QUESTIONS AND ANSWERS ON FRIA

1. What is the purpose of FRIA?

To encourage debtors, both juridical and natural persons, and their creditors to
collectively and realistically resolve and adjust competing claims and property rights,
Republic Act No. 10142, or otherwise known as the Financial Rehabilitation and
Insolvency Act of 2010 (“FRIA”) was enacted.

Basically, FRIA is a law which governs the rehabilitation or liquidation of debtors, may it
be a sole proprietorship, partnership, corporation or an individual debtor. It guarantees
a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors.

2. What is Rehabilitation?

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 plan, more if the debtor continues as a going concern than if it is immediately
liquidated.

3. What is liquidation?

 Liquidation is a process by which assets are converted to cash. Liquidation can be

voluntary or involuntary.

4. Nature of proceedings under FRIA

The proceedings involved under FRIA are considered as in rem, which means that it
binds the whole world. Jurisdiction over all persons affected by the proceedings shall be
considered as acquired upon publication of the notice of the commencement of the
proceedings in any newspaper of general circulation in the Philippines.

5. What or who is considered a debtor under this act?

The definition of a debtor is important to be able to determine if the parties may avail of
the proceedings provided by FRIA. The term debtor covers a sole proprietorship duly
registered with the Department of Trade and Industry (DTI), a partnership duly
 registered with the Securities and Exchange Commission (SEC), a corporation duly
organized and existing under Philippine laws, or an individual debtor who has become
insolvent.

6. Are debtor-banks covered by this act?

No. The term debtor does not include banks as well as insurance companies, pre-need
companies, and national and local government agencies or units. Insolvent banks,
insurance companies, and pre-need companies, however, are covered by R.A. No. 7653
(The New Central Bank Act), P.D. 1460 (Insurance Code), and R.A. 9829 (Pre-Need Code),
with the FRIA only applying suppletorily.

7. What are the three types of rehabilitation under FRIA?

There are three types of rehabilitation, namely:

1. Court-supervised rehabilitation
2. Pre-negotiated rehabilitation; and
3. Out-of-court/Formal Restructuring

8. How can a court-supervised rehabilitation be initiated?

Court-supervised rehabilitation may be initiated through voluntary proceedings or

involuntary proceedings.

9. What is then a voluntary proceedings?

Voluntary Proceedings may be initiated by an insolvent debtor through filing a petition

for rehabilitation with the court and on the grounds provided under the FRIA.

The filing of the petition for rehabilitation must be approved by the owner in case of a
sole proprietorship, or by a majority of the partners in case of a partnership, or in case
of a corporation, by a majority vote of the board of directors or trustees and authorized
by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or in case of nonstock corporation, by the vote of at least two-thirds (2/3)
of the members, in a stockholder’s or member’s meeting duly called for the purpose.

10. Can a group of debtors jointly file a petition for rehabilitation?

A group of debtors may jointly file a petition for rehabilitation when 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 the group is essential under the terms and conditions of the proposed
Rehabilitation Plan.

11. What is a rehabilitation plan?

Rehabilitation Plan shall refer to a plan by which the financial well-being and viability of
an insolvent debtor can be restored using various means including, but not limited to,
debt forgiveness, debt rescheduling, reorganization or quasi-reorganization, dacion en
pago, debt-equity conversion and sale of the business (or parts of it) as a going concern,
or setting-up of new business entity, or other similar arrangements as may be approved
by the court or creditors.

12. When can a rehabilitation plan be deemed rejected?

 The Rehabilitation Plan shall be deemed rejected unless approved by all classes of
creditors whose rights are adversely modified or affected by it. The votes of the
creditors are based on the amount of their respective claims in the registry of claims
prepared by the Rehabilitation Receiver.

