FINANCIAL REHABILITATION and INSOLVENCY
ACT of 2010
Financial Rehabilitation and Insolvency Act (FRIA):
 Governs all petitions filed after it has taken
effect.
 Governs all further proceedings in insolvency,
suspension of payments and rehabilitation cases
pending at the time it became effective (except if
the application of FRIA would not be feasible or
would work injustice)
Policy of the State: Encourage debtors, both natural
and juridical persons, and their creditors to collectively
and realistically resolve and adjust competing claims and
property rights.
Specifically:
1. Ensure a timely, fair, transparent, effective, and
efficient rehabilitation or liquidation of debtors;
2. Ensure or maintain certainty and predictability in
commercial affairs;
3. Preserve and maximize the value of the assets
of debtors;
4. Recognize creditor rights;
5. Respect priority of claims;
6. Ensure equitable treatment of creditors who are
similarly situated; and
7. Facilitate a speedy and orderly liquidation of
these debtors’ assets and the settlement of their
obligations.
Insolvency – refers to the financial condition of a debtor
that is generally unable to pay its or his liabilities as they
fall due in the ordinary course of business or has
liabilities that are greater than its or his assets.
 Balance Sheet Test – denotes the state of a
person whose liabilities are more than his
assets. It is that relative condition of a man’s
assets and liabilities that the former if all made
immediately available, would not be sufficient to
discharge the latter.
*In this sense, insolvency is similar to
bankruptcy.
 Equity Test – the inability of a person to pay his
debts as they become due in the ordinary course
of his business. The person may be insolvent
although he may be able to pay his debts at
some future time on a settlement and winding up
of his affairs.
*In this sense, the debtor is said to be illiquid
not bankrupt.
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Fair Valuation – means what a willing owner, not
compelled to sell, would take, and a willing purchaser
would pay, when not compelled to buy.
*In determining whether the debtor’s liabilities are
greater than his assets, reference must be made to the fair
valuation of his assets. The debtor’s assets must not, at fair
valuation, be sufficient to pay his debts.
Insolvency Law vs. Bankruptcy Law
Insolvency laws operated on the petition of an
insolvent debtor to discharge him from his debts.
Bankruptcy laws operated on petition of a debtor’s
creditors for the purpose of applying his property to the
payment of his debts.
*Both bankruptcy and insolvency statures may be
initiated by either creditor or debtor, and may be used for either
purpose.
Debtors covered by FRIA
1. Sole proprietorship duly registered with Dept. of
Trade and Industry
2. Partnership duly registered with the Securities
and Exchange Commission
3. Corporation duly organized and existing under
Philippine laws
4. Individual debtor who has become insolvent as
defined in the law (FRIA).
Debtors not covered by FRIA
1. Banks
2. Insurance companies
3. Pre-need companies
4. National and Local government agencies or
units
5. Unincorporated company
6. Joint venture (not registered as partnership with
the SEC)
7. Estate of deceased person
8. Trust
Claim – refers to all claims or demands of whatever
nature or character against the debtor or its property,
whether for money or otherwise, liquidated or
unliquidated, fixed or contingent, matured or unmatured,
disputed or undisputed, including but not limited to:
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 FINANCIAL REHABILITATION and INSOLVENCY
ACT of 2010
 All claims of the government (whether national
or local) including taxes, tariffs and custom
duties
 Claims against directors and officers of the
debtor arising from the acts done in the
discharge of their functions falling within the
scope of their authority
*The claim must be against the debtor or its property.
Rehabilitation Court has no jurisdiction over claims of a debtor
against his own debtors or against third parties.
*FRIA covers both monetary and non-monetary claims.
Remedies of Insolvent Debtor:
1. Judicial (e.g., rehabilitation and suspension of
payment under FRIA)
2. Extrajudicial (e.g., dacion en pago)
Remedies under FRIA
 Rehabilitation
o Voluntary
o Involuntary
o Pre-negotiated
 Out-of-Court restructuring
 Liquidation
o Voluntary
o Involuntary
 Petition for suspension of payment (for individual
debtors)
Nature of Proceedings under FRIA
The proceedings under FRIA are proceedings in
rem. In rem actions are against the thing itself and they
are binding upon the whole world.
