Liability of Individual Debtor, Owner
of a Sole Proprietorship, Partners in a Partnership,
or Directors and Officers. - Individual debtor, owner
of a sole proprietorship, partners in a partnership, or
directors and officers of a debtor shall be liable for
double the value of the property sold, embezzled or
disposed of or double the amount of the transaction
involved, whichever is higher to be recovered for benefit
of the debtor and the creditors, if they, having notice
of the commencement of the proceedings, or having
reason to believe that proceedings are about to be
commenced, or in contemplation of the proceedings,
willfully commit the following acts:
25
Section 3, FRIA.
z• Jbid .
21
Ibi d.
28
lbid .
' " Ibi d .
Jbi d.
492 ESSEN TlALS OF CREDIT TRANSA CTI ONS
AND BANKJ NG LAWS
(a) Dispose or cause to be disposed of any prop-
erty of the debtor other than in the ordinary course of
business or authorize or approve any transaction in
fraud of creditors or in a manner grossly disadvanta-
geous to the debtor and/or creditors ; or
(b) Conceal or authorize or approve the conceal-
ment, from the creditors , or embezzles or misappropri-
ates, any property of the debtor.
The court shall determine the extent of the liability
of an owner, partner, director or officer under this
section. In this connection , in case of partnerships
and corporations , the court shall consider the amount
of the shareholding or partnership or equity interest of
such partner, director or officer, the degree of control
of such partner, director or officer over the debtor, and
the extent of the involvement of such partner, director
or debtor in the actual management of the operations of
the debtor.
4. REHABILITATION. If a sole proprietorship, partner-
s hi p , o r corpor ation is in fina ncial dis tress but the proprietor, part-
n e rs o r directors and s hareholde rs believe that it can still continue,
t h e bu s in ess organization ma y conside r re habilitation rather than
outri ght dissolution .
4.0 1. CONCEPT OF REHABILITATION. Rehabilitation
s hall refer to th e r estor a tion of th e de btor t.o a condition of successful
operation a nd solvency, if it is sh own t hat its continuance ofoperation
is econ omica1Jy fea s ibl e and its cr e ditors can recover by way of the
present va lu e of p aymen t s projected in the plan, more if the debtor
continues as a going con cern t h a n if it is immediately liquidateil ."
a. Rehabilitati on conte mplates a continuance of corporate
life an d ac t iviti es in a n effort to r estore and r einstate the corporation
to its form e r position of s u ccPssful opera tion a nd solvency .32
11
Section 3, R.A. 10 142 otherw1se know n as the Financia l Rehabilitation and
Insolvency Act of 2010 or FRIA .
32 San J ose Timber Corporation v. SEC. C.R. No. 1621!:16, February 27, 20 12;
Pacific Wide Realty a nd Development Corporation v. Puerto Azul Land , lnc., C.H. No.
178768 & 180893. Nove mber 25, 2009; Philippine Vtteras Bank Employees Union-
NUBE v. VPga. GR. No. 105364 , June 28. 2001. 360 SC:RA :l3 .
i
PART l - 4 PERSONS IN Fl NANC lAL DISTRESS ,19 3
CHAPTER 19 - FI NANC IAL REHABILITATI ON
/\N il INSOLVENC:Y 1\CT OF 20 10
h. Th e Supre me Court ex pl ain ed in Banh of Philippin "
i s lands u. Sarabia Manor Hot el Corporat ion:'"
"Recogni zing the volatile nature of every busin'=ss, th e rul es on
m rporate reh abilitation have been cra~e<l in order to give compan ies
suffici ent leeway to deal with debilitating financial predica ments in the
hope of restoring or reaching a sustainable operating for m if only to best
accommod ate the vario us interests of all its stakeholders, may 1t. be the
corporation's stockholders, its creditors ::ind even the general public. In
this light, case law has defi ned corporat.E: rehabilitation as_ an _a ttempt to
conser ve and administer the assets of an insolvent corporation m the hope
of it.s eventual return from fin ancial stress to solvency . It contemplates
the continu ance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and
liquidity. Verily, the purpose of r~habilitation proceedings 1_s to enable t~e
company to gain a new lease on hfe and t~ereby allow cred1tors to be paid
their claims from its earnings. Thus, rehab11itation shall b: un_dertaken ~hen
it is shown that the continued operation of the corporation is economically
more feasible and its creditors can recover , by way of :he pre~ent value
of payments projected in the pla~, mor~, if the c~:porat10n contmues as a
going concern than if it is immediately hqU1dated .
4.02. KINDS OF REHABILITATION. Rehabilitation may
either be court supervised or one that is agreed upon out ?f court.
Supervised rehabilitation may either be (1) voluntary or (2) mvolun-
tary .
a. Voluntary Rehabilitation. The following must be
alleged and established in a verified Petition filed by t~e D~btor
corporation: (1) the insolvency of the debtor; a nd (2) the vrnb1ht y of
its rehabilitation .3'
b. Involuntary Rehabilitation. A credi tor or g roup of
cr editors m ay ini tiate involuntary proceedings aga inst the debtor
by fi ling a petition for re habilitation with th e court if:
(1 ) th ere is no genuine issu e of fact or law on the clai m/s
of the pe titione r/~, a nd t h at t he d ue a nil deman dablc pa y me nts
thereon have not b een m a de for at least 6~ ~ays or that the
d ebtor has failed generally to meet its li a b1h t1es as th ey fall
du e; or
(2) a cr edilor, oth er t?an the pe tit.io~er/s , h ~_s initiaLe~
for edos ure proceedin gs aga rnst th e deb to1 th a t \\ ill pre\ en
3 lG. R. No. 17584-1. Ju ly ~9. 20 13.
·"Section 12, fRL'\
494 ESSENTIALS OF CREDIT TRANSACTIONS
AND BANKING LAWS PART 1 - 4 PERSONS IN FINANCIAL DISTRESS 495
CHAPTER 19 - FINANCIAL REHABILITATION
AND INSOLVENCY ACT OF 2010
th e debtor from payin g its debts as they become due or will
render it insolvent. 36 Sole Proprietor- Voluntary Liquidation Insolvent debtor
ship, Partnership (Section 90, FR/A)
. c. R e habilitation Proceedings and Persons Who Will and Corporation
File and/or ~pprove. Th e_ Petiti on for Rehabilitation may be fil ed Sole Proprietor - Involuntary Liqui- a) Three or more credi-
by a corporat10n, partnership or a sole proprietors hip . ship, Partnership dation (Section 91, tors and b) the aggregate
and Corporation FR/A) of whose claims is at least
Type of Type of Who Will Approve or either :l"l,000,000.00 or at
Bus iness Rehabilitation File Petition least 25% of the subscribed
Organization Proceeding capital stock or partner's
contributions of the debtor,
Sole Proprietor- Voluntary Rehabilita- Owner/Proprietor
ship whichever is higher.
tion
Partnership Voluntary Rehabilita - Majority of Partners
tion
4.03. REHABILITATION PLAN. One of the required at-
Corporation Vohmt::iry Rehabilita - (1) Majority of the Direc- tachments to a Petition for Rehabilitation is a Rehabilitation Plan;
t.ion tor or Trustees and the Rehabilitation plan in the form prescribed by law and rules is an
(2) Stockholders indispensable requirement in corporate rehabilitation proceedings. 36
repre-
sen ting 2/8 of Out- Rehabilitation Plan shall refer to a plan by which the financial well-
standing Capital. being and viability of an insolvent debtor can be restor12d using vari-
Sole Propridur- Involun tary Rehabili- ous means including. but not limited to , debt forgiveness , debt re -
Creditor or group of
shi p, lation creditors with a claim scheduling, reorganization or quasi-reorganization , dacion en pa.go,
Panner,;hip and of. or the aggregate of debt-equity conversion and sal e of the business (or parts of it) as a
Corporation whose claim s is. at least going concern, or setting-up of new business entity, or other similar
r 1,000,000.00 m: at least arrangements as may be a pproved by t he court or creditors. 37
2.5% of the subscribed capi-
ta! stock or partners' con- a. "Successful rehabilitation of a distressed corporation
tributions, whichever is will benefit its debtors, creditors, employees, and th e economy in
higher. general. The court may approve a rehabilitation plan even over the
Sole Propri etor- Pre-Negotiated Reha - opposition of creditors holding a majority of the total liabilities of the
The insolvent debtor and
ship, Partnership bilitation (Petition for debtor, if, in its judgment. the rehabilitation of the debtor is feasible
the Rehabilitation Plan is
and C'.orpor::it.ion Approval of Pre- Nego- endorsed or approved by and the opposition of the creditors is manifestly unreasonable.