13. What is the “cram-down power”?

Notwithstanding rejection, the Rehabilitation Court may still exercise its so-called
“cram-down power” and confirm the Rehabilitation Plan if: (a) it complies with the FRIA;
(b) the Rehabilitation Receiver recommends its confirmation; (c) the shareholders,
owners or partners of the debtor lose at least their controlling interest as a result of the
Rehabilitation Plan; and (d) it would likely provide the objecting class of creditors with
compensation which has a net present value greater than what they would receive
under liquidation.

14. How can an involuntary proceedings be initiated?

Any creditor or group of creditors with a claim of, or the aggregate of whose claims is, at
least One Million Pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the
subscribed capital stock or partners’ contributions, whichever is higher, may initiate
involuntary proceedings against the debtor by filing a petition for rehabilitation with the
court if:
(a) there is no genuine issue of fact on law on the claim/s of the petitioner/s, and that
the due and demandable payments thereon have not been made for at least sixty (60)
days or that the debtor has failed generally to meet its liabilities as they fall due; or
 (b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings against
the debtor that will prevent the debtor from paying its debts as they become due or will
render it insolvent.

15. What is a pre-negotiated rehabilitation?

The second way of rehabilitation is the pre-negotiated. Under this preceding, an

insolvent debtor, by itself or jointly with any of its creditors, may file a verified petition
with the court for the approval of a pre-negotiated Rehabilitation Plan which has been
endorsed or approved by creditors holding at least two-thirds (2/3) of the total liabilities
of the debtor, including secured creditors holding more than fifty percent (50%) of the
total secured claims of the debtor and unsecured creditors holding more than fifty
percent (50%) of the total unsecured claims of the debtor.

16. What is the period to which the court should approve the rehabilitation plan? And what
if the court failed to approved it?

The Rehabilitation Court shall have a maximum period of one hundred twenty (120)
days from the date of the filing of the petition to approve the Rehabilitation Plan, and if
it fails to act within said period, the same shall be deemed approved.

17. What are the requirements for an out-of-control or informal restructuring agreements

For an out-of-court or informal restructuring/workout agreement or Rehabilitation Plan

to qualify, it must meet the following minimum requirements:
1. The debtor must agree to the out-of-court or informal restructuring/workout agreement
or Rehabilitation Plan;
2. It must be approved by creditors representing at least sixty-seven (67%) of the secured
obligations of the debtor;
3. It must be approved by creditors representing at least seventy-five percent (75%) of the
unsecured obligations of the debtor; and
4. It must be approved by creditors holding at least eighty-five percent (85%) of the total
liabilities, secured and unsecured, of the debtor.

18. What is the “standstill period”?

A standstill period, which does not exceed one hundred twenty (120) days from the date
of effectivity, is a 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.
 The agreement must be approved by creditors representing more than fifty percent
(50%) of the total liabilities of the debtor and notice thereof is published in a newspaper
of general circulation in the Philippines once a week for two (2) consecutive weeks.

19. Is the standstill period limited only to the contracting parties?

No. The standstill period shall be effective and enforceable not only against the
contracting parties but also against the other creditors.

20. Who is a rehabilitation receiver?

A rehabilitation receiver shall refer to the person or persons, natural or juridical,

appointed as such by the court and which shall be entrusted with such powers and
duties

21. What are the qualifications of a rehabilitation receiver?

The rehabilitation receiver shall have the following minimum qualifications:

 A citizen of the Philippines or a resident of the Philippines in the six (6) months
immediately preceding his nomination;
 Of good moral character and with acknowledged integrity, impartiality and
independence;
 Has the requisite knowledge of insolvency and other relevant commercial laws,
rules and procedures, as well as the relevant training and/or experience that
may be necessary to enable him to properly discharge the duties and obligations
of a rehabilitation receiver; and
 Has no conflict of interest: Provided, That such conflict of interest may be
waived, expressly or impliedly, by a party who may be prejudiced thereby.

22. What is a management committee?

The management committee shall take the place of the management and the governing
body of the debtor and assume their rights and responsibilities.