The court need not acquire jurisdiction over the
person of the defendant in actions in rem because they
are not directed against any person. The court need only
to acquire jurisdiction over the res.
Acquisition of Jurisdiction (FRIA)
Rehabilitation Proceedings – the court acquires
jurisdiction over all persons affected by the proceedings
upon publication of the notice of the commencement of
the proceedings and the Commencement Order in any
newspaper of general circulation in the Philippines for
two (2) consecutive weeks.
Voluntary Liquidation Proceedings – both juridical and
individual debtors, jurisdiction over all persons affected
by the proceedings is acquired upon publication of the
Liquidation Order as provided in the Financial Liquidation
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and Suspension of Payment Rules of Procedures for
Insolvent Debtors (FLSP Rules).
Involuntary Liquidation Proceedings – for juridical
debtors, jurisdiction over all persons affected by the
proceedings is acquired upon publication of the petition
or motion under Section &, Rule 2(B) of the FLSP Rules.
- for individual debtors, jurisdiction over the
person of the debtor is acquired upon service of
summons in accordance with Section 15, Rule 3(C).
Suspension of Payment Proceedings – jurisdiction over
all persons affected by the proceedings is acquired upon
the publication of Suspension of Payments Order.
*Any order issued by the court is under the procedural
rules is immediately executory.
Advantages of Judicial Remedies (FRIA)
1. Retention of Management
2. Non-withholding of Supply
3. Protection from certain actions and processes
4. Exemption from taxes
5. Compromise binding
6. Cram-down Power
7. Binding effect of Rehabilitation Plan
SUSPENSION OF PAYMENT – a petition for
suspension of payment is a remedy available to an
individual debtor who seeks to suspend the payments
outside of the necessary or legitimate expenses of his
business while the proceedings are pending.
Who Can File: Only individual debtors can file a
petition for suspension of payment.
*An individual debtor is a natural person who
is a resident and a citizen of the Philippines who has
become insolvent.
Who Cannot File:
o Creditors cannot file a petition for
suspension of payment against the
debtor
o Corporations and other juridical persons
o Non-Philippine citizen
Venue – the petition is filed in the court having
jurisdiction over the province or city where the
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 FINANCIAL REHABILITATION and INSOLVENCY
ACT of 2010
debtor has resided for six (6) months before the
filing of the petition.
BASIC PROCEDURE:
 Filing of Petition
o The debtor files his verified petition for
suspension of payment and must attach
the following:
 Schedule of debts and liabilities
 Inventory of assets
 Proposed agreement with the
creditors
*The petition must indicate the names of
at least three (3) nominees to the
position of commissioner.
GENERAL RULE: From the time of filing the petition
and for as long as proceedings remain pending, no
creditor can sue or institute proceedings to collect his
claim.
EXCEPTION:
 Creditors having claims for personal labor,
maintenance, expense of last illness, etc.,
incurred within 60 days immediately before
filing.
 Secured creditors
 Action on Petition
o If the court finds the petition sufficient in
form and substance, it will, within five (5)
working days from the filing the petition,
issue the Suspension Order.
 Notification through Publication and Notices
o The Order is published in a newspaper
of general circulation in the province or
city in which the petition is filed once a
week for two (2) consecutive weeks.
o The first publication should be made
within seven (7) days from the time of
the issuance of the Order.
 Creditors’ Meeting and Voting by Creditors
o The creditors will meet on the time, date
and place designated by the court in the
Order.
*The presence of creditors holding claims at
least 3/5 of the liabilities is necessary in
holding the meeting.
o The creditors and the individual debtor
will discuss the propositions in the
proposed agreement and put them to a
vote.
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*To form a majority, it is necessary that (i)
2/3 of the creditors voting unite upon the
same proposition and (ii) claims represented
by the majority vote amount at least 3/5 of
the total liabilities of the debtor mentioned in
the petition.
*A creditor who incurred his credit within 90
days prior to the filing of the petition is not
entitled to vote.