tiated Rehabilitation creditors holding at least The rehabilitation plan, once approved, is binding upon the debtor
Plan) 2/3 Q( the tQta! liabilities and all persons who may be affected by it, including the creditors,
of the debtor including whether or not such persons have participated in the proceedings
secured creditors holding or have opposed the plan or whether or not their claims have been
more than Q0% of the to- scheduled ." 38 "A successful rehabilitation usually depends on two
tal secured claim and un- factors: (1) a positive change in the business fortunes of the debtor;
secured creditors holdin g and (2) the willingness of the creditors and shareholders to arrive at
more than 120½ of unse-
cured claims. (Section 76,
FR/A) 30 Siochi Fishery Enterprises, Inc .. et al. v . Ba nk of Philippine Island s. G.R. No.

193872, October 19, 2011 .

37
3
Section 64, FRIA.
"Sec ti on 13, FRIA . 38 Pacific Wid e Realty a nd Develop ment Corp. v. Puerto Azul Land, Inc., sup ra.
 496 ESSENTIALS OF CREDIT TRANSACTIONS
AND BAN Kl NG LAWS
a compromi se agree ment on rcpaym frn t burd en s, ex tent of dilution ,
et c. The debtor must demonstrate by con vincin g ancl compellin g
evidence that t hese ci rcum sta nces exist or are lik ely to exi st by the
t im e th e rl ebtor s ubmi ts his 'revised or substitute re habilitation
pla n fo r th e fina l approval of t h e court.' "3~
b. Th e circumstances that might demon s t rate in a
convincing a nd compell ing ma nn e r th a t t he debtor coul d su ccessfully
be rehabil itated include th e foll owing: (1 ) th e bu sin ess fortu nes
of the debtor have actually improvPrl since the petiti on was fil ed·
(2) th e ge nera l ci r cum s tan ces a n d for 1c:;cas t fur th e sect or in wh.i ch
the debtor is operating s uppor ts th e likelihood that th e debtor's
bu sin ess . wil l revi ve ; (3) the debtor has taken concrete steps to
11:1pr_ove _its oper ating efficiency; (4 ) the rl eht.or ha s obtained legally
bmdm g m vestment commitm e nts from parties continge nt on the
a pprova l of a rehabilitation plan ; (5) the debtor ha s successfully
addressed other factors that would increase the risk that the debtor's
rehabilita tion plan would fail; (6) the majority of the secured and
unsecured creditor s have ex pressly demon strated a preference that
th e debto: be r ehabi litated rather tha n liquidated and are willing to
comprom1se on theu- claims to reach that result; and (7) the debtor's
shareho_lders _have expressed a willingness to dilute their equity in
conn ect10n 'l'.-7 th a debt equity swap.•0
c. In Bank of Philippine Islands u. Sarabia Manor Hotel
Corporation," the Supreme Co urt explained that:
In _order to determin e th e feasibility of a proposed rehabilitation
P!an , !t 1s impe rati ve tha t a thorough examination an d analysis of the
distressed corporation 's fi nan cial data must be conducted . If the results
of such_examination and_a nalysis show that t,here is a real opportunity to
rehabilitate t_he corporat10n m view of the assu mptions made and financial
goals ~~te_d mthe p~oposed rehabilitation plan , then it may be s aid that
rehabili_tation is feas ible. In th is accord, the rehabilitation court should
not hesitate to allow the corporation to opera te as an on-going concern ,
3
ci . San J ose Timber Corporation v . SEC. G.R. No. 162196, February 27, 2012
t1_ng _PHILlA. Justitui et Ler; Com mercial Law ; Hand book on Corporate l¼:habili -
tat1on, Part HI - The Rules and Applicable Jurisprudence in Questi on and Answer
Form, ~~~stion No._82; httpJ/1 27.0.0.1:8080/rtc_corporatejurisdiction.php.
-'dD J ose Timber Corporat10n v . SEC, ibid., citing PH!l.,JA, JIJ.$titi.a et Lex-
?>mmercial Law ; Handboo k on Corporate Reh~bilitation; Part Ill - The Rule~
and A~pbcable Junsprudence in Question and A.n, wer Form , C:Juestion No. 82 ·
http J/1 27 .0.0 1·8080/:rtc_corporatejurisdicuon.php .
' ' G R. :S:c,. 175844, July 29, 2013.
PABT I - 4 l'r.RSONS IN F'I NANC IAL DISTR l':SS 4':J7
CHAPTER 19- FINANCIAL REHABILl TATIO'.-l
AND INSO LVENCY ACT OP 2010
alheit und e r th e t e rm s a nd conditions s tated m the approve:d rehabil1tatirm
plan . On th e other hand , if the r es ults of the financi a l exa minatio n and
analysis clearly inilicate that there lies no re a sonable probahility t hat the
di stressed corporation couJd be revived a nd that liquidation would , ' n :act,
be tter subserve the inter es ts of its stakeholders, th e n it may be s a id that a
rehabilitation would not be feasible . In s uch case, t he rehabili tation cou rt
may convert thP. proceedings into one for liq uid a tior, ."
d. Th e Supreme Court further e xplained in Wonder Book
Co rporation u. Philippine Bank of Communications.-"' 2
"Rehabilitation is x x x available to a corporation [which], while
illiqujrl, has l!ssets that ca n generate more cas h if used in it.:; daily
operations than sold. Its liquidity iss ues can be addressed by a practicabl e
business plan that will generate enough cash to sustain daily operations,
has a definite source of financing for its proper and full impl e mentation . and
anchored on realistic assumptions and goaJs. This remedy should be denied
to corporations whose insolvency appears to be irreversible and whr,se sole
purpose is to delay the enforcement of any of the rights of the creditors,
which is rendered obvious by the following: (a) the absence of a sound and
workable business plan; (b) baseless and unexplained assumptions. targets
and goals; (c) speculative capital infusion or complete lack thereof for the
execution of the business plan; (d) cash flow cannot sustain daily operations;
and (e) negative net worth and the assets are near full depreciation or fully
depreciated.
e. The Rehabilitation Plan: (1) must be approved by the
creditors (50% of the total claims); 43 and (2) confirmed by the court
after approval of the creditors or even without such approval or even
over the objection of the creditors ...
f. A rehabilitation plan may also be: (1) a pre-negotiated
rehabilitation plan; or (2) an out-of-court informal rehabilitation.
g. Cram Down Rule. The Rehabilitation Plan confirmed
by the Court shall be binding upon the debtor and all persons who
may be affected by it, including creditors, whether or not such
persons have participated in the proceedings, opposed the Plan or
whether or not their claims have be€n schedu.led. •5 The Supr eme
Court explained in one ca se:
;
,;
,.
'
2
G.R. No. 1873 16, July 16, 2012.
'
3
Section 64 , FHIA.
'
"Section 68, FRIA
0
' S1:cti ons G9. 82 , a nd 80. FRLA.