23. What are the qualification of a management committee?

The qualifications and disqualifications of the members of the management committee

shall be set forth in the procedural rules, taking into consideration the nature of the
 business of the debtor and the need to protect the interest of all stakeholders
concerned.

24. Who or what is a liquidator?

A liquidator is a natural person or juridical entity appointed as such by the court and
entrusted with such powers and duties as set forth under the FRIA. If the liquidator is a
juridical entity, it must designate a natural person who possesses all the qualifications
and none of the disqualifications as its representative, it being understood that the
juridical entity and the representative are solidarity liable for all obligations and
responsibilities of the liquidator. Liquidation can be voluntary or involuntary.

25. What is a voluntary liquidation?

In Voluntary Liquidation, an insolvent debtor may apply for liquidation by filing a

petition for liquidation with the court. The petition shall be verified, shall establish the
insolvency of the debtor and shall contain, whether as an attachment or as part of the
body of the petition:
 a schedule of the debtor’s debts and liabilities including a list of creditors with their
addresses, amounts of claims and collaterals, or securities, if any;
 an inventory of all its assets including receivables and claims against third parties;
and
 the names of at least three (3) nominees to the position of liquidator.

26. Can a debtor file a liquidation proceedings during pendency of rehabilitation

proceedings?
Yes. At any time during the pendency of court-supervised or pre-negotiated
rehabilitation proceedings, the debtor may also initiate liquidation proceedings by filing
a motion in the same court where the rehabilitation proceedings are pending to convert
the rehabilitation proceedings into liquidation proceedings.

27. What is a liquidation order?

If the petition or the motion, as the case may be, is sufficient in form and substance, the
court shall issue a Liquidation Order. An individual debtor whose properties are not
sufficient to cover his liabilities, and owing debts exceeding Five hundred thousand
pesos (Php500,000.00), may apply to be discharged from his debts and liabilities by filing
a verified petition with the court of the province or city in which he has resided for six
(6) months prior to the filing of such petition. He shall attach to his petition a schedule
of debts and liabilities and an inventory of assets. The filing of such petition shall be an
act of insolvency.
28. What is the period to which the liquidation should submit the liquidation plan?

The Liquidator shall submit to the Liquidation Court a Liquidation Plan within three (3)
months from assumption of office.

29. What is a commencement order?

Should the petition be deemed sufficient in form and substance, the Rehabilitation
Court will issue a Commencement Order whose effects generally retroact to the date of
filing of the petition, and which shall include a Stay or Suspension Order that shall: (a)
suspend all actions or proceedings, in court or otherwise, for the enforcement of claims
against the debtor; (b) suspend all actions to enforce any judgment, attachment or
other provisional remedy against the debtor; (c) prohibit the debtor from selling,
encumbering, transferring or disposing in any manner of its properties except in the
ordinary course of business; and (d) prohibit the debtor from making any payment of its
outstanding liabilities as of the commencement date, except as may be provided by the
FRIA.

30. How is an involuntary liquidation initiated?

In case of Involuntary Liquidation, three (3) or more creditors the aggregate of whose
claims is at least either One million pesos (Php1,000,000,00) or at least twenty-five
percent (25%) of the subscribed capital stock or partner’s contributions of the debtor,
whichever is higher, may apply for and seek the liquidation of an insolvent debtor by
filing a petition for liquidation of the debtor with the court. The petition shall show that:
 there is no genuine issue of fact or law on the claims/s of the petitioner/s, and that the
due and demandable payments thereon have not been made for at least one hundred
eighty (180) days or that the debtor has failed generally to meet its liabilities as they fall
due; and
 there is no substantial likelihood that the debtor may be rehabilitated.

31. Can creditors file a liquidation proceedings during pendency of rehabilitation

proceedings?