 Objections to Proposal
o If any creditor has dissented from and
protested against the vote of the
majority (proposal and amendments
approved by majority of the creditors
during the
creditors’ meeting), may file an objection
with the court within 10 days from the
date of the last creditors’ meeting.
o GROUNDS:
 Defects in the call for the
meeting, in the holding thereof
and in the deliberations had
which prejudiced the rights of
the creditors;
 Fraudulent connivance between
one or more creditors and the
individual debtor to vote in favor
of the proposed agreement;
 Fraudulent conveyance of
claims for the purpose of
obtaining a majority.

 Hearing and Issuance of Order
o The court must hear and pass upon
such objection within 30 days from the
date of filing and in a summary manner.
IF APPROVED PROPOSED AGREEMENT IS
ANNULLED BY THE COURT: The court will declare the
proceedings terminated and the creditors will be at
liberality to exercise their rights which may correspond to
them.
IF APPROVED PROPOSED AGREEMENT IS UPHELD
OR NO OPPOSITION: The court will order that the
agreement be carried out and all parties bound thereby
to comply with its terms.
Commissioner – will preside the creditors’ meeting in
connection with the proceedings.
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 FINANCIAL REHABILITATION and INSOLVENCY
ACT of 2010
Qualifications:
1. Must be a natural person
2. Citizen of the Philippines or a resident in
the Philippines for six (6) months
immediately preceding his appointment
3. Of good moral character and with
acknowledged integrity, impartiality and
independence
4. Has the requisite knowledge of
insolvency laws, rules and procedures
5. Has no conflict of interest
Prohibited Transactions
The following are prohibited upon the issuance
of the Order and while the so long as the proceedings
relative to the suspension of payments are pending:
1. Sale, transfer, encumbrance or disposition by
the individual debtor of his property
a. EXCEPT: Those used in the ordinary
operations of commerce or industry in
which the petitioning individual debtor is
engaged.
2. Individual debtor is prohibited from making any
payments outside of the necessary or legitimate
expenses of his business or industry.
REHABILITATION – refers to the restoration of the
debtor to a condition of successful operation and
solvency, if it is shown that its continuance of operation
is economically feasible and its creditors can recover by
way of the present value of payments projected in the
Rehabilitation Plan.
Types:
 Court-supervised: Voluntary
 Court-supervised: Involuntary
 Pre-negotiated
 Out-of-court of Informal
Purpose:
1. To efficiently and equitably distribute the
assets of the insolvent debtor to its
creditors
2. To provide the debtor with a fresh start
*If rehabilitation is not feasible, the appropriate
proceeding would be a liquidation proceeding instead of a
rehabilitation proceeding.
Economically Feasible Rehabilitation Plan
(Characteristics):
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1. Debtor has assets that can generate more cash
if used in its daily operations than if sold
2. Liquidity issues can be addressed by a
practicable business plan that will generate
enough cash to sustain daily operations
3. Debtor has a definite source of financing for the
proper and full implementation of the
Rehabilitation Plan that is anchored on realistic
assumptions and goals.
Infeasible Rehabiliation Plan:
1. Absence of a sound workable business plan
2. Baseless and unexplained assumptions, targets
and goals
3. Speculative capital infusion or complete lack
thereof for the execution of the business plan
4. Cash flow cannot sustain daily operations
5. Negative net worth and the assets are near full
depreciation or fully depreciated.