498 ESSENTIALS OF CREDIT TRANS ACTIONS
A.1'-<D BANKIN G LAWS
·'Among other rules th at foster the foregoi ng poli cies, Section 23,
Rule 4 of the interim Rul es of Procedure on Corpornte Rehabilitation
(lntcrim Rules) states tha t a re habi litation pl;rn m;iy be ;i pproved even
over the opposition of the creditors holding a majority of the corporation's
total li abilities if there is a showing that rehabilitation is feasible a nd the
opposition of the credi tors is manifestly unrea sona ble . Also known as the
·'cram-do wn" clause. this provision , which is currEmtly incorporaterl in the
FRLl\. is necessarv to curb th e maj ority creditors' natural tendency to di ctate
th eir own terms and conditions to the r ehabilitation, absent due regard to
the great.er long-term benefit of all stakeholders . Otherwise stated , it forces
the creditors to accept the terms a nd conditions of the rehabilitation plan ,
prefen-ing long-term viability over immediate but incomplete recovery."•6
4.04. STAY ORDER. The Stay Order is included in the
Commencement Order to be issued by the court having jurisdiction
over th e re habilitation case under Section 6 of FRIA. The Stay or
Su sp en sion Ord e r shall:
(1 ) s u spe n d all actions or proceedings, in court or
otherwise, for the enforcement of claims against the debtor;
(2) s u spend all actions to enforce any judgment, attach-
ment or other provisional remedies against the debtor;
(3) prohibi t the debtor from selling, encumbering, trans-
ferring or disposing in any manner an y of its properties except
in the ordi n ary course of business; and
(4) prohi bit the debtor from m aking any payment of its
liabilities outstanding as of the commencement date except as
ma y be provided h e r ein. "
a. The Commencement Order and consequently the Stay
Order shall be effective for the entire duration of the rehabilitation
proceedings .'" The order may be lifted if there is no substantial
likelihood for the debtor to be successfully rehabilitated .
b. Rationale of Suspension of Claims. The claims against
th e cor poration unde r r e hab ilitatio n is suspe nded fo r the following
reasons : (1) To e nable the rehabilitation receive r to effectively
exer cise its/his powers free from or unburd e ned by any judicial or
6
• R1mk of Philippine Is land s v. Sarabia Manor Hotel. Inc., G.R. No. 175844,
JuJ ;- 29. 201 3 .
" Section 16, FRJ A.
8 51
" Section 2 1, FRIA ; PAL v . Sps. Sadie and Aisha Kurangking, et a l., G. R No .
146698. September 24, 2002.
PART 1 - ,J PERSONS IN FINANCIAL DISTRESS -'199
CHAPTt:l{ 19 - FINAN CIAL REHABILITATION
AND INSOLVENCY ACT OF 2010
extra -j udicial inte rference that might unduly hinder or prevent
th e 'r escue' of the debtor company (time, resources and effort will
be used to litigate) ; and (2) To enable th e management committee
or the rehabilitatio n r eceiver to s ubstitute th e defendant in any
pending action against it be fore any court, tribunal , board or body."
Although decided before FRIA, the observation of the Supreme
Court in one case is instructive:
"During rehabilitation receivership, the assets are held in trust for the
equal benefit of all creditors to preclude one from obtaining an advantage or
preference over another by the expediency of an attachment, execution or
otherwise. For what would prevent an alert creditor, upon learning of the
receivership, from rushing posthaste to the courts to secure judgments for
the satisfaction of its claims to the prejudice of the less alert creditors.
As between creditors, the key phrase is 'equality is equity.' When a
corporation threatened by bankruptcy is taken over by a receiver, all the
creditors should stand on an equal footing. Not anyone of them should be
given any preference by paying one or some of them ahead of the others.
This is precisely the reason for the suspension of all pending claims against
the corporation under receivership . Instead of creditors vexing the courts
with suits against the distressed firm, they are directed to file their claims
with the receiver who is a duly appointed officer of the (court)." 50
4.05. SUSPENDED CLAIMS. 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
unJiquidated, fixed or contingent, matured or unmatured . disputed
or undisputed , including, but not limited to: (1) all claims of th e
government, wh ether national or local, including taxes, t a riffs and
customs duties; and (2) claims against directors and office r s of the
debtor arising from acts done in the discharge of their function s
fa lling within the scope of their authority ."
a. Under the expanded concept of "claim,'' the following arc
covered by the Stay Orde r :
(1) l\foney cla im for missing lu ggage against a common
carri er/ 2
·19 PAL v . S ps . Sadie and Aish a Kurangking, et al ., ibid., citing BF Homes. In c.
v . Court of Appeals , 190 SCRA 262.
50 Alemar's Sibal & Sons, Inc. v. Elb in.ias , G .R. No . 7:\414 , ,Ju ne -1 , 1990
Section 3, FRIA.
; 2 Philippine Airlin es v. Sps . Kura ngking. s upra.
500 ESSENTIALS OF CREDIT TRANSACTI ONS
AND BANKING LAWS
(2) Illegal dismissal cases with claims for backwages
a nd other unpaid benefits filed before the National Labor
Relations Commission ;63
(3) Case fi led before the Housing and Land Use Regu-
latory Board to rescind a sale of a subdivis ion lot with corre-
spondin g r efund of th e price."
(4) Ejectmen t cases ;5 5
(5) Complaint for rescission of contract of assignment of
leasehold ri ght with damages; 56
(6) Enforcem ent of repairm an's maritime lien ;5 7
(7) A claim for the value of shares belonging to
t h e pla intiff th at was illegally sold by the liquidators of a
corporation .°' Although the original claim was for the return
of the shares but the claim was the subject of a supervening
event - the sale of t h e shares. After the sale, the money raised
therefrom became generic in the form of money that were
commingled with cash and other assets of the corporation.
b. Secured Creditors and Foreclosure. The Order will
stay all action for claims against the debtor including claims by
secured a nd un secured cr editors .'" Wh at is sought t o achieved is
equality in equity. 60
53
Rubbe rworld (Phil s .) Inc . v. NLRC, G.R . No. 126773, April 14, 1999. 305
SCRA 72 1 (illegal di s missal with backwages); Clarion Printing House v. NLRC, G.R.
No . 148372, June 27, 2005 (illegal dismi ssa l with backwages); Philippine Airlin es
Incorporated v. PALEA, G.R. No. 142399, June 19. 2007, 525 SCRA 29 (claim for 13th
month pay); Garcia v. Ph.ilippine Airlines, Inc., G.R. No . 164856, August 29, 2007,
53 1 SCRA 575 (illegal suspension a nd illega l dismissal) .
'.MSps . So hrej uanite v. ASB Developme nt Corporation, G.R. No. 165675, Sep·
t.c mber 20 , 2005, 471 SCRA 76 3.
55
G.R. No. 140081, June 23, 2005, 461 SCRA 69.
56
Uniwide H oldings, Inc. v. Jandecs Transporta tion Co., Inc ., G .R. No . 168522,
Decem ber 19, 2007, 541 SCRA 158.
57
Negros Navigation Co .. Inc. v . Court of Appeals, G.R. No. 166845, December
10, 2008.
58
Cordova v. Reyes Daway Lim Be rnardo Lindo Rosales Law Officers, G.R .
No.14655 5, JuJy 3, 2007, 526 SCRA 300, 3 10.
59
Philippine Islands Corporation for Tourism and Development, Inc. v. Vic-
torias Milling Company, Inc., G.R. No. 167674 , Jun e 17, 2008; New Frontier Sugar
Corporation v. RTC, Branch 39, lloilo City, G.R. No. 165001, January 31, 2007; Phil -
ippin e Airlines, Inc. v. Sps. Sadie, supra.
wNew Frontier Sugar Corporation v. RTC . ibid.; Alem a r's Siba l & Sons, Inc. v.
Elbinias, G.R. No. 75414 , June 4, 1990, 186 SCRA 94 , 99-100.