Yes. At any time during the pendency of or after a rehabilitation court-supervised or pre-
negotiated rehabilitation proceedings, three (3) or more creditors whose claims is at
least either One million pesos (Php1,000,000.00) or at least twenty-five percent (25%) of
the subscribed capital or partner’s contributions of the debtor, whichever is higher, may
also initiate liquidation proceedings by filing a motion in the same court where the
 rehabilitation proceedings are pending to convert the rehabilitation proceedings into
liquidation proceedings.

32. When can an involuntary liquidation for an individual debtor takes place?
In case of an individual debtor, involuntary liquidation takes place when a creditor or
group of creditors with a claim of, or with claims aggregating at least Five hundred
thousand pesos (Php500, 000.00) files a verified petition for liquidation with the court of
the province or city in which the individual debtor resides.

33. What is a corporate rehabilitation?

Corporate rehabilitation is a remedy for corporations, partnerships and associations

which foresee the impossibility of meeting their debts when they respectively fall due
with an end view to restore and reinstate them to their former position of successful
operation and solvency. The debtor is given a “fresh start” or “a new lease on life [to]
thereby allow creditors to be paid their claims from [the debtor’s] earnings.

34. Is management and control of the insolvent debtor remains with the existing
management?

Yes. Management and control of the insolvent debtor will remain with the existing
management of the debtor, unless the Rehabilitation Receiver is appointed to take over
under Section 36 of the FRIA, or the Rehabilitation Receiver and the Rehabilitation Court
approve the creation of a management committee.

35. What acts of the insolvent debtor needs approval of the rehabilitation receiver /
rehabilitation court?

During the rehabilitation, all disbursements, payments for sale, disposal, assignment,
transfer or encumbrance of property, or any other act affecting title to or interest in
property shall be subject to the recommendation/approval of the Rehabilitation
Receiver and/or Rehabilitation Court.

36. What is the period to which the court can confirm a rehabilitation plan?

The court shall have a maximum period of one (1) year from the date of filing of petition
to confirm a Rehabilitation Plan.

37. What is the effect of the court-approved rehabilitation plan compared to the
confirmation of rehabilitation plan
 The approval of an out-of-court restructuring/workout agreement or Rehabilitation
Plan has the same legal effect as a confirmation of a Rehabilitation Plan in a court-
supervised rehabilitation. Any amendment of an out-of-court restructuring/workout
agreement or Rehabilitation Plan must be made according to the terms of the
agreement and with due notice to all creditors. Either the insolvent debtor and/or
creditor may seek court assistance to execute or implement such agreement or
Rehabilitation Plan.

38. Filing of suspension of payments

A verified petition for suspension of payments may be filed by an individual debtor who
possesses sufficient property to cover all his debts but foresees the impossibility of
meeting them when they fall due.

During the pendency of the petition and upon motion of the debtor, the court may issue
an order suspending execution against the debtor and no creditor shall sue or institute
proceedings to collect claims from the debtor from the time of the filing of the petition
and for as long as proceedings remain pending, except: (a) creditors having claims for
personal labor, maintenance, expense of last illness and funeral of the wife or children
of the debtor incurred in the sixty (60) days immediately prior to the filing of the
petition; and (b) secured creditors.

39. When can we say that there is a majority during the creditors meeting?

For purposes of the creditors’ meeting and approval of the proposed agreement, the
following is necessary to form a majority:
(a) two-thirds (2/3) of the creditors voting unite upon the same proposition; and
(b) the claims represented by said majority vote amount to at least three-fifths (3/5) of
the total liabilities of the debtor mentioned in the petition, but a creditor who incurred
his credit within ninety (90) days prior to the filing of the petition shall not be entitled to
vote.

Failure to meet these requirements shall result in the termination of the proceedings
without recourse and the parties concerned shall be at liberty to enforce their
respective rights.