Court-supervised Rehabilitation
 Voluntary – if an insolvent debtor initiates the
rehabilitation proceedings
To file the petition, there must be
approval from:
(i) Owner in case of single
proprietorship
(ii) Majority of the partners in
case of partnership
(iii) Majority of vote of the board
and vote of stockholders
representing at least 2/3 of
capital stock in case of
corporations
 Involuntary – if a creditor or group of creditors
(with aggregate claims of at least P1 million or at
least 25% of subscribed capital or partners’
contribution) initiates the rehabilitation
proceedings
Venue for Petition
 Sole Proprietorship
o the petition must be filed in the RTC
which has jurisdiction over the principal
office of the debtor
 Corporation, Partnership or Association
(principal office in Metro Manila)
o the petition must be filed in the RTC of
the city or municipality where the hear
office is located
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 FINANCIAL REHABILITATION and INSOLVENCY
ACT of 2010
* If petition involves a group of debtors, the same
must be filed in the RTC which has jurisdiction
over the principal office of any of the debtors
alleged to be insolvent
Requirements and Contents
 By the debtor/s:
1. Petition must be verified
2. Must set forth with sufficient particularity
all of the following material facts:
a. Name, business, and principal
address and other addresses of
the debtor;
b. Nature of the business and
principal activities of the debtor,
and the addresses where these
activities are conducted;
c. History of the debtor
d. Fact and cause of debtor’s
insolvency
e. Specific relief sought
f. Grounds upon which the petition
is based
g. All pending actions or
proceedings by or against the
debtor and the courts or tribunal
where such are pending;
h. Threats or demands to enforce
claims or liens against the
debtor
i. Manner by which the debtor
may be rehabilitated
j. Exact address at which
documents regarding the debtor
and the proceedings may be
reviewed and copied
 By the creditor/s:
a. Name, business, and principal address
and other addresses of the debtor;
b. Nature of the business and principal
activities of the debtor;
c. Circumstances sufficient to support the
petition to initiate involuntary
rehabilitation proceedings;
d. Specific relief sought;
e. Rehabilitation Plan;
f. Names of at least three (3) nominees to
the position of rehabilitation receiver
(with qualifications, office and email
addresses);
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g. Exact address at which documents
regarding the debtor and the
proceedings may be reviewed and
copied
h. Documents showing that there is
substantial likelihood that the debtor
may be rehabilitated
BASIC PROCEDURE:
 Filing of Petition
o Insolvent Debtor: By filing a petition with
the court on the grounds provided in the
FRIA. The petition must be verified to
establish the insolvency of the debtor
and the viability of its rehabilitation.
o Creditor/s: By filing a petition for
rehabilitation with the court on the
grounds provided in the FRIA. The
petition must be verified to establish the
substantial likelihood that the debtor
may be rehabilitated.
 Action for Petition
If the court finds the petition for
rehabilitation sufficient in form and in
substance, it will, within five (5) working
days from filing the petition, issue a
Commencement Order.
If the court finds the petition deficient in
substance and in form, it may, in its
discretion, give the petitioner/s a
reasonable period of time within which
to:
 amend or supplement the
petition
 submit such documents as may
be necessary
 put the petition in proper order
*In this case, the five (5) working
days shall be reckoned from the
date of the filing of the amended or
supplemental petition or the
submission or the submission of
such documents.
*If the deficiency is not complied
within the extended five-day period,
the court will DISMISS the petition.
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 FINANCIAL REHABILITATION and INSOLVENCY
ACT of 2010
When COMMENCEMENT ORDER is issued:
The order will set the case for initial hearing,
which will not be more than 40 days from the
date of filing of the petition.
 Publication of Commencement Order and
Delivery of Notices
o The Order is published in a newspaper
of general circulation in the province or
city in which the petition is filed once a
week for two (2) consecutive weeks.
o The first publication should be made
within seven (7) days from the time of
the issuance of the Order.
HOW NOTICES DELIVERD:
 If petitioner is the debtor: There
will be service by personal
delivery of a copy of the petition
on each creditor holding at least
10% of the total liabilities of the
debtor within five (5) days.
 If petitioner is the creditor: Direct
the service by personal delivery
of a copy of the petition on the
debtor within five (5) days.
 Establishment of Registry of Claims
o Within 20 days from rehabilitation
receiver’s assumption of office, he must
establish a preliminary registry of claims.
o Rehabilitation receiver must make
registry available for public inspection
and provide publication notice by
publishing the place and date of
inspection in a newspaper of general
circulation once every week for two (2)
consecutive weeks.
* The period of inspection cannot exceed 15
days from the last publication.
 Filing of Creditor’s Claim
o The creditors must file their claim at
least five (5) days before the initial
hearing.
*If a creditor fails to file their claim in
accordance with the Commencement Order
and such is not listed in the schedule of
debts and liabilities will not be entitled to
participate in the rehabilitation proceedings.
However, if he files a belated claim, he will
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be entitled to receive distributions arising
from the proceedings although he is not
entitled to participate.