PART 1 - 4 PERSONS IN FINANCIAL DISTRESS 501
CHAPTER 19 - FlNANCIAL REHABILITATION
AND INSOLVENCY ACT OF 2010
(1) Foreclosure of mortgage is likewise suspended
because the above-quoted Section 6 of Rule 3 includes claims
that are enforced by court action "or otherwise." In other words,
th e suspension is not exclusively applicable to civil actions in
court because even extrajudicial foreclosure of mortgage 1s
included.
(2) Nevertheless, the preferred status over the unse-
cured creditors relative to a mortgage lien is retained but the
enforcement of such preference is suspended. In the event that
rehabilitation is no longer feasible and the claims against the
distressed corporation would eventually have to be settled, the
secured creditors shall enjoy preference over the unsecured
creditors.61 The rights of a preferred secured creditor is there-
fore r espected and recognized, "to hold otherwise wou Id r ender
said rights inutile and illusory." 60
c. Section 146 of the FRIA, which makes it applicable to
"all further proceedings in insolvency, suspension of payments and
rehabilitation cases x x x except to the extent that in the opinion
of the court their application would not be feasible or would
work injustice," still presupposes a prospective application. Th e
wording of the law clearly shows that it is applicable to all further
proceedings. In no way could it be made retrospectively applicable
to the Stay Order issued by the rehabilitation court back in 2002.
Nowhere in the Interim Rules is the rehabilitation court authorized
to suspend foreclosure proceedings against properties of third-pa rty
mortgagors .63
4.06. STAGE OF SUSPENDED ACTIONS. Subject to
the exceptions enumerated below, all actions for claims against a
corporation pending before any court, tribunal or board shall ipso
jure be suspended in whatever stage such actions may bP found
upon the appointment by the SEC of a management committee or a
rehabilitation receiver. This was taken to embrace all phases of the
suit, be it before the trial court or any tribunal or on appeal before
61 Yngson, Jr ., v. Philippine N a tiona l Bank, G.R. No. I 71132, August 15, 2012;
Metropoli tan Ba nk and Trust Com pa ny v. ASB Holdings, Inc .. et al., G.R. No. 166 197,
February 27, 2007, 517 SCRA 1, 11 ; Negros Navigation Co., Inc. v. Court of Appeals .
supra.
02 Philippi.ne Commercial Interna tion al Bank v. Hon. Court of App eals, ei al.,
G.R. No. 76853, April 18, 1989.
63 S itus De v. Co rporation v. Asiatrust Bank, G.R. No. 180036. J a r,ua ry 16,
 502 ESSENTIALS OF CREDIT TRANSACTIONS
AND BANKJNG LAWS
the Court of Appeals such that no other action may be taken in,
including the rendition of judgment during the state of suspension
- wha t are automatically stayed or suspended are the proceedings
of an action or suit and not just th e payment of claims during the
execution stage after th e case had become final and executory ...,
4.07 . EXCEPTIONS TO THE STAY ORDER. Th e Stay or
Suspen sion Order sha ll not apply:
(1) to cases already pending appeal in the Supreme
Court as of comm encement date. Any final and executory
judgment ari sin g from such a ppeal shall be referred to the
reha bilita ti on court for appropriate action;
(2) subject to the discretion of th e court, to cases
pending or fil ed at a specialized court or quasi-judicial agency
which , upon determination by the court is capable of resolving
the claim more quickly, fairly and efficiently than the court.
Any final and executory judgment of such court or agency shall
be referred to the reh a bilitation court and shall be treated as a
non-disputed claim;
(3) to th e 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 th e 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;
(4) to any form of action of customers or clients of a
securities market participant to recover or otherwise claim
moneys and securities entrusted to the latter in the ordinary
course of the latter's business as well as any action of such
securities market participant or the appropriate regulatory
agency or self-regulatory organization to pay or settle such
claims or liabilities;
(5) to the actions of a licensed broker or dealer to sell
pledged securities of a debtor pursu;:int to a securities pled ge or
margin agreement for the settlement of securities transactions
64
Phili ppin e Airlines. Inc. v. Court of Appeal s. C .R. No. 150592, J a nu ary 20,
2009; Philippine Airlines, In c. v . z~rnora , G.R. No . 166996, Febru a ry 6, 2007, .~14
fs CH.A fi8~. 604; Phi lippine Airlin es. Inc. v . Cou rt of Appeal s, C.R. Nu. 123238, July
J 1, 2005.
PART l - 4 PERSONS IN FINANCIAL DISTRESS 503
CHAPTER 19 - FINANCIAL REHABILITATION
AND INSOLVENCY ACT OF 2010
in accordance with the provisions of the Securities Regulation
Code and its implementing rules and regulations;
(6) the clearing and settlement of financi;:il transa ctions
through the facilities of a clearing agency or similar entities duly
authorized, registered and/or recognized by the appropriate
regulatory agency like th e Bangko Sentral ng Pilipinas (BSP)
and the SEC as well as any form of actions of such agencies or
entities to reimburse themselves for any transactions settled
for the debtor; and
(7) any criminal action against individual debtor or
owner, partner, director or officer of a debtor shall not he
affected by any proceeding commenced under the FRIA. 65
a. Solidary Creditors. The Stay Order does not apply to
sureties who are solidarily liable. 66 Section 18(c) of FRIA provides
that the Stay Order does 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." In Metropolitan Waterworks and Sewerage
System v. Daway, 61 the Supreme Court ruled that the claims that
are enjoined do not cover claims against the solidary guarantors or
sureties of the debtor who is under rehabilitation. Solidary claims
can be pursued separately from and independent of the rehabilitation
case. Thus, claims against a bank that issued a letter of credit can
be pursued because in the absence any stipulation to the contrary,
the obligation of banks issuing letters of credit is solidary with the
person who applied fo1' its issuance.
PROBLEM:
ABC Company fil ed a Petition for Rehabilitation with the Court.
An Order was issued by the Court: (1) staying enforcement of all claims,
whether money or otherwise against ABC Company, its guarantors and
sureties not solidarily liable with the company; and (2) prohibiting ABC
6
'Section 18. FRLA .
sr,Ja 1,1rl Develop ment Corpora ti on . ~, o/. v. Sec11rit.y l11rnk Corpnrat 1nn. r. .H
No. 190107, June 6, 2011 citing Section 6(b) of the Interim Rul es of Procedure of
Co rporate Reh a bilitation .
,;-,G.R. No. 160732. Jun<' 21, 2004.
:i04 ESSENTlALS OF CRl':DIT TRANSACTIONS
AJ'-JO BANKJNG LAWS
Company fr om making pay ments of its liabilities, outstanding as of t he date
of th e filing of the Petition. XYC Company is a holder of an irrevocable
Standb y Letter of Credit which was previou sly procured by ABC Compa ny
in fav or of XYC Company to secure performance of certain obli gations. Tn
th e li ght of t he Order issued by th e Court. Can XYC Company stiU be ahle
to draw on th eir irrevocable Standby Letter of Credit when due? Explain
your an swer . (2012 Bar)
A: Yes. XYZ ca n still draw on the Standby Letter of Credit. The claim s
against r.h e letter of credit is a ffected by the rehabilita tion proceedings
agai nst the debtor. The claim is not a claim against the debtor under
rehabilita tion . It is also well settled tha t the clai m against the bank
under a letter of credit is solidary in na ture. Under Section lS(c) of the
FRLA. . a Stay or Suspension Order shall not apply to the enforcement
of claims against sureties and other persons solidarilv liable with
th e debtor, and third party or accommodation mortgag~rs as well as
issuers of letters of credit. (Metropolitan Waterworks and Sewerage
System v. Ho n. Reynaldo B. Daway, et al., G.R. No. 160732, June 21,
2004)
b. Criminal Cases Not Suspended. The filing of a criminal
case is not a "claim" that can be enjoined within the purview of P.D.