40. Is the Order confirming the approval of the proposed agreement binding to all
creditors?

General Rule: The Order confirming the approval of the proposed agreement or any
amendment thereon shall bind all creditors whose claims are included in the schedule of
 debts and liabilities submitted by the individual debtor and who were properly
summoned

Exceptions: (a) creditors having claims for personal labor, maintenance, expenses of last
illness and funeral of the wife or children of the debtor incurred in the sixty (60) days
immediately prior to the filing of the petition; and (b) secured creditors who failed to
attend the meeting or refrained from voting therein.

41. What happens then if the debtor failed to perform the agreement?

If the individual debtor fails, wholly or in part, to perform the agreement, all the rights
which the creditors had against the individual debtor before the agreement shall revest
in them.

42. Did the FRIA repeals the Insolvency Act of 1909?

Yes. The FRIA replaces and repeals the Insolvency Law (Act No. 1956) of 1909 which was
almost universally acknowledged as outdated and obsolete. The FRIA also impliedly
amends the Interim Rules on Corporate Rehabilitation first issued by the Supreme Court
in 2000 (and amended in 2008), given several inconsistencies between those rules and
the new FRIA.

43. What is the option granted to the debtor on the FRIA?

The debtor has the option to choose which of its contracts it wishes to confirm, by
delivering written notice of confirmation to the relevant counterparties. Any contract
that is not confirmed by the debtor within a period of 90 days from the commencement
of the rehabilitation proceedings shall be considered terminated. Damages arising
therefrom will be considered a claim arising prior to the commencement of
proceedings.

44. What happens to the taxes and dues due from the debtor to the national and local
government?

While court-supervised proceedings are pending, all taxes and dues due from the debtor
to the national and local government are waived. Similarly, the amount by which any
indebtedness or obligation of the debtor is reduced or forgiven shall not be subject to
any tax.

45. Venue for filing the petition for suspension of payments

 An individual debtor who possesses sufficient property to cover all of his debts but may
not be able to meet them as they fall due may file a petition with a Philippine Regional
Trial Court designated as a special commercial court, to be subject to suspension of
payments. The verified petition must be filed with the court where the debtor has
resided for at least six months prior to the filing of the petition.

46. What are the grounds for objecting to the proposed agreements?

The possible grounds for objecting to the proposed agreement are:

• Defects in the call for the meeting of the creditors, in the holding thereof, and in the
deliberations thereat, which prejudice the rights of the creditors;
• Fraudulent connivance between one or more creditors and the debtor to vote in
favour of the proposed agreement; and
• Fraudulent conveyance of claims for the purpose of obtaining the required majority.

47. Under the FRIA, what does the “commencement date” refers to?

Under the FRIA, the “commencement date” refers to the date on which the court issues
the Commencement Order, which shall be retroactive to the date of filing of the petition
for both voluntary and involuntary proceedings.

48. What is the effectivity and duration of the commencement order?

Unless lifted by the court, or where the rehabilitation plan is seasonably confirmed or
approved, or the rehabilitation proceedings are ordered terminated by the court, the
Commencement Order, including the stay of actions and proceedings for the
enforcement of claims, will remain effective for the duration of the rehabilitation
proceedings for as long as there is a substantial likelihood that the debtor will be
successfully rehabilitated. However, the order suspending any pending execution
against the individual debtor lapses after three months have passed without a proposed
agreement being accepted by the creditors, or as soon as such agreement is denied.

49. Grounds for the dismissal of the petition for rehabilitation

(i) the debtor is not insolvent; (ii) the petition is a sham filing intended only to delay the
enforcement of the rights of the creditor(s) or of any group of creditors; (iii) the petition,
the Rehabilitation Plan and the attachments thereto contain materially false or
misleading statements; or (iv) the debtor has committed acts of misrepresentation or in
fraud of its creditor(s) or a group of creditors

50. Effects of the dismissal of the petition for rehabilitation

 The court may order the petitioner to pay damages to any creditor or to the debtor, as
the case may be, who may have been injured by the filing of the petition, to the extent
of any such injury.