 Challenge of Claims
o Within 30 days from the expiration of the
period to inspect the registry of claims,
the debtors, creditors and stakeholders
may submit their challenge to claim/s to
the court.
o Upon the expiration of the 30-day
period, the rehabilitation receiver must
submit to the court the registry of claims.
*The aggrieved party may seek the review of
the decision of the rehabilitation receiver by
filing a motion with the rehabilitation court
within five (5) days from receipt of
rehabilitation receiver’s decision.
 Initial Hearing and Subsequent Hearings
o At the initial hearing, the court will:
 Determine the creditors who
have made timely and proper
filing of their notice of claims;
 Hear and determine any
objection to the qualifications or
the appointment of the
rehabilitation receiver (and if
necessary, appoint one);
 Direct the creditors to comment
on the petition and
Rehabilitation Plan;
 Direct the rehabilitation receiver
to evaluate the financial
condition of the debtor and to
prepare and submit to the court
within 40 days from the initial
hearing a report (provided in
Sec. 24 of the FRIA).
 Determine the reasonableness
of the rehabilitation receiver’s
fees stated in the Rehabilitation
Plan (which will be presumed
reasonable unless the creditors
object on it)
*The court may hold additionall
hearing as may be necessary to
continue the initial hearing process
but these hearings must be
concluded not later than 90 days
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 FINANCIAL REHABILITATION and INSOLVENCY
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from the first hearing date fixed in
the Commencement Order.
 Creditor’s Comment on the Petition and
Rehabilitation Plan
o The creditors will submit their comments
to the court and rehabilitation receiver
within 20 days from the initial hearing.
 Submission of Report of Rehabilitation
Receiver
o The rehabilitation receiver will submit its
report to the court within 40 days from
the initial hearing stating his preliminary
findings and recommendation, whether:
 The debtor is insolvent;
 The underlying assumptions,
financial goals and procedures
to accomplish in the
Rehabilitation Plan are realistic,
feasible and reasonable;
 There is substantial likelihood
for the debtor to be successfully
rehabilitated;
 The petition should be
dismissed;
 The debtor should be dissolved
or liquidated
 Grant or Dismissal of Petition or Conversion
of Proceedings
o Within 10 days from receipt of the report
of the rehabilitation receiver, the court
may:
 Give due course to the petition
 Dismiss the petition
 Convert the proceedings into
one for the liquidation of the
debtor
 Consultation with Debtors and Creditors
o If the court gives due course to the
petition, the rehabilitation receiver must
confer with the debtor and all of the
creditors, and may consider their views
and proposals in the review, revision or
preparation of a new Rehabilitation Plan.
 Formation of Creditors’ Committee
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o If the petition is given due course, the
court will issue an order directing the
rehabilitation receiver to call a meeting
with the debtor and all classes of
creditors.
*The meeting will take place in not less than
2 weeks nor more than 4 weeks from the
date of the order to consider the organization
of a creditors’ committee.
o A creditors’ committee may be
organized if the creditors, representing
at least a majority of all the claims as
reflected in the registry of claims, cast
their votes for its creation.
CREDITORS’ COMMITTEE: Will be
composed of a representative from each of
the following classes:
 Secured Creditors
 Unsecured Creditors
 Trade Creditors and Suppliers
 Employees of the debtor
 Creditors’ Meeting to Approve Rehabilitation
Plan
o After the rehabilitation receiver reviews
and revises the Rehabilitation Plan, he
will notify the creditors and stakeholders
that the plan is ready for their
examination.
o Within 20 days from the notification, he
will convene the creditors for the
purposes of voting on the approval of
the plan.
o The rehabilitation receiver will notify the
court, the creditors or the creditors’
committee and the stakeholders of the
approval or the rejection of the Plan
within five (5) days from such voting.
 Submission of Rehabilitation Plan to the
Court
o Within five (5) days from the receipt of
the Plan submitted by the rehabilitation
receiver, the court will notify the
creditors that the Rehabilitation Plan has
been submitted for confirmation.
o Creditors may either obtain copy of the
plan or file an objection thereto.
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 FINANCIAL REHABILITATION and INSOLVENCY
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 Filing of Objections
o The creditors may file their objection
within 20 days from receipt of notice
from the court.