902-A. As far as the cri minal aspect of the cases is concerned, the
provisions of Section G(c) of P.D. 902-A should not interfere with
the prosecution of a criminal case, even if restitution, reparation
or indemnification could be ordered, because an absurdity would
result, i.e. , one who ha s engaged in criminal condu ct could escape
punishment by t he mere filing of a petition for rehabilitation by
the corporation of which he is an officer .68 The same rule applies
und er FRIA; th e creditors or third parties are not prohibited from
fili ng cases against th e directors :rncl officers acting in their personal
capacities. 69
(l ) At an y rate , should the Court deem i t fit to award
indemnificatio n in cases involving corporate obligations like
B.P . 22 cases, such award would now fall under the category of
a claim under Section 6(c) of P.D. 902-A, considering that it. is
already one for monetary or pecuniary consideration . Only to
this extent can the order of suspension be considered obligatory
upon any court, tribunal. branch or bod y where there are
pending actions for claims against the distr essed corporation. 70
8
" Ros a rio v. Co, G.R. No. 133608. Au gust 26, 2008.
69
Section 3, FRlA .
' "Rosario v. Co., ibid .
PART 1 - 4 PERSONS IN F!NANClAL DISTRESS .,()ii
CHAPTER 19 -- FINANCIAL REHABILITATION
AND INSOLVENCY ACT OF 2010
However, the rule should be clarified that suspen sion is onlv
possible if it is the corporation who commits a crime through
its officers or agents 71 or when the there is vicarious liability on
the part of the corporation. ·
d. Third Party Mortgagors. In Pacific Wide Realty
and Development Corp . v. Puerto Azul Land, lnc .72 the Supreme
Court ruled that the issuance of a Stay Order cannot suspend the
foreclosure of third party accommodation mortgages. "Whether or
not the properties subject of the third-p:uty mortgage are used by
the debtor corporation or are necessary for its operation is of no
moment, as the Interim Rules do not make a distinction. To repeat,
when the Stay Order was issued, the rehabilitation court was only
empowered to suspend claims against the debtor, its guarantors, and
sureties not solidarily liable with the debtor . Thus, it was beyond
the jurisdiction of the rehabilitation court to suspend foredosure
proceedings against properties of third-party mortgagors."•3 This
rule is expressly recognized under Section 18(c) of FRlA.
e. By way of exception, Section 18(c) of FRV\. provides
that the Stay Order may now cover third-party or accommodation
mortgages, in which the "mortgage is necessary for the rehabilitation
of the debtor as determined by the court upon recommendation by
the rehabilitation receiver."1-1
4.08. EFFECT OF STAY ORDER ON CONTRACTS. The
suspension of claims does not result in amendment of contracts .
There is nothing in FRlA that authorizes the change or modification
of contracts entered into by the distressed corporation and its
creditors.'' For example, the Rehabilitation Plan is void if'it 2mends
the rental rates agreed upon in a contract of lease.'" A Plan that
imposes a dacion en pago is also not tenable. However. Rehabilitation
Plan may propose such dacion en pago so lor,g as no co mpul sion is
involved. 77
71
For example, in violations of B.P. 22 and violat ion of the Trust RPccipts Law
72
G.R. Nos. 178768 & 180893, November 25, 2009.
73
Situs Dev. Corporation v. Asiatrust Bank. G.R. No . 180036. ,January lli.
2013.
'"Ibid.
75
China Banking Corporation v. ASB Holclings. Inc, G.R No 17219:2 . Oece m
ber 23, 2008; Leca Realty Corporation v. Manuela Corporation . G R No 166800.
September 25, 2007, 534 SCRA 97 .
76
Leca Realty Corporation v. Manuela Corporation. ibid
77 Philippine National Bank v. Court of Appeals, G.R. No . 165571, January 2U,
2009; China Banking Corporation v. ASB Holdings, Inc .. s1,pra
 506 ESS ENTIALS OF CREDIT TRANSACTIONS
AND BANKING LAWS
4.09. MANAGEMENT. Generally, the existing Board and/
or Management of the debtor shall continue to function while the
Petition for Rehabilitation is pending.
a. However, upon motion the court may appoint either the
Rehabilitation Receiver or a Managem ent Committee to undertake
the management of the debtor in the following cases:
Aciual or eminent danger of dissipation, loss,
(1)
wastage or destruction of the debtor's assets or properties;
(2) Paralyza tion of the business operations of the debtor;
or
(3) Gross mismanage ment of the debtor, or fraud or
oth er wrongful conduct on th e part of, or gross or willful viola-
tion of th e FRIA by existing management of the debtor, owner,
pa rtner, director. officer or representative/s in the manage-
ment of the debtor. 7R (Section 36, FRIA)
b. The control an d management of the corporation must
he transferred pendente tile to an ind ependent party to ensure
the preservati on of th e corpora te assets.79 Indeed, upon the
appointm ent of a receiver or managem ent committee to undertake
thP. man age ment of the corporati on, the duly elected/appointed
offi cers of the corporation are dives tP.d of the management of such
corporation in favor of the management committee/receiver. 80
4. 10. ADMINISTRATIVE EXPENSES. Certain adminis-
trative expenses as defin ed under Section 3 of FRIA should be paid
even if th ere is a Stay Order. For example, the Rehabilitation Plan
may provide for payment of rentals ."'
4.11. DISPOSITION OF THE CASE. The Court may
take any of th e following alternative actions in a rehabilitation
proceedings:
(1) give due course to the Petition; or
78
Section 36, FRIA.
79
Sy Chim v. Sy Si y Ho & Sons, Inc., G.R. No. 164958, January 27, 2006.
dOSy v. Sy, citing S tate v. Londe, 132 S.W.2d 501 ; Umale v. ASB Rea.lty Corpo-
ration, G.R. No. 181126, June 15, 2011.
81
Leca Realty Corporation v. Manuel a Corporation, supra.
t
PART 1- 4 PERSONS IN FINANCIAL DISTRESS 507
CHAPTER 19 - FINANCIAL REHABILITATION
AND INSOLVENCY ACT OF 2010
(2) dismiss the Petition; or
(3) convert the Proceedings to Liquidation Proceedings.
a. The court shall give due course to the petition upon
finding .that: (1) the debtor is insolvent; and (2) there is a substantial
likelihood for the debtor to be successfully rehabilitated.82
b. The court may dismiss the petition upon finding that: (1)
the debtor is not insolvent; (2) the petition is a sham fili~g intended
n1 t delay the enforcement of the rights of the cred1tors/s or of
~n: ;oup of creditors; (3) the petition, the ~ehabilitation ~Ian ~nd
the attachments thereto contain any materially false or m1slead~ng
statements; or (4) the debtor has committe? acts:f m1srepresentat10n
or in fraud of creditor/s or a group of creditors.
c. In the alternative, the court may convert the proceedings
into Liquidation Proceedings upon fi.~di~g t~at: (1) the debtor 1s
insolvent; and (2) there is no substantial bkehhood for the debtor to
be successfully rehabilitated.s-t
4.12. OUT-OF-COURT REHABILITATION. An out-of-court
or informal restructuring agreement or Rehabilitation Plan that
meets the minimum requirements is recognized under the FRIA as
an alternative. This Out-of-Court Rehabilitation is similar to what
is known in the Bankruptcy laws in the United States as ''Workouts"
which is a private, negotiated adjustments of creditor-company
relations and is sometimes called in Common Law as a "Common
Law Composition." 85 Out-of-Court rehabilitation agreed upon by the
parties has the following advantages:
(1) It is more expeditious because unbridled by court
proceedings, the debtors and creditors enjoy a flexibility;
(2) It is more economic because it avoids the super-
structure of reorganizations including receivers, committees or
trustees;
(3) It is more sensible because it contemplates partici-
pation of the parties in interest, good faith , conciliation and
112
Section 25, FRlA.