The court may also convert the proceedings into one for the liquidation of the debtor
upon a finding that: (a) the debtor is insolvent; (b) there is no substantial likelihood for
the debtor to be successfully rehabilitated as determined in accordance with the rules
promulgated by the Supreme Court; and (c) there is a failure of rehabilitation.

51. Instances when the court can also convert the proceedings into liquidation

The court may also convert the proceedings into liquidation: (i) upon motion of the
debtor (juridical debtor) at any time during the pendency of court-supervised or pre-
negotiated rehabilitation proceedings; (ii) when no rehabilitation plan is confirmed
within one year from the date of filing of the petition to confirm a rehabilitation plan;
(iii) in cases of termination of proceedings, due to failure of rehabilitation or dismissal of
petition for reasons other than technical grounds; or (iv) upon verified motion of three
or more creditors whose claims total at least either PHP 1,000,000 or constitute at least
25% of the subscribed capital or partners’ contributions, whichever is higher.

52. What happens to the obligations incurred after the commencement date?

Under the FRIA, obligations incurred after the commencement date to finance the
rehabilitation of the debtor are considered administrative expenses. Thus, these
obligations can be paid in the ordinary course of business during the rehabilitation
period and enjoy priority in preference of claims. This provision improves creditor rights
for creditors coming in during rehabilitation. By way of comparison, under the Rules on
Corporate Rehabilitation, a Stay Order directs the payment of new loans or other forms
of credit accommodations obtained for the rehabilitation of the debtor only with prior
court approval.

53. What is the treatment on compensation of employees after commencement date?

The compensation of employees required to carry on the business is considered an

administrative expense. Claims for salary and separation pay for work performed after
the commencement date are also an administrative expense. However, claims of
separation pay for months worked prior to the commencement date are considered
pre-commencement claims.

54. Can the court confirm the rehabilitation plan even if there exists unresolved disputes?
 The court may confirm the Rehabilitation Plan notwithstanding the existence of
unresolved disputes over claims if the Rehabilitation Plan has made adequate provisions
for paying these claims

55. What are the rights of secured creditors

The Liquidation Order will not affect the right of a secured creditor to enforce his lien in
accordance with the applicable contract or law. A secured creditor may:
• 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
• Maintain his rights under the security or lien.

56. What happens then if the secured creditor maintains his rights under security

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 creditor 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;
• The liquidator may sell the property and satisfy the secured creditor’s entire claim
from the proceeds of the sale; or
• The secured creditor may enforce the lien or foreclose on the property pursuant to
applicable laws.

57. What is setting off in liquidation?

If the debtor and creditor are mutually debtor and creditor of each other, one debt shall
be set off against the other. Should there be any balance, then the balance will be
allowed in the liquidation proceedings.

58. How does the liquidation plan observe the concurrence and preference of credits?

The Liquidation Plan must ensure that the concurrence and preference of credits as
enumerated in the Civil Code and other relevant laws will be observed, unless a
preferred creditor voluntarily waives his preferred right. Credits for services rendered by
employees or labourers to the debtor enjoy first preference, unless the claims
constitute legal liens under relevant provisions of the Civil Code.

Certain types of credits enjoy preference with respect to specific movable or immovable
properties (“special preferred credits”).
59. What among the special preferred credits enjoys absolute preference?

Among the special preferred credits, taxes and assessments due upon the property to
which the claims relate enjoy absolute preference. All the remaining classes of special
preferred credits with respect to specific movable or immovable property (e.g. credits
secured by a pledge or mortgage) do not enjoy priority among themselves, but must be
paid concurrently and pro rata, i.e. in proportion to the amount of the respective
credits.

60. How credits that do not enjoy any preference can be satisfied?

Credits that do not enjoy any preference with respect to specific property are satisfied
in the order established in article 2244 of the Civil Code. Article 2244 provides for the
preference of certain claims and credits which, without special privilege, appear in
either a public instrument (i.e. the instrument is notarised) or a final judgment. These
credits have preference among themselves in the order of priority of the dates of the
instruments and of the judgments, respectively.