Objections to the Rehabilitation Plan are
limited to the following grounds:
 Creditors’ support was induced
by fraud
 Documents or data relied upon
in the Rehabilitation Plan are
materially false and misleading
 Rehabilitation Plan is in fact not
supported by the voting
creditors
 Hearing on Objections
o The court will issue an order setting the
time and date for the hearing/s on the
objections.
o If it finds merit in the objection, it will
order the rehabilitation receiver or other
party to cure the defect, whenever
feasible.
o If it finds that the debtor acted in bad
faith or that it is not feasible to cure the
defect, it will convert the proceedings
into one for the liquidation of the debtor.
 Court Action
o If no objections were filed within the
period of 20 days, or if objections lack in
merit, the court will issue an order
confirming the Rehabilitation Plan.
*The court has a maximum period of one (1)
year from the date of filing of the petition to
confirm a Rehabilitation Plan.
 Amendments to the Approved Rehabilitation
Plan
o After the confirmation of the
Rehabilitation Plan, the debtor,
rehabilitation receiver or any creditor
may file a verified motion for leave to
amend the Plan.
*The motion must state the reasons
warranting the amendment of the Plan and
the proposed amendments, with a copy
given to the rehabilitation receiver.
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IF MOTION IS GRANTED: The court will
set the proposed amendments for
hearing not later than 15 days from the
date of the order.
 Termination of Proceedings
o The rehabilitation proceedings are, upon
motion by any stockholder or the
rehabilitation receiver, terminated by
order of the court either declaring a
successful implementation of the Plan or
a failure of rehabilitation.
THERE IS FAILURE OF REHABILITATION
IN THE FF CASES:
 Court dismisses the petition
 Debtor fails to submit a
Rehabilitation Plan
 No substantial likelihood that the
debtor can be rehabilitated within a
reasonable period
 Commission of fraud in securing
approval of the Plan or its
amendments
 Court does not confirm the Plan
 Failure of the debtor to comply with
the FLSP Rules, Rules of Court, or
any order of the Court.
COMMENCEMENT ORDER
Contents:
 Declare that the debtor is under rehabilitation.
 Appoint rehabilitation receiver who may or may
not be from among the nominees of the
petitioners
 Prohibit the debtor’s suppliers of goods or
services from withholding the supply of goods
and services in the ordinary course of business
(as long as debtor pays after the issuance of the
Commencement Order)

 Authorize the payment of administrative
expenses as they become due
 Set the case for initial hearing
Effects:
 Vest the rehabilitation receiver with all the powers and
functions provided for in the FRIA
 Prohibit or otherwise serve as the legal basis for
rendering null and void the results of any extrajudicial
activity or process to seize property or attempt to
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 FINANCIAL REHABILITATION and INSOLVENCY
ACT of 2010
collect on or enforce a claim against the debtor after  Criminal action against the individual debtor or
the commencement date owner, partner, director or officer of a debtor
 Serve as the legal basis for rendering null and void
any set-off after the commencement date of any debt
owed to the debtor by any of the creditors
 Serve as the legal basis for rendering null and void
the perfection of any lien against the debtor’s property
after the commencement date
 Consolidate the resolution of all legal proceedings by
and against the debtor to the court

Effectivity and Duration

The Order is effective for the duration of the
rehabilitation proceedings, unless:
 earlier lifted by the Court
 Rehabilitation Plan is seasonably confirmed or
approved
 Rehabilitation proceedings are ordered
terminated by the Court

SUSPENSION ORDER
Effects:
 Suspend all actions or proceedings, in court or
otherwise, for enforcement of claims against the
debtor
 Suspends all actions to enforce any judgment,
attachment or other provisional remedies against
the debtor
 Prohibit the debtor from selling, encumbering,
transferring or disposing in any manner any of its
properties (except in the ordinary course of
business)
 Prohibits the debtor from making any payments
of its liabilities outstanding as of the
commencement date (except as may be
provided)

Does not apply to:

 Cases already pending appeal in the Supreme
Court as of commencement date.
 Cases pending or filed 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
rehabilitation court.
 Enforcement of claims against sureties and other
persons solidarily liable with the debtor, and

accommodation mortgagors or issues of letters

of credit
 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 business

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