83
Ibid .
s.Ibid.
86
Jn Re: Coloni al Ford, Un ited St<1 tes Bankruptcy Court, D. Utah , 24 Bank.r.
1014 (1982).
 ESSENT L- c:: OF CRED IT T RA.1'\ISA CTJ O N~
.\;' \ B.-\..\/KJ!\G LA \\"S
c:rndo r: "thP a lt ern:iti ,·e is litiga t ion a nd its bedfellow s - bluff.
~,e u ifogger, ,~ nd ::: 1rife _";c
a. The :\lini mum Require ment.s of Out-of-Court or l nformal
Res tructuring .-\ g1·ec me1 ts 11 nrl RP]1 [lbi lit ar ion Pl a n s a re as fol lows :8'
\ 1) The d<?btor mu s t agree tor h e out -of-rnll rt or informal
r :::tructuring/work our agr eeme n t or Rehabilita tion P lan :
l~ ) lt musL b<? ap prowd by creditors r e presenting at
l e:=i;:: n, 0
,, of the secured oblig11tion s of the debtor;
13 ) It mll;:t hP approved by creditors re presentin g at
leas t ,S '\, of he llnsecu red obligations of th e debtor: a nd
(-1) Ir mus be approYed by cred itors h olding at least 85%
of t he tota l liabili ties. secu r ed a nd un secured , of t he debtor .
a. Sta nd s till Period . Sect ions 85 of FRIA provides for the
applica bili ty of h e cr a m down r u ]p :ind r ecogni tion of a standstill
period :
Section 85. Standstill Period. - A standstill
period that may be agreed upon by the parties pending
negotiation and finalization of the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan
contemplated herein shall be effective and enforceable
not only against the contracting parties but also against
the other creditors: Provided, That (a) such agreement
is approved by creditors representing more than fifty
percent {50%) of the total liabilities of the debtor; (b)
notice thereof is publishing in a newspaper of general
circulation in the Philippines once a week for two (2)
consecutive weeks ; and (c) the standstill period does
not exceed one hundred twenty (120) days from the
date of effectivity. The notice must invite creditors to
participate in the negotiation for out-of-court reha-
bilitation or restructuring agreement and notify them
that said agreement will be binding on all creditors if the
required majority votes prescribed in Section 84 of this
Act are met.
'"l n Re: Colonial Ford , United Sta tes Ba nkruptcy Court , D. Ut 8 h ?4 B
l O 1-l (19 :2) • - an
ns,.n,,, n 8-l , FRI A .
PART I - 4 PERSONS IN F11'AN ClAL DISTRESS .' i09
CHAPTER 19 - FINA.J~CIAL REH..-\BILITATIO 1
AND INSOLVENCY A CT OF 20 10
b. An agree ment on standstil1 pe riod m ay be bi n ding if the
fo ll owing r equisit es a re prese nt:
l) agTee me nL is a pproved by creditors r epresentin g
more than 50% of th e total li a bilities of the deb tor:
2) notice t h ereof is pub lis hed in a newspape r of gen e ral
circulation in t he P hil ippi n es once a wee k for two consE·cu tive
week s: a nd
3) th e standsti ll p eriod does not. e xrP.ed 120 da ys from
the d l'!tP of effectivity .
C. Cram Down Rul e. Section 86 of FRLA. provid es:
Section 86. Cram Down Effect. - A restructuring/
workout agreement or Rehabilitation Plan that is
approved pursuant to an informal workout framework
referred to in this chapter shall have the same legal
effect as confirmation of a Plan under Section 69 hereof.
The notice of the Rehabilitation Plan or restructuring
agreement or Plan shall be published once a week for
at least three (3) consecutive weeks in a newspaper of
general circulation in the Philippines. The Rehabilitation
Plan or restructuring agreement shall take effect upon
the lapse of fifteen (15) days from the date of the last
publication of the notice thereof.
4.13. LIQUIDATION PROCESS. The liquidation of a
corporation can result by virtue of di rect petition fo r liquidation of
an in solvent corporation. Alter natively, the liquida tion ca n originat.,,
from a rehabilitation proceeding th at was converted by the court to
a liquidation proceeding .
4.1'1. DISTRIBUTION OF ASSETS. T h e asse ts of th <?
insolvent debtor s hall be divided among th e creditors in accordanc<"
with Liquid ation Plan s ubmi t t ed by th e Liquid a tor a nd ap proved by
t h e Court. Th e rul es on con curre nce a nd pr e fere nce of credit.s und e r
t h e New Civil Cod e a nd oth e r r elevant la ws s h a ll b0 ob se rved in th e-
Liquid a tion P lan .M
a. Th e rul es on conc urre n ce a nd or e fe re nce of r rcdit s
unde r the Ne w Ci vi l Code a nd Art icle 11 0 ~f th e Labor Cod e do
k.r
·
'"Sec t i11 n 133, FRI..\ ; S,-~ Cha pte,· l 8
r
510 ESSENTlALS OF CREDIT TRANSACTI ONS PART 1 - 4 PERSONS IN FINANCIAL DISTRESS -511
AND BAN'KlNG LAWS Cl-lAPTER 19- F1 NANCLA.L REHABILITATION
AND INSOLVENCY ACT OF 20 10

not app ly in re habilitation proceedings. Said rules a pply only if 5.0 1. DISTINCTIONS.
th ere is an insolvency or liquidation proceeding. It does not a pply
to rehabilitation proceeding because the purpose of rehabilitation
SUSPENSION OF PAYMENTS LIQUIDATION
is precisely to en able the company to gain n ew lease on life and
th er eby allow creditor s to be paid t heirs from its earnings. 89 1. Debtor is not insolvent - the 1. Debtor is insolvent - his as-
debtor has sufficient assets to sets are insufficient to cover
b. If t h e r eh a bilitation of the corporation is no longer feasi - cover its liabilities. the debtor's lia bilities.
ble a nd the assets of th e corporation are finally liquidated th e rules
2. Payment of obligations is 2. The obligations are dis-
on concurren ce a nd preference of credit already applies. 90 This hap- stayed. charged .
pens if the court converts th e rehabilitation proceedings to liquida -
tion proceedings. 3. Applies only to individual debt- 3. Proceedings can cover jurid.i-
or. cal persons and individual
5. PETITION FOR SUSPENSION OF PAYMENTS. A debtors.
petiti on for su spension of paym e nt is a petition that can be fil ed by 4. May be filed by th e debtor; 4. May be initiated by the debt-
an individual debtor who has sufficient properties to cover all his or (voluntary insolvency) or
debts but h e fo resees t h e impossibility of meeting his debts when by the creditors (involuntary
t hey r espectively fall due for the purpose of asking the court to order insolvency) .
t h e su spension or delay of pay men t of his indebtedness.91 Thus, the
5. T here is no minimum amount of 5. It is required that the debt of
petition requires t h e foll owing:
liabilities prescribed . the individual debtor is not
(1) The petitioner s hould be an individual debtor; Jess than P500,000.00.
6. The rules on concurrence and 6. The rules on concurrence and
(2) The debtor ha s sufficient properties to cover all his
debts; preference of credits under the preference of credits under
New Civil Code do not apply. Articles 2236 and 2251 of the
(3) The debtor foresees t he impossibility of meeting his New Civil Code apply.
debts when they respectively fall du e;
(4) The purpose the petition is to sus pend or delay t h e
payment of debts . SUSPENSION OF PAYMENTS REHABILITATION
1. Applies to Individu a l Deb tor . 1. Applies to Business Organiza-
a. The amount of indebtedn ess is not affected by the Petition.
tions - Single Proprietorship,
Th e debts are not reduced nor discharged because the sole purpose
Partner s hip a nd Corporati on.
is to delay the pay ment of obligations.