61. What happens to the transaction occurring prior to the liquidation order?

Any transaction occurring prior to the issuance of the Liquidation Order or, in case of
the conversion of the rehabilitation proceedings, prior to the commencement date,
entered into by the debtor or involving its assets, may be rescinded or declared null and
void on the ground that the same was executed with intent to defraud a creditor or
creditors or which constitute undue preference of creditors.

The liquidator or, with his conformity, a creditor may initiate and prosecute any action
to rescind, or declare null and void, any transaction described in the immediately
preceding paragraph.

62. Does the FRIA recognizes foreign insolvency laws?

Yes. The FRIA provides for recognition of foreign insolvency proceedings and adopts the
UNCITRAL Model Law on Cross-Border Insolvency, subject to the FR Rules. The FR Rules
apply when:
• Assistance is sought in a Philippine court by a foreign court or a foreign representative
in connection with a foreign proceeding;
• Assistance is sought in a foreign State in connection with a proceeding governed by
the FRIA and the FR Rules;
• A foreign proceeding and a proceeding governed by the FRIA and the FR Rules are
concurrently taking place; or
 • Creditors in a foreign State have an interest in requesting the commencement of, or
participating in, a proceeding under the FR Rules for court-supervised rehabilitation,
pre-negotiated rehabilitation or OCRA

63. Instances when the court should refuse to take any action in a cross-border insolvency
proceedings

Courts must refuse to take any action in any cross-border insolvency proceeding where:
(i) the action would be manifestly contrary to the public policy of the Philippines; and
(ii) the court finds that the country where the foreign rehabilitation proceeding is taking
place does not extend recognition to a Philippine rehabilitation proceeding, or that the
country of which the petitioner-foreign creditor is a national does not grant the same
rights to a Philippine creditor in a manner substantially in accordance with the FR Rules.

64. Are Orders issued by the Court in a rehabilitation proceedings immediately executory?

Yes. Under the FR Rules, any order issued by the court in a rehabilitation proceeding is
immediately executory. A party may file a motion for reconsideration against any order
issued by the court prior to the approval of the Rehabilitation Plan, but an order issued
after the approval of the Rehabilitation Plan may only be reviewed by a special civil
action for certiorari under Rule 65 of the Rules of Court.

65. Where should the petition be filed in case when there is no Special Commercial Court
designated to hear and decide a case filed within a specific territory?

Supreme Court OCA Circular No. 11-2016 provides that when there is no Special
Commercial Court designated to hear and decide a case filed within a specific territory
in accordance with the existing rules on venue, the case may be filed in the nearest
designated Special Commercial Court within the judicial region of said territory

66. On June 16, 1995, Vicente obtained a writ of preliminary attachment against Carlito. The
levy on Carlito’s property occurred on June 25, 1995. On July 29, 1995, another creditor
filed a petition for involuntary insolvency against Carlito. The insolvency court gave due
course to the petition. In the meantime, the case filed by Vicente proceeded, and
resulted in a judgment award in favor of Vicente.
May the judgment obtained by Vicente be enforced independently of the insolvency
proceedings?

The judgment obtained by Vicente can be enforced independently of the insolvency

proceedings. Under Section 32 of the Insolvency Law, the assignment to the assignee of
all the real and personal property, estate and effects of the debtor made by the clerk of
 court shall vacate and set aside any judgment entered in any action commenced within
30 days immediately prior to the commencement of insolvency proceedings. In this
case, however, the action filed by Vicente against Carlito was commenced by Vicente
not later than June 16, 1995 (the facts on this point are not clear) when Vicente
obtained a writ of preliminary attachment against Carlito or more than 30 days before
the petition for involuntary insolvency was filed against Carlito by his other creditors.

67-70
67. Aaron, a well-known architect, is suffering from financial reverses. He has 4 creditors
with a total claim of P26M. Despite his intention to pay these obligations, his current
assets are insufficient to cover all of them. His creditors are about to sue him.
Consequently, he was constrained to file a petition for insolvency.
a) Since Aaron was merely forced by circumstances to petition the court to declare him
insolvent, can the judge properly treat the petition as one for insolvency? Explain.

The petition cannot be treated as one of the involuntary insolvency, because it was filed
by Aaron himself, the debtor, and not by his creditors. To treat it as one of involuntary
insolvency would unduly benefit Aaron as a debtor, because he would not be subject to
the limitation of time within which he is subject in the case of voluntary insolvency for
purposes of discharge.

68. If Aaron is declared an insolvent by the court, what would be the effect, if any, of such
declaration on his creditors?

Actions for unsecured claims cannot be filed, because the claims should be filed in the
insolvency proceeding. Actions for secured claims may be commenced with leave of the
insolvency court.

69. Assuming that Aaron has guarantors for his debts, are the guarantors released from
their obligations once Aaron is discharged from his debts? Explain.

The guarantors are not discharged, because the discharge is limited to Aaron only.

70. What remedies are available to the guarantors in case they are made to pay the
creditors? Explain.

Their remedy is to prove in the insolvency proceeding that they paid the debt and that
they substitute for the creditors, if the creditors have not proven their claims.

71. A debtor who has been adjudged insolvent is given his discharge by the court after his
properties have been applied to his debts. A year later, with those debts still not fully
 paid, he wins in the sweepstakes and comes into a large fortune. His creditors sue him
for the balance.

The suit will not prosper on debts that are properly discharged in insolvency. Those that
are not discharged, assuming that a discharge can be obtained, include:
1. Taxes and assessments due the government, national or local;
2. Obligation arising from embezzlement or fraud;
3. Obligations of any person liable to the insolvent debtor for the same debt;
4. Alimony or claim for support;
5. In general, debts that are not provable against the estate of the insolvent or not listed
in the schedule submitted by the insolvent debtor.

72. Is the issuance of an order, declaring a petitioner in Voluntary Insolvency proceeding

insolvent, mandatory upon the court?

Assuming that the petition was in due form and substance and that the assets of the
petitioner are less than his liabilities, the court must adjudicate the insolvency.

73. What are the preferred claims that shall be satisfied first from the assets of an insolvent
corporation?

Under the Insolvency Law necessary funeral expenses of the debtor is the most
preferred claim. However, this is an insolvent corporation, thus, claims shall be paid in
the following order:
1. Debts due for personal services rendered the insolvent by employees, laborers, or
domestic servants immediately preceding the commencement of proceedings in
insolvency;
2. Compensation due to the laborers or their dependents under the provisions of Act
Numbered 3428, known as the Workmen’s Compensation Act, as amended by Act
Numbered 3812 and under the provisions of Act Numbered 1874, known as the
Employees’ Liability Act, and of other laws providing for payment of indemnity for
damages in cases of labor accidents;
3. 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;
4. Debts, taxes, and assessments due the Insular Government;
5. Debts, taxes and assessments due to any province/s of the Philippine Islands;
6. Debts, taxes and assessments due to any municipality or municipalities of the
Philippine Islands
74. How shall the remaining non-preferred creditors share in the estate of the insolvent
corporation above?

The remaining non-preferred creditors, whose debts are duly proved and allowed, shall
be entitled to share pro-rata in the assets, without priority or preference whatsoever.

75. Distinguish insolvency from suspension of payment.

In insolvency, the liabilities of the debtor are more than his assets, while in suspension
of payments, assets of the debtor are more than his liabilities.
In insolvency, the assets of the debtor are to be converted into cash for distribution
among his creditors, while in suspension of payments, the debtor is only asking for time
within which to convert his frozen assets into liquid cash with which to pay his
obligations when the latter fall due.