2. Th e debtor ha s sufficie nt as- 2. The debtor is insolvent.
b. Unlik e th e oth e r petition s fil ed under FRIA, th e number sets to cover its li a hiliti es.
of cr editors is imma terial. There is no r eq uired number of creditors
3. Secured debtors a re not affect- 3. Secured debtors are affected by
befor e the petition for s uspension can be filed .
ed . stay order.
4. Applies only to indi vidu al 4. May be availed of by juridical
debtor. perso ns and individual debt -
89 ors.
Rubbe rworld (Phjls ) Inc . v. NLRC, G.R. No. 126 773, April 14, 1999; Clarion
Printing House v. NLR C, G.R. No. 148372, June 27, 2005 .
90 fi . Filed by th e debtor. 5. May be initiated by the debtor
Conseulo Metal Corporation v. Plan te rs Development Ba nk , G.R. No. 152580, (voluntary r ehabilitation) or
J une 26, 2008; Cordova v. Reyes Daway Lim Bernardo Lin do Rosa les Law Offices,
G.R. No. 146555, July 3, 2007. by the creditors (involuntary
91
Section 94. FRLA . r ehabilitation).
 512 ESSENTLtu.B OF CREDIT TRANSACTI ONS PART l - 4 PERSONS lN FlNA.i'-lCIAL DISTRESS
AND BANKING LAWS CHAPTER 19 - FINANCIAL REHABILITATION
A.ND INSOLVENCY ACT OF 2010

6. There is no minimum require- 6. Th e cl aim of. or th e aggregate 5.04 . PROHIBITED ACTS. The Individual Debtor is pro-
ment for the amount of the of claims against the debtor hibited (in the Order to be issued by the court after the filing of the
claim s. is at least Pl ,000,000.00 or at P etition for Suspension of Payments) from:
least 25% of the subscribed a) Selling, transferring, encumbering or disposing in any
capital stock or pa rtners' con- manner of his property, except those used in the ordinary operations
tribution s, whichever is high -
er. of commerce or of industry in which the petitioning individual debtor
is engaged so long as the proceedings relative to the suspension of
payments are pending;98 and
5.0 2. SUSPENSION ORDER. Upon motion filed by the
b) Making any payment outside of the necessary or legitin:iate
individual debtor, tbe court may issue an order s uspending any
expenses of his business or industry, so long as the proceedings
pending execu tion against tbe individual debtor .9 2
relative to the suspension of payments are pending. 99
a. Prop emes held as security by secured creditors shall not 5.05 . CREDITORS' MEETING. The Individual Debtor
be th e subj ect of such suspension order .93
shall attach to the Petition for Suspension of Payment a proposed
b. Th e s uspension order sha ll lapse when three months shall agreement with the creditors. ' 00
have passed without the proposed agreement being accepted by the a. The proposed agreement shall be approved or rejected
cr editors or as soon as such agreement is denied. 9 4 in the Creditors' Meeting. The presence of creditors holding claims
c. No creditor sha ll sue or institute proceedings to collect amounting to at least 3/5 of the liabilities of the debtor is nec essary
his claim from the debtor from t he t ime of the filing of the petition for the meeting.
fo r su s pen sion of pa y ments an d fo r as long as proceedings remain (1) A creditor has no right to vote if he incurred his
pending!' credit within 90 days prior to the filing of the petit ion for
5.03. EXCEPTIONS. The following creditors are not affected suspension . 101
by t he Sta y Order. b. Double Majority is necessary for th e approval of
1) those creditors havi ng claims for personal labor, proposed agreement with the creditors, to wit:
maintenance, expe n se of last illness and funeral of the wife or 1) Two-thirds (2/3) of the creditors voting unite upon
children of the debtor incurred in the sixty da ys immediately the same proposition; and
prior to the filing of the pe tition ; and
2) The claims represented by said majority vote amount
2) secured cr editors .96 to at least 3/5 of the total liabilities of the debtor m e ntioned in
the petition. 102
a. These excepted creditors are not affected by the proposed
a gree men t with the debtor unless t he sa me creditors participated c_ Effect of Disapproval by Creditors. If there is no
a nd voted in the creditors m ee ting.9 7 approval of the double majority, the suspension of payments
proceedings will b e terminated and the creditors shall be at liberty
to enforce their rights that correspond to them_ 103

92
Section 96, FRlA. 98
93
Ibid . Section 95 . FRIA.
99
9 Ibid .
' Tbid . 100
95
Ibid . Section 97, FR IA.
96 lOl[bid .
Tbid . 102
97 Ib id.
S ection 98, FRlA . 0
' "Section 90. FR[A.

_13734L
 ESSENTIALS OF CREDIT TRANSACTIONS PART 1 - 4 PERSONS IN FINANCIAL DISTRESS 5 15
514 CHAPTER 19 - FINANCIAL REHABILITATION
AND BANKJNG LAWS
AND INSOLVENCY ACT OF 20 10

6. LIQUIDATION: INDIVIDUAL DEBTORS. Liquidatio_n scribed capital or partners' con -

of In dividual D e btors may be (1) voluntary or (2) involuntary . Th e1r tribution whichever is higher.
s imil a r i ti es a nd distinctions are as follows: 3. The business organization will
3. The individual can continue
his business. be dissolved .
VOLUNTARY LIQUIDATION INVOLUNTARY
4. There must be an act of insol- 4. Act of insolvency IS not re-
OF INDIVIDUAL DEBTOR LIQUIDATION OF
vency. quired.
INDIVlDUAL DEBTOR

1. De btor is in solvent. l. T) pbtnr is in solven t.

6.01. PERSONS WHO CAN FILE. Petition for liquidation
2. Acts of Insolvency n eed not be 2. Creditors mu st prove acts of
can be availed ofby different business organizations and the persons
a lleged a nd proved . insolve ncy.
who will file and/or approve the same are as follows :
3. Th e debts mu st be a t leas t 3. The debts mu st be at least
P500 ,000.00. 1'500,000.00.
Type of Nature of Petition Who Will File or
-4 . Th e in dividu a l debtor fil es t h e 4. A cr editor nr group of credi- Business Approve the Filing
Petition . tor s fil es t h e Petition. Organization
5. The debtor is not absen t a s he 5. Appli Ps even in the case of Sole Proprietor- Voluntary Liquidation. Insolvent debtor.
fil es th e Petition . Absent Debtor (Debtor r e- ship, Partnership (Section 90, FRIA)
sides outs ide or has departed and Corporation
from the Philippines. cannot
be found or conceals himself. Sole Proprietor- Involuntary Liquida- a) Three (3) or more
(Section 108, FRIA) ship, Partnership tion. (Section 91, FRIA) creditors and b) the
and Corporation aggregate of whose
6. Posting of Bon d by cr editors not 6. Posting of Bond by creditors is claims is at least ei-
required . required . (Section 105, FRIA) ther Pl,000,000.00
OT at least 25% of
7. Liquidation Ord er is issu ed 7. Liquid ation Order IS issued the subscribed capi-
wi th out t rial. (Section 104, after tria l. (Section 107, FRIA) tal stock or partner's
FRL4 ) contributions of the
debtor, whichever is
higher .
a. Involuntary Liquidation of Individual Debtors
distinguished from Involuntary Liquidati o n of Business Individual Debtor Suspension of Pay- Individual Debtor.
Organizations. ment. (Section 94,
FRIA)
lnvoluntary Liquidation of Involun tary Liquidation of Individual Debtor Voluntary Liquidation. Individual Debtor with at
Ind . Debtor Busine ss Organization s - (Section 103, FRL4.) least 1'500,000.00 debts
Sole Prop ., Partnership and who does not have suffi -
Corporation. cie nt assets to cover h is
L A l lea st three Credi tor s a re 1. The r e can be one or more cr edi • liabilities.
n·qui red . tors .
Individual Debtor Involunta ry Liquida- Any creditor or group or
2. Th e debts must be at least 2. The debt o r aggregate of debt!-- tion (Petition for Acts cr eru tor s with a claim of.
1'500.000 00 . rn11,;1 be :i t lr a st l'J .000 .00000 of Insolve ncy). (Secti:on or with claims a ggregat-
or equivalent to 25% of the sub 105, FRlA) ing at least P500,000.00.
 ESSENTlALS OF CREDIT TRANSACTIONS
516
AND BANKING LAWS
7. LIQUIDATION PROCESS. This is the proceecling
where claims a re fil ed a nd th e assets of th e insolvent debtor are
disposed and the proceeds a re divid ed among the creclitors . These
rules a pply to inclividu al debtors, sole propri etorships, partnerships
a nd corpora tion . Th e rules below a pply to original liquidation
proceedings a nd proceedings that are originally rehabilitation
procee din gs but converted into liquidation proceedings.
7.01 . LIQUIDATION ORDER. The Court that has jurisclic-
tion over th e liquidation proceedings shall, in proper cases, issue a
Liquidation Order which includes, among others: (1) Declaring that
the debtor is insolvent; (2) Ordering the liquidation of the debtor; (3)
In case of juridical person , declaring it as dissolved; (4) Prohibiting
payments and/or tr a n sfer of property by the debtor; and (5) Direct-
ing all claims to be fil ed with the liquidator.'""
7.0 2. EFFECTS OF LIQUIDATION ORDER. Section 113
of FRIA provides t h e following effects of the Liquidation Order:
(1) The juridical debtor shall be deemed dissolved and
its corporate or juridical e xiste nce terminated ;
(2) Legal title to and control of all the assets of the
debtor, except those that may be exempt from execution, shall
be deemed vested in the liquidator or , pending his election or
appointment, with th e court;
(3) All contracts of the debtor shall be deemed terminated
a n<l/or breach ed. unl ess the liquidator, within 90 days from the
date of his assumption of office, declares otherwise and the
contracting party agrees;
(4) No sepa rate action for Lhe collection of an unsecured
daim shall be allowed . (Actions already pencling will be
transferred to the Liquidator for him to accept and settle or
cont.est) .
(5) No foreclosure procee ding shall be allowed for a
period of 180 days .
7.03. RIGHTS OF SECURED CREDITORS. Section 114 of
FRIA expresses the rule that the Liquidation Order shall not affect
the right of a secured creditor to enforce his lien in accordance with
the applicable contract or law. A secured creditor may:
'
04
See Section 112, FRlA for other contents of the Liquidation Order, Appendix
6 hereof.
PART 1 - 4 PERSONS IN FINANCIAL DISTRESS 5l7
CHAPTER 19 - FINANClAL REHABILITATION
AND INSO LVEN CY ACT OF 2010
(1) waive his right under the security or lien, prove
his claim in the liquidation proceedings and share in the
distribution of the assets of the debtor; or
(2) maintain his rights unde r the security or lie n .
a. If the secured creditor maintains his rights under the
security or lien:
(1) the value of the property may be fixed in a manner
agreed upon by the creditor and the liquidator. When the value
of the property is less than the claim it secures, the liquidator
may convey the property to the secured creclitor and the latter
will be admitted in the liquidation proceedings as a creditor
for the balance. If its value exceeds the claim secured, the
liquidator may convey the property to the creditor and waive
the debtor's right of redemption upon receiving the excess from
the creditor;
(2) the liquidator may sell the property and satisfy the
secured creditor's entire claim from the proceeds of the sale; or
(3) the secured creditor may enforce the lien or foreclose
on the property pursuant to applicable laws.
a. Section 59 of Rule 2 of the Financial Rehabilitation Rules
of Procedure (2013) expressly provides for non-diminution of secured
creditors' rights . Alt.hough there is a Suspension or Stay Order,
the court, upon motion may allow a secured creditor to enforce his
security or lien, or foreclose upon the property of the debtor securing
his/its claim, if the property is not necessary for the rehabilitation
of the debtor. The secured creditor and/or oth er lien holders sh1ll be
admitted to the r ehabilita tion proceedings only for the balance, if
any, of his claim .
8. DISTRIBUTION OF ASSETS . The assets of the
in_solvent debtor shall be divided among the creditors in accordance
with Liquidation Plan submitted by the Liquidator and approver! by
the Court. 100
a. The rules on concurrence and prefere nce of credits under
the New Civil Code and other relevant laws shalJ be observed in
the Liquida tion Plan. 10 • These rules are dis cussed in the previous
Chapter of this work .
106
Sec tion 1,rn. FRIA.
ios !hid .
518 ESSENTlALS OF CREDIT TRANSACTIONS
AND BANKJNG LAWS
9. CROSS-BORDER INSOLVENCY. Th e FRIA adopted
the Model Law on Cross- Border Insolvency of the United Nations
Center for Internation a l Trad e and Development as part thereof. 107
If there is a rehabilitation proceeding fi led by a foreign entity
in a noth er jurisdiction, a petition may be filed by the latter's
representative and the court may issue orders:
(]) suspending any action to enforce claims against the
entity or otherwise seize or foreclose on property of the foreign
entity located in t h e Philippines; ·
(2) r equiring the surrender property of t he foreign
entity to the foreign representative; or
(3) providing oth er necessary relief. 108
a. In determinin g wheth er to grant relief to a foreign entity,
the court shall consider:
(1) t h P protect.io n of crPditors in the Philippines a nd the
inconvenience in pursuing t h eir cl a im in a foreign proceeding;
(2) the just treatment of all cr editors through resort to a
u nified insolvency or reh abilita tion proceedings;
(3) wh ether other jurisdictions have given recognition
to the foreign proceeding;
(4) t he extent that t he foreign proc:eeding recognizes the
rights of creditors and other interested parties in a manner
subst anti ally in accordance with the manner prescribed in the
FRIA; a nd
(5) the extent that the foreign proceeding has recognized
a nd shown defer ence to proceedings under the FRIA and
previous legislation.109
107
Section 139, FRIA.
108
See Section s 140 & 14 1, FRIA.
109
Section 142 . FRIA.
PART2
THE LAWS ON BANKING
INTRODUCTION
A bank is a financial intermediary that plays an important role
in the effort to channel funds to productive use for greater economic
efficiency. Banks, together with non-ba nk financial intermediaries ,
are components of a financial market that move funds from people
who save to people who have productive investment opportuniti es. 1
The importa nt role th at banks play in our economic system
mak es the study of laws and r egulations relating thereto important.
Part 2 of this work deals with such indispensable economic
institutions as well as our central monetary authority, the Bangko
Sentral ng Pilipinas.
The materials in this volume incorporate pertinent legislative,
judicial and administrative issuances through the 1st quarter of
2015. These include selected circulars and regulations iss ued by the
Bangko Sentral ng Pilipinas, especially the Manual of Regulation
for Banks (MORB) that embody basic banking rules. Only basic
provisions of the MORB and other BSP regulations are included
in this work but applicable rules are cited in order to point the
student to the right direction. These rules are readily available in
the official website of the BSP. Unfortunately, even the most basic
banking regulations included in this work are highly vulnerable to
the rapid pace of change in th e administrative plane. Nevertheless,
the administrative rules included in Part 2 of this book, even if
overtaken by new directives, are still useful foundations for a
better understanding of the subsequent norms. Statutes include the
General Banking Act, New Central Bank Act, recent legislations
such as R.A. Nos 9576, 9510, 9194, 9372, 10167, 10575 and other
special laws on banks. There is also a separate chapter on Anti -
Money Laundering and related laws.
1
Frederic S. Mi s hkin , Economics of l\foney, Banking and Fina ncia l Insti tu -
tion s, 5th Ed . p. 7.
5 19